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

OF OPERATIONS

Business Overview	20
2017 in Summary	20
2018 Outlook	22
Results of Operations	22
Reconciliation of Non-GAAP Financial Measures	31
Liquidity and Capital Resources	37
Contractual Obligations	41
Pension Benefits	43
Environmental Matters	44
Off-Balance Sheet Arrangements	45
Related Party Transactions	45
Inflation	45
Critical Accounting Policies and Estimates	46
New Accounting Guidance	52
Forward-Looking Statements	53

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 per share data, unless otherwise indicated.

The results of our former Materials Technologies segment, which contained the Electronic Materials Division (EMD) and the Performance Materials Division (PMD), and the former Energy-from-Waste segment have been presented as discontinued operations. The results of operations and cash flows of these businesses have been removed from the results of continuing operations and segment results for all periods presented. Unless otherwise indicated, financial information is presented on a continuing operations basis. Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional information regarding the discontinued businesses.

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

The discussion of results that follows includes comparisons to certain non-GAAP ("adjusted") financial measures. The presentation of non-GAAP measures is intended to provide investors, potential investors, securities analysts, and others with useful supplemental 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. The reconciliations of reported GAAP results to non-GAAP measures are presented on pages 31-37. Descriptions of the excluded items appear on pages 24-26.

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. With operations in 50 countries, in 2017 we had sales of $8.2 billion, total company assets, including assets of both continuing and discontinued operations, of $18.5 billion, and a worldwide workforce of approximately 15,300 full- and part-time employees from continuing and discontinued operations.

As of 30 September 2017, our operations were organized into five reportable business segments: Industrial Gases – Americas; Industrial Gases – EMEA (Europe, Middle East, and Africa); Industrial Gases – Asia; Industrial Gases – Global; and Corporate and other. The financial statements and analysis that follow discuss our results based on these operations. Refer to Note 25, Business Segment and Geographic Information, to the consolidated financial statements for additional details on our reportable business segments.

2017 IN SUMMARY

In 2017, we were able to focus on our core industrial gases business by completing the separation of EMD through the spin-off of Versum Materials, Inc. (Versum) and the sale of PMD to Evonik Industries AG (Evonik). Sales of $8.2 billion increased nine percent over the prior year, primarily due to volume growth from new project onstreams across our regional industrial gases businesses, underlying growth in the base business, and continued progress on the Jazan project within our Industrial Gases – Global segment, partially offset by weaker liquefied natural gas (LNG) equipment sales. We delivered operating margin of 17.4%, adjusted operating margin of 21.6%, and adjusted EBITDA margin of 34.1% as our productivity actions were offset by the impact of energy cost pass-through to customers. Diluted EPS of $5.16 increased 2% from the prior year. On a non-GAAP basis, adjusted diluted EPS of $6.31 increased 12%.

Highlights for 2017

•

Sales of $8,187.6 increased 9%, or $683.9 as underlying sales growth of 7% and higher energy and natural gas cost pass‑through to customers of 3% were partially offset by unfavorable currency impacts of 1%. Underlying sales increased primarily from higher volumes across the industrial gases businesses, including the Jazan project, partially offset by lower LNG sales in the corporate and other segment.

•

Operating income of $1,427.6 decreased 7%, or $102.1, primarily due to a noncash goodwill and intangible asset impairment charge and higher cost reduction and asset actions, partially offset by favorable volumes and lower other costs. Operating margin of 17.4% decreased 300 bp. On a non‑GAAP basis, adjusted operating income of $1,769.6 increased 9%, or $149.7, and adjusted operating margin of 21.6% was flat.

•	Adjusted EBITDA of $2,795.0 increased 7%, or $173.5. Adjusted EBITDA margin of 34.1% decreased 80 bp and was negatively impacted by 90 bp from higher contractual energy pass-through to customers. Excluding this impact, adjusted EBITDA margin was up 10 bp.

•	Income from continuing operations of $1,134.4 increased 3%, or $34.9, and diluted EPS of $5.16 increased 2%, or $.12. On a non-GAAP basis, adjusted income from continuing operations of $1,385.9 increased 13%, or $155.6, and adjusted diluted EPS of $6.31 increased 12%, or $.67. A summary table of changes in diluted earnings per share, including a non‑GAAP reconciliation, is presented below.

•	We completed the spin-off of EMD as Versum on 1 October 2016.

•	We completed the sale of PMD to Evonik on 3 January 2017.

•	We entered into an agreement to form a $1.3 billion joint venture in China with Lu’An Clean Energy Company.

•	We increased our quarterly dividend by 10% from $.86 to $.95 per share. This represents the 35th consecutive year that we have increased our dividend payment.

Changes in Diluted Earnings per Share Attributable to Air Products

										Increase
		2017				2016				(Decrease)
Diluted Earnings per Share
Net income		$	13.65			$	2.89			$	10.76
Income (Loss) from discontinued operations		8.49				(2.15		)		10.64
Income from Continuing Operations – GAAP Basis		$	5.16			$	5.04			$	.12
Operating Income Impact (after-tax)
Underlying business
Volume										$	.29
Price/raw materials										.03
Costs										.24
Currency										(.03		)
Business separation costs										.09
Business restructuring and cost reduction actions										(.38		)
Pension settlement loss										(.01		)
Goodwill and intangible asset impairment charge										(.70		)
Gain on land sale										.03
Total Operating Income Impact (after-tax)										$	(.44	)
Other Impact (after-tax)
Equity affiliates' income										.04
Equity method investment impairment charge										(.36		)
Interest expense										(.02		)
Other non-operating income (expense), net										.10
Loss on extinguishment of debt										.02
Income tax										.07
Tax costs associated with business separation										.26
Tax election benefit										.50
Noncontrolling interests										(.01		)
Weighted average diluted shares										(.04		)
Total Other Impact (after-tax)										$	.56
Total Change in Diluted Earnings per Share from Continuing Operations – GAAP Basis										$	.12

										Increase
		2017				2016				(Decrease)
Income from Continuing Operations – GAAP Basis		$	5.16			$	5.04			$	.12
Business separation costs		.12				.21				(.09		)
Tax (benefit) costs associated with business separation		(.02		)		.24				(.26		)
Business restructuring and cost reduction actions		.49				.11				.38
Pension settlement loss		.03				.02				.01
Goodwill and intangible asset impairment charge		.70				—				.70
Gain on land sale		(.03		)		—				(.03		)
Equity method investment impairment charge		.36				—				.36
Loss on extinguishment of debt		—				.02				(.02		)
Tax election benefit		(.50		)		—				(.50		)
Income from Continuing Operations – Non-GAAP Basis		$	6.31			$	5.64			$	.67

2018 OUTLOOK

In 2018, we intend to build on our strong fiscal year 2017 operating results through a combination of base business growth, new project onstreams, and productivity benefits. We expect lower income from transition services agreements to be offset by cost reductions associated with these services. Our recent portfolio actions, including the spin-off of Versum and the sale PMD, and improved operating results have positioned us with a strong balance sheet and the opportunity to invest in our core industrial gases business to drive future growth and create shareholder value.

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

RESULTS OF OPERATIONS

Discussion of Consolidated Results

	2017			2016			2015
Sales	$	8,187.6		$	7,503.7		$	7,824.3
Operating income	1,427.6			1,529.7			1,233.2
Operating margin	17.4		%	20.4		%	15.8		%
Equity affiliates’ income	80.1			147.0			152.3
Non-GAAP Measures
Adjusted EBITDA	$	2,795.0		$	2,621.5		$	2,399.4
Adjusted EBITDA margin	34.1		%	34.9		%	30.7		%
Adjusted operating income	1,769.6			1,619.9			1,388.6
Adjusted operating margin	21.6		%	21.6		%	17.7		%
Adjusted equity affiliates' income	159.6			147.0			152.3

Sales

	% Change from Prior Year
	2017		2016
Underlying business
Volume	6	%	3	%
Price	1	%	—	%
Energy and raw material cost pass-through	3	%	(4	)%
Currency	(1	)%	(3	)%
Total Consolidated Change	9	%	(4	)%

2017 vs. 2016

Sales of $8,187.6 increased 9%, or $683.9. Underlying sales increased 7% from higher volumes of 6% and higher pricing of 1%. Higher volumes, primarily due to new project onstreams, underlying base business growth across the Industrial Gases regions, and continued progress on the Jazan project within our Industrial Gases – Global segment, were partially offset by lower LNG project activity in the Corporate and other segment. The pricing improvement was primarily attributable to the Industrial Gases – Asia segment. Higher energy and natural gas cost pass-through to customers increased sales by 3%, and unfavorable currency effects reduced sales by 1%.

2016 vs. 2015

Sales of $7,503.7 decreased 4.0%, or $320.6. Underlying sales increased 3%, primarily due to higher volumes in the Industrial Gases – Global and Industrial Gases – Asia segments, 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 the Industrial Gases – Asia segment. Underlying sales growth was more than offset by lower energy contractual cost pass-through to customers of 4% and unfavorable currency of 3%.

Operating Income and Margin

2017 vs. 2016

Operating income of $1,427.6 decreased 7%, or $102.1, as a goodwill and intangible asset impairment charge of $162, higher cost reduction and asset actions of $117, unfavorable currency impacts of $9, and higher pension settlement losses of $5 were partially offset by favorable volumes of $83, favorable net operating costs of $69, lower business separation costs of $20, a gain on the sale of land of $12, and favorable pricing, net of energy, fuel, and raw material costs, of $7. Net operating costs were lower primarily due to benefits from cost reduction actions and higher other income. Operating margin of 17.4% decreased 300 bp, primarily due to the goodwill and intangible asset impairment charge and higher cost reduction and asset actions.

On a non-GAAP basis, adjusted operating income of $1,769.6 increased 9%, or $149.7, primarily due to higher volumes and favorable cost performance. Adjusted operating margin of 21.6% was flat as higher energy and natural gas pass-through to customers was offset by lower costs.

2016 vs. 2015

Operating income of $1,529.7 increased 24%, or $296.5, as lower operating costs of $235, lower business restructuring and cost reduction actions of $146, favorable pricing, net of energy, fuel, and raw material costs, of $33, and lower pension settlement losses of $14 were partially offset by higher business separation costs of $43, unfavorable currency impacts of $35, and lower volumes of $2. In addition, fiscal year 2015 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 $115, lower pension expense of $33, lower maintenance expense of $37, and lower other costs of $50.

Operating margin of 20.4% increased 460 bp, primarily due to favorable costs and favorable pricing, net of energy, fuel, and raw material costs.

On a non-GAAP basis, adjusted operating income of $1,619.9 increased 17%, or $231.3, and adjusted operating margin of 21.6% increased 390 bp.

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, other non‑operating income (expense), net, income tax provision, and depreciation and amortization expense. Adjusted EBITDA provides a useful metric for management to assess operating performance.

2017 vs. 2016

Adjusted EBITDA of $2,795.0 increased $173.5, or 7%, primarily due to higher volumes and favorable cost performance. Adjusted EBITDA margin of 34.1% decreased 80 bp, primarily due to a 90 bp impact from higher energy pass-through to customers.

2016 vs. 2015

Adjusted EBITDA of $2,621.5 increased $222.1, or 9%, primarily due to favorable costs and favorable pricing, net of energy, fuel, and raw material costs. Adjusted EBITDA margin of 34.9% increased 420 bp.

Equity Affiliates’ Income

2017 vs. 2016

Income from equity affiliates of $80.1 decreased $66.9, primarily due to a noncash impairment charge of $79.5 ($.36 per share) on our investment in Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (AHG), a 25%‑owned equity affiliate in our Industrial Gases – EMEA segment. This charge has been excluded from segment results. On a non-GAAP basis, adjusted equity affiliates' income of $159.6 increased 9%, or $12.6.

Refer to Note 8, Summarized Financial Information of Equity Affiliates, to the consolidated financial statements for additional information regarding the impairment charge.

2016 vs. 2015

Income from equity affiliates of $147.0 decreased $5.3, as lower income from Industrial Gases – Americas and Industrial Gases – EMEA affiliates was partially offset by higher income from Industrial Gases – Asia affiliates.

Cost of Sales and Gross Margin

2017 vs. 2016

Cost of sales of $5,753.4 increased $576.8, or 11%, due to higher costs attributable to sales volumes of $418, higher energy and natural gas cost pass-through to customers of $218, and higher other costs of $24, partially offset by favorable currency impacts of $83.

Gross margin of 29.7% decreased 130 bp, primarily due to higher energy and natural gas cost pass-through to customers and unfavorable volume mix.

2016 vs. 2015

Cost of sales of $5,176.6 decreased $421.6, or 8%, primarily due to lower energy costs of $271, a favorable currency impact of $192, and lower operating costs of $148, partially offset by higher costs attributable to sales volumes of $189. Operating costs included favorable impacts from cost reduction actions of $48, lower maintenance costs of $37, lower pension expense of $21, 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 31.0% increased 250 bp, primarily due to lower costs.

Selling and Administrative Expense

2017 vs. 2016

Selling and administrative expense of $715.6 increased $30.6, or 4%, primarily due to costs in support of transition services agreements with Versum and Evonik, for which the reimbursement is reflected in "Other income (expense), net." Selling and administrative expense as a percent of sales decreased to 8.7% from 9.1%.

2016 vs. 2015

Selling and administrative expense of $685.0 decreased $88.0, or 11%, primarily due to the benefits of cost reduction actions of $59 and favorable currency effects of $27. Selling and administrative expense as a percent of sales decreased to 9.1% from 9.9%.

Research and Development

2017 vs. 2016

Research and development expense of $57.8 decreased $13.8, or 19%. Research and development expense as a percent of sales decreased to .7% from 1.0%.

2016 vs. 2015

Research and development expense of $71.6 decreased $4.8, or 6%. Fiscal year 2016 and 2015 research and development expense as a percent of sales was 1.0%.

Business Separation Costs

In connection with the disposition of EMD and PMD, we incurred separation costs of $30.2 ($26.5 after-tax, or $.12 per share), $50.6 ($46.7 after-tax, or $.21 per share), and $7.5 ($.03 per share) in fiscal year 2017, 2016, and 2015, respectively. These costs are reflected on the consolidated income statements as “Business separation costs” and include legal, advisory, and pension related costs.

Our fiscal year 2017 income tax provision includes net tax benefits of $5.5 ($.02 per share) primarily related to changes in tax positions on business separation activities. Our fiscal year 2016 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 that was declared in June 2016 to repatriate $443.8 from a subsidiary in South Korea to the U.S. in anticipation of the separation of EMD from the industrial gases business in South Korea.

Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional information regarding the dispositions.

Business Restructuring and Cost Reduction Actions

We recorded charges in fiscal year 2017, 2016, and 2015 for business restructuring and cost reduction actions. The charges for these actions are excluded from segment operating income. Refer to Note 5, Business Restructuring and Cost Reduction Actions, to the consolidated financial statements for additional details on these actions.

Cost Reduction Actions

In fiscal year 2017, we recognized a net expense of $151.4 ($109.3 attributable to Air Products, after-tax, or $.49 per share), of which $154.8 related to actions taken during the current year, partially offset by the favorable settlement of the remaining $3.4 accrued balance associated with prior business restructuring actions. Asset actions totaled $88.5 and included charges resulting from the write‑down of an air separation unit in the Industrial Gases – EMEA segment that was constructed mainly to provide oxygen to one of the Energy‑from‑Waste plants, the planned sale of a non-industrial gas hardgoods business in the Industrial Gases – Americas segment, and the closure of a facility in the Corporate and other segment that manufactured LNG heat exchangers. Severance and other benefits totaled $66.3 and related to the elimination or planned elimination of approximately 625 positions, primarily in the Corporate and other segment and in the Industrial Gases – EMEA segment. The actions in the Corporate and other segment were driven by the reorganization of our engineering, manufacturing, and technology functions.

In fiscal year 2016, we recognized an expense of $34.5 ($24.7 after-tax, or $.11 per share) for severance and other benefits related to cost reduction actions which resulted in the elimination of approximately 610 positions. The expenses related primarily to the Industrial Gases – Americas segment and the Industrial Gases – EMEA segment.

Business Realignment and Reorganization

In fiscal year 2015, we recognized an expense of $180.1 ($132.9 after-tax, or $.61 per share). Severance and other benefits totaled $131.5 and related to the elimination of approximately 1,700 positions. Asset and associated contract actions totaled $48.6 and related primarily to a plant shutdown in the Corporate and other segment and the exit of a product line within the Industrial Gases – Global segment.

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 their retirement date. A participant's vested benefit is considered settled upon cash payment of the lump sum. We recognize pension settlement losses when cash payments exceed the sum of the service and interest cost components of net periodic benefit cost of the plan for the fiscal year. We recognized pension settlement losses of $10.5 ($6.6 after-tax, or $.03 per share), $5.1 ($3.3 after-tax, or $.02 per share), and $19.3 ($12.4 after-tax, or $.06 per share) in fiscal year 2017, 2016, and 2015, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss, primarily associated with the U.S. Supplementary Pension Plan.

Goodwill and Intangible Asset Impairment Charge

During the third quarter of fiscal year 2017, we determined 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. We recorded a noncash impairment charge of $162.1 ($154.1 attributable to Air Products, after-tax, or $.70 per share), which was driven by lower economic growth and profitability in the region. Refer to Note 10, Goodwill, and Note 11, Intangible Assets, to the consolidated financial statements for additional details.

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 were consolidated within our Industrial Gases – Americas segment. 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. Refer to Note 6, Business Combination, to the consolidated financial statements for additional details.

Other Income (Expense), Net

Items recorded to other income (expense), net arise from transactions and events not directly related to our principal income earning activities. The detail of other income (expense), net is presented in Note 23, Supplemental Information, to the consolidated financial statements.

2017 vs. 2016

Other income (expense), net of $121.0 increased $71.6, primarily due to income from transition services agreements with Versum and Evonik, income from the sale of assets and investments, including a gain of $12.2 ($7.6 after-tax, or $.03 per share) resulting from the sale of a parcel of land, and a favorable foreign exchange impact.

2016 vs. 2015

Other income (expense), net of $49.4 increased $3.9, primarily due to lower foreign exchange losses, favorable contract settlements, and receipt of a government subsidy. Fiscal year 2015 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 fiscal year 2015.

Interest Expense

	2017			2016			2015
Interest incurred	$	139.6		$	147.9		$	151.9
Less: Capitalized interest	19.0			32.7			49.1
Interest Expense	$	120.6		$	115.2		$	102.8

2017 vs. 2016

Interest incurred decreased $8.3 as the impact from a lower average debt balance of $26 was partially offset by the impact from a higher average interest rate on the debt portfolio of $19. The change in capitalized interest was driven by a decrease in the carrying value of projects under construction, primarily as a result of our decision to exit from the Energy-from-Waste business.

2016 vs. 2015

Interest incurred decreased $4.0. 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.

Other Non-Operating Income (Expense), Net

Other non-operating income (expense), net of $29.0 in fiscal year 2017 primarily resulted from interest income on cash and time deposits, which are comprised primarily of proceeds from the sale of PMD. Interest income was included in "Other income (expense), net" in 2016 and 2015. Interest income in previous periods was not material.

Loss on Extinguishment of Debt

On 30 September 2016, in anticipation of the spin-off of EMD, 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. This noncash exchange, which was excluded from the consolidated statements of cash flows, 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 22, Income Taxes, to the consolidated financial statements for details on factors affecting the effective tax rate.

2017 vs. 2016

The effective tax rate was 18.4% and 27.8% in 2017 and 2016, respectively. The current year rate included an impact of approximately 700 bp from a net income tax benefit resulting from a tax election related to a non-U.S. subsidiary and an impact of approximately 100 bp from excess tax benefits on share-based compensation resulting from the adoption of new accounting guidance in the first quarter of fiscal year 2017. These impacts were partially offset by an increase of approximately 200 bp due to both a goodwill impairment charge in our Latin America reporting unit and an impairment of an equity method investment for which no tax benefits were available. The 2016 rate included a 330 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 under Business Separation Costs. The remaining change was primarily due to the impact of business separation costs for which a tax benefit was estimated to not be available. On a non-GAAP basis, the adjusted effective tax rate decreased from 24.2% in 2016 to 23.2% in 2017, primarily due to excess tax benefits on share-based compensation. Refer to Note 2, New Accounting Guidance, to the consolidated financial statements for additional information on our adoption of the share-based compensation accounting guidance.

2016 vs. 2015

The effective tax rate was 27.8% and 23.7% in 2016 and 2015, respectively. The change included a 330 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 under Business Separation Costs. The remaining 80 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 estimated to not be available. On a non-GAAP basis, the adjusted effective tax rate increased from 24.0% in 2015 to 24.2% in 2016, primarily due to the increase in and mix of income in jurisdictions with a higher effective tax rate.

Discontinued Operations

The results of our former Materials Technologies segment and the former Energy-from-Waste segment have been presented as discontinued operations. Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional information, including detail of the major line items that comprise income from discontinued operations, net of tax, on the consolidated income statements for the fiscal years ended 30 September 2017, 2016, and 2015.

Materials Technologies

On 16 September 2015, we announced plans to separate our Materials Technologies segment, which contained EMD and PMD. On 1 October 2016, we completed the separation of EMD through the spin-off of Versum. On 3 January 2017, we completed the sale of PMD to Evonik for $3.8 billion in cash. A gain of $2,870 ($1,828 after-tax, or $8.32 per share) was recognized on the sale. As a result of the dispositions, both EMD and PMD are reflected in our consolidated financial statements as discontinued operations for all periods presented.

Energy-from-Waste

On 29 March 2016, the Board of Directors approved the Company’s exit of its Energy‑from‑Waste (EfW) business and efforts to start up and operate the two EfW projects located in Tees Valley, United Kingdom, were discontinued. Since that time, the EfW segment has been presented as a discontinued operation. Our fiscal year 2016 loss from discontinued operations, net of tax, includes a loss on disposal of $945.7 ($846.6 after-tax) recorded to write down plant assets to their estimated net realizable value and record a liability for plant disposition and other costs.

During the first quarter of fiscal year 2017, we determined that it is unlikely for a buyer to assume the remaining assets and contract obligations, including land lease obligations. As a result, we recorded an additional loss of $59.3 ($47.1 after-tax) in results of discontinued operations, of which $53.0 was recorded primarily for land lease obligations and $6.3 was recorded to update our estimate of the net realizable value of the plant assets as of 31 December 2016. There have been no changes to our estimates during the remainder of fiscal year 2017. We may incur additional exit costs in future periods related to other outstanding commitments.

Segment Analysis

Industrial Gases – Americas

	2017			2016			2015
Sales	$	3,637.0		$	3,344.1		$	3,694.5
Operating income	950.6			893.2			806.1
Operating margin	26.1		%	26.7		%	21.8		%
Equity affiliates’ income	58.1			52.7			64.6
Adjusted EBITDA	1,473.1			1,389.5			1,288.2
Adjusted EBITDA margin	40.5		%	41.6		%	34.9		%

Industrial Gases – Americas Sales

	% Change from Prior Year
	2017		2016
Underlying business
Volume	2	%	(2	)%
Price	—	%	1	%
Energy and raw material cost pass-through	6	%	(6	)%
Currency	1	%	(2	)%
Total Industrial Gases – Americas Change	9	%	(9	)%

2017 vs. 2016

Underlying sales were up 2% from stronger hydrogen volumes and a new hydrogen plant in Canada. Higher energy and natural gas cost pass-through to customers increased sales by 6%. Favorable currency effects, primarily from the Chilean Peso, increased sales by 1%.

Operating income of $950.6 increased 6%, or $57.4, primarily due to lower operating costs of $37 and higher volumes of $18. Operating costs were lower due to benefits from productivity improvements. Operating margin decreased 60 bp from the prior year primarily due to higher energy and natural gas pass-through to customers, partially offset by favorable cost performance.

Equity affiliates’ income of $58.1 increased $5.4, primarily due to lower maintenance expense and a new plant onstream.

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 $893.2 increased 11%, or $87.1, 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 fiscal year 2015, 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.

Industrial Gases – EMEA

	2017			2016			2015
Sales	$	1,780.4		$	1,704.4		$	1,866.4
Operating income	387.1			384.6			331.3
Operating margin	21.7		%	22.6		%	17.8		%
Equity affiliates’ income	47.1			36.5			42.4
Adjusted EBITDA	611.3			606.8			568.0
Adjusted EBITDA margin	34.3		%	35.6		%	30.4		%

Industrial Gases – EMEA Sales

	% Change from Prior Year
	2017		2016
Underlying business
Volume	6	%	(2	)%
Price	—	%	1	%
Energy and raw material cost pass-through	1	%	(4	)%
Currency	(3	)%	(4	)%
Total Industrial Gases – EMEA Change	4	%	(9	)%

2017 vs. 2016

Underlying sales were up 6% from higher volumes as pricing was flat. Volumes increased primarily due to a new plant onstream in India. Higher energy and natural gas cost pass-through to customers increased sales by 1%. Unfavorable currency effects, primarily from the British Pound Sterling, reduced sales by 3%.

Operating income of $387.1 increased 1%, or $2.5, primarily due to lower operating costs of $21 and higher volumes, including a new plant onstream, of $15, partially offset by lower price net of power costs of $18 and unfavorable currency impacts of $15. Operating costs were lower primarily due to benefits from operational improvements. Operating margin decreased 90 bp from the prior year, as lower price net of power costs, higher energy and natural gas pass-through to customers, and unfavorable currency impacts were partially offset by favorable cost performance.

Equity affiliates’ income of $47.1 increased $10.6, primarily due to higher volumes.

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 in June of 2016 did not have a notable impact on our business.

Operating income of $384.6 increased 16%, or $53.3, primarily due to favorable operating costs of $60 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 fiscal year 2015 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.

Industrial Gases – Asia

	2017			2016			2015
Sales	$	1,964.7		$	1,720.4		$	1,661.3
Operating income	531.2			451.0			389.3
Operating margin	27.0		%	26.2		%	23.4		%
Equity affiliates’ income	53.5			57.8			46.1
Adjusted EBITDA	787.9			706.7			645.3
Adjusted EBITDA margin	40.1		%	41.1		%	38.8		%

Industrial Gases – Asia Sales

	% Change from Prior Year
	2017		2016
Underlying business
Volume	14	%	10	%
Price	1	%	(1	)%
Energy and raw material cost pass-through	—	%	—	%
Currency	(1	)%	(5	)%
Total Industrial Gases – Asia Change	14	%	4	%

2017 vs. 2016

Underlying sales were up 15% from higher volumes of 14% and higher pricing of 1%. Volumes increased primarily due to new plant onstreams, sale of equipment activity, and base business growth driven by higher merchant volumes across Asia. Pricing was up 1% primarily due to increases in China wholesale, spot, and underlying prices during the second half of the year across all merchant liquid product lines. Unfavorable currency effects reduced sales by 1%, primarily from the Chinese Renminbi, partially offset by strengthening of the South Korean Won and Taiwan Dollar.

Operating income of $531.2 increased 18%, or $80.2, due to higher volumes of $68 and higher price net of power costs of $24, partially offset by higher operating costs of $8 and an unfavorable currency impact of $4. Operating margin increased 80 bp versus the prior year, primarily due to higher price net of power costs and favorable volumes partially offset by unfavorable cost performance.

Equity affiliates’ income of $53.5 decreased $4.3, primarily due to favorable contract and insurance settlements in the prior year.

2016 vs. 2015

Underlying sales increased by 9% from higher volumes of 10%, 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 $451.0 increased 16%, or $61.7, primarily due to higher volumes of $66 and lower operating costs of $27, 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 280 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.

Industrial Gases – Global

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

	2017			2016			2015
Sales	$	722.9		$	498.8		$	286.7
Operating income (loss)	71.3			(21.3		)	(51.6		)
Adjusted EBITDA	81.1			(13.4		)	(35.9		)

2017 vs. 2016

Sales of $722.9 increased $224.1, or 45%. The increase in sales was primarily 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. In 2017, we recognized approximately $540 of sales related to the Jazan project.

Operating income of $71.3 increased $92.6 from an operating loss in the prior year, primarily from income on the Jazan project and productivity improvements.

2016 vs. 2015

Sales of $498.8 increased $212.1, or 74%. The increase in sales was driven by the Jazan project 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 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 fiscal year 2015.

Corporate and other

The Corporate and other segment includes two ongoing global businesses (our LNG equipment business and our liquid helium and liquid hydrogen transport and storage container businesses), and corporate support functions that benefit all the segments. Corporate and other also includes income and expense that is not directly associated with the business segments, including foreign exchange gains and losses and stranded costs. Stranded costs result from functional support previously provided to the two divisions comprising the former Materials Technologies segment. The majority of these costs are reimbursed to Air Products pursuant to short-term transition services agreements under which Air Products provides transition services to Versum for EMD and to Evonik for PMD. The reimbursement for costs in support of the transition services has been reflected on the consolidated income statements within "Other income (expense), net."

	2017			2016			2015
Sales	$	82.6		$	236.0		$	315.4
Operating loss	(170.6		)	(87.6		)	(86.5		)
Adjusted EBITDA	(158.4		)	(68.1		)	(66.2		)

2017 vs. 2016

Sales of $82.6 decreased $153.4, primarily due to lower LNG project activity. We expect continued weakness in new LNG project orders due to continued oversupply of LNG in the market. Operating loss of $170.6 increased $83.0 due to lower LNG activity, partially offset by productivity improvements and income from transition service agreements with Versum and Evonik.

2016 vs. 2015

Sales of $236.0 decreased $79.4, or 25%, primarily due to lower LNG sale of equipment activity. Operating loss of $87.6 increased 1%, or $1.1, due to lower LNG activity, mostly offset by benefits from our recent cost reduction actions and lower foreign exchange losses.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(Millions of dollars unless otherwise indicated, except for per 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 supplemental 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 has executed its strategic plan to restructure the Company to focus on its core Industrial Gases business. This resulted in significant cost reduction and asset actions that we believe are important for investors to understand separately from the performance of the underlying business. The reader should be aware that we may incur similar expenses in the future. 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. 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)		Equity Affiliates' Income			Income Tax Provision(B)			Net Income			Diluted EPS
2017 GAAP	$	1,427.6		17.4	%	$	80.1		$	260.9		$	1,134.4		$	5.16
2016 GAAP	1,529.7			20.4	%	147.0			432.6			1,099.5			5.04
Change GAAP	$	(102.1	)	(300	)bp	$	(66.9	)	$	(171.7	)	$	34.9		$	.12
% Change GAAP	(7		)%			(46		)%	(40		)%	3		%	2		%
2017 GAAP	$	1,427.6		17.4	%	$	80.1		$	260.9		$	1,134.4		$	5.16
Business separation costs(C)	30.2			.4	%	—			3.7			26.5			.12
Tax benefit associated with business separation(C)	—			—	%	—			5.5			(5.5		)	(.02		)
Business restructuring and cost reduction actions(D)	151.4			1.8	%	—			41.6			109.3			.49
Pension settlement loss	10.5			.1	%	—			3.9			6.6			.03
Goodwill and intangible asset impairment charge(E)	162.1			2.0	%	—			4.6			154.1			.70
Gain on land sale(F)	(12.2		)	(.1	)%	—			(4.6		)	(7.6		)	(.03		)
Equity method investment impairment charge	—			—	%	79.5			—			79.5			.36
Tax election benefit	—			—	%	—			111.4			(111.4		)	(.50		)
2017 Non-GAAP Measure	$	1,769.6		21.6	%	$	159.6		$	427.0		$	1,385.9		$	6.31
2016 GAAP	$	1,529.7		20.4	%	$	147.0		$	432.6		$	1,099.5		$	5.04
Business separation costs(C)	50.6			.7	%	—			3.9			46.7			.21
Tax costs associated with business separation(C)	—			—	%	—			(51.8		)	51.8			.24
Business restructuring and cost reduction actions	34.5			.4	%	—			9.8			24.7			.11
Pension settlement loss	5.1			.1	%	—			1.8			3.3			.02
Loss on extinguishment of debt(G)	—			—	%	—			2.6			4.3			.02
2016 Non-GAAP Measure	$	1,619.9		21.6	%	$	147.0		$	398.9		$	1,230.3		$	5.64
Change Non-GAAP Measure	$	149.7		—		$	12.6		$	28.1		$	155.6		$	.67
% Change Non-GAAP Measure	9		%			9		%	7		%	13		%	12		%

	Continuing Operations
	Operating Income			Operating Margin(A)		Equity Affiliates' Income			Income Tax Provision(B)			Net Income			Diluted EPS
2016 GAAP	$	1,529.7		20.4	%	$	147.0		$	432.6		$	1,099.5		$	5.04
2015 GAAP	1,233.2			15.8	%	152.3			300.2			933.3			4.29
Change GAAP	$	296.5		460	bp	$	(5.3	)	$	132.4		$	166.2		$	.75
% Change GAAP	24		%			(3		)%	44		%	18		%	17		%
2016 GAAP	$	1,529.7		20.4	%	$	147.0		$	432.6		$	1,099.5		$	5.04
Business separation costs(C)	50.6			.7	%	—			3.9			46.7			.21
Tax costs associated with business separation(C)	—			—	%	—			(51.8		)	51.8			.24
Business restructuring and cost reduction actions	34.5			.4	%	—			9.8			24.7			.11
Pension settlement loss	5.1			.1	%	—			1.8			3.3			.02
Loss on extinguishment of debt(G)	—			—	%	—			2.6			4.3			.02
2016 Non-GAAP Measure	$	1,619.9		21.6	%	$	147.0		$	398.9		$	1,230.3		$	5.64
2015 GAAP	$	1,233.2		15.8	%	$	152.3		$	300.2		$	933.3		$	4.29
Business separation costs(C)	7.5			.1	%	—			—			7.5			.03
Business restructuring and cost reduction actions	180.1			2.3	%	—			47.2			132.9			.61
Pension settlement loss	19.3			.2	%	—			6.9			12.4			.06
Gain on previously held equity interest	(17.9		)	(.3	)%	—			(6.7		)	(11.2		)	(.05		)
Gain on land sales(F)	(33.6		)	(.4	)%	—			(5.3		)	(28.3		)	(.13		)
Loss on extinguishment of debt(G)	—			—	%	—			2.4			14.2			.07
2015 Non-GAAP Measure	$	1,388.6		17.7	%	$	152.3		$	344.7		$	1,060.8		$	4.88
Change Non-GAAP Measure	$	231.3		390	bp	$	(5.3	)	$	54.2		$	169.5		$	.76
% Change Non-GAAP Measure	17		%			(3		)%	16		%	16		%	16		%

(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 4, Materials Technologies Separation, to the consolidated financial statements for additional information.

(D)	Noncontrolling interests impact of $.5 in fiscal year 2017.

(E)	Noncontrolling interests impact of $3.4 in fiscal year 2017.

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

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

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, other non-operating income (expense), net, income tax provision, and depreciation and amortization expense. Adjusted EBITDA provides a useful metric for management to assess operating performance.

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

	2017			2016			2015			2014			2013
Income from Continuing Operations(A)	$	1,155.2		$	1,122.0		$	965.9		$	691.0		$	900.0
Add: Interest expense	120.6			115.2			102.8			124.0			138.8
Less: Other non-operating income (expense), net	29.0			—			—			—			—
Add: Income tax provision	260.9			432.6			300.2			258.1			275.1
Add: Depreciation and amortization	865.8			854.6			858.5			875.6			824.6
Add: Business separation costs	30.2			50.6			7.5			—			—
Add: Business restructuring and cost reduction actions	151.4			34.5			180.1			11.1			98.3
Add: Pension settlement loss	10.5			5.1			19.3			5.2			—
Add: Goodwill and intangible asset impairment charge	162.1			—			—			310.1			—
Less: Gain on previously held equity interest	—			—			17.9			—			—
Add: Advisory costs	—			—			—			—			10.1
Less: Gain on land sales(B)	12.2			—			33.6			—			—
Add: Equity method investment impairment charge	79.5			—			—			—			—
Add: Loss on extinguishment of debt	—			6.9			16.6			—			—
Adjusted EBITDA	$	2,795.0		$	2,621.5		$	2,399.4		$	2,275.1		$	2,246.9
Change GAAP
Income from continuing operations change	$	33.2		$	156.1		$	274.9		$	(209.0	)
Income from continuing operations % change	3		%	16		%	40		%	(23		)%
Change Non-GAAP
Adjusted EBITDA change	$	173.5		$	222.1		$	124.3		$	28.2
Adjusted EBITDA % change	7		%	9		%	5		%	1		%

(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			Corporate and other			Segment Total
GAAP Measure
Twelve Months Ended 30 September 2017
Operating income (loss)	$	950.6		$	387.1		$	531.2		$	71.3		$	(170.6	)	$	1,769.6
Operating margin	26.1		%	21.7		%	27.0		%							21.6		%
Twelve Months Ended 30 September 2016
Operating income (loss)	$	893.2		$	384.6		$	451.0		$	(21.3	)	$	(87.6	)	$	1,619.9
Operating margin	26.7		%	22.6		%	26.2		%							21.6		%
Twelve Months Ended 30 September 2015
Operating income (loss)	$	806.1		$	331.3		$	389.3		$	(51.6	)	$	(86.5	)	$	1,388.6
Operating margin	21.8		%	17.8		%	23.4		%							17.7		%
2017 vs. 2016
Operating income (loss) change	$	57.4		$	2.5		$	80.2		$	92.6		$	(83.0	)	$	149.7
Operating income (loss) % change	6		%	1		%	18		%	435		%	(95		)%	9		%
Operating margin change	(60		) bp	(90		) bp	80		bp							—
2016 vs. 2015
Operating income (loss) change	$	87.1		$	53.3		$	61.7		$	30.3		$	(1.1	)	$	231.3
Operating income (loss) % change	11		%	16		%	16		%	59		%	(1		)%	17		%
Operating margin change	490		bp	480		bp	280		bp							390		bp

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

	Industrial Gases– Americas			Industrial Gases– EMEA			Industrial Gases– Asia			Industrial Gases– Global			Corporate and other			Segment Total
Non-GAAP Measure
Twelve Months Ended 30 September 2017
Operating income (loss)	$	950.6		$	387.1		$	531.2		$	71.3		$	(170.6	)	$	1,769.6
Add: Depreciation and amortization	464.4			177.1			203.2			8.9			12.2			865.8
Add: Equity affiliates' income	58.1			47.1			53.5			.9			—			159.6
Adjusted EBITDA	$	1,473.1		$	611.3		$	787.9		$	81.1		$	(158.4	)	$	2,795.0
Adjusted EBITDA margin(A)	40.5		%	34.3		%	40.1		%							34.1		%
Twelve Months Ended 30 September 2016
Operating income (loss)	$	893.2		$	384.6		$	451.0		$	(21.3	)	$	(87.6	)	$	1,619.9
Add: Depreciation and amortization	443.6			185.7			197.9			7.9			19.5			854.6
Add: Equity affiliates' income	52.7			36.5			57.8			—			—			147.0
Adjusted EBITDA	$	1,389.5		$	606.8		$	706.7		$	(13.4	)	$	(68.1	)	$	2,621.5
Adjusted EBITDA margin(A)	41.6		%	35.6		%	41.1		%							34.9		%
Twelve Months Ended 30 September 2015
Operating income (loss)	$	806.1		$	331.3		$	389.3		$	(51.6	)	$	(86.5	)	$	1,388.6
Add: Depreciation and amortization	417.5			194.3			209.9			16.5			20.3			858.5
Add: Equity affiliates' income (loss)	64.6			42.4			46.1			(.8		)	—			152.3
Adjusted EBITDA	$	1,288.2		$	568.0		$	645.3		$	(35.9	)	$	(66.2	)	$	2,399.4
Adjusted EBITDA margin(A)	34.9		%	30.4		%	38.8		%							30.7		%
2017 vs. 2016
Adjusted EBITDA change	$	83.6		$	4.5		$	81.2		$	94.5		$	(90.3	)	$	173.5
Adjusted EBITDA % change	6		%	1		%	11		%	705		%	(133		)%	7		%
Adjusted EBITDA margin change	(110		) bp	(130		) bp	(100		) bp							(80		) bp
2016 vs. 2015
Adjusted EBITDA change	$	101.3		$	38.8		$	61.4		$	22.5		$	(1.9	)	$	222.1
Adjusted EBITDA % change	8		%	7		%	10		%	63		%	(3		)%	9		%
Adjusted EBITDA margin change	670		bp	520		bp	230		bp							420		bp

(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
	2017			2016			2015
Income Tax Provision—GAAP	$	260.9		$	432.6		$	300.2
Income from Continuing Operations before Taxes—GAAP	$	1,416.1		$	1,554.6		$	1,266.1
Effective Tax Rate—GAAP	18.4		%	27.8		%	23.7		%
Income Tax Provision—GAAP	$	260.9		$	432.6		$	300.2
Business separation costs	3.7			3.9			—
Tax benefit (costs) associated with business separation	5.5			(51.8		)	—
Business restructuring and cost reduction actions	41.6			9.8			47.2
Pension settlement loss	3.9			1.8			6.9
Goodwill and intangible asset impairment charge	4.6			—			—
Gain on previously held equity interest	—			—			(6.7		)
Gain on land sales	(4.6		)	—			(5.3		)
Equity method investment impairment charge	—			—			—
Loss on extinguishment of debt	—			2.6			2.4
Tax election benefit	111.4			—			—
Income Tax Provision—Non-GAAP Measure	$	427.0		$	398.9		$	344.7
Income from Continuing Operations before Taxes—GAAP	$	1,416.1		$	1,554.6		$	1,266.1
Business separation costs	30.2			50.6			7.5
Business restructuring and cost reduction actions	151.4			34.5			180.1
Pension settlement loss	10.5			5.1			19.3
Goodwill and intangible asset impairment charge	162.1			—			—
Gain on previously held equity interest	—			—			(17.9		)
Gain on land sales	(12.2		)	—			(33.6		)
Equity method investment impairment charge	79.5			—			—
Loss on extinguishment of debt	—			6.9			16.6
Income from Continuing Operations Before Taxes—Non-GAAP Measure	$	1,837.6		$	1,651.7		$	1,438.1
Effective Tax Rate—Non-GAAP Measure	23.2		%	24.2		%	24.0		%

LIQUIDITY AND CAPITAL RESOURCES

We maintained a strong financial position throughout 2017 and as of 30 September 2017 our consolidated balance sheet included cash and cash items of $3,273.6. The cash and cash items balance is higher than our historical trend and primarily results from the sale of PMD to Evonik on 3 January 2017. We continue to have consistent access to commercial paper markets, and cash flows from operating and financing activities are expected to meet liquidity needs for the foreseeable future.

As of 30 September 2017, we had $1,530.2 of foreign cash and cash items compared to a total amount of cash and cash items of $3,273.6. If the foreign cash and cash items are needed for operations in the U.S. or we otherwise elect to repatriate the funds, we may be required to accrue and pay U.S. taxes on a significant portion of these amounts. However, since we have significant current investment plans outside the U.S., it is our intent to permanently reinvest the majority of our foreign cash and cash items outside the U.S. Current financing alternatives do not require the repatriation of foreign funds.

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

Cash provided by (used for)		2017				2016				2015
Operating activities		$	2,534.1			$	2,258.8			$	2,047.0
Investing activities		(1,417.7		)		(864.8		)		(1,146.7		)
Financing activities		(2,040.9		)		(860.2		)		(960.4		)

Operating Activities

For the year ended 2017, cash provided by operating activities was $2,534.1. Income from continuing operations of $1,134.4 included a goodwill and intangible impairment charge of $162.1, an equity method investment impairment charge of $79.5, and a write-down of long-lived assets associated with restructuring of $69.2. Refer to Note 5, Business Restructuring and Cost Reduction Actions; Note 8, Summarized Financial Information of Equity Affiliates; Note 10, Goodwill; and Note 11, Intangible Assets, of the consolidated financial statements for additional information on these charges. Other specifically identified adjustments to income from continuing operations include depreciation and amortization, deferred income taxes, share-based compensation, noncurrent capital lease receivables, and undistributed earnings of unconsolidated affiliates. Other adjustments of $165.4 included changes in uncertain tax positions and the fair value of foreign exchange contracts that hedge intercompany loans as well as pension contributions and expense. The working capital accounts were a source of cash of $48.0 that were primarily driven by payables and accrued liabilities and other receivables, partially offset by other working capital and trade receivables. The increase in payables and accrued liabilities of $163.8 was primarily due to timing differences related to payables and accrued liabilities and an increase in customer advances of $52.8 primarily related to sale of equipment activity. The source of cash from other receivables of $124.7 was primarily due to the maturities of forward exchange contracts that hedged foreign currency exposures. Other working capital was a use of cash of $154.0, primarily driven by payments for income taxes. Trade receivables was a use of cash of $73.6 which is primarily due to timing differences.

For the year ended 2016, cash provided by operating activities was $2,258.8. Income from continuing operations of $1,099.5 included a loss on extinguishment of debt of $6.9. Other adjustments of $156.7 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 source of cash of $21.2 that were primarily driven by payables and accrued liabilities and inventory partially offset by trade receivables and other working capital. The increase in payables and accrued liabilities of $60.1 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. The use of cash from other working capital of $47.8 was primarily driven by advances associated with the purchase of helium partially offset by an increase in accrued income taxes, including the impacts of higher income.

For the year ended 2015, cash provided by operating activities was $2,047.0. Income from continuing operations of $933.3 included the write-down of long-lived assets associated with business restructuring of $40.2, a noncash 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 $120.1 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 $256.0. The increase of payables and accrued liabilities of $134.9 includes an increase in accrued incentive compensation of $72.7.

Investing Activities

For the year ended 30 September 2017, cash used for investing activities was $1,417.7. Capital expenditures for plant and equipment was $1,039.7. Purchases of investments of $2,692.6 include short-term instruments with original maturities greater than three months and less than one year. Proceeds from investments of $2,290.7 resulted from maturities of short-term instruments with original maturities greater than three months and less than one year.

For the year ended 30 September 2016, cash used for investing activities was $864.8, driven by capital expenditures for plant and equipment of $907.7. Proceeds from the sale of assets and investments of $44.6 was primarily driven by the receipt of $30.0 for our rights to a corporate aircraft that was under construction.

For the year ended 30 September 2015, cash used for investing activities was $1,146.7, 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.

Capital Expenditures

Capital expenditures are detailed in the following table:

	2017			2016			2015
Additions to plant and equipment	$	1,039.7		$	907.7		$	1,162.4
Acquisitions, less cash acquired	8.2			—			34.5
Investments in and advances to unconsolidated affiliates	8.1			—			4.3
Capital Expenditures on a GAAP Basis	$	1,056.0		$	907.7		$	1,201.2
Capital lease expenditures(A)	9.9			27.2			95.6
Purchase of noncontrolling interests in a subsidiary(A)	—			—			278.4
Capital Expenditures on a Non-GAAP Basis	$	1,065.9		$	934.9		$	1,575.2

(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 in the consolidated statements of cash flows 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 2017 totaled $1,056.0, compared to $907.7 in 2016. The increase of $148.3 was primarily due to higher capital expenditures on facility improvement projects and major project spending. Additions to plant and equipment also included support capital of a routine, ongoing nature, including expenditures for distribution equipment and facility improvements. Spending in 2017 and 2016 included plant and equipment constructed to provide oxygen and nitrogen for coal to liquid fuel in China, hydrogen to global markets, oxygen to the steel industry, and nitrogen for the electronics industry.

Capital expenditures on a non-GAAP basis in 2017 totaled $1,065.9 compared to $934.9 in 2016. The increase of $131.0 was primarily due to higher capital expenditures on facility improvement projects and major project spending partially offset by lower capital lease expenditures.

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 were excluded from the consolidated statements of cash flows and there was no impact in 2017. 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 2017 was $481 compared to $1,057 at 30 September 2016. The decrease was primarily driven by progress on the Jazan project.

2018 Outlook

Capital expenditures for new plant and equipment in 2018 are expected to be approximately $1,000 to $1,200. This range excludes possible acquisitions and our previously announced agreement to form a joint venture, Air Products Lu’an (Changzhi) Co., Ltd., with Lu’An Clean Energy Company that will build, own and operate four large air separation units as discussed in the Contractual Obligations section on page 43. 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 our current cash balance and cash generated from continuing operations. In addition, we intend to continue to evaluate acquisitions of small and medium size industrial gas companies or assets from other industrial gas companies; the purchase of existing industrial gas facilities from our customers to create long-term contracts where we own and operate the plant and sell industrial gases to the customer based on a fixed fee; and investment in very large industrial gas projects driven by demand for more energy, cleaner energy, and emerging market growth.

Financing Activities

For the year ended 2017, cash used for financing activities was $2,040.9. This consisted primarily of repayments of commercial paper and short-term borrowings of $798.6, dividend payments to shareholders of $787.9 and payments on long-term debt of $483.9. Payments on long-term debt primarily consisted of the repayment of a 4.625% Eurobond of €300 million ($317.2) that matured on 15 March 2017 and $138.0 for the repayment of industrial revenue bonds.

For the year ended 2016, cash used for financing activities was $860.2. Our borrowings (short- and long-term proceeds, net of repayments) were a net use of cash of $237.7 and included the repayment of 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 which were partially offset by debt proceeds from the issuance of a .375% Eurobond of €350 million ($386.9) on 1 June 2016. 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 noncash debt for debt exchange was excluded from the consolidated statements of cash flows. Refer to Note 4, Materials Technologies Separation, 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 $960.4 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 $73.9 and included $285.2 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.

Discontinued Operations

For the year ended 2017, cash flows of discontinued operations primarily included impacts associated with the spin-off of EMD as Versum on 1 October 2016 and the sale of PMD to Evonik on 3 January 2017. Cash used for operating activities of $966.2 was primarily driven by taxes paid on the gain on the sale of PMD. Cash provided by investing activities of $3,750.6 primarily resulted from the proceeds on the sale of PMD. Cash provided by financing activities resulted from a $69.5 receipt of cash from Versum related to finalization of the spin-off. Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional information.

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, and the Materials Technologies business which contained two divisions, EMD and PMD. Cash provided by discontinued operations was $753.6 primarily driven by income from operations of discontinued operations, which excludes the noncash impairment charge, of $386.1 and long-term debt proceeds from Versum's Term Loan B of $575.0, partially offset by capital expenditures for plant and equipment of $245.1. Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional information.

For the year ended 2015, cash used by discontinued operations was $47.2. The use of cash was primarily driven by expenditures for plant and equipment of $452.4 which primarily related to the Energy-from-Waste facilities. This use of cash was partially offset by income from discontinued operations of $344.6. Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional information.

Financing and Capital Structure

Capital needs in 2017 were satisfied primarily with cash from operations. At the end of 2017, total debt outstanding was $3,962.8 compared to $5,210.9 at the end of 2016, and cash and cash items were $3,273.6 compared to $1,293.2 at the end of 2016.

On 31 March 2017, we entered into a five-year $2,500.0 revolving credit agreement with a syndicate of banks (the “2017 Credit Agreement”), under which senior unsecured debt is available to both the Company and certain of its subsidiaries. The 2017 Credit Agreement provides a source of liquidity for the Company and supports its commercial paper program. The Company’s only financial covenant is a maximum ratio of total debt to total capitalization (total debt plus total equity) no greater than 70%. Total debt at 30 September 2017 and 2016, expressed as a percentage of total capitalization (total debt plus total equity), was 28.0% and 41.9%, respectively. No borrowings were outstanding under the 2017 Credit Agreement as of 30 September 2017.

The 2017 Credit Agreement terminates and replaces our previous $2,690.0 revolving credit agreement (the “2013 Credit Agreement”), which was to mature 30 April 2018. No borrowings were outstanding under the previous agreement at the time of its termination, and no early termination penalties were incurred.

Commitments totaling $23.4 are maintained by our foreign subsidiaries, all of which was borrowed and outstanding at 30 September 2017.

As of 30 September 2017, 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 2017, 2016 or 2015. At 30 September 2017, $485.3 in share repurchase authorization remains.

2018 Outlook

Cash flows from operations and financing activities are expected to meet liquidity needs for the foreseeable future and our working capital balance was $3,387.7 at 30 September 2017. We expect that we will continue to be in compliance with all of our financial covenants.

On 16 October 2017, we repaid a 1.2% Senior Note of $400 that matured on 15 October 2017. As of 30 September 2017, this note was reflected in current portion of long-term debt on the consolidated balance sheets.

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 2017, the Board of Directors increased the quarterly dividend from $.86 per share to $.95 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 on a continuing operations basis as of 30 September 2017:

	Total			2018			2019			2020			2021			2022			Thereafter
Long-term debt obligations
Debt maturities	$	3,837		$	416		$	409		$	356		$	433		$	401		$	1,822
Contractual interest	438			76			75			57			49			37			144
Capital leases	30			2			2			2			3			1			20
Operating leases	314			57			46			35			27			23			126
Pension obligations	698			52			47			47			46			48			458
Unconditional purchase obligations	6,533			822			234			275			309			285			4,608
Obligation for future contribution to an equity affiliate	100			—			—			100			—			—			—
Total Contractual Obligations	$	11,950		$	1,425		$	813		$	872		$	867		$	795		$	7,178

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 $655 of long-term debt subject to variable interest rates at 30 September 2017, 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 2017. Variable interest rates are primarily determined by U.S. short-term tax-exempt interest rates and by interbank offer rates.

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, less the net pension liability transferred to discontinued operations. 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 $5,600 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 $280 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.

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 $300 for additional plant and equipment are included in the unconditional purchase obligations in 2018. In addition, we have purchase commitments totaling approximately $180 in 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 2017 and 2016, we recorded a noncurrent liability of $94.4 for our obligation to make future equity contributions in 2020 based on our proportionate share of the advances received by the joint venture under the loan.

Investment in Joint Venture

On 10 September 2017, Air Products signed an agreement to form a joint venture, Air Products Lu’an (Changzhi) Co., Ltd., with Lu’An Clean Energy Company. Air Products has already invested $300 million to build, own, and operate four large air separation units to supply the Changzhi City site. Under the agreement, Air Products will contribute the air separation units and invest an additional $500. Air Products will own 60% of the joint venture and will consolidate its financial results. Closing will occur upon the completion of initial operational start-up and government and regulatory approvals. Due to the uncertainty of those milestones, the additional investment has been excluded from the contractual obligations table above.

Income Tax Liabilities

Noncurrent deferred income tax liabilities as of 30 September 2017 were $778.4. Tax liabilities related to unrecognized tax benefits as of 30 September 2017 were $146.4. These tax liabilities were excluded from the Contractual Obligations table as it is impractical to determine a cash impact by year given that payments will vary according to changes in tax laws, tax rates, and our operating results. In addition, there are uncertainties in timing of the effective settlement of our uncertain tax positions with respective taxing authorities. Refer to Note 22, Income Taxes, to the consolidated financial statements for additional information.

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. The shift to defined contribution plans is expected to continue 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 2017 measurement date increased to $4,409.2 from $4,116.4 at the end of fiscal year 2016. The projected benefit obligation for these plans was $5,107.1 and $5,327.3 at the end of fiscal years 2017 and 2016, respectively. The net unfunded liability decreased by approximately $513 from $1,211 to $698, primarily due to higher discount rates, favorable asset experience and the effects of the Versum spin-off and the sale of PMD to Evonik. Refer to Note 16, Retirement Benefits, to the consolidated financial statements for comprehensive and detailed disclosures on our postretirement benefits.

Pension Expense

	2017			2016			2015
Pension expense – Continuing operations	$	72.0		$	55.8		$	115.0
Special terminations, settlements, and curtailments (included above)	15.0			6.0			30.5
Weighted average discount rate(A)	3.0		%	4.1		%	4.0		%
Weighted average expected rate of return on plan assets	7.4		%	7.5		%	7.4		%
Weighted average expected rate of compensation increase	3.5		%	3.5		%	3.5		%

(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 accounted for this as a change in accounting estimate and, accordingly, accounted for it prospectively. This change did not affect the measurement of the total benefit obligation.

2017 vs. 2016

Pension expense, excluding special items, increased from the prior year primarily due to a decrease in the discount rate offset by favorable asset experience. Special items of $15.0 included pension settlement losses of $10.5 related to the U.S. Supplementary Pension Plan, curtailment and special termination benefits of $4.5, $2.5 of which was reflected in "Business separation costs" and $2.0 reflected in "Business restructuring and cost reduction actions" on the consolidated income statements.

2016 vs. 2015

Pension expense, excluding special items, decreased from fiscal year 2015 due to the adoption of the spot rate approach, which reduced service cost and interest cost, and the impacts 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 $6.0 included pension settlement losses of $5.1, special termination benefits of $2.0, and curtailment gains of $1.1. These resulted primarily from our recent business restructuring and cost reduction actions.

2018 Outlook

In 2018, pension expense, excluding special items, is expected to be relatively flat compared to 2017 with a range of approximately $50 to $55. This results from lower loss amortization primarily due to favorable asset experience, offset by the impact of lower discount rates and a lower expected return on assets. Pension settlement losses of $5 to $10 are expected, depending on the timing of retirements. In 2018, we expect pension expense to include approximately $128 for amortization of actuarial losses. In 2017, total company pension expense, which includes both continuing and discontinued operations, included amortization of actuarial losses of $143. Net actuarial losses of $352 were recognized in accumulated other comprehensive income in 2017. 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 2018.

As noted in Note 2, New Accounting Guidance, to the consolidated financial statements, we expect to early adopt guidance on the presentation of net periodic pension and postretirement benefit cost in 2018. The amendments require that the service cost component of the net periodic benefit cost be presented in the same line items as other compensation costs arising from services rendered by employees during the period. The other components of net periodic benefit cost will be presented outside of operating income.

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 2017 and 2016, our cash contributions to funded plans and benefit payments for unfunded plans were $64.1 and $79.3, respectively.

For 2018, cash contributions to defined benefit plans are estimated to be $50 to $70. 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 pages 41-43 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 $11.4, $12.2, and $11.8 in 2017, 2016, and 2015, 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 in 2017, $3 in 2016, and $2 in 2015 on capital projects to control pollution. Capital expenditures to control pollution in future years are estimated to be approximately $3 in both 2018 and 2019.

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 $83 to a reasonably possible upper exposure of $97 as of 30 September 2017. The consolidated balance sheets at 30 September 2017 and 2016 included an accrual of $83.6 and $81.4, 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 regulatory regimes governing emissions of greenhouse gases ("GHG"), including carbon dioxide. These include existing coverage under the European Union Emission Trading Scheme, California and Ontario cap and trade schemes, Alberta’s Specified Gas Emitters Regulation, China’s Emission Trading Scheme pilots, South Korea’s Emission Trading Scheme, and mandatory reporting and anticipated constraints on GHG emissions under an Ontario cap and trade scheme, nation-wide expansion of the China Emission Trading Scheme, and revisions to the Alberta regulation. In addition, the U.S. Environmental Protection Agency ("EPA") requires mandatory reporting of GHG emissions and is regulating GHG emissions for new construction and major modifications to existing facilities. Some jurisdictions have various mechanisms to target the power sector to achieve emission reductions, which often result in higher power costs.

Increased public concern may result in more international, U.S. federal, and/or regional requirements to reduce or mitigate the effects of GHG. Although uncertain, these developments could increase our costs related to consumption of electric power and hydrogen production. We believe it will be able to mitigate some of the increased costs through contractual terms, but the lack of definitive legislation or regulatory requirements prevents an accurate estimate of the long-term impact these measures will have on our operations. Any legislation that limits or taxes GHG emissions could negatively impact our growth, increase our operating costs, or reduce 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 steam methane reforming, enable cleaner transportation fuels, and facilitate alternate fuel source development. In addition, the potential demand for clean coal 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 $540 and $300 during fiscal year 2017 and 2016, respectively. Sales related to this contract 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 2017 totaled $8,440.2, and depreciation expense totaled $843.2 during 2017. 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. 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 would impact annual depreciation expense as summarized below:

		Decrease Life By 1 Year				Increase Life By 1 Year
Industrial Gases – Regional		$	40			$	(35	)

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 to the results of discontinued operations of $913.5 to reduce the carrying values of plant assets to their estimated net realizable value. 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. During the first quarter of fiscal year 2017, we recorded an additional loss of $6.3 to update our estimate of the net realizable value of the plant assets as of 31 December 2016 of $11.0. In addition, a charge of $45.7 was recorded to continuing operations to write-down the air separation unit in the Industrials Gases–EMEA segment that was constructed mainly to provide oxygen to one of the Energy-from-Waste plants to its net realizable value of $1.4. There have been no changes to our estimates during the remainder of 2017. Refer to Note 3, Discontinued Operations, and Note 5, Business Restructuring and Cost Reduction Actions, for additional information.

In the third quarter of 2017, we performed interim impairment testing of our Latin America reporting unit (LASA) long-lived assets and indefinite-lived intangible assets, including goodwill, as of 30 June 2017. See the discussions below under Goodwill and Intangible Assets on 2017 Impairment Testing. We also tested the recoverability of LASA's long-lived assets, including finite-lived intangible assets subject to amortization, and concluded that they were recoverable from expected future undiscounted cash flows.

Goodwill

The acquisition method of accounting for business combinations requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the aggregate purchase price over the fair value of identifiable net assets of an acquired entity. Goodwill was $721.5 as of 30 September 2017. 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. We have five business segments and eleven 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.

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 quantitative test is required. We chose to bypass the qualitative assessment and conduct quantitative testing, as further described below.

As described in Note 2, New Accounting Guidance, to the consolidated financial statements, we elected to early adopt the new accounting guidance which simplified the test for goodwill impairment by eliminating Step 2, which measured the impairment loss based on the fair value of goodwill. Under the new guidance, an impairment loss will be recognized for the amount by which the carrying amount of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

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 and/or EBITDA margins, discount rate, and exit multiple. Projected revenue growth rates and operating profit and/or EBITDA assumptions are consistent with those utilized in our operating plan and/or revised forecasts 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 and/or regional manufacturing 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.

2017 Impairment Testing

For the first nine months of fiscal year 2017, volumes declined in our Latin America reporting unit (LASA), and overall revenue growth did not meet expectations. Due to weak economic conditions in Latin America and expectations for continued volume weakness in the Latin American countries and markets in which we operate, we lowered our long-term growth projections for LASA by more than 200 basis points, which also unfavorably impacted our EBITDA margin. Management considered the revised projections for LASA to be indicators of potential impairment and, accordingly, performed interim impairment testing of our long-lived assets and indefinite-lived intangible assets, including goodwill, as of 30 June 2017 utilizing the revised projections. LASA represents approximately 6% of the Company’s total revenue with business units in Chile, Colombia, and other Latin America countries.

We estimated the fair value of LASA as of 30 June 2017 based on two valuation approaches, the income approach and the market approach, as described above. We reviewed relevant facts and circumstances in determining the weighting of the approaches. Under the income approach, we estimated the fair value of LASA based on management's estimates of revenue growth rates and EBITDA margins, taking into consideration business and market conditions for the Latin American countries and markets in which we operate. These estimates were consistent with our revised forecast and long-term financial planning processes, which included a reduction in sales growth by more than 200 basis points from that previously identified. We calculated the discount rate based on a market-participant, risk-adjusted weighted average cost of capital, which considers industry-specific rates of return on debt and equity capital for a target industry capital structure, adjusted for risks associated with business size and geography. Under the market approach, we estimated fair value based on market multiples of revenue and earnings derived from publicly-traded industrial gases companies and regional manufacturing companies, adjusted to reflect differences in size and growth prospects.

Based on the results of the valuations, we determined that the goodwill associated with LASA was impaired and recorded a noncash impairment charge of $145.3, the amount by which the carrying amount of the reporting unit exceeded its fair value, during the third quarter of 2017. This impairment is reflected on our consolidated income statements within “Goodwill and intangible asset impairment charge.” This charge was not deductible for tax purposes and has been excluded from segment operating income.

During the fourth quarter of 2017, we conducted our annual goodwill impairment testing. We determined that the fair value of all our reporting units substantially exceeded their carrying value except LASA, for which the fair value equaled the carrying value.

The excess of fair value over carrying value for our reporting units other than LASA ranged from approximately 80% 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 60% to 300%.

As of 30 September 2017, the carrying value of Latin America goodwill was $67.3, or less than 1% of consolidated total assets. Further events that could have a negative impact on the level of excess fair value over carrying value of the reporting unit include but are not limited to a decline in market share, pricing pressures, and further economic weakening in the markets we serve. Revenue growth and EBITDA margin assumptions are two primary drivers of the fair value of LASA. We determined that, with other assumptions held constant, a decrease in revenue growth rates of approximately 125 basis points or a decrease in EBITDA margin of approximately 225 basis points would result in an impairment of the remaining goodwill balance. The carrying value of LASA's other material assets at 30 September 2017 included: Plant and equipment, net of $345.3; customer relationships of $166.3; and trade names and trademarks of $46.9. The trade names and trademarks are classified as indefinite-lived intangible assets.

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 2017 totaled $321.4 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 2017 totaled $46.9 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 involves 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.

2017 Impairment Testing

In the third quarter of 2017, we conducted an interim impairment test and determined that the carrying value of the LASA indefinite-lived intangible assets was impaired. We determined that the carrying value of trade names and trademarks was in excess of fair value, and as a result, we recorded a noncash impairment charge of $16.8 to reduce these indefinite-lived intangible assets to their fair value. This impairment is reflected on our consolidated income statements within “Goodwill and intangible asset impairment charge"

In the fourth quarter of 2017, 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 $1,286.9 at 30 September 2017. 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 the income approach and/or market approach. We utilize estimated discounted future cash flows expected to be generated by the investee under the income approach. For the market approach, we utilize market multiples of revenue and earnings derived from comparable publicly-traded industrial gases companies. Changes in key assumptions about the financial condition of an investee or actual conditions that differ from estimates could result in an impairment charge.

During the third quarter of fiscal year 2017, Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (AHG), a 25%‑owned equity affiliate in our Industrial Gases – EMEA segment, completed a review of its business plan and outlook. As a result of the revised business plan, we determined there was an other-than-temporary impairment of our investment in AHG and, therefore, recorded a noncash impairment charge of $79.5 to reduce the carrying value of our investment. This charge is reflected on our consolidated income statements within “Equity affiliates' income” and was not deductible for tax purposes.

The decline in value results from expectations for lower future cash flows to be generated by AHG, primarily due to challenging economic conditions in Saudi Arabia, including the impacts of lower prices in the oil and gas industry, increased competition, and capital project growth opportunities not materializing as anticipated. The AHG investment was valued based on the results of the income and market valuation approaches.

The income approach utilized a discount rate based on a market-participant, risk-adjusted weighted average cost of capital, which considers industry required rates of return on debt and equity capital for a target industry capital structure adjusted for risks associated with size and geography. Other significant estimates and assumptions that drive our updated valuation of AHG include revenue growth rates and profit margins that were lower than those upon acquisition and our assessment of AHG's business improvement plan effectiveness.

Under the market approach, we estimated fair value based on market multiples of revenue and earnings derived from publicly-traded industrial gases companies engaged in similar lines of business, adjusted to reflect differences in size and growth prospects.

As of 30 September 2017, the carrying value of our investment in AHG is $66.7 and is reflected in our Industrial Gases – EMEA segment. The investment is reported in “Investment in net assets of and advances to equity affiliates” on our consolidated balance sheets.

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 costs or labor hours incurred to date compared with total estimated costs or labor hours to be incurred. 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.

Changes in estimates on projects accounted for under the percentage-of-completion method, including the Jazan project, favorably impacted operating income by approximately $27 in fiscal year 2017 and $20 in fiscal year 2016. Our changes in estimates would not have significantly impacted amounts recorded in prior years. Changes in estimates during fiscal year 2015 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 2017, accrued income taxes and net deferred tax liabilities amounted to $98.6 and $603.9, respectively. Tax liabilities related to uncertain tax positions as of 30 September 2017 were $146.4, excluding interest and penalties. Income tax expense for the year ended 30 September 2017 was $260.9. Disclosures related to income taxes are included in Note 22, Income Taxes, to the consolidated financial statements.

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

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

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

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

Pension and Other Postretirement Benefits

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

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

Several assumptions and statistical variables are used in the models to calculate the expense and liability related to the plans. We determine assumptions about the discount rate, the expected rate of return on plan assets, and the rate of compensation increase. Note 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. Mortality rates are based on the most recent Society of Actuaries tables. 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.

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 accounted for this as a change in accounting

estimate and, accordingly accounted for it on a prospective basis. This change did 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 changes 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 $36 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 $15 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

In the first quarter of fiscal year 2017, we adopted guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt instead of as a separate deferred asset. The guidance resulted in a reclassification adjustment that decreased other noncurrent assets by $17.0 with a corresponding decrease to long-term debt as of 30 September 2016. We have elected to continue to present debt issuance costs associated with a line-of-credit arrangement as a deferred asset, regardless of whether there are any outstanding borrowings.

In addition, during the first quarter of fiscal year 2017, we adopted guidance that simplified the accounting for employee share-based payments. The new guidance requires excess tax benefits and deficiencies to be

recognized in the income statement rather than in additional paid-in capital on the balance sheet. As a result of applying this change prospectively, we recognized $17.6 of excess tax benefits in our provision for income taxes during fiscal year 2017. Adoption of this guidance resulted in the presentation of excess tax benefits as an operating activity on the statement of cash flows rather than a financing activity. We applied these presentation changes retrospectively to all periods presented.

In the third quarter of fiscal year 2017, we elected to early adopt guidance which simplified the test for goodwill impairment by eliminating Step 2, which measured the impairment loss based on the fair value of goodwill. Under the new guidance, an impairment loss will be recognized for the amount by which the carrying amount of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Refer to Note 10, Goodwill, for a discussion of our interim and annual goodwill impairment tests.

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; political risks, including the risks of unanticipated government actions; acts of war or terrorism; the inability to eliminate stranded costs previously allocated to the Company's Electronic Materials and Performance Materials divisions, which have been divested, and other unexpected impacts of the divestitures; 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; our ability to execute the projects in our backlog; asset impairments due to economic conditions or specific events; the impact of price fluctuations in natural gas and disruptions in markets and the economy due to oil price volatility; costs and outcomes of litigation or regulatory investigations; the success of productivity and operational improvement programs; the timing, impact, and other uncertainties of future acquisitions or divestitures, including reputational impacts; the Company's ability to implement and operate with new technologies; the impact of changes in environmental, tax or other legislation, economic sanctions and regulatory activities in jurisdictions in which the Company and its affiliates operate; and other risk factors described in Part I, Item 1A. Risk Factors, of this Form 10-K. The Company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in this report 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.