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

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

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Business Overview			22
2016 in Summary			23
2017 Outlook			24
Results of Operations			25
Reconciliation of Non-GAAP Financial Measures			35
Liquidity and Capital Resources			41
Contractual Obligations			45
Pension Benefits			46
Environmental Matters			48
Off-Balance Sheet Arrangements			49
Related Party Transactions			49
Inflation			49
Critical Accounting Policies and Estimates			49
New Accounting Guidance			55
Forward-Looking Statements			55

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

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

The discussion of results that follows includes comparisons to non-GAAP financial measures. The presentation of non-GAAP measures is intended to enhance the usefulness of financial information by providing measures which, when viewed together with our financial results reported in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. The reconciliation of reported GAAP results to non-GAAP measures is presented on pages 35-40. Descriptions of the excluded items appear on pages 27-29.

BUSINESS OVERVIEW

Air Products and Chemicals, Inc. is a world-leading Industrial Gases company in operation for over 75 years. The Company’s core Industrial Gases business provides atmospheric and process gases and related equipment to manufacturing markets, including refining and petrochemical, metals, electronics, and food and beverage. Air Products is also the world’s leading supplier of liquefied natural gas process technology and equipment. The Company’s Materials Technologies business serves the semiconductor, polyurethanes, cleaning and coatings, and adhesives industry.

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

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

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

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

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

2016 IN SUMMARY

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

Highlights for 2016

	•		Sales of $9,524.4 decreased 4%, or $370.5. Underlying sales growth of 2% was more than offset by unfavorable currency and lower energy contractual cost pass-through to customers. Underlying sales increased from higher volumes in Industrial Gases – Global and Industrial Gases – Asia.

	•		Operating income of $2,106.0 increased 23%, or $397.7, primarily due to better cost performance. On a non-GAAP basis, operating income of $2,198.5 increased 16%, or $305.3. Adjusted EBITDA of $3,273.0 increased 10%, or $288.9.

	•		Income from continuing operations of $1,515.3 increased 18%, or $230.6, and diluted earnings per share from continuing operations of $6.94 increased 17%, or $1.03. On a non-GAAP basis, income from continuing operations of $1,647.8 increased 15%, or $214.0, and diluted earnings per share from continuing operations of $7.55 increased 14%, or $0.95. A summary table of changes in diluted earnings per share, including a non-GAAP reconciliation, is presented below.

	•		We entered into a sales agreement to sell the Performance Materials division of our Materials Technologies segment to Evonik, which is subject to regulatory approval and other closing conditions.

	•		We completed the spin-off of the Electronic Materials division as Versum Materials, Inc. on 1 October 2016.

	•		We committed to exit the Energy-from-Waste business.

	•		We increased our quarterly dividend by 6% from $.81 to $.86 per share. This represents the 34th 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 2017 Outlook below.

Changes in Diluted Earnings per Share Attributable to Air Products


	2016			2015			Increase (Decrease)
Diluted Earnings per Share
Net income		$2.89			$5.88			$(2.99	)
Loss from discontinued operations		(4.05	)		(.03	)		(4.02	)
Income from Continuing Operations—GAAP Basis		$6.94			$5.91			$1.03

Operating income (after-tax)
Underlying business
Volume								(.01	)
Price/raw materials								.29
Costs/other								.94
Currency								(.16	)
Business separation costs								(.19	)
Business restructuring and cost reduction actions								.60
Pension settlement loss								.04
Gain on previously held equity interest								(.05	)
Gain on land sales								(.13	)
Operating Income								1.33

Other (after-tax)
Equity affiliates’ income								(.02	)
Interest expense								(.04	)
Loss on extinguishment of debt								.05
Income tax								(.06	)
Tax costs related to business separation								(.24	)
Noncontrolling interests								.04
Average shares outstanding								(.03	)
Other								(.30	)
Total Change in Diluted Earnings per Share from Continuing Operations—GAAP Basis								$1.03

	2016			2015			Increase (Decrease)
Income from Continuing Operations—GAAP Basis		$6.94			$5.91			$1.03

Business separation costs		.22			.03			.19
Tax costs related to business separation		.24			—			.24
Business restructuring and cost reduction actions		.11			.71			(.60	)
Pension settlement loss		.02			.06			(.04	)
Gain on previously held equity interest		—			(.05	)		.05
Gain on land sales		—			(.13	)		.13
Loss on extinguishment of debt		.02			.07			(.05	)
Income from Continuing Operations—Non-GAAP Basis		$7.55			$6.60			$.95

2017 OUTLOOK

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

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

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

RESULTS OF OPERATIONS

Discussion of Consolidated Results


	2016		2015		2014
Sales		$9,524.4		$9,894.9		$10,439.0
Operating income—GAAP Basis		2,106.0		1,708.3		1,339.1
Operating margin—GAAP Basis		22.1%		17.3%		12.8%
Equity affiliates’ income		148.6		154.5		151.4

Non-GAAP Basis
Adjusted EBITDA		3,273.0		2,984.1		2,775.7
Adjusted EBITDA margin		34.4%		30.2%		26.6%
Operating income		2,198.5		1,893.2		1,667.4
Operating margin		23.1%		19.1%		16.0%

Sales
			% Change from Prior Year
			2016		2015
Underlying business
Volume				2%		2%
Price				—%		1%
Energy and raw material cost pass-through				(3)%		(3)%
Currency				(3)%		(5)%
Total Consolidated Change				(4)%		(5)%

2016 vs. 2015

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

2015 vs. 2014

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

Operating Income and Margin

2016 vs. 2015

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

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

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

2015 vs. 2014

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

On a non-GAAP basis, operating income of $1,893.2 increased 14%, or $225.8. The increase was primarily due to higher volumes of $144, favorable pricing, net of energy and fuel costs, of $105, and favorable cost performance across most segments of $92, partially offset by unfavorable currency of $115. Costs were lower as benefits from cost reduction actions of approximately $170 and lower maintenance expense of $33 were offset by higher incentive compensation of approximately $100 due to improved results. Non-GAAP operating margin of 19.1% increased 310 bp due to favorable costs, higher volumes, and higher pricing.

Adjusted EBITDA

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

2016 vs. 2015

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

2015 vs. 2014

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

Equity Affiliates’ Income

2016 vs. 2015

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

2015 vs. 2014

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

Cost of Sales and Gross Margin

2016 vs. 2015

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

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

2015 vs. 2014

Cost of sales of $6,939.0 decreased $690.9, or 9%, primarily due to a favorable currency impact of $368, lower energy costs of $313, and lower operating costs of $102, partially offset by costs attributable to higher sales volumes of $92. Operating costs included favorable impacts from cost reduction actions of $48 and lower other costs, including maintenance, of $115, partially offset by higher incentive compensation of $61.

Gross margin of 29.9% increased 300 bp, due to lower costs of 120 bp, higher price, net of raw materials, of 100 bp, and higher volumes of 80 bp.

Selling and Administrative Expense

2016 vs. 2015

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

2015 vs. 2014

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

Research and Development

2016 vs. 2015

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

2015 vs. 2014

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

Business Separation Costs

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

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

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

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

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

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

Business Restructuring and Cost Reduction Actions

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

Cost Reduction Actions

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

Business Realignment and Reorganization

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

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

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

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

Pension Settlement Loss

Certain of our pension plans provide for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after the retirement date. Pension settlements are recognized when cash payments exceed the sum of the service and interest cost components of net periodic pension cost of the plan for the fiscal year. We recognized $6.4 ($4.1 after-tax, or $.02 per share), $21.2 ($13.7 after-tax, or $.06 per share), and $5.5 ($3.6 after-tax, or $.02 per share) of settlement charges in 2016, 2015, and 2014, respectively. The settlement accelerated the recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss primarily related to our U.S. Supplementary Pension Plan.

Goodwill and Intangible Asset Impairment Charge

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

Gain on Previously Held Equity Interest

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

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

Other Income (Expense), Net

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

2016 vs. 2015

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

2015 vs. 2014

Other income (expense), net of $47.3 decreased $5.5 and included a gain of $33.6 ($28.3 after-tax, or $.13 per share) resulting from the sale of two parcels of land. The gain was partially offset by unfavorable foreign exchange impacts and lower gains on other sales of assets and emissions credits. No other individual items were significant in comparison to fiscal year 2014.

Interest Expense


	2016		2015		2014
Interest incurred		$148.4		$152.6		$158.1
Less: Capitalized interest		32.9		49.1		33.0
Interest Expense		$115.5		$103.5		$125.1

2016 vs. 2015

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

2015 vs. 2014

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

Loss on Extinguishment of Debt

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

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

Effective Tax Rate

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

2016 vs. 2015

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

2015 vs. 2014

On a GAAP basis, the effective tax rate was 24.0% and 27.1% in 2015 and 2014, respectively. The effective tax rate was higher in fiscal year 2014 primarily due to the goodwill impairment charge of $305.2, which was not deductible for tax purposes, and the Chilean tax reform enacted in September 2014 which increased income tax expense by $20.6. These impacts were partially offset by an income tax benefit of $51.6 associated with losses from transactions and a tax election in a non-U.S. subsidiary. Refer to Note 10, Goodwill, and Note 23, Income Taxes, to the consolidated financial statements for additional information. On a non-GAAP basis, the effective tax rate was 24.2% and 24.1% in 2015 and 2014, respectively.

Discontinued Operations

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

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

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

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

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

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

Segment Analysis

Industrial Gases – Americas


	2016			2015			2014
Sales		$3,343.6			$3,693.9			$4,078.5
Operating income		895.2			808.4			762.6
Operating margin		26.8	%		21.9	%		18.7	%
Equity affiliates’ income		52.7			64.6			60.9
Adjusted EBITDA		1,390.4			1,289.9			1,237.9
Adjusted EBITDA margin		41.6	%		34.9	%		30.4	%

Industrial Gases – Americas Sales


	% Change from Prior Year
	2016			2015
Underlying business
Volume		(2	)%		—	%
Price		1	%		2	%
Energy and raw material cost pass-through		(6	)%		(8	)%
Currency		(2	)%		(3	)%
Total Industrial Gases – Americas Change		(9	)%		(9	)%

2016 vs. 2015

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

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

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

2015 vs. 2014

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

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

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

Industrial Gases – EMEA


	2016			2015			2014
Sales		$1,700.3			$1,864.9			$2,150.7
Operating income		382.8			330.7			351.2
Operating margin		22.5	%		17.7	%		16.3	%
Equity affiliates’ income		36.5			42.4			44.1
Adjusted EBITDA		605.0			567.4			615.5
Adjusted EBITDA margin		35.6	%		30.4	%		28.6	%


Industrial Gases – EMEA Sales
	% Change from Prior Year
	2016			2015
Underlying business
Volume		(2	)%		—	%
Price		1	%		1	%
Energy and raw material cost pass-through		(4	)%		(1	)%
Currency		(4	)%		(13	)%
Total Industrial Gases – EMEA Change		(9	)%		(13	)%

2016 vs. 2015

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

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

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

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

2015 vs. 2014

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

Operating income of $330.7 decreased 6%, or $20.5, due to unfavorable currency impacts of $44, partially offset by lower costs of $13 resulting from restructuring actions, favorable volume mix impacts of $5, and higher pricing, net of energy and fuel costs, of $5. Operating margin increased 140 bp from 2014 primarily due to the lower costs.

Equity affiliates’ income of $42.4 decreased $1.7.

Industrial Gases – Asia


	2016			2015			2014
Sales		$1,716.1			$1,637.5			$1,527.0
Operating income		449.1			380.5			310.4
Operating margin		26.2	%		23.2	%		20.3	%
Equity affiliates’ income		57.8			46.1			38.0
Adjusted EBITDA		704.0			629.5			553.7
Adjusted EBITDA margin		41.0	%		38.4	%		36.3	%

Industrial Gases – Asia Sales
				% Change from Prior Year
				2016			2015
Underlying business
Volume					11	%		12	%
Price					(1)	%		(2)	%
Energy and raw material cost pass-through					—	%		1	%
Currency					(5)	%		(4)	%
Total Industrial Gases – Asia Change					5	%		7	%

2016 vs. 2015

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

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

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

2015 vs. 2014

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

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

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

Industrial Gases – Global


	2016			2015			2014
Sales		$498.8			$286.8			$296.0
Operating loss		(21.3	)		(51.6	)		(57.3	)
Adjusted EBITDA		(13.5	)		(35.9	)		(44.4	)

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

2016 vs. 2015

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

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

2015 vs. 2014

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

Materials Technologies


	2016		2015		2014
Sales	$2,019.5		$2,087.1		$2,064.6
Operating income	530.2		476.7		379.0
Operating margin	26.3	%	22.8	%	18.4	%
Adjusted EBITDA	609.3		571.7		480.7
Adjusted EBITDA margin	30.2	%	27.4	%	23.3	%

Materials Technologies Sales


	% Change from Prior Year
	2016			2015
Underlying business
Volume		(2	)%		3	%
Price		–	%		2	%
Currency		(1	)%		(4	)%
Total Materials Technologies Change		(3	)%		1	%

2016 vs. 2015

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

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

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

2015 vs. 2014

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

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

Corporate and other


	2016			2015			2014
Sales		$246.1			$324.7			$322.2
Operating loss		(37.5	)		(51.5	)		(78.5	)
Adjusted EBITDA		(22.2	)		(38.5	)		(67.7	)

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

2016 vs. 2015

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

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

2015 vs. 2014

Sales of $324.7 increased $2.5, or 1%, primarily due to higher LNG project activity, mostly offset by lower helium container sales and the impact of exiting our PUI business which was completed as of the end of the first quarter of 2014. Operating loss of $51.5 decreased 34%, or $27.0, primarily due to higher LNG project activity and the benefits of our cost reduction actions.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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

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

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

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

CONSOLIDATED RESULTS


	Continuing Operations
		Operating Income		Operating Margin	(A)	Income Tax Provision	(B)	Net Income		Diluted EPS
2016 GAAP		$2,106.0		22.1	%	$586.5		$1,515.3		$6.94
2015 GAAP		1,708.3		17.3	%	418.3		1,284.7		5.91
Change GAAP		$397.7		480bp		$168.2		$230.6		$1.03
% Change GAAP		23	%			40	%	18	%	17	%

2016 GAAP		$2,106.0		22.1	%	$586.5		$1,515.3		$6.94
Business separation costs(C)		52.2		.5	%	3.9		48.3		.22
Tax costs associated with business separation(C)		—		—		(51.8	)	51.8		.24
Business restructuring and cost reduction actions		33.9		.4	%	9.9		24.0		.11
Pension settlement loss		6.4		.1	%	2.3		4.1		.02
Loss on extinguishment of debt(D)		—		—		2.6		4.3		.02
2016 Non-GAAP Measure		$2,198.5		23.1	%	$553.4		$1,647.8		$7.55

2015 GAAP		$1,708.3		17.3	%	$418.3		$1,284.7		$5.91
Business separation costs(C)		7.5		.1	%	—		7.5		.03
Business restructuring and cost reduction actions		207.7		2.1	%	54.5		153.2		.71
Pension settlement loss		21.2		.2	%	7.5		13.7		.06
Gain on previously held equity interest		(17.9	)	(.2	)%	(6.7	)	(11.2	)	(.05	)
Gain on land sales(E)		(33.6	)	(.4	)%	(5.3	)	(28.3	)	(.13	)
Loss on extinguishment of debt(D)		—		—		2.4		14.2		.07
2015 Non-GAAP Measure		$1,893.2		19.1	%	$470.7		$1,433.8		$6.60

Change Non-GAAP Measure		$305.3		400bp		$82.7		$214.0		$.95
% Change Non-GAAP Measure		16	%			18	%	15	%	14	%

	Continuing Operations
		Operating Income		Operating Margin	(A)	Income Tax Provision	(B)	Net Income		Diluted EPS
2015 GAAP		$1,708.3		17.3	%	$418.3		$1,284.7		$5.91
2014 GAAP		1,339.1		12.8	%	369.4		994.6		4.62
Change GAAP		$369.2		450bp		$48.9		$290.1		$1.29
% Change GAAP		28	%			13	%	29	%	28	%

2015 GAAP		$1,708.3		17.3	%	$418.3		$1,284.7		$5.91
Business separation costs(C)		7.5		.1	%	—		7.5		.03
Business restructuring and cost reduction actions		207.7		2.1	%	54.5		153.2		.71
Pension settlement loss		21.2		.2	%	7.5		13.7		.06
Gain on previously held equity interest		(17.9	)	(.2	)%	(6.7	)	(11.2	)	(.05	)
Gain on land sales(E)		(33.6	)	(.4	)%	(5.3	)	(28.3	)	(.13	)
Loss on extinguishment of debt(D)		—		—		2.4		14.2		.07
2015 Non-GAAP Measure		$1,893.2		19.1	%	$470.7		$1,433.8		$6.60

2014 GAAP		$1,339.1		12.8	%	$369.4		$994.6		$4.62
Business restructuring and cost reduction actions		12.7		.1	%	4.5		8.2		.04
Pension settlement loss		5.5		.1	%	1.9		3.6		.02
Goodwill and intangible asset impairment charge(F)		310.1		3.0	%	1.3		275.1		1.27
Chilean tax rate change		—		—		(20.6	)	20.6		.10
Tax election benefit		—		—		51.6		(51.6	)	(.24	)
2014 Non-GAAP Measure		$1,667.4		16.0	%	$408.1		$1,250.5		$5.81

Change Non-GAAP Measure		$225.8		310bp		$62.6		$183.3		$.79
% Change Non-GAAP Measure		14	%			15	%	15	%	14	%

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

(B)	The tax impact of our non-GAAP adjustments reflects the expected current and deferred income tax expense impact of the transactions and is impacted primarily by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions.

(C)	Refer to Note 3, Materials Technologies Separation, to the consolidated financial statements for additional information.

(D)	Income from continuing operations before taxes impact of $6.9 and $16.6 in 2016 and 2015, respectively.

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

(F)	Net income attributable to noncontrolling interests impact of $33.7.

ADJUSTED EBITDA

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


	2016		2015		2014		2013		2012
Income from Continuing Operations(A)	$1,545.7		$1,324.4		$996.0		$1,047.6		$1,025.2
Add: Interest expense	115.5		103.5		125.1		141.8		123.7
Add: Income tax provision	586.5		418.3		369.4		310.2		287.3
Add: Depreciation and amortization	925.9		936.4		956.9		907.0		840.8
Add: Business separation costs	52.2		7.5		—		—		—
Add: Business restructuring and cost reduction actions	33.9		207.7		12.7		231.6		327.4
Add: Pension settlement loss	6.4		21.2		5.5		—		—
Add: Goodwill and intangible asset impairment charge	—		—		310.1		—		—
Less: Gain on previously held equity interest	—		17.9		—		—		85.9
Add: Advisory costs	—		—		—		10.1		—
Add: Customer bankruptcy	—		—		—		—		9.8
Less: Gain on land sales(B)	—		33.6		—		—		—
Add: Loss on early retirement of debt	6.9		16.6		—		—		—
Adjusted EBITDA	$3,273.0		$2,984.1		$2,775.7		$2,648.3		$2,528.3
Change GAAP
Income from continuing operations change	$221.3		$328.4		$(51.6	)	$22.4
Income from continuing operations % change	17	%	33	%	(5	)%	2	%
Change Non-GAAP
Adjusted EBITDA change	$288.9		$208.4		$127.4		$120.0
Adjusted EBITDA % change	10	%	8	%	5	%	5	%

(A) Includes net income attributable to noncontrolling interests.

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

Below is a summary of segment operating income:


	Industrial Gases– Americas		Industrial Gases– EMEA		Industrial Gases– Asia		Industrial Gases– Global		Materials Technologies		Corporate and other		Segment Total
GAAP Measure
Twelve Months Ended 30 September 2016
Operating income (loss)	$895.2		$382.8		$449.1		$(21.3	)	$530.2		$(37.5	)	$2,198.5
Operating margin	26.8	%	22.5	%	26.2	%			26.3	%			23.1	%
Twelve Months Ended 30 September 2015
Operating income (loss)	$808.4		$330.7		$380.5		$(51.6	)	$476.7		$(51.5	)	$1,893.2
Operating margin	21.9	%	17.7	%	23.2	%			22.8	%			19.1	%
Twelve Months Ended 30 September 2014
Operating income (loss)	$762.6		$351.2		$310.4		$(57.3	)	$379.0		$(78.5	)	$1,667.4
Operating margin	18.7	%	16.3	%	20.3	%			18.4	%			16.0	%
2016 vs. 2015
Operating income (loss) change	$86.8		$52.1		$68.6		$30.3		$53.5		$14.0		$305.3
Operating income (loss) % change	11	%	16	%	18	%	59	%	11	%	27	%	16	%
Operating margin change	490bp		480bp		300bp				350bp				400bp
2015 vs. 2014
Operating income (loss) change	$45.8		$(20.5	)	$70.1		$5.7		$97.7		$27.0		$225.8
Operating income (loss) % change	6	%	(6	)%	23	%	10	%	26	%	34	%	14	%
Operating margin change	320bp		140bp		290bp				440bp				310bp

Below is a reconciliation of segment operating income to adjusted EBITDA:


	Industrial Gases– Americas			Industrial Gases– EMEA			Industrial Gases– Asia			Industrial Gases– Global			Materials Technologies			Corporate and other			Segment Total
Non-GAAP Measure
Twelve Months Ended 30 September 2016
Operating income (loss)		$895.2			$382.8			$449.1			$(21.3	)		$530.2			$(37.5	)		$2,198.5
Add: Depreciation and amortization		442.5			185.7			197.1			7.9			77.4			15.3			925.9
Add: Equity affiliates’ income (loss)		52.7			36.5			57.8			(.1	)		1.7			—			148.6
Adjusted EBITDA		$1,390.4			$605.0			$704.0			$(13.5	)		$609.3			$(22.2	)		$3,273.0
Adjusted EBITDA margin(A)		41.6	%		35.6	%		41.0	%					30.2	%					34.4	%
Twelve Months Ended 30 September 2015
Operating income (loss)		$808.4			$330.7			$380.5			$(51.6	)		$476.7			$(51.5	)		$1,893.2
Add: Depreciation and amortization		416.9			194.3			202.9			16.5			92.8			13.0			936.4
Add: Equity affiliates’ income		64.6			42.4			46.1			(.8	)		2.2			—			154.5
Adjusted EBITDA		$1,289.9			$567.4			$629.5			$(35.9	)		$571.7			$(38.5	)		$2,984.1
Adjusted EBITDA margin(A)		34.9	%		30.4	%		38.4	%					27.4	%					30.2	%
Twelve Months Ended 30 September 2014
Operating income (loss)		$762.6			$351.2			$310.4			$(57.3	)		$379.0			$(78.5	)		$1,667.4
Add: Depreciation and amortization		414.4			220.2			205.3			7.1			99.1			10.8			956.9
Add: Equity affiliates’ income		60.9			44.1			38.0			5.8			2.6			—			151.4
Adjusted EBITDA		$1,237.9			$615.5			$553.7			$(44.4	)		$480.7			$(67.7	)		$2,775.7
Adjusted EBITDA margin(A)		30.4	%		28.6	%		36.3	%					23.3	%					26.6	%

2016 vs. 2015
Adjusted EBITDA change		$100.5			$37.6			$74.5			$22.4			$37.6			$16.3			$288.9
Adjusted EBITDA % change		8	%		7	%		12	%		62	%		7	%		42	%		10	%
Adjusted EBITDA margin change		670bp			520bp			260bp						280bp						420bp

2015 vs. 2014
Adjusted EBITDA change		$52.0			$(48.1	)		$75.8			$8.5			$91.0			$29.2			$208.4
Adjusted EBITDA % change		4	%		(8	)%		14	%		19	%		19	%		43	%		8	%
Adjusted EBITDA margin change		450bp			180bp			210bp						410bp						360bp

(A) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by sales.

INCOME TAXES

The tax impact of our non-GAAP adjustments reflects the expected current and deferred income tax expense impact of the transactions and is impacted primarily by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions.


	Effective Tax Rate
		2016		2015		2014
Income Tax Provision—GAAP		$586.5		$418.3		$369.4
Income from Continuing Operations before Taxes—GAAP		$2,132.2		$1,742.7		$1,365.4
Effective Tax Rate—GAAP		27.5	%	24.0	%	27.1	%
Income Tax Provision—GAAP		$586.5		$418.3		$369.4
Business separation costs		3.9		—		—
Tax costs associated with business separation		(51.8	)	—		—
Business restructuring and cost reduction actions		9.9		54.5		4.5
Pension settlement loss		2.3		7.5		1.9
Goodwill and intangible asset impairment charge		—		—		1.3
Gain on previously held equity interest		—		(6.7	)	—
Gain on land sales		—		(5.3	)	—
Loss on extinguishment of debt		2.6		2.4		—
Chilean tax rate change		—		—		(20.6	)
Tax election benefit		—		—		51.6
Income Tax Provision—Non-GAAP Measure		$553.4		$470.7		$408.1
Income from Continuing Operations before Taxes—GAAP		$2,132.2		$1,742.7		$1,365.4
Business separation costs		52.2		7.5		—
Business restructuring and cost reduction actions		33.9		207.7		12.7
Pension settlement loss		6.4		21.2		5.5
Goodwill and intangible asset impairment charge		—		—		310.1
Gain on previously held equity interest		—		(17.9	)	—
Gain on land sales		—		(33.6	)	—
Loss on extinguishment of debt		6.9		16.6		—
Income from Continuing Operations Before Taxes—Non-GAAP Measure		$2,231.6		$1,944.2		$1,693.7
Effective Tax Rate—Non-GAAP Measure		24.8	%	24.2	%	24.1	%

LIQUIDITY AND CAPITAL RESOURCES

We maintained a strong financial position throughout 2016 and as of 30 September 2016 our consolidated balance sheet included cash and cash items of $1,501.3. The cash and cash items balance is higher than our historical trend and primarily results from transactions related to the anticipated spin-off of Versum and positive operating cash flows. Approximately $1,000.0 of debt was raised by Versum in September which included a $575.0 term loan that drove an increase in cash and cash items. We expect our cash balance and cash flows from operating and financing activities to meet liquidity needs for the foreseeable future.

As of 30 September 2016, we had $545.3 of foreign cash and cash items compared to a total amount of cash and cash items of $1,501.3. 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 from continuing operations, as reflected in the consolidated statements of cash flows, are summarized in the following table:


	2016		2015		2014
Cash provided by (used for)
Operating activities	$2,707.4		$2,446.4		$2,190.1
Investing activities	(972.0	)	(1,250.5	)	(1,316.5	)
Financing activities	(271.1	)	(945.4	)	(504.3	)

Operating Activities

For the year ended 2016, cash provided by operating activities was $2,707.4. Income from continuing operations of $1,515.3 included a loss on extinguishment of debt of $6.9. Income from continuing operations is adjusted for reconciling items that include depreciation and amortization, deferred income taxes, share-based compensation, noncurrent capital lease receivables, and undistributed earnings of unconsolidated affiliates. Other adjustments of $155.2 were primarily driven by the remeasurement of intercompany transactions as the related hedging instruments that eliminate the earnings impact are included in other receivables and payables and accrued liabilities. The working capital accounts were a use of cash of $20.1 that were primarily driven by trade receivables and other working capital partially offset by payables and accrued liabilities. The use of cash from other working capital of $57.4 was primarily driven by advances associated with the purchase of helium. The increase in payables and accrued liabilities of $57.0 was primarily related to an increase in customer advances which includes payment from our joint venture in Jazan, Saudi Arabia and was partially offset by the changes in the fair value of foreign exchange contracts that hedge intercompany loans.

For the year ended 2015, cash provided by operating activities was $2,446.4. Income from continuing operations of $1,284.7 included the write-down of long-lived assets associated with business restructuring of $47.4, a non-cash gain on the previously held equity interest of $17.9, and a loss on extinguishment of debt of $16.6. Other adjustments included pension and postretirement expense of $141.4 and contributions to our pension plans of $137.5, primarily for plans in the U.S. and U.K. Management considers various factors when making pension funding decisions, including tax, cash flow, and regulatory implications. The working capital accounts were a source of cash of $224.7. The increase of payables and accrued liabilities of $156.2 includes an increase in accrued incentive compensation of $97.0.

For the year ended 2014, cash provided by operating activities was $2,190.1. Income from continuing operations of $994.6 included the goodwill and intangible asset impairment charge of $310.1. Other adjustments included $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 $250.0. Inventory was a use of cash of $23.5 primarily due to the timing of helium purchases. The reduction of payables and accrued liabilities of $237.9 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.

Investing Activities

For the year ended 30 September 2016, cash used for investing activities was $972.0, driven by capital expenditures for plant and equipment of $1,055.8. Proceeds from the sale of assets and investments of $85.5 was primarily driven by the receipt of $30.0 for our rights to a corporate aircraft that was under construction, $15.9 for the sale of our 20% equity investment in Daido Air Products Electronics, Inc., and $14.9 for the sale of a wholly owned subsidiary located in Wuhu, China.

For the year ended 30 September 2015, cash used for investing activities was $1,250.5, primarily capital expenditures for plant and equipment. On 30 December 2014, we acquired our partner’s equity ownership interest in a liquefied atmospheric industrial gases production joint venture in North America which increased our ownership from 50% to 100%. Refer to Note 6, Business Combination, to the consolidated financial statements for additional information.

For the year ended 30 September 2014, cash used for investing activities was $1,316.5, primarily capital expenditures for plant and equipment. Refer to the Capital Expenditures section below for additional detail.

Capital Expenditures

Capital expenditures are detailed in the following table:


	2016	2015	2014
Additions to plant and equipment	$1,055.8	$1,265.6	$1,362.7
Acquisitions, less cash acquired	—	34.5	—
Investments in and advances to unconsolidated affiliates	—	4.3	(2.0	)
Capital Expenditures on a GAAP Basis	$1,055.8	$1,304.4	$1,360.7
Capital lease expenditures(A)	27.2	95.6	202.4
Purchase of noncontrolling interests in a subsidiary(A)	—	278.4	.5
Capital Expenditures on a Non-GAAP Basis	$1,083.0	$1,678.4	$1,563.6

(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 purchase of subsidiary shares from noncontrolling interests is accounted for 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 2016 totaled $1,055.8, compared to $1,265.6 in 2015. The decrease of $209.8 was primarily due to the completion of major projects in 2016 and 2015. Additions to plant and equipment also included support capital of a routine, ongoing nature, including expenditures for distribution equipment and facility improvements. Spending in 2016 and 2015 included plant and equipment constructed to provide oxygen for coal gasification in China, hydrogen to the global market, oxygen to the steel industry, nitrogen to the electronic semiconductor industry, and capacity expansion for the Materials Technologies segment.

Capital expenditures on a non-GAAP basis in 2016 totaled $1,083.0 compared to $1,678.4 in 2015. The decrease of $595.4 was primarily due to the prior year purchase of the 30.5% equity interest in our Indura S.A. subsidiary from the largest minority shareholder for $277.9. Refer to Note 21, Noncontrolling Interests, to the consolidated financial statements for additional details. Additionally, capital lease expenditures of $27.2, decreased by $68.4, reflecting lower project spending.

On 19 April 2015, a joint venture between Air Products and ACWA Holding entered into a 20-year oxygen and nitrogen supply agreement to supply Saudi Aramco’s oil refinery and power plant being built in Jazan, Saudi Arabia. Air Products owns 25% of the joint venture. During 2016 and 2015, we recorded noncash transactions which resulted in an increase of $26.9 and $67.5, respectively, to our investment in net assets of and advances to equity affiliates for our obligation to invest in the joint venture. These noncash transactions have been excluded from the consolidated statements of cash flows. In total, we expect to invest approximately $100 in this joint venture. Air Products has also entered into a sale of equipment contract with the joint venture to engineer, procure, and construct the industrial gas facilities that will supply the gases to Saudi Aramco.

Sales backlog represents our estimate of revenue to be recognized in the future on our share of Air Products’ sale of equipment orders and related process technology that are under firm contracts. The sales backlog for the Company at 30 September 2016 was $1,057, compared to $1,535 at 30 September 2015. The decrease was driven by progress on the Jazan project and completion of LNG orders.

2017 Outlook

Excluding acquisitions, capital expenditures for new plant and equipment in 2017 are expected to be approximately $1,200. A majority of the total capital expenditures is expected to be for new plants that are currently under construction or expected to start construction. 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 2016, cash used for financing activities was $271.1. Our borrowings (short- and long-term proceeds, net of repayments) were a net source of cash (issuance) of $331.2 and included debt proceeds from the issuance of a .375% Eurobond of €350 million ($386.9) on 1 June 2016 and the issuance of a $575.0 term loan by Versum in anticipation of the spin-off, partially offset by the repayment of long-term debt, including the 2.0% Senior Note of $350.0 million on 2 August 2016, and a $144.2 use of cash for net commercial paper and other short-term debt borrowings. Versum distributed in-kind notes with an aggregate principal amount of $425.0 to Air Products. However, since Air Products exchanged these notes with certain financial institutions for $418.3 of Air Products’ outstanding commercial paper, this non-cash debt for debt exchange was excluded from the consolidated statement of cash flows. Refer to Note 15, Debt, to the consolidated financial statements for additional details. We also used cash to pay dividends of $721.2 and received proceeds from stock option exercises of $141.3.

For the year ended 2015, cash used for financing activities was $945.4 primarily attributable to cash used to pay dividends of $677.5 and payments for subsidiary shares from noncontrolling interest of $278.4, which was partially offset by proceeds from stock option exercises of $121.3. Our borrowings were a net use of cash of $84.4 and included $284.0 of net commercial paper and other short-term debt issuances, debt proceeds from the issuance of a 1.0% Eurobond of €300 million ($335.3), repayment of a 3.875% Eurobond of €300 million ($335.9), repayment of Industrial Revenue Bonds totaling $147.2, and repayment of 3,000,000 Unidades de Fomento (“UF”) Series E 6.30% Bonds totaling $146.6. Refer to Note 15, Debt, to the consolidated financial statements for additional details.

For the year ended 2014, cash used for financing activities was $504.3 primarily attributable to cash used to pay dividends of $627.7 which was partially offset by proceeds from stock options exercised of $141.6. Our borrowings were a net use of cash (issuance) of $3.5 and included $148.7 of net commercial paper and other short-term debt issuances, debt proceeds from the issuance of a $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.

Discontinued Operations

For the year ended 2016, discontinued operations primarily includes the Energy-from-Waste business which the Company decided to exit in the second quarter of 2016. Cash used by discontinued operations was $176.9 primarily driven by capital expenditures for plant and equipment of $97.0 and the loss from discontinued operations of $37.6. Refer to Note 4, Discontinued Operations, to the consolidated financial statements for additional information.

For the year ended 2015, cash used by discontinued operations was $357.8. The use of cash was primarily driven by expenditures for plant and equipment of $349.2 related to the Energy-from-Waste facilities. Refer to Note 4, Discontinued Operations, to the consolidated financial statements for additional information.

For the year ended 2014, cash used by discontinued operations was $471.8. The use of cash was driven by capital expenditures of $321.5 for our Energy-from-Waste facilities and a payment made to the Linde Group for contingent proceeds we were obligated to return from the sale of our Homecare business of $157.1. Refer to Note 4, Discontinued Operations, to the consolidated financial statements for additional information.

Financing and Capital Structure

Capital needs in 2016 were satisfied primarily with cash from operations. At the end of 2016, total debt outstanding was $6,225.2 compared to $5,879.0 at the end of 2015, and cash and cash items were $1,501.3 compared to $206.4 at the end of 2015. Total debt at 30 September 2016 and 2015, expressed as a percentage of total capitalization (total debt plus total equity), was 46.3% and 44.3%, respectively.

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. There have been subsequent amendments to the 2013 Credit Agreement, and as of 30 September 2016, the maximum borrowing capacity was $2,690.0. 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 no greater than 70%. No borrowings were outstanding under the 2013 Credit Agreement as of 30 September 2016.

During September 2016, in anticipation of the Versum spin-off, Versum entered into certain financing transactions to allow for a cash distribution of $550.0 and a distribution in-kind of notes issued by Versum with an aggregate principal amount of $425.0 to Air Products. Air Products then exchanged these notes with certain financial institutions for $418.3 of Air Products’ outstanding commercial paper. Since Versum debt was issued in September but Versum did not become a separate entity until 1 October 2016, Air Products’ consolidated balance sheet includes the Versum debt. The $575.0 term loan and the $425.0 of notes were included in the Versum spin-off transaction and do not represent obligation of the Company in the future. In addition, Versum entered into a senior secured first lien revolving credit facility (Versum Revolving Facility) in an aggregate principal amount of $200.0 that matures on 30 September 2021. Lenders under the Revolving Facility have a maximum first lien net leverage ratio covenant (total debt net of cash on hand to total adjusted EBITDA) of 3.25:1.00 and certain other customary covenants. No borrowings were outstanding on the Versum Revolving Facility as of 30 September 2016. Refer to Note 3, Materials Technologies Separation, to the consolidated financial statements for additional details.

Commitments totaling $51.3 are maintained by our foreign subsidiaries, all of which was borrowed and outstanding at 30 September 2016.

As of 30 September 2016, we are in compliance with all of the financial and other covenants under our debt agreements.

On 15 September 2011, the Board of Directors authorized the repurchase of up to $1,000 of our outstanding common stock. We did not purchase any of our outstanding shares during fiscal years 2016, 2015 or 2014. At 30 September 2016, $485.3 in share repurchase authorization remains.

2017 Outlook

Cash flows from operations and financing activities are expected to meet liquidity needs for the foreseeable future and our working capital balance was $1,034.0 at 30 September 2016. We expect that we will continue to be in compliance with all of our financial covenants.

We expect to utilize the proceeds from the distribution from Versum to pay down debt, largely commercial paper, in the first quarter of fiscal 2017.

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 2016, the Board of Directors increased the quarterly dividend from $.81 per share to $.86 per share.

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 2016:


	Total	2017	2018	2019	2020	2021	Thereafter
Long-term debt obligations
Debt maturities	$5,289	$371	$419	$407	$353	$417	$3,322
Contractual interest	880	131	119	117	99	91	323
Capital leases	31	2	1	2	2	3	21
Operating leases	355	71	62	50	38	32	102
Pension obligations	1,211	67	50	51	52	56	935
Unconditional purchase obligations	5,331	942	525	307	298	276	2,983
Obligation for future contribution to an equity affiliate	100	—	—	—	100	—	—
Total Contractual Obligations	$13,197	$1,584	$1,176	$934	$942	$875	$7,686

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 15, 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 $1,396 of long-term debt subject to variable interest rates at 30 September 2016, 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 2016. Variable interest rates are primarily determined by interbank offer rates and by U.S. short-term tax-exempt interest rates.

Consistent with the debt maturities table within Note 15, Debt, the long-term debt obligations reflect financing entered into in anticipation of the spin-off of EMD as Versum Materials, Inc. The spin-off was completed on 1 October 2016 and the related debt of $997.2 was maintained by Versum.

Leases

Refer to Note 12, 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 16, 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 $4,000 of our unconditional purchase obligations relate to helium purchases, which include crude feedstock supply to multiple helium refining plants in North America as well as refined helium purchases from sources around the world. As a rare byproduct of natural gas production in the energy sector, these helium sourcing agreements are medium- to long-term and contain take-or-pay provisions. The refined helium is distributed globally and sold as a merchant gas, primarily under medium-term requirements contracts. While contract terms in the energy sector are longer than those in merchant, helium is a rare gas used in applications with few or no substitutions because of its unique physical and chemical properties.

Approximately $330 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 purchase obligations would have a material effect on our financial condition or results of operations. Refer to Note 17, 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.

Purchase commitments to spend approximately $350 for additional plant and equipment are included in the unconditional purchase obligations in 2017. In addition, we have purchase commitments totaling approximately $500 in 2017 and 2018 relating to our long-term sale of equipment project for Saudi Aramco’s Jazan oil refinery.

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.

Obligation for Future Contribution to an Equity Affiliate

On 19 April 2015, a joint venture between Air Products and ACWA Holding entered into a 20-year oxygen and nitrogen supply agreement to supply Saudi Aramco’s oil refinery and power plant being built in Jazan, Saudi Arabia. Air Products owns 25% of the joint venture and guarantees the repayment of its share of an equity bridge loan. In total, we expect to invest approximately $100 in this joint venture. As of 30 September 2016, we recorded a noncurrent liability of $94.4 for our obligation to make future equity contributions based on our proportionate share of the advances received by the joint venture under the loan.

Income Tax Liabilities

Noncurrent deferred income tax liabilities as of 30 September 2016 were $767.1. Tax liabilities related to unrecognized tax benefits as of 30 September 2016 were $106.9. 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 23, Income Taxes, to the consolidated financial statements for additional information.

PENSION BENEFITS

The Company and certain of its subsidiaries sponsor defined benefit pension plans and defined contribution plans that cover a substantial portion of its worldwide employees. The principal defined benefit pension plans are the U.S. salaried pension plan and the U.K. pension plan. These plans were closed to new participants in 2005 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.

The fair market value of plan assets for our defined benefit pension plans as of the 30 September 2016 measurement date increased to $4,116.4 from $3,916.4 at the end of fiscal year 2015. The projected benefit obligation for these plans was $5,327.3 and $4,787.8 at the end of the fiscal years 2016 and 2015, respectively. The net unfunded liability increased by approximately $340 from $871 to $1,211 due primarily to lower discount rates. Refer to Note 16, Retirement Benefits, to the consolidated financial statements for comprehensive and detailed disclosures on our postretirement benefits.

Pension Expense


	2016		2015		2014
Pension expense	$68.1		$135.6		$135.9
Special terminations, settlements, and curtailments (included above)	7.3		35.2		5.8
Weighted average discount rate(A)	4.1	%	4.0	%	4.6	%
Weighted average expected rate of return on plan assets	7.5	%	7.4	%	7.7	%
Weighted average expected rate of compensation increase	3.5	%	3.5	%	3.9	%

(A)

Effective in 2016, the Company began to measure the service cost and interest cost components of pension expense by applying spot rates along the yield curve to the relevant projected cash flows, as we believe this provides a better measurement of these costs. The Company has accounted for this as a change in accounting estimate and, accordingly has accounted for it on a prospective basis. This change does not affect the measurement of the total benefit obligation.

2016 vs. 2015

Pension expense, excluding special items, decreased from the prior year due to the adoption of the spot rate approach which reduced service cost and interest cost, the impact from expected return on assets and demographic gains, partially offset by the impact of the adoption of new mortality tables for our major plans. Special items of $7.3 included pension settlement losses of $6.4, special termination benefits of $2.0, and curtailment gains of $1.1. These resulted primarily from our recent business restructuring and cost reduction actions.

2015 vs. 2014

The decrease in pension expense, excluding special items, was due to the impact from expected return on assets, a 40 bp reduction in the weighted average compensation increase assumption, and lower service cost and interest cost. The decrease was partially offset by the impact of higher amortization of actuarial losses, which resulted primarily from a 60 bp decrease in weighted average discount rate. Special items of $35.2 included pension settlement losses of $21.2, special termination benefits of $8.7, and curtailment losses of $5.3. These resulted primarily from our recent business restructuring and cost reduction actions.

2017 Outlook

In 2017, pension expense, excluding special items, is estimated to be approximately $70 to $75, an increase of $10 to $15 from 2016, resulting primarily from a decrease in discount rates, offset by favorable asset experience, effects of the Versum spin-off and the adoption of new mortality tables. Pension settlement losses of $10 to $15 are expected, dependent on the timing of retirements. In 2017, we expect pension expense to include approximately $164 for amortization of actuarial losses compared to $121 in 2016. Net actuarial losses of $484 were recognized in accumulated other comprehensive income in 2016, primarily attributable to lower discount rates and improved mortality projections. 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 2017.

During the first quarter of 2017, the Company expects to record a curtailment loss estimated to be $5 to $10 related to employees transferring to Versum. The loss will be reflected in the results from discontinued operations on the consolidated income statements. We continue to evaluate opportunities to manage the liabilities associated with our pension plans.

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 2016 and 2015, our cash contributions to funded plans and benefit payments for unfunded plans were $79.3 and $137.5, respectively.

For 2017, cash contributions to defined benefit plans are estimated to be $65 to $85. The estimate is based on expected contributions to certain international plans and anticipated benefit payments for unfunded plans, which

are dependent upon the timing of retirements and future cost reduction actions. 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 45 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 17, Commitments and Contingencies, to the consolidated financial statements.

The amounts charged to income from continuing operations related to environmental matters totaled $27.0, $28.3, and $35.1 in 2016, 2015, and 2014, 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 17, Commitments and Contingencies, to the consolidated financial statements for additional information.

Although precise amounts are difficult to determine, we estimate that we spent $7 and $4 in 2016 and 2015, respectively, on capital projects to control pollution. Capital expenditures to control pollution in future years are estimated to be approximately $3 in both 2017 and 2018.

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 $81 to a reasonably possible upper exposure of $95 as of 30 September 2016. The consolidated balance sheets at 30 September 2016 and 2015 included an accrual of $81.4 and $80.6, respectively. The accrual for the environmental obligations includes amounts for the Pace, Florida; Piedmont, South Carolina; and Pasadena, Texas, locations which were a part of previously divested chemicals businesses. Refer to Note 17, Commitments and Contingencies, to the consolidated financial statements for further details on these facilities.

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, California’s cap and trade scheme, South Korea’s Emission Trading Scheme, Alberta’s Specified Gases Emitter Regulation and, beginning in 2017, the Ontario cap and trade scheme and China National Emission Trading Scheme. Where these regulations impose compliance costs on our hydrogen production facilities (California, Alberta, and Ontario), we have been able to mitigate the majority of such 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 17, 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 in the industrial gas business. In 2015, we entered into a long-term sale of equipment contract to engineer, procure, and construct industrial gas facilities with a 25% owned joint venture for Saudi Aramco’s Jazan oil refinery and power plant in Saudi Arabia. The agreement included terms that are consistent with those that we believe would have been negotiated at an arm’s length with an independent party. Sales related to this contract are included in the results of our Industrial Gases – Global segment and were approximately $300 during fiscal year 2016 and were not material during fiscal year 2015.

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 2016 totaled $8,852.7, and depreciation expense totaled $893.0 during 2016. 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.

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.

The regional Industrial Gases segments have numerous long-term customer supply contracts for which we construct an on-site plant adjacent to or near the customer’s facility. These contracts typically have initial contract terms of 10 to 20 years. 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 remaining physical life of the asset.

Our regional Industrial Gases segments also have contracts for liquid or gaseous bulk supply and, for smaller customers, packaged gases. The depreciable lives of production facilities associated with these contracts are

generally 15 years. The depreciable lives of production facilities within the Materials Technologies 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 weighted average remaining depreciable life by one year for assets associated with our regional Industrial Gases segments and Materials Technologies segment would impact annual depreciation expense as summarized below:


	Decrease Life	Increase Life
	By 1 Year	By 1 Year
Industrial Gases – Regional	$36	$(31)
Materials Technologies	$4	$(3)

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, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the long-lived asset, 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 that meet the held for sale criteria are reported at the lower of carrying amount or fair value less cost to sell.

The assumptions underlying the undiscounted future cash flow projections require significant management judgment. Factors that management must estimate include industry and market conditions, sales volume and prices, costs to produce, inflation, etc. The assumptions underlying the cash flow projections represent management’s best estimates at the time of the impairment review. 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 impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.

On 29 March 2016, the Board of Directors approved the Company’s exit of its Energy-from-Waste business. Accordingly, we assessed the recoverability of capital costs for the two projects associated with this business and recorded an impairment charge of $913.5 to reduce the carrying values of plant assets to their estimated net realizable value of $20. We estimated the net realizable value of the projects assuming an orderly liquidation of assets capable of being marketed on a secondary equipment market based on market quotes and our experience with selling similar equipment. An asset’s orderly liquidation value is the amount that could be realized from a liquidation sale, given a reasonable period of time to find a buyer, selling the asset in the existing condition where it is located, and assuming the highest and best use of the asset by market participants. The valuation includes inputs that are unobservable and therefore considered Level 3 inputs in the fair value hierarchy. The loss was measured as the difference between the orderly liquidation value of the assets and the net book value of the assets. Refer to Note 4, Discontinued Operations, for additional information. There have been no significant changes in the estimated net realizable value as of 30 September 2016.

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 $1,150.2 as of 30 September 2016. Disclosures related to goodwill are included in Note 10, 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 the need for more frequent testing. The tests are done at the reporting unit level, which is defined as being equal to or 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 2016, we had six business segments and thirteen reporting units. Reporting units are primarily based on products and subregions within each business segment. The majority of our goodwill is assigned to reporting units within the three regional Industrial Gases segments and the Materials Technologies segment.

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.

In 2014, we conducted our annual goodwill impairment testing as of 1 July 2014 and concluded that the goodwill associated with the Latin America reporting unit was impaired and recorded a non-cash impairment charge of $305.2. The Latin America reporting unit is composed predominately of our Indura business with business units in Chile, Colombia, and other Latin America countries, which the Company acquired in 2012.

During the fourth quarter of 2016, we conducted our annual goodwill impairment testing noting no indications of impairment. The fair value of all of our reporting units substantially exceeded their carrying value.

The excess of fair value over carrying value for our reporting units ranged from approximately 30% to approximately 350%. Management judgment is required in the determination of each assumption utilized in the valuation model, and actual results could differ from the estimates. 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 15% to 300%.

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: long-term economic weakness, 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 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.

Intangible Assets

Intangible assets with determinable lives at 30 September 2016 totaled $425.3 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 2016 totaled $62.7 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 11, Intangible Assets, to the consolidated financial statements for additional information.

In the fourth quarter of 2016, we conducted our annual impairment test of indefinite-lived intangibles and found no indications of impairment.

Equity Investments

Investments in and advances to equity affiliates totaled $1,288.1 at 30 September 2016. 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 8, 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 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.

Revenue Recognition- Percentage-of-Completion Method

Revenue from equipment sale contracts is recorded primarily using the percentage-of-completion method. Under this method, revenue from the sale of major equipment, such as liquefied natural gas (LNG) heat exchangers and large air separation units, is recognized based on labor hours or costs incurred to date compared with total estimated labor hours or costs to be incurred, depending on the nature of the project and the best measure of progress toward completion. We estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete the contract and recognize the profit over the life of the contract.

Accounting for contracts using the percentage-of-completion method requires management judgment relative to assessing risks and their impact on the estimate of revenues and costs. Our estimates are impacted by factors

such as the potential for incentives or penalties on performance, schedule and technical issues, labor productivity, the complexity of work performed, the cost and availability of materials, and performance of subcontractors. When adjustments in estimated total contract revenues or estimated total costs or labor hours are required, any changes in the estimated profit from prior estimates are recognized in the current period for the inception-to-date effect of such change. When estimates of total costs to be incurred on a contract exceed estimates of total revenues to be earned, a provision for the entire estimated loss on the contract is recorded in the period in which the loss is determined.

Our Jazan large air separation unit sale of equipment project within our Industrial Gases – Global segment spans several years. In addition to the typical risks associated with underlying performance of project procurement and construction activities, this project requires monitoring of risks associated with schedule, geography, and other aspects of the contract and their effects on our estimates of total revenues and total costs to complete the contract. Given the revenue and cost uncertainties associated with these risks, we recognized revenue and cost with no estimated profit through the third quarter of 2016. During the fourth quarter of 2016, as a result of progress toward completion and a reassessment of revenue and cost risks, we changed our estimated profit on the project and recognized the inception-to-date effect of that change associated with approximately $300 of revenue.

Changes in estimates on projects accounted for under the percentage-of-completion method, including the Jazan project, favorably impacted operating income by approximately $20 in fiscal year 2016, primarily during the fourth quarter. Our changes in estimates would not have significantly impacted amounts recorded in prior years. Changes in estimates during fiscal years 2015 and 2014 were not significant.

We assess the performance of our sale of equipment projects as they progress. Our earnings could be positively or negatively impacted by changes to our forecast of revenues and costs on these projects.

Income Taxes

We account for income taxes under the asset and 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 enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. At 30 September 2016, accrued income taxes and net deferred tax liabilities amounted to $146.6 and $574.4, respectively. Tax liabilities related to uncertain tax positions as of 30 September 2016 were $106.9, excluding interest and penalties. Income tax expense for the year ended 30 September 2016 was $586.5. Disclosures related to income taxes are included in Note 23, 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 $21.

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 16, 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. In fiscal year 2016, the beginning-of-year projected benefit obligation and benefit costs for the U.S. plans reflect the adoption of the new Society of Actuaries RP-2014 mortality table projected with Scale BB-2D. As of 30 September 2016, the projected benefit obligation reflects the adoption of the new mortality projection scale MP-2016 for the U.S. plans. Our mortality assumptions will differ from the IRS mortality assumptions used to determine funding valuations, as the IRS is not expected to adopt the new tables until 2018 or later.

One of the assumptions used in the actuarial models is the discount rate used to measure benefit obligations. 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. Effective in 2016, the Company began to measure the service cost and interest cost components of pension expense by applying spot rates along the yield curve to the relevant projected cash flows, as we believe this provides a better measurement of these costs. The Company has accounted for this as a change in accounting estimate and, accordingly has accounted for it on a prospective basis. This change does not affect the measurement of the total benefit obligation. 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 $33 per year.

The expected rate of return on plan assets represents an estimate of 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 estimated asset class returns, we take into account historical and future expected 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 $19 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 return and actual return on plan assets. The expected return on plan assets is determined based on a market-related value of plan assets. For equities, this 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 and reduces year-to-year volatility. The market-related value for fixed income investments equals 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 $16 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 17, 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.

NEW ACCOUNTING GUIDANCE

As of the first quarter of fiscal year 2016, we adopted guidance on the presentation of deferred income taxes that resulted in all deferred tax liabilities and assets being classified as noncurrent on the balance sheet. Accordingly, prior year amounts were reclassified to conform to the current year presentation. The guidance, which did not change the existing requirement to net deferred tax assets and liabilities within a jurisdiction, resulted in a reclassification adjustment that increased noncurrent deferred tax assets by $13.7 and decreased noncurrent deferred tax liabilities by $99.9 as of 30 September 2015.

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 business outlook. These forward-looking statements are based on management’s reasonable expectations and assumptions as of the date of this report. 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, global or regional economic conditions and supply and demand dynamics in market segments into which the Company sells; significant fluctuations in interest rates and foreign currencies from that currently anticipated; future financial and operating performance of major customers; unanticipated contract terminations or customer cancellations or postponement of projects and sales; asset impairments due to economic conditions or specific customer or other events; the impact of competitive products and pricing; ability to protect and enforce the Company’s intellectual property rights; unexpected changes in raw material supply and markets; the impact of price fluctuations in natural gas and disruptions in markets and the economy due to oil price volatility; the ability to recover increased energy and raw material costs from customers; costs and outcomes of litigation or regulatory investigations; the success of productivity and cost reduction programs; the timing, impact, and other uncertainties of future acquisitions or divestitures; political risks, including the risks of unanticipated government actions; acts of war or terrorism; the impact of changes in environmental, tax or other legislation and regulatory activities in jurisdictions in which the Company and its affiliates operate; 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.

Previous: Item 6. SELECTED FINANCIAL DATA · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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