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

OF OPERATIONS

Business Overview	21
2019 in Summary	21
2020 Outlook	23
Results of Operations	23
Reconciliations of Non-GAAP Financial Measures	29
Liquidity and Capital Resources	34
Contractual Obligations	37
Pension Benefits	38
Environmental Matters	40
Off-Balance Sheet Arrangements	41
Related Party Transactions	41
Inflation	41
Critical Accounting Policies and Estimates	41
New Accounting Guidance	46

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 Forward-Looking Statements and Item 1A, Risk Factors, of this Annual Report on Form 10-K.

The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for fiscal years 2019 and 2018. For the discussion of changes from fiscal year 2017 to fiscal year 2018 and other financial information related to fiscal year 2017, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our fiscal year 2018 Form 10-K. This document was filed with the United States Securities and Exchange Commission on 20 November 2018.

The following discussion should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this report. Financial information is presented in millions of dollars, except for per share data. Except for net income, financial information is presented on a continuing operations basis.

The financial measures included in the discussion that follows are presented in accordance with U.S. generally accepted accounting principles ("GAAP"), except as noted. We present certain financial measures on a non-GAAP ("adjusted") basis because we believe such measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting the Company's historical financial performance and projected future results. For each non-GAAP financial measure, including adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, and adjusted effective tax rate, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These reconciliations and explanations regarding the use of these measures are presented on pages 29-33.

BUSINESS OVERVIEW

Air Products and Chemicals, Inc. is a world-leading industrial gases company in operation for nearly 80 years. Focused on serving energy, environment and emerging markets, the Company provides essential industrial gases, related equipment and applications expertise to customers in dozens of industries, including refining, chemical, metals, electronics, manufacturing, and food and beverage. Air Products is also the global leader in the supply of liquefied natural gas ("LNG") process technology and equipment. The Company also develops, engineers, builds, owns and operates some of the world's largest industrial gas projects, including gasification projects that sustainably convert abundant natural resources into syngas for the production of high-value power, fuels and chemicals. With operations in 51 countries outside the United States, in fiscal year 2019 we had sales of $8.9 billion, assets of $18.9 billion, and a worldwide workforce of approximately 17,700 full- and part-time employees.

As of 30 September 2019, 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

This Management’s Discussion and Analysis discusses our results based on these operations. Refer to Note 26, Business Segment and Geographic Information, to the consolidated financial statements for additional details on our reportable business segments.

2019 IN SUMMARY

In fiscal year 2019, we remained focused on improving our existing business while deploying capital into larger, more complex industrial gas projects. We continued to execute our gasification strategy, with the Lu'An project in China reaching its first full year of operation and the progression of other projects such as the Jiutai coal-to-syngas project and the Debang syngas project. We also received a number of important recognitions for our strong focus on sustainability and our commitment to advancing diversity and inclusion. The results below are compared to fiscal year 2018.

•	Sales of $8,918.9 were flat as favorable pricing of 3% and higher volumes of 2% were offset by negative currency impacts of 3% and the negative impact of a contract modification to a tolling arrangement in India of 2%.

•	Operating income of $2,144.4 increased 9%, or $178.8, and operating margin of 24.0% increased 200 bp.

•	Net income of $1,809.4 increased 18%, or $276.5, and net income margin of 20.3% increased 310 bp.

•	Adjusted EBITDA of $3,468.0 increased 11%, or $352.5, and adjusted EBITDA margin of 38.9% increased 400 bp.

•	Diluted EPS of $7.94 increased 20%, or $1.35 per share. Adjusted diluted EPS of $8.21 increased 10%, or $.76 per share. A summary table of changes in diluted EPS is presented on the following page.

•	We increased our quarterly dividend by 5% from $1.10 to $1.16 per share, or $4.64 per share annually. This is the 37th consecutive year that we have increased our dividend payment, reflecting continued confidence in our financial strength, significant cash flows, and growth outlook.

Changes in Diluted EPS Attributable to Air Products

							Increase
	2019			2018			(Decrease)
Diluted EPS		$7.94			$6.59			$1.35
Operating Income Impact (after-tax)
Underlying business
Volume								$.40
Price, net of variable costs							.81
Other costs							(.17		)
Currency							(.20		)
Facility closure							(.10		)
Change in inventory valuation method							(.08		)
Cost reduction actions							(.08		)
Gain on exchange of equity affiliate investments							.13
Total Operating Income Impact (after-tax)								$.71
Other Impact (after-tax)
Equity affiliates' income							.04
Interest expense							(.02		)
Other non-operating income (expense), net							.21
Change in effective tax rate, excluding discrete items below							(.09		)
Tax reform repatriation							2.22
Tax reform adjustment related to deemed foreign dividends							(.51		)
Tax reform rate change and other							(.96		)
Tax restructuring							(.16		)
Noncontrolling interests							(.06		)
Weighted average diluted shares							(.03		)
Total Other Impact (after-tax)								$.64
Total Change in Diluted EPS								$1.35

							Increase
	2019			2018			(Decrease)
Diluted EPS		$7.94			$6.59			$1.35
Facility closure	.10			—			.10
Change in inventory valuation method	—			(.08		)	.08
Cost reduction actions	.08			—			.08
Gain on exchange of equity affiliate investments	(.13		)	—			(.13		)
Pension settlement loss	.02			.15			(.13		)
Tax reform repatriation	(.06		)	2.16			(2.22		)
Tax reform adjustment related to deemed foreign dividends	.26			(.25		)	.51
Tax reform rate change and other	—			(.96		)	.96
Tax restructuring	—			(.16		)	.16
Adjusted Diluted EPS		$8.21			$7.45			$.76

2020 OUTLOOK

In fiscal year 2020, we intend to grow our earnings by continuing to improve our base businesses and execute against our capital deployment strategy. Backed by our current 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. We expect earnings to grow from an investment in a new equity affiliate that will acquire the gasification, power, and industrial gas assets at Jazan Economic City, Saudi Arabia ("the Jazan gas and power project").

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

RESULTS OF OPERATIONS

Discussion of Consolidated Results

	2019			2018			$ Change			Change
GAAP Measures
Sales		$8,918.9			$8,930.2			($11.3	)	—	%
Operating income	2,144.4			1,965.6			178.8			9	%
Operating margin	24.0		%	22.0		%	—			200 bp
Equity affiliates’ income		$215.4			$174.8			$40.6		23	%
Net income	1,809.4			1,532.9			276.5			18	%
Net income margin	20.3		%	17.2		%	—			310	bp
Non-GAAP Measures
Adjusted EBITDA		$3,468.0			$3,115.5			$352.5		11	%
Adjusted EBITDA margin	38.9		%	34.9		%	—			400 bp

Sales

Sales % Change from Prior Year
Volume	2	%
Price	3	%
Energy and raw material cost pass-through	—	%
Currency	(3	)%
Other(A)	(2	)%
Total Consolidated Sales Change	—	%

(A)	Includes the impact from the modification of a hydrogen supply contract to a tolling arrangement in India in December 2018 ("the India contract modification").

Sales of $8,918.9 were flat as favorable pricing of 3% and higher volumes of 2% were offset by negative currency impacts of 3% and the impact of the India contract modification of 2%. The pricing improvement was primarily attributable to our merchant business across the regional segments. Volumes were higher from new projects, mainly the Lu'An project in Asia, and positive base business growth. These drivers were partially offset by lower Jazan sale of equipment activity, which negatively impacted volumes by 2%, and a prior year equipment sale resulting from a contract termination in Asia. Unfavorable currency impacts were driven by the Chinese Renminbi, Euro, and British Pound Sterling. Energy and natural gas cost pass-through to customers was flat versus the prior year.

Cost of Sales and Gross Margin

Cost of sales, including the facility closure discussed below, was $6,004.5. Total cost of sales decreased 3%, or $185.0, as a favorable impact from the India contract modification of $193 and positive currency impacts of $189 were partially offset by higher other costs of $67, higher costs attributable to sales volumes of $44, higher energy and natural gas cost pass-through to customers of $33, the facility closure of $29, and a benefit of $24 for the change in inventory valuation method for our United States industrial gas inventories in the prior year. Gross margin of 32.7% increased 200 bp, primarily due to positive pricing, favorable volume mix, and the India contract modification, partially offset by unfavorable net operating costs.

Facility Closure

In December 2018, one of our customers was subject to a government enforced shutdown due to environmental reasons. As a result, we recognized a charge of $29.0 ($22.1 after-tax, or $.10 per share) during the first quarter of fiscal year 2019 primarily related to the write-off of onsite assets. This charge is reflected as “Facility closure” on our consolidated income statements. We do not expect to recognize additional charges related to this shutdown.

Selling and Administrative Expense

Selling and administrative expense of $750.0 decreased 1%, or $10.8. Selling and administrative expense as a percent of sales decreased from 8.5% to 8.4%.

Research and Development

Research and development expense of $72.9 increased 13%, or $8.4. Research and development expense as a percent of sales increased to .8% from .7%.

Cost Reduction and Asset Actions

In fiscal year 2019, we recognized an expense of $25.5 ($18.8 after-tax, or $.08 per share) for severance and other benefits associated with position eliminations that are expected to drive cost synergies, primarily within the Industrial Gases – EMEA and the Industrial Gases – Americas segments. This expense has been reflected as "Cost reduction and asset actions" on our consolidated income statements.

Gain on Exchange of Equity Affiliate Investments

In fiscal year 2019, we recognized a net gain of $29.1 ($.13 per share) resulting from the exchange of two 50%-owned industrial gas joint ventures in China. Refer to Note 7, Acquisitions, to the consolidated financial statements for additional information. The net gain has been reflected as "Gain on exchange of equity affiliate investments" on our consolidated income statements. There were no tax impacts on the exchange.

Other Income (Expense), Net

Other income (expense), net of $49.3 decreased 2%, or $.9, primarily due to lower income from transition services agreements, mostly offset by income from the sale of assets and investments and a favorable foreign exchange impact.

Operating Income and Margin

Operating income of $2,144.4 increased 9%, or $178.8, as positive pricing, net of power and fuel costs, of $220, favorable volumes of $110, and a gain on the exchange of two 50%-owned equity affiliates of $29 were partially offset by unfavorable currency impacts of $55, higher net operating costs of $46, a charge for a facility closure of $29, a charge for cost reduction actions of $26, and the impact of the change in inventory valuation method of $24 in the prior year. Operating margin of 24.0% increased 200 bp, primarily due to positive pricing and favorable volume mix, partially offset by unfavorable net operating costs.

Equity Affiliates’ Income

Income from equity affiliates of $215.4 increased 23%, or $40.6, primarily due to an expense of $28.5 in the prior year resulting from the U.S. Tax Cuts and Jobs Act, favorable volumes, and new plant contributions. For additional information on the U.S. Tax Cuts and Jobs Act, refer to Note 23, Income Taxes, to the consolidated financial statements.

Interest Expense

	2019			2018
Interest incurred		$150.5			$150.0
Less: Capitalized interest	13.5			19.5
Interest Expense		$137.0			$130.5

Interest incurred increased $.5 as interest expense associated with financing the Lu'An joint venture was mostly offset by favorable impacts from currency, a lower average interest rate on the debt portfolio, and a lower average debt balance. Capitalized interest decreased 31%, or $6.0, due to a decrease in the carrying value of projects under construction, primarily driven by the Lu'An project in Asia.

Other Non-Operating Income (Expense), Net

Other non-operating income (expense), net of $66.7 increased $61.6, primarily due to lower pension settlement losses, higher non-service pension income, and higher interest income on cash and cash items. The prior year included pension settlement losses of $43.7 ($33.2 after-tax, or $.15 per share) primarily in connection with the transfer of certain pension assets and payment obligations to an insurer for our U.S. salaried and hourly plans. In fiscal year 2019, we recognized a pension settlement loss of $5.0 ($3.8 after-tax, or $.02 per share) associated with the U.S. Supplementary Pension Plan during the second quarter.

Net Income and Net Income Margin

Net income of $1,809.4 increased 18%, or $276.5, primarily due to impacts from the U.S. Tax Cuts and Jobs Act, positive pricing, and favorable volumes. Net income margin of 20.3% increased 310 bp.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $3,468.0 increased 11%, or $352.5, primarily due to positive pricing and higher volumes, partially offset by unfavorable currency. Adjusted EBITDA margin of 38.9% increased 400 bp, primarily due to higher volumes, positive pricing, and the India contract modification. The India contract modification contributed 80 bp.

Effective Tax Rate

The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. The effective tax rate was 21.0% and 26.0% in fiscal years 2019 and 2018, respectively.

The current year rate was lower primarily due to impacts related to the enactment of the U.S. Tax Cuts and Jobs Act (the “Tax Act") in 2018, which significantly changed existing U.S. tax laws, including a reduction in the federal corporate income tax rate from 35% to 21%, a deemed repatriation tax on unremitted foreign earnings, as well as other changes. As a result of the Tax Act, our income tax provision reflects discrete net income tax costs of $43.8 and $180.6 in fiscal years 2019 and 2018, respectively. The current year included a cost of $56.2 ($.26 per share) for the reversal of a benefit recorded in 2018 related to the U.S. taxation of deemed foreign dividends. We recorded this reversal based on regulations issued in 2019. The 2019 reversal was partially offset by a favorable adjustment of $12.4 ($.06 per share) that was recorded as we completed our estimates of the impacts of the Tax Act. This adjustment is primarily related to foreign tax items, including the deemed repatriation tax for foreign tax redeterminations. In addition, the current year rate included a net gain on the exchange of two equity affiliates of $29.1, which was not a taxable transaction. The higher 2018 expense resulting from the Tax Act was partially offset by a $35.7 tax benefit from the restructuring of foreign subsidiaries, a $9.1 benefit from a foreign audit settlement agreement, and higher excess tax benefits on share-based compensation.

The adjusted effective tax rate was 19.4% and 18.6% in fiscal years 2019 and 2018, respectively. The lower prior year rate was primarily due to the $9.1 benefit from a foreign audit settlement agreement and higher excess tax benefits on share-based compensation.

Refer to Note 23, Income Taxes, to the consolidated financial statements for additional information.

Discontinued Operations

In fiscal year 2018, income from discontinued operations, net of tax, of $42.2 included 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 our former Performance Materials Division. These benefits were partially offset by an after-tax loss of $1.0 related to Energy-from-Waste.

Segment Analysis

Industrial Gases – Americas

	2019			2018			$ Change			Change
Sales		$3,873.5			$3,758.8			$114.7		3	%
Operating income	997.7			927.9			69.8			8	%
Operating margin	25.8		%	24.7		%	—			110 bp
Equity affiliates’ income		$84.8			$82.0			$2.8		3	%
Adjusted EBITDA	1,587.7			1,495.2			92.5			6	%
Adjusted EBITDA margin	41.0		%	39.8		%	—			120 bp

Sales % Change from Prior Year
Volume	1	%
Price	3	%
Energy and natural gas cost pass-through	—	%
Currency	(1	)%
Total Industrial Gases – Americas Sales Change	3	%

Sales of $3,873.5 increased 3%, or $114.7, as positive pricing of 3% and higher volumes of 1% were partially offset by a negative impact from currency of 1%. The pricing improvement was primarily driven by our merchant business. Energy and natural gas cost pass-through to customers was flat versus the prior year.

Operating income of $997.7 increased 8%, or $69.8, as higher pricing, net of power and fuel costs, of $85 and favorable volumes of $34 were partially offset by higher costs of $44 and unfavorable currency impacts of $5. The higher costs were primarily driven by distribution costs. Operating margin of 25.8% increased 110 bp as positive pricing and higher volumes were partially offset by unfavorable costs.

Equity affiliates’ income of $84.8 increased 3%, or $2.8, primarily due to positive pricing and lower costs, partially offset by unfavorable impacts from currency.

Industrial Gases – EMEA

	2019			2018			$ Change			Change
Sales		$2,002.5			$2,193.3			($190.8	)	(9	)%
Operating income	472.4			445.8			26.6			6	%
Operating margin	23.6		%	20.3		%	—			330 bp
Equity affiliates’ income		$69.0			$61.1			$7.9		13	%
Adjusted EBITDA	730.9			705.5			25.4			4	%
Adjusted EBITDA margin	36.5		%	32.2		%	—			430 bp

Sales % Change from Prior Year
Volume	2	%
Price	3	%
Energy and natural gas cost pass-through	—	%
Currency	(5	)%
Other(A)	(9	)%
Total Industrial Gases – EMEA Sales Change	(9	)%

(A)	Includes the impact from the modification of a hydrogen supply contract to a tolling arrangement in India in December 2018 ("the India contract modification").

Sales of $2,002.5 decreased 9%, or $190.8, as the negative impact from the India contract modification of 9% and unfavorable currency impacts of 5% were partially offset by positive pricing of 3% and higher volumes of 2%. The negative currency impact was mainly driven by the Euro and British Pound Sterling. The pricing improvement was mostly attributable to our merchant business. The volume increase was primarily driven by acquisition activity as our base business remained stable. Energy and natural gas cost pass-through to customers was flat versus the prior year.

Operating income of $472.4 increased 6%, or $26.6, primarily due to higher pricing, net of power and fuel costs, of $60, partially offset by unfavorable currency impacts of $25 and higher costs of $10. Operating margin of 23.6% increased 330 bp as favorable pricing and the impact of the India tolling arrangement were partially offset by higher costs.

Equity affiliates’ income of $69.0 increased 13%, or $7.9, primarily due to the Jazan Gas Projects Company joint venture.

Industrial Gases – Asia

	2019			2018			$ Change			Change
Sales		$2,663.6			$2,458.0			$205.6		8	%
Operating income	864.2			689.9			174.3			25	%
Operating margin	32.4		%	28.1		%	—			430 bp
Equity affiliates’ income		$58.4			$58.3			$.1		—	%
Adjusted EBITDA	1,284.1			1,014.0			270.1			27	%
Adjusted EBITDA margin	48.2		%	41.3		%	—			690 bp

Sales % Change from Prior Year
Volume	9	%
Price	3	%
Energy and natural gas cost pass-through	—	%
Currency	(4	)%
Total Industrial Gases – Asia Sales Change	8	%

Sales of $2,663.6 increased 8%, or $205.6, as higher volumes of 9% and positive pricing of 3% were partially offset by unfavorable currency impacts of 4%. The volume increase was primarily driven by new plants onstream, mainly the Lu'An gasification project, and base business growth, partially offset by the impact of a prior year equipment sale resulting from a contract termination. Pricing improved across Asia, primarily driven by our merchant business. The unfavorable currency impact was primarily attributable to the Chinese Renminbi. Energy and natural gas cost pass-through to customers was flat versus the prior year.

Operating income of $864.2 increased 25%, or $174.3, due to higher volumes of $117, favorable pricing, net of power and fuel costs, of $73, and lower net operating costs of $14, partially offset by unfavorable currency impacts of $30. Operating margin of 32.4% increased 430 bp, primarily due to higher volumes and positive pricing.

Equity affiliates’ income of $58.4 was flat versus the prior year.

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.

	2019			2018			$ Change			Change
Sales		$261.0			$436.1			($175.1	)	(40	)%
Operating income (loss)	(11.7		)	53.9			(65.6		)	(122	)%
Adjusted EBITDA	.1			63.9			(63.8		)	(100	)%

Sales of $261.0 decreased 40%, or $175.1. The decrease in sales was primarily driven by lower sale of equipment activity as we near completion 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 by the end of the first quarter of fiscal year 2020.

Operating loss of $11.7 decreased $65.6 from operating income of $53.9 in the prior year, primarily due to the lower sale of equipment activity.

Corporate and other

The Corporate and other segment includes our LNG, turbo machinery equipment, 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.

	2019			2018			$ Change			Change
Sales		$118.3			$84.0			$34.3		41	%
Operating loss	(152.8		)	(176.0		)	23.2			13	%
Adjusted EBITDA	(134.8		)	(163.1		)	28.3			17	%

Sales of $118.3 increased 41%, or $34.3, primarily due to higher turbo machinery activity. Operating loss of $152.8 decreased 13%, or $23.2, primarily due to income generated from turbo machinery and lower corporate costs.

RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES

Millions of dollars unless otherwise indicated, except for per share data

The Company presents certain financial measures on a non-GAAP (“adjusted”) basis. On a consolidated basis, these measures include adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, and adjusted effective tax rate. On a segment basis, these measures include adjusted EBITDA and adjusted EBITDA margin. In addition to these measures, which are presented above, we also include certain supplemental non-GAAP financial measures that are presented below to help the reader understand the impact that our non-GAAP adjustments have on the calculation of our adjusted diluted EPS. For each non-GAAP financial measure, we present below a reconciliation to the most directly comparable financial measure calculated in accordance with U.S. Generally Accepted Accounting Principles ("GAAP").

The Company's non-GAAP measures are not meant to be considered in isolation or as a substitute for the most directly comparable 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 financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting the Company's historical financial performance and projected future results.

In many cases, non-GAAP measures are determined by adjusting the most directly comparable GAAP measure to exclude certain disclosed items, or “non-GAAP adjustments,” that the Company believes are not representative of underlying business performance. For example, the Company previously excluded certain expenses associated with cost reduction actions, impairment charges, and gains on disclosed transactions. The reader should be aware that the Company may recognize similar losses or gains in the future. Readers 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.

The tax impact on our pre-tax non-GAAP adjustments reflects the expected current and deferred income tax impact of the transactions. These tax impacts are primarily driven by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions.

Consolidated Results

The tables below provide a reconciliation to the most directly comparable GAAP measure for each of the major components used to calculate adjusted diluted EPS, which the Company views as a key performance metric. We believe it is important for the reader to understand the per share impact of our non-GAAP adjustments as management does not consider these impacts when evaluating underlying business performance. The measures presented are based on continuing operations.

	Operating Income			Equity Affiliates' Income			Income Tax Provision			Net Income Attributable to Air Products			Diluted EPS
2019 GAAP		$2,144.4			$215.4			$480.1			$1,760.0			$7.94
2018 GAAP	1,965.6			174.8			524.3			1,455.6			6.59
Change GAAP											$304.4			$1.35
% Change GAAP										21		%	20		%
2019 GAAP		$2,144.4			$215.4			$480.1			$1,760.0			$7.94
Facility closure	29.0			—			6.9			22.1			.10
Cost reduction actions	25.5			—			6.7			18.8			.08
Gain on exchange of equity affiliate investments	(29.1		)	—			—			(29.1		)	(.13		)
Pension settlement loss(A)	—			—			1.2			3.8			.02
Tax reform repatriation	—			—			12.4			(12.4		)	(.06		)
Tax reform adjustment related to deemed foreign dividends	—			—			(56.2		)	56.2			.26
2019 Non-GAAP Measures ("Adjusted")		$2,169.8			$215.4			$451.1			$1,819.4			$8.21
2018 GAAP		$1,965.6			$174.8			$524.3			$1,455.6			$6.59
Change in inventory valuation method	(24.1		)	—			(6.6		)	(17.5		)	(.08		)
Pension settlement loss(A)	—			—			10.5			33.2			.15
Tax reform repatriation	—			28.5			(448.6		)	477.1			2.16
Tax reform adjustment 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 Measures ("Adjusted")		$1,941.5			$203.3			$383.3			$1,644.7			$7.45
Change Non-GAAP Measures ("Adjusted")											$174.7			$.76
% Change Non-GAAP Measures ("Adjusted")										11		%	10		%

(A)	The before-tax impact of $5.0 and $43.7 for fiscal years 2019 and 2018, respectively, is reflected on the consolidated income statements within "Other non-operating income (expense), net."

The table below provides a reconciliation of adjusted diluted EPS to GAAP diluted EPS for fiscal years 2017, 2016, and 2015:

	2017			2016			2015
Diluted EPS		$5.16			$5.04			$4.29
Business separation costs	.12			.21			.03
Tax (benefit) costs associated with business separation	(.02		)	.24			—
Business restructuring, cost reduction, and asset actions	.49			.11			.61
Goodwill and intangible asset impairment charge	.70			—			—
Gain on previously held equity interest	—			—			(.05		)
Gain on land sales	(.03		)	—			(.13		)
Equity method investment impairment charge	.36			—			—
Pension settlement loss	.03			.02			.06
Loss on extinguishment of debt	—			.02			.07
Tax election benefit	(.50		)	—			—
Adjusted Diluted EPS		$6.31			$5.64			$4.88

Adjusted EBITDA

We define Adjusted EBITDA as net income less income (loss) from discontinued operations, net of tax, and excluding certain non‑GAAP adjustments, 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 and adjusted EBITDA margin provide useful metrics for management to assess operating performance. Margin is calculated for each period by dividing each line item by consolidated sales for the respective period.

Below is a presentation of consolidated sales and a reconciliation of net income on a GAAP basis to adjusted EBITDA and net income margin on a GAAP basis to adjusted EBITDA margin:

	2019					2018					2017					2016					2015
Sales		$8,918.9					$8,930.2					$8,187.6					$7,503.7					$7,824.3

	2019						2018						2017						2016						2015
	$			Margin			$			Margin			$			Margin			$			Margin			$			Margin
Net income and net income margin		$1,809.4		20.3	%			$1,532.9		17.2	%			$3,021.2		36.9	%			$661.5		8.8	%			$1,317.6		16.8	%
Less: Income (Loss) from discontinued operations, net of tax	—			—	%		42.2			.5	%		1,866.0			22.8	%		(460.5		)	(6.1	)%		351.7			4.5	%
Add: Interest expense	137.0			1.5	%		130.5			1.5	%		120.6			1.5	%		115.2			1.5	%		102.8			1.3	%
Less: Other non-operating income (expense), net	66.7			.7	%		5.1			.1	%		16.6			.2	%		(5.4		)	(.1	)%		(42.3		)	(.5	)%
Add: Income tax provision	480.1			5.4	%		524.3			5.9	%		260.9			3.2	%		432.6			5.8	%		300.2			3.8	%
Add: Depreciation and amortization	1,082.8			12.1	%		970.7			10.9	%		865.8			10.6	%		854.6			11.4	%		858.5			11.0	%
Less: Change in inventory valuation method	—			—	%		24.1			.3	%		—			—	%		—			—	%		—			—	%
Add: Facility closure	29.0			.3	%		—			—	%		—			—	%		—			—	%		—			—	%
Add: Business separation costs	—			—	%		—			—	%		32.5			.4	%		50.6			.7	%		7.5			.1	%
Add: Business restructuring, cost reduction, and asset actions	25.5			.3	%		—			—	%		151.4			1.8	%		34.5			.4	%		180.1			2.4	%
Add: Goodwill and intangible asset impairment charge	—			—	%		—			—	%		162.1			2.0	%		—			—	%		—			—	%
Less: Gain on previously held equity interest	—			—	%		—			—	%		—			—	%		—			—	%		17.9			.2	%
Less: Gain on exchange of equity affiliate investments	29.1			.3	%		—			—	%		—			—	%		—			—	%		—			—	%
Less: Gain on land sales	—			—	%		—			—	%		12.2			.2	%		—			—	%		33.6			.4	%
Add: Equity method investment impairment charge	—			—	%		—			—	%		79.5			1.0	%		—			—	%		—			—	%
Add: Loss on extinguishment of debt	—			—	%		—			—	%		—			—	%		6.9			.1	%		16.6			.2	%
Add: Tax reform repatriation - equity method investment	—			—	%		28.5			.3	%		—			—	%		—			—	%		—			—	%
Adjusted EBITDA and adjusted EBITDA margin		$3,468.0		38.9	%			$3,115.5		34.9	%			$2,799.2		34.2	%			$2,621.8		34.9	%			$2,422.4		31.0	%

	2019					2018					2017					2016
Change GAAP
Net income $ change			$276.5					($1,488.3	)				$2,359.7					($656.1	)
Net income % change		18		%			(49		)%			357		%			(50		)%
Net income margin change		310		bp			(1,970		) bp			2,810		bp			(800		) bp
Change Non-GAAP
Adjusted EBITDA $ change			$352.5					$316.3					$177.4					$199.4
Adjusted EBITDA % change		11		%			11		%			7		%			8		%
Adjusted EBITDA margin change		400		bp			70		bp			(70		) bp			390		bp

Below is reconciliation of operating income and operating margin by segment to adjusted EBITDA and adjusted EBITDA margin by segment:

	Industrial Gases– Americas			Industrial Gases– EMEA			Industrial Gases– Asia			Industrial Gases– Global			Corporate and other			Total
GAAP Measure
Twelve Months Ended 30 September 2019
Operating income (loss)		$997.7			$472.4			$864.2			($11.7	)		($152.8	)		$2,169.8		(A)
Operating margin	25.8		%	23.6		%	32.4		%
Twelve Months Ended 30 September 2018
Operating income (loss)		$927.9			$445.8			$689.9			$53.9			($176.0	)		$1,941.5		(A)
Operating margin	24.7		%	20.3		%	28.1		%
2019 vs. 2018
Operating income (loss) change		$69.8			$26.6			$174.3			($65.6	)		$23.2
Operating income (loss) % change	8		%	6		%	25		%	(122		)%	13		%
Operating margin change	110		bp	330		bp	430		bp

	Industrial Gases– Americas			Industrial Gases– EMEA			Industrial Gases– Asia			Industrial Gases– Global			Corporate and other			Total
Non-GAAP Measure
Twelve Months Ended 30 September 2019
Operating income (loss)		$997.7			$472.4			$864.2			($11.7	)		($152.8	)		$2,169.8		(A)
Add: Depreciation and amortization	505.2			189.5			361.5			8.6			18.0			1,082.8
Add: Equity affiliates' income	84.8			69.0			58.4			3.2			—			215.4			(B)
Adjusted EBITDA		$1,587.7			$730.9			$1,284.1			$.1			($134.8	)		$3,468.0
Adjusted EBITDA margin	41.0		%	36.5		%	48.2		%
Twelve Months Ended 30 September 2018
Operating income (loss)		$927.9			$445.8			$689.9			$53.9			($176.0	)		$1,941.5		(A)
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			(B)
Adjusted EBITDA		$1,495.2			$705.5			$1,014.0			$63.9			($163.1	)		$3,115.5
Adjusted EBITDA margin	39.8		%	32.2		%	41.3		%
2019 vs. 2018
Adjusted EBITDA change		$92.5			$25.4			$270.1			($63.8	)		$28.3
Adjusted EBITDA % change	6		%	4		%	27		%	(100		)%	17		%
Adjusted EBITDA margin change	120		bp	430		bp	690		bp

(A)	The table below reconciles operating income as reflected on our consolidated income statements to total operating income in the table above:

Operating Income	2019			2018
Consolidated operating income		$2,144.4			$1,965.6
Change in inventory valuation method	—			(24.1		)
Facility closure	29.0			—
Cost reduction and asset actions	25.5			—
Gain on exchange of equity affiliate investments	(29.1		)	—
Total		$2,169.8			$1,941.5

(B)	The table below reconciles equity affiliates' income as reflected on our consolidated income statements to total equity affiliates' income in the table above:

Equity Affiliates' Income	2019			2018
Consolidated equity affiliates' income		$215.4			$174.8
Tax reform repatriation - equity method investment	—			28.5
Total		$215.4			$203.3

Income Taxes

The tax impact of our pre-tax non-GAAP adjustments reflects the expected current and deferred income tax expense associated with each adjustment and is primarily dependent upon the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions. For additional discussion on the impact of the U.S. Tax Cuts and Jobs Act, refer to Note 23, Income Taxes, to the consolidated financial statements.

	Effective Tax Rate
	2019			2018
Income Tax Provision		$480.1			$524.3
Income From Continuing Operations Before Taxes		$2,289.5			$2,015.0
Effective Tax Rate	21.0		%	26.0		%
Income Tax Provision		$480.1			$524.3
Change in inventory valuation method	—			(6.6		)
Facility closure	6.9			—
Cost reduction actions	6.7			—
Pension settlement loss	1.2			10.5
Tax reform repatriation	12.4			(448.6		)
Tax reform adjustment related to deemed foreign dividends	(56.2		)	56.2
Tax reform rate change and other	—			211.8
Tax restructuring	—			35.7
Adjusted Income Tax Provision		$451.1			$383.3
Income from Continuing Operations Before Taxes		$2,289.5			$2,015.0
Change in inventory valuation method	—			(24.1		)
Facility closure	29.0			—
Cost reduction actions	25.5			—
Gain on exchange of equity affiliate investments	(29.1		)	—
Pension settlement loss	5.0			43.7
Tax reform repatriation - equity method investment	—			28.5
Adjusted Income From Continuing Operations Before Taxes		$2,319.9			$2,063.1
Adjusted Effective Tax Rate	19.4		%	18.6		%

LIQUIDITY AND CAPITAL RESOURCES

We maintained a strong financial position throughout fiscal year 2019. As of 30 September 2019, our consolidated balance sheet included cash and cash items of $2,248.7. 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 2019, we had $971.5 of foreign cash and cash items compared to a total amount of cash and cash items of $2,248.7. As a result of the Tax Act, we do not expect that a significant portion of our foreign subsidiaries' and affiliates' earnings will be subject to U.S. income tax upon subsequent repatriation to the United States. The repatriation of these earnings may be subject to foreign withholding and other taxes depending on the country in which the subsidiaries and affiliates reside. However, because 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 23, Income Taxes, for additional information.

The table below summarizes our cash flows from operating activities, investing activities, and financing activities from continuing operations as reflected on the consolidated statements of cash flows:

Cash Provided by (Used for)	2019			2018
Operating activities		$2,969.9			$2,547.2
Investing activities	(2,113.4		)	(1,641.6		)
Financing activities	(1,370.5		)	(1,359.8		)

Operating Activities

For the fiscal year ended 30 September 2019, cash provided by operating activities was $2,969.9. Income from continuing operations of $1,760.0 was adjusted for items including depreciation and amortization, deferred income taxes, impacts from the Tax Act, a charge for the facility closure of one of our customers, undistributed earnings of unconsolidated affiliates, gain on sale of assets and investments, share-based compensation, noncurrent capital lease receivables, and certain other adjustments. The caption "Gain on sale of assets and investments" includes a gain of $14.1 recognized on the disposition of our interest in High-Tech Gases (Beijing) Co., Ltd., a previously held equity investment in our Industrial Gases – Asia segment. Refer to Note 7, Acquisitions, to the consolidated financial statements for additional information. The working capital accounts were a use of cash of $25.3, primarily driven by $69.0 from trade receivables and $41.8 from payables and accrued liabilities, partially offset by $79.8 from other receivables. The use of cash within "Payables and accrued liabilities" was primarily driven by a $48.9 decrease in accrued utilities and a $30.3 decrease in accrued interest, partially offset by a $51.6 increase in customer advances primarily related to sale of equipment activity. The decrease in accrued utilities was primarily driven by a contract modification to a tolling arrangement in India and lower utility costs in the Industrial Gases – Americas segment. The source of cash from other receivables of $79.8 was primarily due to the maturities of forward exchange contracts that hedged foreign currency exposures and the collection of value added taxes.

For the fiscal year ended 30 September 2018, cash provided by operating activities was $2,547.2, including income from continuing operations of $1,455.6. 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 $128.3 was primarily due to the maturities of forward exchange contracts that hedged foreign currency exposures.

Investing Activities

For the fiscal year ended 30 September 2019, cash used for investing activities was $2,113.4. Payments for additions to plant and equipment totaled $1,989.7. Cash paid for acquisitions, net of cash acquired, was $123.2. Refer to Note 7, Acquisitions, to the consolidated financial statements for further details. Proceeds from investments of $190.5 resulting from maturities of short-term instruments with original maturities greater than three months and less than one year exceeded purchase of $172.1.

For the fiscal year ended 30 September 2018, cash used for investing activities was $1,641.6. Payments for additions to plant and equipment totaled $1,568.4. Cash paid for acquisitions, net of cash acquired, was $345.4. Refer to Note 7, Acquisitions, to the consolidated financial statements for further details. Proceeds from investments of $748.2 exceeded our purchases of investments of $530.3.

Capital Expenditures

Capital expenditures is a non-GAAP measure that we define as cash flows for additions to plant and equipment, acquisitions (less cash acquired), and investment in and advances to unconsolidated affiliates. A reconciliation of cash used for investing activities to our reported capital expenditures is provided below:

	2019			2018
Cash used for investing activities		$2,113.4			$1,641.6
Proceeds from sale of assets and investments	11.1			48.8
Purchases of investments	(172.1		)	(530.3		)
Proceeds from investments	190.5			748.2
Other investing activities	(14.3		)	5.5
Capital Expenditures		$2,128.6			$1,913.8

The components of our capital expenditures are detailed in the table below:

	2019			2018
Additions to plant and equipment		$1,989.7			$1,568.4
Acquisitions, less cash acquired	123.2			345.4
Investments in and advances to unconsolidated affiliates	15.7			—
Capital Expenditures		$2,128.6			$1,913.8

Capital expenditures in fiscal year 2019 totaled $2,128.6 compared to $1,913.8 in fiscal year 2018. The increase of $214.8 was primarily due to major project spending, including payment for gasification and syngas clean up assets from Lu'An. Additions to plant and equipment also included support capital of a routine, ongoing nature, including expenditures for distribution equipment and facility improvements.

2020 Outlook for Investing Activities

Capital expenditures in fiscal year 2020 are expected to be approximately $4 billion to $4.5 billion, which primarily includes our initial expected equity affiliate investment in the Jazan gas and power project as well as new plants that are currently under construction or expected to start construction. It is not possible, without unreasonable efforts, to reconcile our forecasted capital expenditures to future cash used for investing activities because we are unable to identify the timing or occurrence of our future investment activity, which is driven by our assessment of competing opportunities at the time we enter into transactions. These decisions, either individually or in the aggregate, could have a significant effect on our cash used for investing activities.

We anticipate capital expenditures to be funded principally with our current cash balance and cash generated from continuing operations. In addition, we intend to continue to evaluate (1) acquisitions of small- and medium-sized industrial gas companies or assets from other industrial gas companies; (2) purchases of existing industrial gas facilities from our customers to create long-term contracts under which we own and operate the plant and sell industrial gases to the customer based on a fixed fee; and (3) investment in large industrial gas projects driven by demand for more energy, cleaner energy, and emerging market growth.

Financing Activities

For the fiscal year ended 2019, cash used for financing activities was $1,370.5. This use of cash was largely attributable to dividend payments to shareholders of $994.0 and payments on long-term debt of $428.6. Payments on long-term debt primarily related to the repayment of a 4.375% U.S. Senior Note of $400.0 that matured on 21 August 2019.

For the fiscal year ended 2018, cash used for financing activities was $1,359.8. This use of cash was largely attributable to 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.

Financing and Capital Structure

Capital needs in fiscal year 2019 were satisfied primarily with cash from operations. At the end of 2019, total debt outstanding was $3,326.0 compared to $3,812.6 at the end of 2018, and cash and cash items were $2,248.7 compared to $2,791.3 at the end of 2018. Total debt as of 30 September 2019 includes related party debt $357.9 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 2019 and 2018 expressed as a percentage of total capitalization was 22.6% and 25.4%, respectively. No borrowings were outstanding under the 2017 Credit Agreement as of 30 September 2019.

As of 30 September 2019, we classified our 2.000% Eurobond of €300 million ($327.0) maturing in August 2020 as long-term debt because we have the ability to refinance the debt under the 2017 Credit Agreement. Our current intent is to refinance this debt via the U.S. or European public or private placement markets.

Commitments totaling $2.3 are maintained by our foreign subsidiaries, all of which was borrowed and outstanding at 30 September 2019.

As of 30 September 2019, 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 2019 or 2018. As of 30 September 2019, $485.3 in share repurchase authorization remains.

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 2019, the Board of Directors increased the quarterly dividend from $1.10 per share to $1.16 per share, or $4.64 per share annually.

On 26 November 2019, the Board of Directors declared the first quarter 2020 dividend of $1.16 per share. The dividend is payable on 10 February 2020 to shareholders of record at the close of business on 2 January 2020.

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 2019:

	Total			2020			2021			2022			2023			2024			Thereafter
Debt maturities		$3,275			$367			$440			$439			$454			$454			$1,121
Contractual interest on debt	466			78			69			55			44			35			185
Capital leases	21			2			3			1			1			1			13
Operating leases	418			75			63			44			36			29			171
Pension obligations	641			35			51			52			52			52			399
Unconditional purchase obligations	8,310			1,358			407			369			349			350			5,477
Deemed repatriation tax related to the Tax Act	215			—			21			21			21			37			115
Obligation for future contribution to an equity affiliate	100			100			—			—			—			—			—
Total Contractual Obligations		$13,446			$2,015			$1,054			$981			$957			$958			$7,481

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 16, 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 $635 of long-term debt subject to variable interest rates at 30 September 2019, 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 2019. Variable interest rates are primarily determined by U.S. short-term tax-exempt interest rates and by interbank offer rates.

Leases

Refer to Note 13, 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 17, 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 $7,100 of our unconditional purchase obligations relate to helium purchases. The majority of these obligations occur after fiscal year 2024. Helium purchases include crude feedstock supply to 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 our helium sourcing contracts are generally longer than our customer sales contracts, helium is a rare gas used in applications with few or no substitutions because of its unique physical and chemical properties.

Approximately $160 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.

We estimate our maximum obligation for future purchases of plant and equipment to be approximately $890 based on open purchase orders as of 30 September 2019. This includes spending for the Jiutai coal-to-syngas project. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to reschedule, cancel, or otherwise modify based on our business needs. We have disclosed this obligation in fiscal year 2020; however, timing of actual satisfaction of the obligation may vary.

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 2019 were $231.7. These tax liabilities were excluded from the table above 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 table above includes our accrued liability of approximately $215 for deemed repatriation tax that is payable through 2026 related to the Tax Act. Refer to Note 23, 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. We guarantee the repayment of our 25% share of an equity bridge loan to fund equity commitments to the joint venture. In total, we expect to invest approximately $100 in this joint venture. As of 30 September 2019, payables and accrued liabilities included $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 Equity Affiliate Investment in Jazan Gas and Power Project

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 expects to own 51% 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 $11.5 billion. Our expected equity affiliate investment has been excluded from the contractual obligations table above pending financial closing, which is currently expected in fiscal year 2020.

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 2019 measurement date increased to $4,504.8 from $4,273.1 at the end of fiscal year 2018. The projected benefit obligation for these plans was $5,145.6 and $4,583.3 at the end of fiscal years 2019 and 2018, respectively. The net unfunded liability increased $330.6 from $310.2 to $640.8, primarily due to lower discount rates partially offset by favorable asset experience. Refer to Note 17, Retirement Benefits, to the consolidated financial statements for additional disclosures on our postretirement benefits.

Pension Expense

	2019			2018
Pension expense, including special items noted below		$27.6			$91.8
Settlements, termination benefits, and curtailments ("special items")	7.2			48.9
Weighted average discount rate – Service cost	3.4		%	3.2		%
Weighted average discount rate – Interest cost	3.4		%	2.9		%
Weighted average expected rate of return on plan assets	6.4		%	6.9		%
Weighted average expected rate of compensation increase	3.5		%	3.5		%

Pension expense decreased from the prior year due to lower pension settlements, lower loss amortization, primarily from favorable asset experience and the impact of higher discount rates, partially offset by lower expected returns on assets. Special items (settlements, termination benefits, and curtailments) decreased from the prior year primarily due to lower pension settlement losses. In fiscal year 2019, special items of $7.2 included pension settlement losses of $6.4, of which $5.0 was recorded during the second quarter and related to the U.S. Supplementary Pension Plan, and $.8 of termination benefits. These amounts are reflected within "Other non-operating income (expense), net" on the consolidated income statements. In fiscal year 2018, special items of $48.9 included a pension settlement loss of $43.7 primarily in connection with the transfer of certain pension assets and payment obligations for our U.S. salaried and hourly plans to an insurer during the fourth quarter, $4.8 of pension settlement losses related to lump sum payouts from the U.S. Supplementary Pension Plan, and $.4 of termination benefits.

U.K. Lloyds Equalization Ruling

On 26 October 2018, the United Kingdom High Court issued a ruling related to the equalization of pension plan participants’ benefits for the gender effects of Guaranteed Minimum Pensions. As a result of this ruling, we estimated the impact of retroactively increasing benefits in our U.K. plan in accordance with the High Court ruling. We treated the additional benefits as a prior service cost, which resulted in an increase to our projected benefit obligation and accumulated other comprehensive loss of $4.7 during the first quarter of fiscal year 2019. We are amortizing this cost over the average remaining life expectancy of the U.K. participants.

2020 Outlook

In fiscal year 2020, we expect pension expense to be approximately $5 to $20, which includes expected pension settlement losses of $5 to $10, depending on the timing of retirements. The expected range reflects lower expected interest cost and higher total assets, partially offset by higher expected loss amortization primarily due to the impact of lower discount rates. In fiscal year 2020, we expect pension expense to include approximately $105 for amortization of actuarial losses.

In fiscal year 2019, pension expense included amortization of actuarial losses of $76.2. Net actuarial losses of $424.4 were recognized in accumulated other comprehensive income in fiscal year 2019. 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 2020.

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 2019 and 2018, our cash contributions to funded plans and benefit payments for unfunded plans were $40.2 and $68.3, respectively.

For fiscal year 2020, cash contributions to defined benefit plans are estimated to be $30 to $40. 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 page 37 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 CERCLA, 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 18, Commitments and Contingencies, to the consolidated financial statements.

The amounts charged to income from continuing operations related to environmental matters totaled $14.2 and $12.8 in fiscal years 2019 and 2018, respectively. These amounts represent an estimate of expenses for compliance with environmental laws and activities undertaken to meet internal Company standards. Refer to Note 18, Commitments and Contingencies, to the consolidated financial statements for additional information.

Although precise amounts are difficult to determine, we estimate that we spent $5 and $3, in fiscal years 2019 and 2018, respectively, on capital projects to control pollution. Capital expenditures to control pollution are estimated to be approximately $5 in both fiscal years 2020 and 2021.

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 $68 to a reasonably possible upper exposure of $82 as of 30 September 2019. The consolidated balance sheets at 30 September 2019 and 2018 included an accrual of $68.9 and $76.8, 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 18, 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 ("GHGs"), including carbon dioxide. These include existing coverage under the European Union Emission Trading system, the California cap and trade scheme, China’s Emission Trading Scheme and its nation-wide expansion, and South Korea’s Emission Trading Scheme. In Canada, Alberta and Ontario are both in the development/approval process for new GHG regulations. Alberta’s Carbon Competitiveness Incentive Regulation will end December 31, 2019 and will be replaced by the proposed Technology Innovation and Emission Reduction ("TIER") System or Environment & Climate Change Canada's Output Based Pricing System ("OBPS"). In lieu of adherence to the OBPS, Ontario seeks approval from Environment & Climate Change Canada to implement their proposed GHG Emissions Performance Standards program. 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, hydrogen production and application of our gasification technology. 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 18, 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 as well as other income primarily from fees charged for use of Air Products' patents and technology. Sales to and other income from related parties totaled approximately $410 and $360 in fiscal years 2019 and 2018, respectively. Sales 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 fiscal year 2018. Refer to Note 7, Acquisitions, to the consolidated financial statements for additional information on outstanding liabilities associated with the acquisition.

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 2019 totaled $10,337.6, and depreciation expense totaled $1,049.7 during fiscal year 2019. 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.

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 to be disposed of other than by sale may be reviewed for impairment upon the occurrence of certain triggering events, such as unexpected contract terminations or unexpected foreign government-imposed restrictions or expropriations. 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 2019, 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. However, one of our customers was subject to a government enforced shutdown due to environmental reasons. As a result, we recognized a charge of $29.0 during the first quarter of fiscal year 2019 primarily related to the write-off of related onsite assets. Refer to Note 24, Supplemental Information, to the consolidated financial statements for additional information.

Impairment of Assets – 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 $797.1 as of 30 September 2019. Disclosures related to goodwill are included in Note 11, 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 26, 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 adjusted EBITDA margins, discount rate, and exit multiple. Projected revenue growth rates and operating profit and/or adjusted 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.

During the fourth quarter of fiscal year 2019, 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, which is further discussed below. Substantially all of the remaining goodwill balance related to reporting units in which the fair value exceeded the carrying value by at least 100%.

The fair value of LASA exceeded its carrying value by 11%. Revenue growth and adjusted EBITDA margin assumptions are two primary drivers of the fair value. We determined that, with other assumptions held constant, a decrease in revenue growth rates of approximately 310 basis points or a decrease in adjusted EBITDA margin of approximately 300 basis points would result in the fair value of the reporting unit being equal to its carrying value. As of 30 September 2019, the carrying value of LASA goodwill was $59.8, or less than 1% of consolidated total assets. The carrying value of LASA's other material assets at 30 September 2019 included: Plant and equipment, net of $339.2; customer relationships of $129.0; and trade names and trademarks of $41.3. 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.

Impairment of Assets – Intangible Assets

Intangible assets, net with determinable lives at 30 September 2019 totaled $375.4 and consisted primarily of customer relationships, purchased patents and technology, and land use rights. These intangible assets are tested for impairment as part of the long-lived asset grouping impairment tests. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying 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 2019 totaled $44.1 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 12, Intangible Assets, to the consolidated financial statements.

In the fourth quarter of 2019, we conducted our annual impairment test of indefinite-lived intangibles which resulted in no impairment.

Impairment of Assets – Equity Method Investments

Investments in and advances to equity affiliates totaled $1,276.2 at 30 September 2019. 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 9, 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.

In fiscal year 2019, there was no need to test for impairment on any of our equity affiliate investments as no events or changes in circumstances indicated that the carrying amount of the investments may not be recoverable.

Revenue Recognition – Cost Incurred Input Method

Revenue from equipment sale contracts is generally recognized over time as we have an enforceable right to payment for performance completed to date and our performance under the contract terms does not create an asset with alternative use. We use a cost incurred input method to recognize revenue by which costs incurred to date relative to total estimated costs at completion are used to measure progress toward satisfying performance obligations. Costs incurred include material, labor, and overhead costs and represent work contributing and proportionate to the transfer of control to the customer.

Accounting for contracts using the cost incurred input 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 cost incurred input method, including the Jazan project, favorably impacted operating income by approximately $37 and $38 in fiscal years 2019 and 2018, 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.

Revenue Recognition – On-site Customer Contracts

For customers who require large volumes of gases on a long-term basis, we produce and supply gases under long-term contracts from large facilities that we build, own and operate on or near the customer’s facilities. Certain of these on-site contracts contain complex terms and provisions such as tolling arrangements, minimum payment requirements, variable components and pricing provisions that require significant judgment to determine the amount and timing of revenue recognition.

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 2019, accrued income taxes, including the amount recorded in noncurrent, was $302.0 and net deferred tax liabilities was $678.6. Tax liabilities related to uncertain tax positions as of 30 September 2019 were $231.7, excluding interest and penalties. Income tax expense for the year ended 30 September 2019 was $480.1 and includes a discrete net income tax expense of $43.8 related to the Tax Act. Disclosures related to income taxes are included in Note 23, Income Taxes, to the consolidated financial statements.

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

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

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

A 1% increase/decrease in our effective tax rate would decrease/increase net income by approximately $23.

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 17, 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 $18 per year.

The expected rate of return on plan assets represents an estimate of the long-term average rate of return to be earned by plan assets reflecting current asset allocations. 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 $20 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 non-equity 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 $8 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 18, 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.