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

OF OPERATIONS

Business Overview	20
2018 in Summary	21
2019 Outlook	23
Results of Operations	23
Reconciliation of Non-GAAP Financial Measures	33
Liquidity and Capital Resources	40
Contractual Obligations	43
Pension Benefits	45
Environmental Matters	46
Off-Balance Sheet Arrangements	47
Related Party Transactions	48
Inflation	48
Critical Accounting Policies and Estimates	48
New Accounting Guidance	55

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 expectations and assumptions as of the date of this report and are not guarantees of future performance. 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, those described in our Forward-Looking Statements and Part I, Item 1A. Risk Factors, of this Annual Report on Form 10-K.

The following discussion should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this report. Unless otherwise indicated, financial information is presented on a continuing operations basis. 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.

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 33-39. Descriptions of the excluded items appear on pages 25-28.

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, process, and specialty gases and related equipment to many industries including refining, chemical, gasification, metals, electronics, manufacturing, and food and beverage. Air Products is also the world’s leading supplier of liquefied natural gas (LNG) process technology and equipment. With operations in 50 countries, in fiscal year 2018 we had sales of $8.9 billion, assets of $19.2 billion, and a worldwide workforce of approximately 16,300 full- and part-time employees.

As of 30 September 2018, 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.

2018 IN SUMMARY

In fiscal year 2018, we delivered strong safety and financial results. Sales of $8.9 billion increased nine percent over the prior year primarily driven by higher volumes from base business growth and new, large industrial gas project onstreams. The higher regional volumes were partially offset by lower sale of equipment activity on our Jazan project as we near project completion. In addition, we began to execute our gasification strategy with the completion and onstream of the Lu'An acquisition and our announcements of the Jazan gasifier/power project in Jazan, Saudi Arabia, the Yankuang coal-to-syngas production facility in Yulin City, Shaanxi Province, China, and the Jiutai coal-to-syngas project in Hohhot, China.

We delivered operating margin of 22.0% and adjusted EBITDA margin of 34.9%. Diluted EPS of $6.59 increased 28% from the prior year. On a non-GAAP basis, adjusted diluted EPS of $7.45 increased 18%.

Highlights for 2018

•	Sales of $8,930.2 increased 9%, or $742.6, from underlying sales growth of 7% and favorable currency impacts of 2%. The underlying sales growth was primarily driven by higher volumes across all regional Industrial Gases segments, partially offset by lower sale of equipment activity in the Industrial Gases – Global segment.

•	Operating income of $1,965.6 increased 37%, or $525.6, and operating margin of 22.0% increased 440 bp. On a non‑GAAP basis, adjusted operating income of $1,941.5 increased 9%, or $167.7, and adjusted operating margin of 21.7% was flat.

•	Income from continuing operations of $1,455.6 increased 28%, or $321.2, and diluted EPS of $6.59 increased 28%, or $1.43. On a non-GAAP basis, adjusted income from continuing operations of $1,644.7 increased 19%, or $258.8, and adjusted diluted EPS of $7.45 increased 18%, or $1.14. A summary table of changes in diluted earnings per share is presented on the following page.

•	Adjusted EBITDA of $3,115.5 increased 11%, or $316.3. Adjusted EBITDA margin of 34.9% increased 70 bp.

•	We completed the formation of a syngas supply joint venture with Lu'An, including the acquisition of Lu'An's gasification and syngas purification assets.

•	We increased our quarterly dividend by 16% from $.95 to $1.10 per share, or $4.40 per share annually, the largest increase in Company history. This represents the 36th consecutive year that we have increased our dividend payment.

Changes in Diluted Earnings per Share Attributable to Air Products

										Increase
		2018				2017				(Decrease)
Diluted Earnings per Share
Net income			$6.78				$13.65				($6.87	)
Income from discontinued operations		.19				8.49				(8.30		)
Income from Continuing Operations – GAAP			$6.59				$5.16				$1.43
Operating Income Impact (after-tax)
Underlying business
Volume											$.71
Price/raw materials										.16
Costs										(.45		)
Currency										.16
Change in inventory valuation method										.08
Business separation costs										.12
Cost reduction and asset actions										.49
Goodwill and intangible asset impairment charge										.70
Gain on land sale										(.03		)
Total Operating Income Impact (after-tax)											$1.94
Other Impact (after-tax)
Equity affiliates' income										.15
Equity method investment impairment charge										.36
Interest expense										(.03		)
Other non-operating income (expense), net										(.04		)
Income tax										.44
Tax reform repatriation										(2.16		)
Tax reform benefit related to deemed foreign dividends										.25
Tax reform rate change and other										.96
Tax restructuring										.16
Tax benefit associated with business separation										(.02		)
Tax election benefit										(.50		)
Noncontrolling interests										(.05		)
Weighted average diluted shares										(.03		)
Total Other Impact (after-tax)											($.51	)
Total Change in Diluted Earnings per Share from Continuing Operations – GAAP Measure											$1.43

										Increase
		2018				2017				(Decrease)
Income from Continuing Operations – GAAP Basis			$6.59				$5.16				$1.43
Change in inventory valuation method		(.08		)		—					($.08	)
Business separation costs		—				.12				(.12		)
Tax benefit associated with business separation		—				(.02		)		.02
Cost reduction and asset actions		—				.49				(.49		)
Goodwill and intangible asset impairment charge		—				.70				(.70		)
Gain on land sale		—				(.03		)		.03
Equity method investment impairment charge		—				.36				(.36		)
Pension settlement loss		.15				.03				.12
Tax reform repatriation		2.16				—				2.16
Tax reform benefit related to deemed foreign dividends		(.25		)		—				(.25		)
Tax reform rate change and other		(.96		)		—				(.96		)
Tax restructuring		(.16		)		—				(.16		)
Tax election benefit		—				(.50		)		.50
Income from Continuing Operations – Non-GAAP Measure			$7.45				$6.31				$1.14

2019 OUTLOOK

In fiscal year 2019, we intend to grow our earnings by continuing to improve our base businesses and by bringing new, large projects onstream. We expect the full year impact of the Lu'An project to be a large contributor to our earnings growth. Backed by our strong financial position, we will strive to continue to win and invest in key growth projects, including large gasification projects that are consistent with our onsite business model. In addition, we expect lower sale of equipment activity from our Jazan project as it nears completion.

The above guidance should be read in conjunction with the section entitled “Forward-Looking Statements” of this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Discussion of Consolidated Results

	2018			2017			2016
Sales		$8,930.2			$8,187.6			$7,503.7
Operating income	1,965.6			1,440.0			1,535.1
Operating margin	22.0		%	17.6		%	20.5		%
Equity affiliates’ income	174.8			80.1			147.0
Income from continuing operations	1,455.6			1,134.4			1,099.5
Non-GAAP Measures
Adjusted EBITDA		$3,115.5			$2,799.2			$2,621.8
Adjusted EBITDA margin	34.9		%	34.2		%	34.9		%
Adjusted operating income	1,941.5			1,773.8			1,620.2
Adjusted operating margin	21.7		%	21.7		%	21.6		%
Adjusted equity affiliates' income	203.3			159.6			147.0

	% Change from Prior Year
Sales	2018		2017
Underlying business
Volume	6	%	6	%
Price	1	%	1	%
Energy and raw material cost pass-through	—	%	3	%
Currency	2	%	(1	)%
Total Consolidated Sales Change	9	%	9	%

2018 vs. 2017

Sales of $8,930.2 increased 9%, or $742.6. Underlying sales increased 7% from higher volumes of 6% and higher pricing of 1%. Volumes were higher across all regional Industrial Gases segments driven by new project onstreams, primarily in the Industrial Gases – Asia and Industrial Gases – EMEA segments, underlying base business growth, and an equipment sale resulting from the termination of a contract in the Industrial Gases – Asia segment. The regional volume increase was partially offset by lower sale of equipment activity in the Industrial Gases – Global segment. The pricing improvement was primarily attributable to the China and Europe merchant businesses. Energy and natural gas cost pass-through to customers was flat versus the prior year. Favorable currency impacts, primarily from the Euro, the British Pound Sterling, and the Chinese Renminbi, increased sales by 2%.

2017 vs. 2016

Sales of $8,187.6 increased 9.0%, 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%.

Operating Income and Margin

2018 vs. 2017

Operating income of $1,965.6 increased 37%, or $525.6, due to higher volumes of $204, a prior year goodwill and intangible asset impairment charge of $162, prior year cost reduction and asset actions of $151, favorable currency impacts of $47, favorable pricing, net of energy, fuel, and raw material costs, of $47, prior year business separation costs of $33, and a favorable impact from the change in inventory valuation method of $24, partially offset by unfavorable net operating costs of $130 and a prior year gain on land sale of $12. The increase in net operating costs was primarily driven by higher planned maintenance costs, lower cost reimbursement, including costs for transitions services, and higher costs to support growth opportunities. Operating margin of 22.0% increased 440 bp, primarily due to the goodwill and intangible asset impairment charge, cost reduction and asset actions, and business separation costs in the prior year.

On a non-GAAP basis, adjusted operating income of $1,941.5 increased 9%, or $167.7, primarily due to higher volumes, favorable currency impacts, and favorable pricing, net of energy, fuel, and raw material costs, partially offset by unfavorable net operating costs. Adjusted operating margin of 21.7% was flat as higher volumes and favorable pricing, net of power costs, were mostly offset by higher costs.

2017 vs. 2016

Operating income of $1,440.0 decreased 6%, or $95.1, as a goodwill and intangible asset impairment charge of $162, higher cost reduction and asset actions of $117, and unfavorable currency impacts of $9 were partially offset by favorable volumes of $83, favorable net operating costs of $73, lower business separation costs of $18, a gain on sale of land of $12, and favorable pricing, net of energy, fuel, and raw material costs of $7. Operating margin of 17.6% decreased 290 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 $1,773.8 increased 9%, or $153.6, primarily due to higher volumes and favorable cost performance. Adjusted operating margin of 21.7% increased 10 bp as lower costs were partially offset by higher energy and natural gas pass-through to customers.

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.

2018 vs. 2017

Adjusted EBITDA of $3,115.5 increased 11%, or $316.3, primarily due to higher volumes, favorable currency, positive pricing, and income from regional industrial gases equity affiliates, partially offset by higher costs. Adjusted EBITDA margin of 34.9% increased 70 bp, primarily due to higher volumes and income from regional industrial gases equity affiliates, partially offset by higher costs.

2017 vs. 2016

Adjusted EBITDA of $2,799.2 increased 7%, or $177.4, primarily due to higher volumes and favorable cost performance. Adjusted EBITDA margin of 34.2% decreased 70 bp, primarily due to a 90 bp impact from higher energy pass-through to customers.

Equity Affiliates’ Income

2018 vs. 2017

Income from equity affiliates of $174.8 increased $94.7. The fiscal year 2017 income included 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. Refer to Note 8, Summarized Financial Information of Equity Affiliates, to the consolidated financial statements for additional information. Fiscal year 2018 included an expense of $28.5 resulting from the U.S. Tax Cuts and Jobs Act. Refer to Note 22, Income Taxes, to the consolidated financial statements for additional information. On a non-GAAP basis, adjusted equity affiliates' income of $203.3 increased 27%, or $43.7, primarily driven by Industrial Gases – Americas and Industrial Gases – EMEA affiliates.

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 AHG in fiscal year 2017. On a non-GAAP basis, adjusted equity affiliates' income of $159.6 increased 9%, or $12.6.

Cost of Sales and Gross Margin

2018 vs. 2017

Cost of sales of $6,189.5 increased 8%, or $438.0, primarily due to higher costs attributable to sales volumes of $225, unfavorable currency impacts of $133, and higher other costs, including maintenance costs, of $97, partially offset by the benefit from the change in inventory valuation method from a last-in, first-out (LIFO) basis to a first-in, first-out (FIFO) basis of $24 in fiscal year 2018. For additional information on the change in inventory valuation method, refer to Note 1, Major Accounting Policies, and Note 7, Inventories, to the consolidated financial statements.

Gross margin of 30.7% increased 90 bp, primarily due to higher volumes, favorable pricing, net of raw materials, and the benefit from the change in inventory valuation adjustment, partially offset by higher other costs.

2017 vs. 2016

Cost of sales of $5,751.5 increased 11%, or $574.2, 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 $21, partially offset by favorable currency impacts of $83.

Gross margin of 29.8% decreased 120 bp, primarily due to higher energy and natural gas cost pass-through to customers and unfavorable volume mix.

Selling and Administrative Expense

2018 vs. 2017

Selling and administrative expense of $760.8 increased 7%, or $47.3, primarily driven by unfavorable currency impacts and higher costs to support growth opportunities, partially offset by cost reductions associated with the completion of transition services agreements with Versum and Evonik. Selling and administrative expense as a percent of sales decreased to 8.5% in fiscal year 2018 from 8.7% in fiscal year 2017.

2017 vs. 2016

Selling and administrative expense of $713.5 increased 4%, or $29.7, 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% in fiscal year 2017 from 9.1% in fiscal year 2016.

Research and Development

2018 vs. 2017

Research and development expense of $64.5 increased 12%, or $6.9. Research and development expense as a percent of sales in fiscal years 2018 and 2017 was .7%.

2017 vs. 2016

Research and development expense of $57.6 decreased 20%, or $14.2. Research and development expense as a percent of sales decreased to .7% in fiscal year 2017 from 1.0% in fiscal year 2016.

Business Separation Costs

In fiscal year 2017, we completed the separation of the divisions comprising the former Materials Technologies segment through the spin-off of the Electronics Materials Division (EMD) as Versum Materials, Inc. (Versum) and the sale of the Performance Materials Division (PMD) to Evonik Industries AG (Evonik). For additional information on the dispositions, refer to Note 3, Discontinued Operations, to the consolidated financial statements.

In connection with the dispositions, we incurred net separation costs of $30.2 ($26.5 after-tax, or $.12 per share) in fiscal year 2017. The net costs include legal and advisory fees of $32.5, which are reflected on the consolidated income statements as “Business separation costs,” and a pension settlement benefit of $2.3 presented within "Other non-operating income (expense), net." 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.

In fiscal year 2016, we incurred business separation costs of $50.6 ($46.7 after-tax, or $.21 per share) for legal and advisory fees. 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 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.

Cost Reduction and Asset 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) for cost reduction and asset actions. The year-to-date net expense included a charge of $154.8 for actions taken during fiscal year 2017, partially offset by the favorable settlement of the remaining $3.4 accrued balance associated with business restructuring actions taken in 2015. The charge included asset actions of $88.5 and severance actions of $66.3.

In fiscal year 2016, we recognized an expense of $34.5 ($24.7 after-tax, or $.11 per share) for severance and other benefits.

The charges we record for cost reduction and asset actions have been excluded from segment operating income. Refer to Note 5, Cost Reduction and Asset Actions, to the consolidated financial statements for additional details on these actions.

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. This impairment charge has been excluded from segment results. Refer to Note 10, Goodwill, and Note 11, Intangible Assets, to the consolidated financial statements for additional information.

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.

2018 vs. 2017

Other income (expense), net of $50.2 decreased $70.8, primarily due to lower income from the transition services agreements with Versum and Evonik, lower income from the sale of assets and investments, lower favorable contract settlements, and an unfavorable foreign exchange impact.

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.

Interest Expense

	2018			2017			2016
Interest incurred		$150.0			$139.6			$147.9
Less: Capitalized interest	19.5			19.0			32.7
Interest Expense		$130.5			$120.6			$115.2

2018 vs. 2017

Interest incurred increased $10.4 as project financing associated with the Lu'An joint venture and a higher average interest rate on the debt portfolio were partially offset by the impact from a lower average debt balance. The change in capitalized interest was driven by an increase in the carrying value of projects under construction.

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 EfW business.

Other Non-Operating Income (Expense), Net

2018 vs. 2017

Other non-operating income (expense), net of $5.1 decreased $11.5. During the fourth quarter of fiscal year 2018, we recognized a pension settlement loss of $43.7 ($33.2 after-tax, or $.15 per share) that primarily resulted from the transfer of certain pension payment obligations to an insurer for our U.S. salaried and hourly plans through the purchase of an irrevocable, nonparticipating group annuity contract with plan assets. For additional information, refer to Note 16, Retirement Benefits, to the consolidated financial statements. This loss was partially offset by higher interest income on cash and cash items and short-term investments and lower other non-service pension expense. The prior year pension expense included a settlement loss of $10.5 ($6.6 after-tax, or $.03 per share) associated with the U.S. Supplementary Pension Plan and a settlement benefit of $2.3 related to the disposition of EMD and PMD.

2017 vs. 2016

Other non-operating income of $16.6 increased $22.0 from an expense of $5.4 in fiscal year 2016, primarily due to interest income on cash and time deposits, which are comprised primarily of proceeds from the sale of PMD. Fiscal year 2016 included a pension settlement loss of $5.1 ($3.3 after-tax, or $.02 per share) to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss, primarily associated with the U.S. Supplementary Pension Plan. In fiscal year 2016, interest income was included in "Other income (expense), net" and 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). This loss was deductible for tax purposes.

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.

2018 vs. 2017

The effective tax rate was 26.0% and 18.4% in fiscal years 2018 and 2017, respectively. The current year rate was higher primarily due to the enactment of the U.S. Tax Cuts and Jobs Act ("the Tax Act") in the first quarter of fiscal year 2018, which significantly changed existing U.S. tax laws, including a reduction in the federal corporate income tax rate from 35% to 21% that became effective 1 January 2018, a deemed repatriation tax on unremitted foreign earnings, as well as other changes. As a result of the Tax Act, our income tax provision for fiscal year 2018 reflects a discrete net income tax expense of $180.6. This included a deemed repatriation tax on accumulated unremitted foreign earnings and adjustments to the future cost of repatriation from foreign investments of $448.6, partially offset by a benefit of $56.2 related to the U.S. taxation of deemed foreign dividends under the Tax Act. This benefit may be eliminated by future legislation. Fiscal year 2018 tax expense also includes a benefit of $211.8, primarily from the re-measurement of our net U.S. deferred tax liabilities at the lower corporate tax rate. In fiscal year 2018, we also recorded a tax benefit of $35.7 from the restructuring of foreign subsidiaries.

The income tax provision in fiscal year 2017 included a net income tax benefit of $111.4 resulting from a tax election related to a non-U.S. subsidiary. The effective tax rate in the prior year was also impacted by a goodwill impairment charge of $145.3 in our Latin America reporting unit and an impairment of $79.5 of an equity method investment for which no tax benefits were available.

On a non-GAAP basis, the adjusted effective tax rate decreased from 23.2% in fiscal year 2017 to 18.6% in fiscal year 2018. We estimate that the lower U.S. federal statutory rate and other impacts of the Tax Act reduced our fiscal year 2018 adjusted effective tax rate by approximately 3.5%. The current year rate was also lower due to a benefit of $9.1 related to a final foreign tax audit settlement.

We are reporting the impacts of the Tax Act provisionally based upon reasonable estimates as of 30 September 2018. The impacts are not yet finalized as they are dependent on factors and analysis not yet known or fully completed, including but not limited to, further book to U.S. tax adjustments for the earnings of foreign entities, the issuance of additional guidance, as well as our ongoing analysis of the Tax Act.

As a fiscal year-end taxpayer, certain provisions of the Tax Act became effective in our fiscal year 2018, while other provisions do not become effective until fiscal year 2019. The corporate tax rate reduction is effective as of 1 January 2018 and, accordingly, reduces our 2018 fiscal year U.S. federal statutory rate to a blended rate of approximately 24.5%.

2017 vs. 2016

The effective tax rate was 18.4% and 27.8% in fiscal years 2017 and 2016, respectively. The 2017 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 fiscal year 2016 to 23.2% in fiscal year 2017, primarily due to excess tax benefits on share-based compensation.

Discontinued Operations

In fiscal year 2018, income from discontinued operations, net of tax, of $42.2 includes an income tax benefit of $25.6 resulting from the resolution of uncertain tax positions taken in conjunction with the disposition of our former European Homecare business in fiscal year 2012. In addition, we recorded an after-tax benefit of $17.6 resulting from the resolution of certain post-closing adjustments associated with the sale of PMD. Refer to Note 22, Income Taxes, to the consolidated financial statements for additional information. These benefits were partially offset by an after-tax loss of $1.0 related to EfW project exit activities, which were completed during the first quarter of fiscal year 2018.

In fiscal year 2017, income from discontinued operations, net of tax, of $1,866.0 includes a gain of $2,870 ($1,828 after-tax, or $8.32 per share) for the sale of PMD to Evonik. The sale closed on 3 January 2017 for $3.8 billion in cash. In addition, we recorded a loss on the disposal of EfW of $59.3 ($47.1 after-tax) during the first quarter of 2017, primarily for land lease obligations and to update our estimate of the net realizable value of the plant assets.

In fiscal year 2016, the loss from discontinued operations, net of tax, of $460.5 includes a loss of $945.7 ($846.6 after-tax) from the write down of EfW plant assets to their estimated net realizable value and a liability recorded for plant disposition and other costs. This loss was partially offset by the results of PMD and EMD.

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

Segment Analysis

Industrial Gases – Americas

	2018			2017			2016
Sales		$3,758.8			$3,637.0			$3,344.1
Operating income	927.9			946.1			891.3
Operating margin	24.7		%	26.0		%	26.7		%
Equity affiliates’ income	82.0			58.1			52.7
Adjusted EBITDA	1,495.2			1,468.6			1,387.6
Adjusted EBITDA margin	39.8		%	40.4		%	41.5		%

	% Change from Prior Year
Sales	2018		2017
Underlying business
Volume	4	%	2	%
Price	—	%	—	%
Energy and raw material cost pass-through	(1	)%	6	%
Currency	—	%	1	%
Total Industrial Gases – Americas Sales Change	3	%	9	%

2018 vs. 2017

Sales of $3,758.8 increased 3%, or $121.8. Underlying sales were up 4% from higher volumes, primarily in our onsite and merchant businesses, as pricing was flat. The onsite increase was primarily driven by higher hydrogen volumes in North America. Lower energy and natural gas cost pass-through to customers decreased sales by 1%. Currency was flat versus the prior year.

Operating income of $927.9 decreased 2%, or $18.2, primarily due to higher costs of $84 and lower pricing, net of power and fuel costs, of $13, partially offset by higher volumes of $76 and favorable currency impacts of $3. The higher costs included higher maintenance and supply chain costs. Operating margin of 24.7% decreased 130 bp from the prior year, primarily due to higher costs, partially offset by favorable volumes.

Equity affiliates’ income of $82.0 increased 41%, or $23.9, primarily due to volume growth.

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 $946.1 increased 6%, or $54.8, primarily due to lower operating costs of $35 and higher volumes of $18. Operating costs were lower due to benefits from productivity improvements. Operating margin decreased 70 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.

Industrial Gases – EMEA

	2018			2017			2016
Sales		$2,193.3			$1,780.4			$1,704.4
Operating income	445.8			395.5			387.0
Operating margin	20.3		%	22.2		%	22.7		%
Equity affiliates’ income	61.1			47.1			36.5
Adjusted EBITDA	705.5			619.7			609.2
Adjusted EBITDA margin	32.2		%	34.8		%	35.7		%

	% Change from Prior Year
Sales	2018		2017
Underlying business
Volume	12	%	6	%
Price	1	%	—	%
Energy and raw material cost pass-through	3	%	1	%
Currency	7	%	(3	)%
Total Industrial Gases – EMEA Sales Change	23	%	4	%

2018 vs. 2017

Sales of $2,193.3 increased 23%, or $412.9. Underlying sales were up 13% from higher volumes of 12% and higher pricing of 1%. The volume increase was primarily driven by a hydrogen plant in India and higher merchant volumes. Higher energy and natural gas cost pass-through to customers increased sales by 3%. Favorable currency impacts, primarily from the Euro and British Pound Sterling, increased sales by 7%.

Operating income of $445.8 increased 13%, or $50.3, due to higher volumes of $38, favorable currency impacts of $26, and higher pricing, net of power and fuel costs, of $4, partially offset by unfavorable costs $18. Operating margin of 20.3% decreased 190 bp from the prior year, primarily due to unfavorable costs and lower margins on the hydrogen volumes in India.

Equity affiliates’ income of $61.1 increased 30%, or $14.0, primarily due to volume growth, lower costs, and favorable currency.

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 $395.5 increased 2%, or $8.5, primarily due to lower operating costs of $27 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 50 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.

Industrial Gases – Asia

	2018			2017			2016
Sales		$2,458.0			$1,964.7			$1,720.4
Operating income	689.9			532.6			452.8
Operating margin	28.1		%	27.1		%	26.3		%
Equity affiliates’ income	58.3			53.5			57.8
Adjusted EBITDA	1,014.0			789.3			708.5
Adjusted EBITDA margin	41.3		%	40.2		%	41.2		%

	% Change from Prior Year
Sales	2018		2017
Underlying business
Volume	17	%	14	%
Price	4	%	1	%
Energy and raw material cost pass-through	—	%	—	%
Currency	4	%	(1	)%
Total Industrial Gases – Asia Sales Change	25	%	14	%

2018 vs. 2017

Sales of $2,458.0 increased 25%, or $493.3. Underlying sales were up 21% from higher volumes of 17% and higher pricing of 4%. The volume increase was primarily driven by new plant onstreams, including the Lu'An project, an equipment sale resulting from the termination of a contract in the first quarter of fiscal year 2018, and higher merchant volumes, partially offset by the impact of short-term sale of equipment activity in fiscal year 2017. Pricing improved across Asia driven primarily by the China merchant market. Energy and natural gas cost pass-through to customers was flat versus the prior year. Favorable currency impacts, primarily from the Chinese Renminbi, South Korean Won, and Taiwan Dollar, increased sales by 4%.

Operating income of $689.9 increased 30%, or $157.3, due to higher volumes of $107, favorable price, net of power costs, of $53, and favorable currency impacts of $21, partially offset by higher operating costs of $24. Operating margin of 28.1% increased 100 bp as favorable price, net of power costs, and higher volumes were partially offset by unfavorable cost performance.

Equity affiliates’ income of $58.3 increased 9%, or $4.8, primarily due to higher volumes.

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 $532.6 increased 18%, or $79.8, 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, 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 fiscal year 2016.

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.

	2018			2017			2016
Sales		$436.1			$722.9			$498.8
Operating income (loss)	53.9			71.1			(21.5		)
Adjusted EBITDA	63.9			80.9			(13.6		)

2018 vs. 2017

Sales of $436.1 decreased 40%, or $286.8. The decrease in sales was primarily driven by lower sale of equipment activity on the multiple air separation units that will serve Saudi Aramco’s Jazan oil refinery and power plant in Saudi Arabia. We expect to complete this project in 2019.

Operating income of $53.9 decreased 24%, or $17.2, primarily due to the lower sale of equipment activity.

2017 vs. 2016

Sales of $722.9 increased $224.1, or 45%. The increase in sales was primarily driven by higher sales activity for our Jazan sale of equipment project.

Operating income of $71.1 increased $92.6 from an operating loss in fiscal year 2016, primarily from income on the Jazan project and productivity improvements.

Corporate and other

The Corporate and other segment includes our LNG and helium storage and distribution sale of equipment businesses and corporate support functions that benefit all segments. The results of the Corporate and other segment also include income and expense that is not directly associated with the other segments, such as foreign exchange gains and losses and stranded costs related to the former Materials Technologies segment, which is presented within discontinued operations. Stranded costs primarily relate to costs in support of transition services agreements with Versum and Evonik, the majority of which were reimbursed to Air Products. All transition services were completed during fiscal year 2018.

	2018			2017			2016
Sales		$84.0			$82.6			$236.0
Operating loss	(176.0		)	(171.5		)	(89.4		)
Adjusted EBITDA	(163.1		)	(159.3		)	(69.9		)

2018 vs. 2017

Sales of $84.0 increased 2%, or $1.4. Operating loss of $176.0 increased 3%, or $4.5.

2017 vs. 2016

Sales of $82.6 decreased $153.4, primarily due to lower LNG activity. Operating loss of $171.5 increased $82.1 due to lower LNG activity, partially offset by productivity improvements and income from transition service agreements with Versum and Evonik.

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 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, in fiscal years 2017 and 2016, we restructured the Company to focus on its core Industrial Gases business. This resulted in significant cost reduction and asset actions that we believe were important for investors to understand separately from the performance of the underlying business. Additionally, in fiscal year 2018, we recorded discrete impacts associated with the Tax Act. The reader should be aware that we may incur similar expenses in the future.

The tax impact on our pre-tax 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.

During the first quarter of fiscal year 2018, we adopted accounting guidance on the presentation of net periodic pension and postretirement benefit cost. Certain prior year information has been reclassified to conform to the fiscal year 2018 presentation. Refer to Note 2, New Accounting Guidance, to the consolidated financial statements for additional information.

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			Net Income			Diluted EPS
2018 GAAP		$1,965.6		22.0	%		$174.8			$524.3			$1,455.6			$6.59
2017 GAAP	1,440.0			17.6	%	80.1			260.9			1,134.4			5.16
Change GAAP		$525.6		440	bp		$94.7			$263.4			$321.2			$1.43
% Change GAAP	37		%			118		%	101		%	28		%	28		%
2018 GAAP		$1,965.6		22.0	%		$174.8			$524.3			$1,455.6			$6.59
Change in inventory valuation method	(24.1		)	(.3	)%	—			(6.6		)	(17.5		)	(.08		)
Pension settlement loss(B)	—			—	%	—			10.5			33.2			.15
Tax reform repatriation	—			—	%	28.5			(448.6		)	477.1			2.16
Tax reform benefit related to deemed foreign dividends	—			—	%	—			56.2			(56.2		)	(.25		)
Tax reform rate change and other	—			—	%	—			211.8			(211.8		)	(.96		)
Tax restructuring	—			—	%	—			35.7			(35.7		)	(.16		)
2018 Non-GAAP Measure		$1,941.5		21.7	%		$203.3			$383.3			$1,644.7			$7.45
2017 GAAP		$1,440.0		17.6	%		$80.1			$260.9			$1,134.4			$5.16
Business separation costs	32.5			.4	%	—			3.7			26.5			.12
Tax benefit associated with business separation	—			—	%	—			5.5			(5.5		)	(.02		)
Cost reduction and asset actions(C)	151.4			1.8	%	—			41.6			109.3			.49
Goodwill and intangible asset impairment charge(D)	162.1			2.0	%	—			4.6			154.1			.70
Gain on land sale	(12.2		)	(.1	)%	—			(4.6		)	(7.6		)	(.03		)
Equity method investment impairment charge	—			—	%	79.5			—			79.5			.36
Pension settlement loss(B)	—			—	%	—			3.9			6.6			.03
Tax election benefit	—			—	%	—			111.4			(111.4		)	(.50		)
2017 Non-GAAP Measure		$1,773.8		21.7	%		$159.6			$427.0			$1,385.9			$6.31
Change Non-GAAP Measure		$167.7		—			$43.7			($43.7	)		$258.8			$1.14
% Change Non-GAAP Measure	9		%			27		%	(10		)%	19		%	18		%

	Continuing Operations
	Operating Income			Operating Margin(A)		Equity Affiliates' Income			Income Tax Provision			Net Income			Diluted EPS
2017 GAAP		$1,440.0		17.6	%		$80.1			$260.9			$1,134.4			$5.16
2016 GAAP	1,535.1			20.5	%	147.0			432.6			1,099.5			5.04
Change GAAP		($95.1	)	(290	)bp		($66.9	)		($171.7	)		$34.9			$.12
% Change GAAP	(6		)%			(46		)%	(40		)%	3		%	2		%
2017 GAAP		$1,440.0		17.6	%		$80.1			$260.9			$1,134.4			$5.16
Business separation costs	32.5			.4	%	—			3.7			26.5			.12
Tax benefit associated with business separation	—			—	%	—			5.5			(5.5		)	(.02		)
Cost reduction and asset actions(C)	151.4			1.8	%	—			41.6			109.3			.49
Goodwill and intangible asset impairment charge(D)	162.1			2.0	%	—			4.6			154.1			.70
Gain on land sale	(12.2		)	(.1	)%	—			(4.6		)	(7.6		)	(.03		)
Equity method investment impairment charge	—			—	%	79.5			—			79.5			.36
Pension settlement loss(B)	—			—	%	—			3.9			6.6			.03
Tax election benefit	—			—	%	—			111.4			(111.4		)	(.50		)
2017 Non-GAAP Measure		$1,773.8		21.7	%		$159.6			$427.0			$1,385.9			$6.31
2016 GAAP		$1,535.1		20.5	%		$147.0			$432.6			$1,099.5			$5.04
Business separation costs	50.6			.7	%	—			3.9			46.7			.21
Tax costs associated with business separation	—			—	%	—			(51.8		)	51.8			.24
Cost reduction and asset actions	34.5			.4	%	—			9.8			24.7			.11
Pension settlement loss(B)	—			—	%	—			1.8			3.3			.02
Loss on extinguishment of debt(E)	—			—	%	—			2.6			4.3			.02
2016 Non-GAAP Measure		$1,620.2		21.6	%		$147.0			$398.9			$1,230.3			$5.64
Change Non-GAAP Measure		$153.6		10	bp		$12.6			$28.1			$155.6			$.67
% Change Non-GAAP Measure	9		%			9		%	7		%	13		%	12		%

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

(B)	Reflected on the consolidated income statements in "Other non-operating income (expense), net." Fiscal year 2018 includes a before-tax impact of $43.7 primarily resulting from the transfer of certain pension payment obligations to an insurer through the purchase of an irrevocable, nonparticipating group annuity contract during the fourth quarter.

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

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

(E)	Income from continuing operations before taxes impact of $6.9 in fiscal year 2016.

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:

	2018			2017			2016			2015			2014
Income From Continuing Operations**(A)**		$1,490.7			$1,155.2			$1,122.0			$965.9			$691.0
Less: Change in inventory valuation method	24.1			—			—			—			—
Add: Interest expense	130.5			120.6			115.2			102.8			124.0
Less: Other non-operating income (expense), net	5.1			16.6			(5.4		)	(42.3		)	(51.7		)
Add: Income tax provision	524.3			260.9			432.6			300.2			258.1
Add: Depreciation and amortization	970.7			865.8			854.6			858.5			875.6
Add: Business separation costs	—			32.5			50.6			7.5			—
Add: Cost reduction and asset actions	—			151.4			34.5			180.1			11.1
Add: Goodwill and intangible asset impairment charge	—			162.1			—			—			310.1
Less: Gain on previously held equity interest	—			—			—			17.9			—
Less: Gain on land sales	—			12.2			—			33.6			—
Add: Equity method investment impairment charge	—			79.5			—			—			—
Add: Loss on extinguishment of debt	—			—			6.9			16.6			—
Add: Tax reform repatriation - equity method investment	28.5			—			—			—			—
Adjusted EBITDA		$3,115.5			$2,799.2			$2,621.8			$2,422.4			$2,321.6
Adjusted EBITDA margin	34.9		%	34.2		%	34.9		%	31.0		%	27.7		%
Change GAAP
Income from continuing operations change		$335.5			$33.2			$156.1			$274.9
Income from continuing operations % change	29		%	3		%	16		%	40		%
Change Non-GAAP
Adjusted EBITDA change		$316.3			$177.4			$199.4			$100.8
Adjusted EBITDA % change	11		%	7		%	8		%	4		%
Adjusted EBITDA margin change	70		bp	(70		) bp	390		bp	330		bp

(A)	Includes net income attributable to noncontrolling interests.

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 2018
Operating income (loss)		$927.9			$445.8			$689.9			$53.9			($176.0	)		$1,941.5
Operating margin	24.7		%	20.3		%	28.1		%							21.7		%
Twelve Months Ended 30 September 2017
Operating income (loss)		$946.1			$395.5			$532.6			$71.1			($171.5	)		$1,773.8
Operating margin	26.0		%	22.2		%	27.1		%							21.7		%
Twelve Months Ended 30 September 2016
Operating income (loss)		$891.3			$387.0			$452.8			($21.5	)		($89.4	)		$1,620.2
Operating margin	26.7		%	22.7		%	26.3		%							21.6		%
2018 vs. 2017
Operating income (loss) change		($18.2	)		$50.3			$157.3			($17.2	)		($4.5	)		$167.7
Operating income (loss) % change	(2		)%	13		%	30		%	(24		)%	(3		)%	9		%
Operating margin change	(130		) bp	(190		) bp	100		bp							—
2017 vs. 2016
Operating income (loss) change		$54.8			$8.5			$79.8			$92.6			($82.1	)		$153.6
Operating income (loss) % change	6		%	2		%	18		%	431		%	(92		)%	9		%
Operating margin change	(70		) bp	(50		) bp	80		bp							10		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 2018
Operating income (loss)		$927.9			$445.8			$689.9			$53.9			($176.0	)		$1,941.5
Add: Depreciation and amortization	485.3			198.6			265.8			8.1			12.9			970.7
Add: Equity affiliates' income	82.0			61.1			58.3			1.9			—			203.3
Adjusted EBITDA		$1,495.2			$705.5			$1,014.0			$63.9			($163.1	)		$3,115.5
Adjusted EBITDA margin**(A)**	39.8		%	32.2		%	41.3		%							34.9		%
Twelve Months Ended 30 September 2017
Operating income (loss)		$946.1			$395.5			$532.6			$71.1			($171.5	)		$1,773.8
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		$1,468.6			$619.7			$789.3			$80.9			($159.3	)		$2,799.2
Adjusted EBITDA margin**(A)**	40.4		%	34.8		%	40.2		%							34.2		%
Twelve Months Ended 30 September 2016
Operating income (loss)		$891.3			$387.0			$452.8			($21.5	)		($89.4	)		$1,620.2
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		$1,387.6			$609.2			$708.5			($13.6	)		($69.9	)		$2,621.8
Adjusted EBITDA margin**(A)**	41.5		%	35.7		%	41.2		%							34.9		%
2018 vs. 2017
Adjusted EBITDA change		$26.6			$85.8			$224.7			($17.0	)		($3.8	)		$316.3
Adjusted EBITDA % change	2		%	14		%	28		%	(21		)%	(2		)%	11		%
Adjusted EBITDA margin change	(60		) bp	(260		) bp	110		bp							70		bp
2017 vs. 2016
Adjusted EBITDA change		$81.0			$10.5			$80.8			$94.5			($89.4	)		$177.4
Adjusted EBITDA % change	6		%	2		%	11		%	695		%	(128		)%	7		%
Adjusted EBITDA margin change	(110		) bp	(90		) bp	(100		) bp							(70		) bp

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

Below is a reconciliation of segment total operating income to consolidated operating income:

Operating Income	2018			2017			2016
Segment total		$1,941.5			$1,773.8			$1,620.2
Change in inventory valuation method	24.1			—			—
Business separation costs	—			(32.5		)	(50.6		)
Cost reduction and asset actions	—			(151.4		)	(34.5		)
Goodwill and intangible asset impairment charge	—			(162.1		)	—
Gain on land sale	—			12.2			—
Consolidated Total		$1,965.6			$1,440.0			$1,535.1

Below is a reconciliation of segment total equity affiliates' income to consolidated equity affiliates' income:

Equity Affiliates' Income	2018			2017			2016
Segment total		$203.3			$159.6			$147.0
Equity method investment impairment charge	—			(79.5		)	—
Tax reform repatriation - equity method investment	(28.5		)	—			—
Consolidated Total		$174.8			$80.1			$147.0

INCOME TAXES

The tax impact of our pre-tax 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. For additional discussion on the fiscal year 2018 non-GAAP tax adjustments, including the impact of the U.S. Tax Cuts and Jobs Act, refer to Note 22, Income Taxes, to the consolidated financial statements.

	Effective Tax Rate
	2018			2017			2016
Income Tax Provision—GAAP		$524.3			$260.9			$432.6
Income From Continuing Operations Before Taxes—GAAP		$2,015.0			$1,416.1			$1,554.6
Effective Tax Rate—GAAP	26.0		%	18.4		%	27.8		%
Income Tax Provision—GAAP		$524.3			$260.9			$432.6
Change in inventory valuation method	(6.6		)	—			—
Business separation costs	—			3.7			3.9
Tax benefit (costs) associated with business separation	—			5.5			(51.8		)
Cost reduction and asset actions	—			41.6			9.8
Goodwill and intangible asset impairment charge	—			4.6			—
Gain on land sale	—			(4.6		)	—
Pension settlement loss	10.5			3.9			1.8
Loss on extinguishment of debt	—			—			2.6
Tax reform repatriation	(448.6		)	—			—
Tax reform benefit related to deemed foreign dividends	56.2			—			—
Tax reform rate change and other	211.8			—			—
Tax restructuring	35.7			—			—
Tax election benefit	—			111.4			—
Income Tax Provision—Non-GAAP Measure		$383.3			$427.0			$398.9
Income from Continuing Operations before Taxes—GAAP		$2,015.0			$1,416.1			$1,554.6
Change in inventory valuation method	(24.1		)	—			—
Business separation costs	—			30.2			50.6
Cost reduction and asset actions	—			151.4			34.5
Goodwill and intangible asset impairment charge	—			162.1			—
Gain on land sale	—			(12.2		)	—
Equity method investment impairment charge	—			79.5			—
Pension settlement loss	43.7			10.5			5.1
Loss on extinguishment of debt	—			—			6.9
Tax reform repatriation - equity method investment	28.5			—			—
Income From Continuing Operations Before Taxes—Non-GAAP Measure		$2,063.1			$1,837.6			$1,651.7
Effective Tax Rate—Non-GAAP Measure	18.6		%	23.2		%	24.2		%

LIQUIDITY AND CAPITAL RESOURCES

We maintained a strong financial position throughout 2018 and as of 30 September 2018 our consolidated balance sheet included cash and cash items of $2,791.3. 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 2018, we had $995.1 of foreign cash and cash items compared to a total amount of cash and cash items of $2,791.3. As a result of the Tax Act, we currently do not expect that a significant portion of the earnings of our foreign subsidiaries and affiliates will be subject to U.S. income tax upon subsequent repatriation to the United States. Depending on the country in which the subsidiaries and affiliates reside, the repatriation of these earnings may be subject to foreign withholding and other taxes. 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 that would be subject to additional taxes outside the U.S. Refer to Note 22, Income Taxes, for additional information.

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)		2018				2017				2016
Operating activities			$2,554.7				$2,534.1				$2,258.8
Investing activities		(1,649.1		)		(1,417.7		)		(864.8		)
Financing activities		(1,359.8		)		(2,040.9		)		(860.2		)

Operating Activities

For the year ended 2018, cash provided by operating activities was $2,554.7. Income from continuing operations of $1,455.6 was adjusted for items including depreciation and amortization, deferred income taxes, impacts from the Tax Act, undistributed earnings of unconsolidated affiliates, share-based compensation, and noncurrent capital lease receivables. Other adjustments of $131.6 include a $54.9 net impact from the remeasurement of intercompany transactions. The related hedging instruments that eliminate the earnings impact are included as a working capital adjustment in other receivables or payables and accrued liabilities. In addition, other adjustments were impacted by cash received from the early termination of a cross currency swap of $54.4, as well as the excess of pension expense over pension contributions of $23.5. The working capital accounts were a use of cash of $265.4, primarily driven by payables and accrued liabilities, inventories, and trade receivables, partially offset by other receivables. The use of cash in payables and accrued liabilities of $277.7 includes a decrease in customer advances of $145.7 primarily related to sale of equipment activity and $67.1 for maturities of forward exchange contracts that hedged foreign currency exposures. The use of cash in inventories primarily resulted from the purchase of helium molecules. In addition, inventories reflect the noncash impact of our change in accounting for U.S. inventories from LIFO to FIFO. The source of cash from other receivables of $123.6 was primarily due to the maturities of forward exchange contracts that hedged foreign currency exposures

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 asset 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, Cost Reduction and Asset 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 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.

Investing Activities

For the year ended 30 September 2018, cash used for investing activities was $1,649.1. Capital expenditures for plant and equipment was $1,568.4. Cash paid for acquisitions, net of cash acquired was $345.4. Refer to Note 6,

Acquisitions, to the consolidated financial statements for further details. Purchases of investments of $530.3 include short-term instruments with original maturities greater than three months and less than one year. Proceeds from investments of $748.2 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 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 exceeded our proceeds from investments of $2,290.7.

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.

Capital Expenditures

Capital expenditures are detailed in the following table:

	2018			2017			2016
Additions to plant and equipment		$1,568.4			$1,039.7			$907.7
Acquisitions, less cash acquired	345.4			8.2			—
Investments in and advances to unconsolidated affiliates	—			8.1			—
Capital Expenditures on a GAAP Basis		$1,913.8			$1,056.0			$907.7
Capital lease expenditures(A)	20.2			9.9			27.2
Capital Expenditures on a Non-GAAP Basis		$1,934.0			$1,065.9			$934.9

(A)

We utilize a non-GAAP measure in the computation of capital expenditures and include spending associated with facilities accounted for as capital leases. 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. 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 fiscal year 2018 totaled $1,913.8, compared to $1,056.0 in fiscal year 2017. The increase of $857.8 was primarily due to major project spending and higher business combination activity, including the purchase of gasification and syngas clean up assets from Lu'An. Refer to Note 6, Acquisitions, to the consolidated financial statements for additional information. Additions to plant and equipment also included support capital of a routine, ongoing nature, including expenditures for distribution equipment and facility improvements.

Capital expenditures on a non-GAAP basis in fiscal year 2018 totaled $1,934.0 compared to $1,065.9 in fiscal year 2017. The increase of $868.1 was primarily due to higher major project spending and higher business combination activity.

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, we recorded a noncash transaction of $26.9 to our investment in net assets of and advances to equity affiliates to increase our obligation to invest in the joint venture to $94.4. This noncash transaction was excluded from the consolidated statements of cash flows. We expect to invest approximately $100 in this joint venture.

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 technologies that are under firm contracts. The sales backlog for the Company at 30 September 2018 was $204 compared to $481 at 30 September 2017.

2019 Outlook

Capital expenditures for new plant and equipment in fiscal year 2019 are expected to be approximately $2,300 to $2,500. A majority of the total capital expenditures are 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 2018, cash used for financing activities was $1,359.8. This consisted primarily of dividend payments to shareholders of $897.8 and payments on long-term debt of $418.7. Payments on long-term debt primarily related to the repayment of a 1.2% U.S. Senior Note of $400.0 that matured on 16 October 2017.

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.

Discontinued Operations

For the year ended 2018, cash flows of discontinued operations were not material.

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.

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.

Financing and Capital Structure

Capital needs in fiscal year 2018 were satisfied primarily with cash from operations. At the end of 2018, total debt outstanding was $3,812.6 compared to $3,962.8 at the end of 2017, and cash and cash items were $2,791.3 compared to $3,273.6 at the end of 2017. Total debt as of 30 September 2018 includes related party debt of 2.6 billion RMB ($384) associated with the Lu'An joint venture.

On 31 March 2017, we entered into a five-year $2,500.0 revolving credit agreement maturing 31 March 2022 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. On 28 September 2018, we amended the 2017 Credit Agreement to reduce the maximum borrowing capacity to $2,300.0. No other terms were impacted by the amendment.

The 2017 Credit Agreement provides a source of liquidity for the Company and supports its commercial paper program. The Company’s only financial covenant under the 2017 Credit Agreement is a maximum ratio of total debt to total capitalization (total debt plus total equity) no greater than 70%. Total debt at 30 September 2018 and 2017 expressed as a percentage of total capitalization was 25.4% and 28.0%, respectively. No borrowings were outstanding under the 2017 Credit Agreement as of 30 September 2018.

Commitments totaling $7.0 are maintained by our foreign subsidiaries, all of which was borrowed and outstanding at 30 September 2018.

As of 30 September 2018, 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 2018, 2017 or 2016. At 30 September 2018, $485.3 in share repurchase authorization remains.

2019 Outlook

Cash flows from operations and financing activities are expected to meet liquidity needs for the foreseeable future and our working capital balance was $2,743.9 at 30 September 2018. We expect that we will continue to be in compliance with all of our financial covenants.

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 2018, the Board of Directors increased the quarterly dividend from $.95 per share to $1.10 per share, or $4.40 per share annually.

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 2018:

	Total			2019			2020			2021			2022			2023			Thereafter
Debt maturities		$3,774			$407			$381			$474			$448			$449			$1,615
Contractual interest on debt	589			101			81			71			57			46			233
Capital leases	23			2			2			3			1			1			14
Operating leases	334			66			50			41			31			23			123
Pension obligations	310			53			40			41			41			41			94
Unconditional purchase obligations	7,660			851			362			342			318			326			5,461
Deemed repatriation tax related to the Tax Act	184			—			14			16			16			16			122
Obligation for future contribution to an equity affiliate	100			—			100			—			—			—			—
Total Contractual Obligations		$12,974			$1,480			$1,030			$988			$912			$902			$7,662

Debt Obligations

Our debt obligations include the maturity payments of the principal amount of long-term debt, including the current portion and amounts owed to related parties, and the related contractual interest obligations. Refer to Note 15, Debt, to the consolidated financial statements for additional information on our debt obligations.

Contractual interest is the interest we are contracted to pay on our 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 approximately $640 of long-term debt subject to variable interest rates at 30 September 2018, 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 2018. 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 for our U.S. and international pension plans. For additional information, 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 may be 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 $6,800 of our unconditional purchase obligations relate to helium purchases. The majority of these obligations occur after fiscal year 2023. Helium purchases 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-if-tendered 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 $210 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 $455 for additional plant and equipment are included in the unconditional purchase obligations in 2019.

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

Income Tax Liabilities

Tax liabilities related to unrecognized tax benefits as of 30 September 2018 were $233.6. 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. However, the Contractual Obligations table above includes our accrued liability of approximately $184 for deemed repatriation tax that is payable over eight years related to the Tax Act. Refer to Note 22, Income Taxes, to the consolidated financial statements for additional information.

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 2018, 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.

Expected Investment in Joint Venture

On 12 August 2018, Air Products entered an agreement to form a gasification/power joint venture ("JV") with Saudi Aramco and ACWA in Jazan, Saudi Arabia. Air Products will own at least 55% of the JV, with Saudi Aramco and ACWA Power owning the balance. The JV will purchase the gasification assets, power block, and the associated utilities from Saudi Aramco for approximately $8 billion. Our expected investment has been excluded from the contractual obligations table above pending closing, which is currently expected in fiscal year 2020.

The JV will own and operate the facility under a 25-year contract for a fixed monthly fee. Saudi Aramco will supply feedstock to the JV, and the JV will produce power, hydrogen and other utilities for Saudi Aramco.

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, after which defined contribution plans were offered to new employees. 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 2018 measurement date decreased to $4,273.1 from $4,409.2 at the end of fiscal year 2017. The projected benefit obligation for these plans was $4,583.3 and $5,107.2 at the end of fiscal years 2018 and 2017, respectively. The net unfunded liability decreased $387.8 from $698.0 to $310.2, primarily due to higher discount rates and favorable asset experience. Refer to Note 16, Retirement Benefits, to the consolidated financial statements for comprehensive and detailed disclosures on our postretirement benefits.

Pension Expense

	2018			2017			2016
Pension expense – Continuing operations		$91.8			$72.0			$55.8
Settlements, termination benefits, and curtailments (included above)	48.9			15.0			6.0
Weighted average discount rate – Service cost	3.2		%	2.9		%	4.1		%
Weighted average discount rate – Interest cost	2.9		%	2.5		%	3.4		%
Weighted average expected rate of return on plan assets	6.9		%	7.4		%	7.5		%
Weighted average expected rate of compensation increase	3.5		%	3.5		%	3.5		%

2018 vs. 2017

Pension expense, excluding settlements, termination benefits, and curtailments ("special items"), decreased from the prior year primarily due to recognition of favorable asset experience, partially offset by lower expected returns on assets. In fiscal year 2018, special items of $48.9 included a pension settlement loss of $43.7 primarily resulting from the transfer of certain U.S. pension payment obligations to an insurer during the fourth quarter, $4.8 of pension settlement losses related to lump sum payouts from the U.S. Supplemental Pension Plan, and $.4 of termination benefits, all of which are reflected in "Other non-operating income (expense), net" on the consolidated income statements.

2017 vs. 2016

Pension expense, excluding special items, increased from fiscal year 2016 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, as well as curtailment and termination benefits of $4.5.

2019 Outlook

In fiscal year 2019, pension expense, excluding special items, is expected to be approximately $20 to $30. This results from lower loss amortization primarily due to favorable asset experience and the impact of higher discount rates, partially offset by lower expected returns on assets. Pension settlement losses of $10 to $15 are expected, depending on the timing of retirements. In fiscal year 2019, we expect pension expense to include approximately $75 for amortization of actuarial losses. In fiscal year 2018, pension expense included amortization of actuarial losses of $128. Net actuarial gains of $232 were recognized in accumulated other comprehensive income in fiscal year 2018. 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 fiscal year 2019.

Subsequent Event – GMP Equalization

On 26 October 2018, the United Kingdom High Court issued a ruling in a case relating to equalization of pension plan participants’ benefits for the gender effects of Guaranteed Minimum Pensions ("GMP equalization"). The ruling relates to the Lloyds Banking Group pension plans but impacts other U.K. defined benefit pension plans. We are still assessing the impact of this ruling. If we determine that the ruling impacts our U.K. pension plan, the approach to achieve GMP equalization may retroactively increase our benefit obligation for some participants in the plan and may impact funding requirements.

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 2018 and 2017, our cash contributions to funded plans and benefit payments for unfunded plans were $68.3 and $64.1, respectively.

For fiscal year 2019, cash contributions to defined benefit plans are estimated to be $45 to $65. 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. 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 43-44 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 $12.8, $11.4, and $12.2 in fiscal years 2018, 2017, and 2016, respectively. These amounts represent an estimate of expenses for compliance with environmental laws and activities undertaken to meet internal Company standards. Refer to Note 17, Commitments and Contingencies, to the consolidated financial statements for additional information.

Although precise amounts are difficult to determine, we estimate that we spent $3, $7, and $3 in fiscal years 2018, 2017, and 2016, respectively, on capital projects to control pollution. Capital expenditures to control pollution are estimated to be approximately $4 in both fiscal years 2019 and 2020.

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 $76 to a reasonably possible upper exposure of $90 as of 30 September 2018. The consolidated balance sheets at 30 September 2018 and 2017 included an accrual of $76.8 and $83.6, respectively, primarily as part of other noncurrent liabilities. 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 system, the California cap and trade schemes, Alberta’s Carbon Competitiveness Incentive Regulation, China’s Emission Trading Scheme, South Korea’s Emission Trading Scheme, nation-wide expansion of the China Emission Trading Scheme, revisions to the Alberta regulation, and Environment Canada's developing Output Based Pricing System. 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 we 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 also have developed 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. In addition, 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

We have related party sales to some of our equity affiliates and joint venture partners. Sales to related parties totaled approximately $340, $580, and $320 during fiscal years 2018, 2017, and 2016, respectively, and primarily related to Jazan sale of equipment activity. Agreements with related parties include terms that are consistent with those that we believe would have been negotiated at an arm’s length with an independent party.

In addition, we completed the formation of Air Products Lu An (Changzhi) Co., Ltd., a 60%-owned JV with Lu'An Clean Energy Company ("Lu'An"), and the JV acquired gasification and syngas clean-up assets from Lu'An during the third quarter of 2018. In connection with the acquisition, Lu'An made a loan of 2.6 billion RMB to the JV, and we established a liability of 2.3 billion RMB for cash payments expected to be made to or on behalf of Lu'An in fiscal year 2019. As of 30 September 2018, long-term debt payable to Lu'An of 2.6 billion RMB ($384) is presented on the consolidated balance sheets as "Long-term debt – related party," and our expected remaining cash payments of approximately 2.2 billion RMB ($330) are presented within "Payables and accrued liabilities."

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 2018 totaled $9,923.7, and depreciation expense totaled $940.7 during fiscal year 2018. 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.

In addition, we may purchase assets through transactions accounted for as either an asset acquisition or a business combination. Depreciable lives are assigned to acquired assets based on our historical experience with similar assets. 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			$45				($39	)

Impairment of Assets

Plant and Equipment

Plant and equipment meeting the held for sale criteria are reported at the lower of carrying amount or fair value less cost to sell. 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.

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.

In fiscal year 2018, there was no need to test for impairment on any of our asset groupings as no events or changes in circumstances indicated that the carrying amount of the asset groupings may not be recoverable.

In fiscal year 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 2017 Impairment Testing discussions under the Goodwill and Intangible Assets sections below*.* 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.

In fiscal year 2016, the Board of Directors approved the Company’s exit of its EfW business. We assessed the recoverability of capital costs for the two projects associated with this business and recorded an impairment charge of $913.5 to reduce the carrying values of plant assets to their estimated net realizable value. 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 loss was measured as the difference between the orderly liquidation value of the assets and the net book value of the assets. The loss was recorded in the results of discontinued operations.

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. The loss was recorded in the results of discontinued operations. In fiscal year 2017, we also recorded a charge of $45.7 to write-down the air separation unit in the Industrials Gases – EMEA segment that was constructed mainly to provide oxygen to one of the EfW plants to its net realizable value of $1.4. The charge was recorded in the results of continuing operations. The remaining assets associated with EfW were liquidated during fiscal year 2018 with no value remaining as of 30 September 2018.

Refer to Note 3, Discontinued Operations, and Note 5, Cost Reduction and Asset Actions, to the consolidated financial statements for additional information.

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 (plus the fair value of any noncontrolling interest and previously held equity interest in the acquiree) over the fair value of identifiable net assets of an acquired entity. Goodwill was $788.9 as of 30 September 2018. 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 that the carrying value of goodwill might not be recoverable. 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 that are comprised of ten reporting units within seven operating segments. Refer to Note 25, Business Segment and Geographic Information, for additional information. Reporting units are primarily based on products and subregions within each reportable segment. The majority of our goodwill is assigned to reporting units within our 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 choose to bypass the qualitative assessment and conduct quantitative testing to determine if the carrying value of the reporting unit exceeds its fair value. An impairment loss will be recognized for the amount by which the carrying value 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.

2018 Impairment Testing

During the fourth quarter of fiscal year 2018, we conducted our annual goodwill impairment test. We determined that the fair value of all our reporting units substantially exceeded their carrying value except LASA, for which the fair value exceeded the carrying value by 8%.

The excess of fair value over carrying value for our reporting units other than LASA ranged from approximately 110% to approximately 280%. 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 other than LASA continued to exceed their carrying value by a range of approximately 90% to 240%.

As of 30 September 2018, the carrying value of LASA goodwill was $65.6, 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 rates of approximately 230 basis points or a decrease in EBITDA margin of approximately 210 basis points would result in an impairment of the remaining goodwill balance. The carrying value of LASA's other material assets at 30 September 2018 included: Plant and equipment, net of $341.1; customer relationships of $152.1; and trade names and trademarks of $48.4. 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.

2017 Impairment Testing

For the first nine months of fiscal year 2017, volumes declined in our LASA reporting unit, 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 represented approximately 6% of the Company’s total revenue in 2017 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 value 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 is excluded from segment operating income.

Intangible Assets

Intangible assets, net with determinable lives at 30 September 2018 totaled $387.3 and consisted primarily of customer relationships, purchased patents and technology, and land use rights. These intangible assets are tested for impairment as part of the long-lived asset grouping impairment tests. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying value 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 2018 totaled $51.2 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.

Disclosures related to intangible assets other than goodwill are included in Note 11, Intangible Assets, to the consolidated financial statements.

2018 Impairment Testing

In the fourth quarter of 2018, we conducted our annual impairment test of indefinite-lived intangibles which resulted in no impairment.

2017 Impairment Testing

During the third quarter of fiscal year 2017, we conducted an interim impairment test of the indefinite-lived intangible assets associated with LASA. 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 charge has been excluded from segment operating income and is reflected on our consolidated income statements within “Goodwill and intangible asset impairment charge."

Equity Investments

Investments in and advances to equity affiliates totaled $1,277.2 at 30 September 2018. 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.

An impairment loss is recognized in the event that an other-than-temporary decline in fair value of an investment occurs. 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 recorded a noncash impairment charge of $79.5 to reduce the carrying value of our investment. The impairment charge is reflected on our consolidated income statements within “Equity affiliates' income.” This charge was not deductible for tax purposes and has been excluded from segment results.

The decline in value resulted 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 drove our updated valuation of AHG included 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.

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 LNG heat exchangers and large air separation units, is primarily recognized based on costs incurred to date compared with total estimated costs 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 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.

In addition to the typical risks associated with underlying performance of project procurement and construction activities, our Jazan large air separation unit sale of equipment project within our Industrial Gases – Global segment 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 $38, $27, and $20 in fiscal years 2018, 2017, and 2016, respectively. Our changes in estimates would not have significantly impacted amounts recorded in prior years.

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 2018, accrued income taxes, including the amount recorded in noncurrent, was $244.0 and net deferred tax liabilities was $653.7. Tax liabilities related to uncertain tax positions as of 30 September 2018 were $233.6, excluding interest and penalties. Income tax expense for the year ended 30 September 2018 was $524.3 and includes a discrete net income tax expense of $180.6 related to the Tax Act. The net expense was recorded based on provisional estimates pursuant to the SEC Staff Accounting Bulletin No. 118. Subsequent adjustments, if any, will be accounted for in the period such adjustments are identified. 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 $20.

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 U.S. 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 U.S. and international mortality 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. The Company measures the service cost and interest cost components of pension expense by applying spot rates along the yield curve to the relevant projected cash flows. The rates along the yield curve are used to discount the future cash flows of benefit obligations back to the measurement date. These rates change from year to year based on market conditions that affect corporate bond yields. A higher discount rate decreases the present value of the benefit obligations and results in lower pension expense. A 50 bp increase/decrease in the discount rate decreases/increases pension expense by approximately $32 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 $21 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 $11 per year.

Loss Contingencies

In the normal course of business, we encounter contingencies, or situations involving varying degrees of uncertainty as to the outcome and effect on the Company. 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 details are provided in Note 17, Commitments and Contingencies, to the consolidated financial statements. Significant judgment is required to determine both the 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 to 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, a different remediation alternative is identified, 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

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