Annual Report (10-k)

Date : 11/20/2018 @ 7:53PM
Source : Edgar (US Regulatory)
Stock : Air Products And Chemicals, Inc. (APD)
Quote : 158.84  1.13 (0.72%) @ 4:09PM

Annual Report (10-k)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended 30 September 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from                    to                 
Commission file number 001-04534
AIR PRODUCTS AND CHEMICALS, INC.
7201 Hamilton Boulevard
 
State of incorporation: Delaware
Allentown, Pennsylvania, 18195-1501
 
I.R.S. identification number: 23-1274455
Tel. (610) 481-4911
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
 
Registered on:
Common Stock, par value $1.00 per share
 
New York Stock Exchange
2.0% Euro Notes due 2020
 
New York Stock Exchange
0.375% Euro Notes due 2021
 
New York Stock Exchange
1.0% Euro Notes due 2025
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
YES
x
 
NO
¨
 
 
 
 
 
 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
YES
¨
 
NO
x
 
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES
x
 
NO
¨
 
 
 
 
 
 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
YES
x
 
NO
¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
 
 
 
 
 
¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer    x
 
Accelerated filer   ¨
 
Non-accelerated filer    ¨
 
Smaller reporting company    ¨
 
Emerging growth company   ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 
 
 
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
YES
¨
 
NO
x
The aggregate market value of the voting stock held by non-affiliates of the registrant on 31 March 2018 was approximately $34.8 billion . For purposes of the foregoing calculations, all directors and/or executive officers have been deemed to be affiliates, but the registrant disclaims that any such director and/or executive officer is an affiliate.
The number of shares of common stock outstanding as of 31 October 2018 was 219,533,532 .
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on 24 January 2019 are incorporated by reference into Part III.




AIR PRODUCTS AND CHEMICALS, INC.
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended 30 September 2018
TABLE OF CONTENTS
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 1B.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 
 
ITEM 7.
 
 
 
ITEM 7A.
 
 
 
ITEM 8.
 
 
 
ITEM 9.
 
 
 
ITEM 9A.
 
 
 
ITEM 9B.
 
 
 
ITEM 10.
 
 
 
ITEM 11.
 
 
 
ITEM 12.
 
 
 
ITEM 13.
 
 
 
ITEM 14.
 
 
 
ITEM 15.
 
 
ITEM 16.
 
 
 
 

2


FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “outlook,” “plan,” “positioned,” “possible,” “potential,” “project,” “should,” “target,” “will,” “would,” and similar expressions or variations thereof, or the negative thereof, but these terms are not the exclusive means of identifying such statements. 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. You are cautioned not to place undue reliance on our forward-looking statements.
Forward-looking statements may relate to a number of matters, including expectations regarding revenue, margins, expenses, earnings, tax provisions, cash flows, pension obligations, share repurchases or other statements regarding economic conditions or our business outlook; statements regarding plans, projects, strategies and objectives for our future operations, including our ability to win new projects and execute the projects in our backlog; and statements regarding our expectations with respect to pending legal claims or disputes. While forward-looking statements are made in good faith and based on assumptions, expectations and projections that management believes are reasonable based on currently available information, actual performance and financial results may differ materially from projections and estimates expressed in the forward-looking statements because of many factors, including, without limitation:
changes in global or regional economic conditions, supply and demand dynamics in the market segments we serve, or in the financial markets;
risks associated with having extensive international operations, including political risks, risks associated with unanticipated government actions and risks of investing in developing markets;
project delays, contract terminations, customer cancellations, or postponement of projects and sales;
future financial and operating performance of major customers and joint venture partners;
our ability to develop, implement, and operate new technologies, or to execute the projects in our backlog;
tariffs, economic sanctions and regulatory activities in jurisdictions in which we and our affiliates and joint ventures operate;
the impact of environmental, tax or other legislation, as well as regulations affecting our business and related compliance requirements, including regulations related to global climate change;
changes in tax rates and other changes in tax law;
the timing, impact, and other uncertainties relating to acquisitions and divestitures, including our ability to integrate acquisitions and separate divested businesses, respectively;
risks relating to cybersecurity incidents, including risks from the interruption, failure or compromise of our information systems;
catastrophic events, such as natural disasters, acts of war, or terrorism;
the impact of price fluctuations in natural gas and disruptions in markets and the economy due to oil price volatility;
costs and outcomes of legal or regulatory proceedings and investigations;
asset impairments due to economic conditions or specific events;
significant fluctuations in interest rates and foreign currency exchange rates from those currently anticipated;
damage to facilities, pipelines or delivery systems, including those we own or operate for third parties;
availability and cost of raw materials; and
the success of productivity and operational improvement programs.

3


In addition to the foregoing factors, forward-looking statements contained herein are qualified with respect to the risks disclosed elsewhere in this document, including in Item 1A, Risk Factors, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 7A, Quantitative and Qualitative Disclosures About Market Risk. Any of these factors, as well as those not currently anticipated by management, could cause our results of operations, financial condition or liquidity to differ materially from what is expressed or implied by any forward-looking statement. Except as required by law, we disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein to reflect any change in assumptions, beliefs, or expectations or any change in events, conditions, or circumstances upon which any such forward-looking statements are based.

PART I

ITEM 1.    BUSINESS
Air Products and Chemicals, Inc., a Delaware corporation originally founded in 1940, serves customers globally with a unique portfolio of products, services, and solutions that include atmospheric gases, process and specialty gases, equipment, and services. The Company is the world’s largest supplier of hydrogen and has built leading positions in growth markets such as helium and natural gas liquefaction. As used in this report, unless the context indicates otherwise, the terms “we,” “our,” “us,” the “Company,” or “registrant” include controlled subsidiaries, affiliates, and predecessors of Air Products and its controlled subsidiaries and affiliates.
During its fiscal year ended 30 September 2018 (“fiscal year 2018 ”), the Company reported its continuing operations in five reporting segments under which it managed its operations, assessed performance, and reported earnings: Industrial Gases – Americas; Industrial Gases – EMEA (Europe, Middle East, and Africa); Industrial Gases – Asia; Industrial Gases – Global; and Corporate and other.
Except as otherwise noted, the description of the Company's business below reflects the Company's continuing operations. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 25 , Business Segment and Geographic Information , and Note 3 , Discontinued Operations , to the consolidated financial statements for additional details on our reportable business segments and our discontinued operations.
Industrial Gases Business
The Company’s Industrial Gases business produces atmospheric gases (oxygen, nitrogen, argon, and rare gases); process gases (hydrogen, helium, carbon dioxide, carbon monoxide, syngas, and specialty gases); and equipment for the production or processing of gases, such as air separation units and non-cryogenic generators. Atmospheric gases are produced through various air separation processes of which cryogenic is the most prevalent. Process gases are produced by methods other than air separation. For example, hydrogen, carbon monoxide and syngas are produced by steam methane reforming of natural gas and by the gasification of liquid and solid hydrocarbons. Hydrogen is also produced by purifying byproduct sources obtained from the chemical and petrochemical industries; and helium is produced as a byproduct of gases extracted from underground reservoirs, primarily natural gas, but also carbon dioxide purified before resale.
The Company’s Industrial Gases business is organized and operated regionally. The regional Industrial Gases segments (Americas, EMEA, and Asia) supply gases and related equipment in the relevant region to diversified customers in many industries, including those in refining, chemical, gasification, metals, electronics, manufacturing, and food and beverage. Hydrogen is used by refiners to facilitate the conversion of heavy crude feedstock and lower the sulfur content of gasoline and diesel fuels. The chemicals industry uses hydrogen, oxygen, nitrogen, carbon monoxide, and syngas as feedstocks in the production of many basic chemicals. The energy production industry uses nitrogen injection for enhanced recovery of oil and natural gas and oxygen for gasification. Oxygen is used in combustion and industrial heating applications, including in the gasification, steel, certain nonferrous metals, glass, and cement industries. Nitrogen applications are used in food processing for freezing and preserving flavor and nitrogen for inerting is used in various fields, including the metals, chemical, and semiconductor industries. Helium is used in laboratories and healthcare for cooling and in other industries for pressurizing, purging, and lifting. Argon is used in the metals and other industries for its unique inerting, thermal conductivity, and other properties. Industrial gases are also used in welding and providing healthcare and are utilized in various manufacturing processes to make them more efficient and to optimize performance.

4


We distribute gases to our customers through a variety of supply modes:
Liquid Bulk— Product is delivered in bulk (in liquid or gaseous form) by tanker or tube trailer and stored, usually in its liquid state, in equipment designed and installed typically by the Company at the customer’s site for vaporizing into a gaseous state as needed. Liquid bulk sales are usually governed by three- to five-year contracts.
Packaged Gases— Small quantities of product are delivered in either cylinders or dewars. The Company operates packaged gas businesses in Europe, Asia, and Latin America. In the United States, the Company’s packaged gas business sells products (principally helium) only for the electronics and magnetic resonance imaging industries.
On-Site Gases— Large quantities of hydrogen, nitrogen, oxygen, carbon monoxide, and syngas (a mixture of hydrogen and carbon monoxide) are provided to customers, principally the energy production and refining, chemical, gasification, and metals industries worldwide, that require large volumes of gases and have relatively constant demand. Gases are produced at large facilities located adjacent to customers’ facilities or by pipeline systems from centrally located production facilities and are generally governed by 15- to 20- year contracts. The Company also delivers small quantities of product through small on-site plants (cryogenic or non-cryogenic generators), typically either via a 10- to 15- year sale of gas contract or through the sale of the equipment to the customer.
Electricity is the largest cost component in the production of atmospheric gases. Steam methane reformers utilize natural gas as the primary raw material and gasifiers use liquid and solid hydrocarbons as the principal raw material for the production of hydrogen, carbon monoxide and syngas. We mitigate electricity, natural gas, and hydrocarbon price fluctuations contractually through pricing formulas, surcharges, and cost pass-through and tolling arrangements. During fiscal year 2018 , no significant difficulties were encountered in obtaining adequate supplies of power and natural gas.
The Company obtains helium from a number of sources globally, including crude helium for purification from the U.S. Bureau of Land Management's helium reserve.
The regional Industrial Gases segments also include our share of the results of several joint ventures accounted for by the equity method. The largest of these joint ventures operate in Mexico, Italy, South Africa, India, Saudi Arabia, and Thailand.
Each of the regional Industrial Gases segments competes against two global industrial gas companies: Air Liquide S.A. and Linde plc (the successor to Praxair, Inc. and Linde AG, pursuant to a combination that became effective on 31 October 2018), as well as regional competitors. Competition in Industrial Gases is based primarily on price, reliability of supply, and the development of industrial gas applications. In locations where we have pipeline networks, which enable us to provide reliable and economic supply of products to larger customers, we derive a competitive advantage.
Overall regional industrial gases sales constituted approximately 94% of consolidated sales in fiscal year 2018 , 90% in fiscal year 2017 , and 90% in fiscal year 2016 . Sales of tonnage hydrogen and related products constituted approximately 25% of consolidated sales in fiscal year 2018 , 24% in fiscal year 2017 , and 21% in fiscal year 2016 . Sales of atmospheric gases constituted approximately 46% of consolidated sales in fiscal year 2018 , 45% in fiscal year 2017 , and 46% in fiscal year 2016 .
Industrial Gases Equipment
The Company designs and manufactures equipment for air separation, hydrocarbon recovery and purification, natural gas liquefaction ("LNG"), and liquid helium and liquid hydrogen transport and storage. The Industrial Gases – Global segment includes activity related to cryogenic and gas processing equipment for air separation. The equipment is sold worldwide to customers in a variety of industries, including chemical and petrochemical manufacturing, oil and gas recovery and processing, and steel and primary metals processing. The Corporate and other segment includes three global equipment businesses: our LNG equipment business, our Gardner Cryogenics business fabricating helium and hydrogen transport and storage containers, and our Rotoflow business which manufactures turboexpanders and other precision rotating equipment. Steel, aluminum, and capital equipment subcomponents (compressors, etc.) are the principal raw materials in the manufacturing of equipment. Adequate raw materials for individual projects are acquired under firm purchase agreements. Equipment is produced at the Company’s manufacturing sites with certain components being procured from subcontractors and vendors. Competition in the equipment business is based primarily on technological performance, service, technical know-how, price, and performance guarantees. Sale of equipment constituted approximately 6% of consolidated sales in fiscal year 2018 , 10% in fiscal year 2017 , and 10% in fiscal year 2016 .

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The backlog of equipment orders was approximately $.2 billion on 30 September 2018 (as compared to a total backlog of approximately $.5 billion on 30 September 2017 ). The Company estimates that approximately 50% of the total sales backlog as of 30 September 2018 will be recognized as revenue during fiscal year 2019 , dependent on execution schedules of the relevant projects.
International Operations
The Company, through subsidiaries, affiliates, and less-than-controlling interests, conducts business in 50 countries outside the United States. Its international businesses are subject to risks customarily encountered in foreign operations, including fluctuations in foreign currency exchange rates and controls; import and export controls; and other economic, political, and regulatory policies of local governments described in Item 1A, Risk Factors, below.
The Company has majority or wholly owned foreign subsidiaries that operate in Canada; 16 European countries (including the United Kingdom, the Netherlands, and Spain); eight Asian countries (including China, South Korea, and Taiwan); seven Latin American countries (including Chile and Brazil); four countries in the Middle East, and two African countries. The Company also owns less-than-controlling interests in entities operating in Europe, Asia, Africa, the Middle East, and Latin America (including Italy, Germany, China, India, Saudi Arabia, Thailand, Oman, South Africa, and Mexico).
Financial information about the Company’s foreign operations and investments is included in Note 8 , Summarized Financial Information of Equity Affiliates ; Note 22 , Income Taxes ; and Note 25 , Business Segment and Geographic Information , to the consolidated financial statements included under Item 8, below. Information about foreign currency translation is included under “Foreign Currency” in Note 1 , Major Accounting Policies , and information on the Company’s exposure to currency fluctuations is included in Note 13 , Financial Instruments , to the consolidated financial statements, included under Item 8, below, and in “Foreign Currency Exchange Rate Risk,” included under Item 7A, below. Export sales from operations in the United States to third-party customers amounted to $33.1 million, $64.2 million, and $134.9 million in fiscal years 2018 , 2017 , and 2016 , respectively.
Technology Development
The Company pursues a market-oriented approach to technology development through research and development, engineering, and commercial development processes. It conducts research and development principally in its laboratories located in the United States (Trexlertown, Pennsylvania), Canada (Vancouver), the United Kingdom (Basingstoke and Carrington), Spain (Barcelona), China (Shanghai), and Saudi Arabia (Dhahran). The Company also funds and cooperates in research and development programs conducted by a number of major universities and undertakes research work funded by others, principally the United States government.
The Company’s research groups are aligned with and support the research efforts of various businesses throughout the Company. Development of technology for use within the Industrial Gases business focuses primarily on new and improved processes and equipment for the production and delivery of industrial gases and new or improved applications for industrial gas products.
During fiscal year 2018 , the Company owned approximately 535 United States patents, approximately 2,888 foreign patents, and was a licensee under certain patents owned by others. While the patents and licenses are considered important, the Company does not consider its business as a whole to be materially dependent upon any particular patent, patent license, or group of patents or licenses.
Environmental Controls
The Company is subject to various environmental laws and regulations in the countries in which it has operations. Compliance with these laws and regulations results in higher capital expenditures and costs. In the normal course of business, the Company is involved in legal proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA: the federal Superfund law); Resource Conservation and Recovery Act (RCRA); and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. The Company’s accounting policy for environmental expenditures is discussed in Note 1 , Major Accounting Policies , and environmental loss contingencies are discussed in Note 17 , Commitments and Contingencies , to the consolidated financial statements, included under Item 8, below.
The amounts charged to income from continuing operations related to environmental matters totaled $12.8 million in fiscal year 2018 , $11.4 million in fiscal year 2017 , and $12.2 million in fiscal year 2016 . These amounts represent an estimate of expenses for compliance with environmental laws and activities undertaken to meet internal Company standards. Refer to Note 17 , Commitments and Contingencies , to the consolidated financial statements for additional information.

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The Company estimates that we spent approximately $3 million in fiscal year 2018 , $7 million in fiscal year 2017 , and $3 million in fiscal year 2016 on capital projects reflected in continuing operations to control pollution. Capital expenditures to control pollution are estimated to be approximately $4 million  in both fiscal years 2019 and 2020 .
Employees
On 30 September 2018 , the Company (including majority-owned subsidiaries) had approximately 16,300 employees, of whom approximately 16,000 were full-time employees and of whom approximately 11,800 were located outside the United States. The Company has collective bargaining agreements with unions at various locations that expire on various dates over the next four years. The Company considers relations with its employees to be satisfactory.
Available Information
All periodic and current reports, registration statements, and other filings that the Company is required to file with the Securities and Exchange Commission ("SEC"), including the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), are available free of charge through the Company’s website at www.airproducts.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. All such reports filed during the period covered by this report were available on the Company’s website on the same day as filing. In addition, our filings with the SEC are available free of charge on the SEC's website, www.sec.gov.
Seasonality
The Company’s businesses are not subject to seasonal fluctuations to any material extent.
Inventories
The Company maintains limited inventory where required to facilitate the supply of products to customers on a reasonable delivery schedule. Inventory consists primarily of crude helium, industrial gas, and specialty gas inventories supplied to customers through liquid bulk and packaged gases supply modes.
Customers
We do not have a homogeneous customer base or end market, and no single customer accounts for more than 10% of our consolidated revenues . We do have concentrations of customers in specific industries, primarily refining, chemicals, and electronics. Within each of these industries, the Company has several large-volume customers with long-term contracts. A negative trend affecting one of these industries, or the loss of one of these major customers, although not material to our consolidated revenue, could have an adverse impact on our financial results.
Governmental Contracts
Our business is not subject to a government entity’s renegotiation of profits or termination of contracts that would be material to our business as a whole.

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Executive Officers of the Company
The Company’s executive officers and their respective positions and ages on 20 November 2018 follow. Information with respect to offices held is stated in fiscal years.
Name
Age
Office
M. Scott Crocco
54
Executive Vice President and Chief Financial Officer (became Executive Vice President and Chief Financial Officer in 2016; Senior Vice President and Chief Financial Officer in 2013; and Vice President and Corporate Controller in 2008).
Seifi Ghasemi
74
Chairman, President, and Chief Executive Officer (became Chairman, President and Chief Executive Officer in 2014 and previously served as Chairman and Chief Executive Officer of Rockwood Holdings, Inc. beginning in 2001). Mr. Ghasemi is a member and Chairman of the Board of Directors and the Chairman of the Executive Committee of the Board of Directors.
Sean D. Major
54
Executive Vice President, General Counsel and Secretary (Secretary since December 2017 and Executive Vice President and General Counsel since May 2017). Previously, Mr. Major served as Executive Vice President, General Counsel and Secretary for Joy Global Inc. since 2007. From 1998 until joining Joy Global Inc. in 2007, Mr. Major was employed by Johnson Controls, Inc., serving in roles of increasing legal responsibility, including Assistant General Counsel and Assistant Secretary.  
Dr. Samir Serhan
57
Executive Vice President (since December 2016). Previously, Dr. Serhan served as President, Global HyCO, since 2014 for Praxair Inc. From 2000-2014, he worked in leadership positions in the U.S. and Germany for The Linde Group, including Managing Director of Linde Engineering from 2008-2014.

ITEM 1A.    RISK FACTORS
Our operations are affected by various risks, many of which are beyond our control. In evaluating investment in the Company and the forward-looking information contained in this Annual Report on Form 10-K or presented elsewhere by management from time to time, you should consider the following risk factors. Any of the following risks could have a material adverse effect on our business, operating results, financial condition, and the actual outcome of matters as to which forward-looking statements are made and could adversely affect the value of an investment in our common stock as well. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that adversely affect our business, performance, or financial condition in the future that are not presently known, are not currently believed to be significant, or are not identified below because they are common to all businesses.
Changes in global and regional economic conditions, the markets we serve, or the financial markets may adversely affect our results of operations and cash flows.
Unfavorable conditions in the global economy or regional economies, the markets we serve or financial markets may decrease the demand for our goods and services and adversely impact our revenues, operating results, and cash flows.
Demand for our products and services depends in part on the general economic conditions affecting the countries and markets in which we do business. Weak economic conditions in certain geographies and changing supply and demand balances in the markets we serve have negatively impacted demand for our products and services in the past and may do so in the future. Reduced demand for our products and services would have a negative impact on our revenues and earnings. In addition, reduced demand could depress sales, reduce our margins, constrain our operating flexibility or reduce efficient utilization of our manufacturing capacity, or result in charges which are unusual or nonrecurring. Excess capacity in our manufacturing facilities or those of our competitors could decrease our ability to maintain pricing and generate profits.
Our operating results in one or more segments may also be affected by uncertain or deteriorating economic conditions for particular customer markets within a segment. A decline in the industries served by our customers or adverse events or circumstances affecting individual customers can impair the ability of such customers to satisfy their obligations to the Company, resulting in uncollected receivables, unanticipated contract terminations, project delays, or inability to recover plant investments, any of which may negatively impact our financial results.

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Weak overall demand or specific customer conditions may also cause customer shutdowns or default, or other inabilities to operate facilities profitably, and may force sale or abandonment of facilities and equipment or prevent projects from coming on-stream. These or other events associated with weak economic conditions or specific end market, product, or customer events may require us to record an impairment on tangible assets, such as facilities and equipment, or intangible assets, such as intellectual property or goodwill, which would have a negative impact on our financial results.
Our extensive international operations can be adversely impacted by operational, economic, political, security, legal, and currency translation risks that could decrease profitability.
In fiscal year 2018, over 60% of our sales were derived from customers outside the United States and many of our operations, suppliers, and employees are located outside the United States. Our operations in foreign jurisdictions may be subject to risks including exchange control regulations, import and trade restrictions, trade policy and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad. Changing economic and political conditions within foreign jurisdictions, strained relations between countries, or the imposition of tariffs or international sanctions can cause fluctuations in demand, price volatility, supply disruptions, or loss of property. The occurrence of any of these risks could have a material adverse impact on our financial condition, results of operation, and cash flows.
Our growth strategies depend in part on our ability to further penetrate markets outside the United States, particularly in higher-growth markets, and involve larger and more complex projects, including world-scale gasification projects, in regions where there is the potential for significant economic and political disruptions, including Russia, the Middle East and China. We are actively investing significant capital and other resources, in some cases through joint ventures, in developing or high growth markets, which present special risks. Our operations in these markets may be subject to greater risks than those faced by our operations in mature economies, including political and economic instability, project delay or abandonment due to unanticipated government actions, inadequate investment in infrastructure, undeveloped property rights and legal systems, unfamiliar regulatory environments, relationships with local partners, language and cultural differences and talent risks. Our contracts in these locations may be subject to cancellation without full compensation for loss. Successful operation of particular facilities or execution of projects may be disrupted by civil unrest, acts of sabotage or terrorism, and other local security concerns. Such concerns may require us to incur greater costs for security or require us to shut down operations for a period of time.
Because the majority of our revenue is generated from sales outside the United States, we are exposed to fluctuations in foreign currency exchange rates. Our business is primarily exposed to translational currency risk as the results of our foreign operations are translated into U.S. dollars at current exchange rates throughout the fiscal period. Our policy is to minimize cash flow volatility from changes in currency exchange rates. We choose not to hedge the translation of our foreign subsidiaries’ earnings into dollars. Accordingly, reported sales, net earnings, cash flows, and fair values have been, and in the future will be, affected by changes in foreign exchange rates. For a more detailed discussion of currency exposure, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, below.
Operational and project execution risks may adversely affect our operations or financial results.
Some of our projects, including some of our largest growth projects, involve challenging engineering, procurement and construction phases that may occur in more risky locations and over extended time periods, sometimes up to several years. We may encounter difficulties in engineering, delays in designs or materials provided by the customer or a third party, equipment and materials delivery delays, schedule changes, customer scope changes, delays related to obtaining regulatory permits and rights-of-way, inability to find adequate sources of labor in the locations where we are building new plants, weather-related delays, delays by customers' contractors in completing their portion of a project, technical or transportation difficulties, and other factors, some of which are beyond our control, but which may impact our ability to complete a project within the original delivery schedule. In some cases, delays and additional costs may be substantial, and we may be required to cancel a project and/or compensate the customer for the delay. We may not be able to recover any of these costs. These factors could also negatively impact our reputation or relationships with our customers, which could adversely affect our ability to secure new contracts in the future, and these risks are more significant as we take on larger and more complex projects, including gasification projects, as part of our growth strategy.

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The operation of our facilities, pipelines, and delivery systems inherently entails hazards that require continuous oversight and control, such as pipeline leaks and ruptures, fire, explosions, toxic releases, mechanical failures, or vehicle accidents. If operational risks materialize, they could result in loss of life, damage to the environment, or loss of production, all of which could negatively impact our ongoing operations, reputation, financial results, and cash flows. In addition, our operating results are dependent on the continued operation of our production facilities and our ability to meet customer requirements, which depend, in part, on our ability to properly maintain and replace aging assets.
We are subject to extensive government regulation in the jurisdictions in which we do business. Regulations addressing, among other things, environmental compliance, import/export restrictions, anti-bribery and corruption, and taxes, can negatively impact our financial condition, results of operation, and cash flows.
We are subject to government regulation in the United States and in the foreign jurisdictions where we conduct business. The application of laws and regulations to our business is sometimes unclear. Compliance with laws and regulations may involve significant costs or require changes in business practices that could result in reduced profitability. If there is a determination that we have failed to comply with applicable laws or regulations, we may be subject to penalties or sanctions that could adversely impact our reputation and financial results. Compliance with changes in laws or regulations can result in increased operating costs and require additional capital expenditures. Export controls or other regulatory restrictions could prevent us from shipping our products to and from some markets or increase the cost of doing so. Changes in tax laws and regulations and international tax treaties could affect the financial results of our businesses. Increasingly aggressive enforcement of anti-bribery and anti-corruption requirements, including the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act and the China Anti-Unfair Competition Law, could subject us to criminal or civil sanctions if a violation is deemed to have occurred. In addition, we are subject to laws and sanctions imposed by the U.S. and other jurisdictions where we do business that may prohibit us, or certain of our affiliates, from doing business in certain countries, or restricting the kind of business that we may conduct. Such restrictions may provide a competitive advantage to competitors who are not subject to comparable restrictions or prevent us from taking advantage of growth opportunities.
Further, we cannot guarantee that our internal controls and compliance systems will always protect us from acts committed by employees, agents, business partners, or businesses that we acquire that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, kickbacks and false claims, pricing, sales and marketing practices, conflicts of interest, competition, export and import compliance, money laundering, and data privacy. Any such improper actions or allegations of such acts could damage our reputation and subject us to civil or criminal investigations in the United States and in other jurisdictions and related shareholder lawsuits, could lead to substantial civil and criminal, monetary and non-monetary penalties, and could cause us to incur significant legal and investigatory fees. In addition, the government may seek to hold us liable as a successor for violations committed by companies in which we invest or that we acquire.
We may be unable to successfully identify, execute or effectively integrate acquisitions, or effectively disentangle divested businesses.
Our ability to grow revenue, earnings, and cash flow at anticipated rates depends in part on our ability to identify, successfully acquire and integrate businesses and assets at appropriate prices, and realize expected growth, synergies, and operating efficiencies. We may not be able to complete transactions on favorable terms, on a timely basis or at all. In addition, our results of operations and cash flows may be adversely impacted by the failure of acquired businesses or assets to meet expected returns, the failure to integrate acquired businesses, the inability to dispose of non-core assets and businesses on satisfactory terms and conditions, and the discovery of unanticipated liabilities or other problems in acquired businesses or assets for which we lack adequate contractual protections or insurance. In addition, we may incur asset impairment charges related to acquisitions that do not meet expectations.
We continually assess the strategic fit of our existing businesses and may divest businesses that are deemed not to fit with our strategic plan or are not achieving the desired return on investment. These transactions pose risks and challenges that could negatively impact our business and financial statements. For example, when we decide to sell or otherwise dispose of a business or assets, we may be unable to do so on satisfactory terms within our anticipated time frame or at all. In addition, divestitures or other dispositions may dilute our earnings per share, have other adverse financial and accounting impacts, distract management, and give rise to disputes with buyers. In addition, we have agreed, and may in the future agree, to indemnify buyers against known and unknown contingent liabilities. Our financial results could be impacted adversely by claims under these indemnities.

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The security of our information technology systems could be compromised, which could adversely affect our ability to operate.
We depend on information technology to enable us to operate efficiently and interface with customers as well as to maintain financial accuracy and efficiency. Our information technology capabilities are delivered through a combination of internal and external services and service providers. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to our confidential business information due to a security breach. In addition, our information technology systems may be damaged, disrupted or shut down due to attacks by computer hackers, computer viruses, employee error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events, and in any such circumstances our system redundancy and other disaster recovery planning may be ineffective or inadequate. Security breaches of our systems (or the systems of our customers, suppliers or other business partners) could result in the misappropriation, destruction or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, partners, customers or suppliers, and may subject us to legal liability.
As with most large systems, our information technology systems have in the past been, and in the future likely will be subject to computer viruses, malicious codes, unauthorized access and other cyber-attacks, and we expect the sophistication and frequency of such attacks to continue to increase. To date, we are not aware of any significant impact on our operations or financial results from such attempts; however, unauthorized access could disrupt our business operations, result in the loss of assets, and have a material adverse effect on our business, financial condition, or results of operations. Any of the attacks, breaches or other disruptions or damage described above could: interrupt our operations at one or more sites; delay production and shipments; result in the theft of our and our customers’ intellectual property and trade secrets; damage customer and business partner relationships and our reputation; result in defective products or services, legal claims and proceedings, liability and penalties under privacy laws, or increased costs for security and remediation; or raise concerns regarding our accounting for transactions. Each of these consequences could adversely affect our business, reputation and our financial statements.
Our business involves the use, storage, and transmission of information about our employees, vendors, and customers. The protection of such information, as well as our proprietary information, is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. We have established policies and procedures to help protect the security and privacy of this information. We also, from time to time, export sensitive customer data and technical information to recipients outside the United States. Breaches of our security measures or the accidental loss, inadvertent disclosure, or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery, or other forms of deception, could expose us, our customers, or the individuals affected to a risk of loss or misuse of this information, which could ultimately result in litigation and potential legal and financial liability. These events could also damage our reputation or otherwise harm our business.
Interruption in ordinary sources of raw material or energy supply or an inability to recover increases in energy and raw material costs from customers could result in lost sales or reduced profitability.
Hydrocarbons, including natural gas, are the primary feedstock for the production of hydrogen, carbon monoxide, and syngas. Energy, including electricity, natural gas, and diesel fuel for delivery trucks is the largest cost component of our business. Because our industrial gas facilities use substantial amounts of electricity, energy price fluctuations could materially impact our revenues and earnings. A disruption in the supply of energy, components, or raw materials, whether due to market conditions, legislative or regulatory actions, natural events, or other disruption, could prevent us from meeting our contractual commitments and harm our business and financial results.
Our supply of crude helium for purification and resale is largely dependent upon natural gas production by crude helium suppliers. Lower natural gas production resulting from natural gas pricing dynamics, supplier operating or transportation issues or other interruptions in sales from crude helium suppliers, can reduce our supplies of crude helium available for processing and resale to customers.
We typically contract to pass-through cost increases in energy and raw materials to customers, but cost variability can still have a negative impact on our results. We may be unable to raise prices as quickly as costs rise, or competitive pressures may prevent full recovery of such costs. Increases in energy or raw material costs that cannot be passed on to customers for competitive or other reasons may negatively impact our revenues and earnings. Even where costs are passed through, price increases can cause lower sales volume.

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Catastrophic events could disrupt our operations or the operations of our suppliers or customers, having a negative impact on our business, financial results, and cash flows.
Our operations could be impacted by catastrophic events outside our control, including severe weather conditions such as hurricanes, floods, earthquakes, storms, epidemics, or acts of war and terrorism. Any such event could cause a serious business disruption that could affect our ability to produce and distribute products and possibly expose us to third-party liability claims. Additionally, such events could impact our suppliers or customers, which could cause energy and raw materials to be unavailable to us, or our customers to be unable to purchase or accept our products and services. Any such occurrence could have a negative impact on our operations and financial results.
New technologies create performance risks that could impact our financial results or reputation.
We are continually developing and implementing new technologies and product offerings. Existing technologies are being implemented in products and designs or at scales beyond our experience base. These technological expansions can create nontraditional performance risks to our operations. Failure of the technologies to work as predicted, or unintended consequences of new designs or uses, could lead to cost overruns, project delays, financial penalties, or damage to our reputation. Large scale gasification projects may contain processes or technologies that we have not operated at the same scale or in the same combination, and although such projects generally include technologies and processes that have been demonstrated previously by others, such technologies or processes may be new to us and may introduce new risks to our operations.
Legislative, regulatory and societal responses to global climate change create financial risk.
We are the world’s leading supplier of hydrogen, the primary use of which is the production of ultra-low sulfur transportation fuels that have significantly reduced transportation emissions and helped improve human health. To make the high volumes of hydrogen needed by our customers, we use steam methane reforming, which releases carbon dioxide. Some of our operations are within jurisdictions that have or are developing regulatory regimes governing emissions of greenhouse gases ("GHG"), including carbon dioxide. These include existing coverage under the European Union Emission Trading system, the California cap and trade schemes, Alberta’s Carbon Competitiveness Incentive Regulation, China’s Emission Trading Scheme, South Korea’s Emission Trading Scheme, nation-wide expansion of the China Emission Trading Scheme, revisions to the Alberta regulation, and Environment Canada's developing Output Based Pricing System. In addition, the U.S. Environmental Protection Agency ("EPA") requires mandatory reporting of GHG emissions and is regulating GHG emissions for new construction and major modifications to existing facilities. Some jurisdictions have various mechanisms to target the power sector to achieve emission reductions, which often result in higher power costs.
Increased public concern may result in more international, U.S. federal, and/or regional requirements to reduce or mitigate the effects of GHG. Although uncertain, these developments could increase our costs related to consumption of electric power and hydrogen production. We believe we will be able to mitigate some of the increased costs through contractual terms, but the lack of definitive legislation or regulatory requirements prevents an accurate estimate of the long-term impact these measures will have on our operations. Any legislation that limits or taxes GHG emissions could negatively impact our growth, increase our operating costs, or reduce demand for certain of our products.
Our financial results may be affected by various legal and regulatory proceedings, including those involving antitrust, tax, environmental, or other matters.
We are subject to litigation and regulatory investigations and proceedings in the normal course of business and could become subject to additional claims in the future, some of which could be material. While we seek to limit our liability in our commercial contractual arrangements, there are no guarantees that each contract will contain suitable limitations of liability or that limitations of liability will be enforceable. Also, the outcome of existing legal proceedings may differ from our expectations because the outcomes of litigation, including regulatory matters, are often difficult to predict reliably. Various factors or developments can lead us to change current estimates of liabilities and related insurance receivables, where applicable, or make such estimates for matters previously not susceptible to reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments, or changes in applicable law. A future adverse ruling, settlement, or unfavorable development could result in charges that could have a material adverse effect on our financial condition, results of operations, and cash flows in any particular period.

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Costs and expenses resulting from compliance with environmental regulations may negatively impact our operations and financial results.
We are subject to extensive federal, state, local, and foreign environmental and safety laws and regulations concerning, among other things, emissions in the air; discharges to land and water; and the generation, handling, treatment, and disposal of hazardous waste and other materials. We take our environmental responsibilities very seriously, but there is a risk of environmental impact inherent in our manufacturing operations and in the transportation of our products. Future developments and more stringent environmental regulations may require us to make additional unforeseen environmental expenditures. In addition, laws and regulations may require significant expenditures for environmental protection equipment, compliance, and remediation. These additional costs may adversely affect financial results. For a more detailed description of these matters, see Item 1 - Business Environmental Controls, above.
Implementation of the United Kingdom’s (“UK”) exit from European Union (“EU”) membership could adversely affect our European Operations.
The UK’s exit from EU membership may adversely affect customer demand, our relationships with customers and suppliers and our European business. Although it is unknown what the terms of the United Kingdom’s future relationship with the EU will be, it is possible that there will be greater restrictions on imports and exports between the United Kingdom and EU members and increased regulatory complexities. Any of these factors could adversely affect customer demand, our relationships with customers and suppliers, and our European business.
Inability to compete effectively in a segment could adversely impact sales and financial performance.
We face strong competition from large global competitors and many smaller regional ones in many of our business segments. Introduction by competitors of new technologies, competing products, or additional capacity could weaken demand for or impact pricing of our products, negatively impacting financial results. In addition, competitors’ pricing policies could affect our profitability or market share.
A change of tax law in key jurisdictions could result in a material increase in our tax expense.
The multinational nature of our business subjects us to taxation in the United States and numerous foreign jurisdictions. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation.
Changes to income tax laws and regulations in any of the jurisdictions in which we operate, or in the interpretation of such laws, could significantly increase our effective tax rate and adversely impact our financial condition, results of operations or cash flows. In December 2017, the U.S. enacted the Tax Cuts and Jobs Act ("the Tax Act"), which significantly revised the U.S. federal corporate income tax law by, among other things, lowering the corporate income tax rate, implementing a territorial tax system, and imposing a one-time tax on unremitted cumulative non-U.S. earnings of foreign subsidiaries. As a result of the Tax Act, we recorded a discrete net tax expense of $180.6 for fiscal 2018, including a reduction in the deemed repatriation tax related to the taxation of deemed foreign dividends that may be eliminated by future legislation. Various levels of government are increasingly focused on tax reform and other legislative action to increase tax revenue. Further changes in tax laws in the U.S. or foreign jurisdictions where we operate could have a material adverse effect on our business, results of operations, or financial condition.

13


We could incur significant liability if the distribution of Versum common stock to our stockholders is determined to be a taxable transaction.
We have received an opinion from outside tax counsel to the effect that the spin-off of Versum qualifies as a transaction that is described in Sections 355(a) and 368(a)(1)(D) of the Internal Revenue Code. The opinion relies on certain facts, assumptions, representations and undertakings from Versum and us regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not satisfied, our shareholders and we may not be able to rely on the opinion of tax counsel and could be subject to significant tax liabilities. Notwithstanding the opinion of tax counsel we have received, the IRS could determine on audit that the spin-off is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinion. If the spin-off is determined to be taxable for U.S. federal income tax purposes, our shareholders that are subject to U.S. federal income tax and we could incur significant U.S. federal income tax liabilities.

ITEM 1B.    UNRESOLVED STAFF COMMENTS
We have not received any written comments from the Commission staff that remain unresolved.

ITEM 2.    PROPERTIES
Air Products and Chemicals, Inc. owns its principal administrative offices, which are the Company’s headquarters located in Trexlertown, Pennsylvania, Hersham, England, and Santiago, Chile. The Company leases the principal administrative office in Shanghai, China. The Company leases administrative offices in the United States, Spain, Malaysia, and China for its Global Business Support organization.
The following is a description of the properties used by our five business segments. We believe that our facilities are suitable and adequate for our current and anticipated future levels of operation.
Industrial Gases – Americas
This business segment currently operates from over 400 production and distribution facilities in North and South America (approximately one-fourth of which are located on owned property), and 10% of which are integrated sites that serve dedicated customers as well as merchant customers. The Company has sufficient property rights and permits for the ongoing operation of our pipeline systems in the Gulf Coast, California, and Arizona in the United States and Alberta and Ontario, Canada. Management and sales support is based in our Trexlertown and Santiago offices referred to above, and at 12 leased properties located throughout North and South America.
Hydrogen fueling stations built by the Company support commercial markets in California and Japan as well as demonstration projects in Europe and other parts of Asia.
Industrial Gases – EMEA
This business segment currently operates from over 180 production and distribution facilities in Europe, the Middle East, and Africa (approximately one-third of which are on owned property). The Company has sufficient property rights and permits for the ongoing operation of our pipeline systems in the Netherlands, the United Kingdom, Belgium, France, and Germany. Management and sales support for this business segment is based in Hersham, England, referred to above, Barcelona, Spain and at 16 leased regional office sites and at least 15 leased local office sites, located throughout the region.
Industrial Gases – Asia
Industrial Gases – Asia currently operates from over 170 production and distribution facilities within Asia (approximately one-fourth of which are on owned property or long duration term grants). The Company has sufficient property rights and permits for the ongoing operation of our pipeline systems in China, South Korea, Taiwan, Malaysia, Singapore, and Indonesia. Management and sales support for this business segment is based in Shanghai, China and Kuala Lumpur, Malaysia, and in 18 leased office locations throughout the region.

14


Industrial Gases – Global
Management, sales, and engineering support for this business segment is based in our principal administrative offices noted above, and an office in India.
Equipment is manufactured in Missouri, Pennsylvania, and China.
Research and development ("R&D") activities for this business segment are conducted at owned locations in the U.S., the United Kingdom, and Spain, and 4 leased locations in Canada, Europe, and Asia.
Helium is processed at multiple sites in the U.S. and then distributed to/from transfill sites globally.
Corporate and other
Corporate administrative functions are based in the Company’s administrative offices referred to above.
The LNG business operates a manufacturing facility in Florida in the United States with management, engineering, and sales support based in the Trexlertown offices referred to above and a nearby leased office.
The Gardner Cryogenic business operates at facilities in Pennsylvania and Kansas in the United States and in France.
The Rotoflow business operates manufacturing and service facilities in Texas and Pennsylvania in the United States with management, engineering, and sales support based in the Trexlertown offices referred to above and a nearby leased office.

ITEM 3.    LEGAL PROCEEDINGS
In the normal course of business, the Company and its subsidiaries are involved in various legal proceedings, including contract, product liability, intellectual property, insurance, and regulatory matters. Although litigation with respect to these matters is routine and incidental to the conduct of our business, such litigation could result in large monetary awards, especially if compensatory and/or punitive damages are awarded. However, we believe that litigation currently pending to which we are a party will be resolved without any material adverse effect on our financial position, earnings, or cash flows.
From time to time, we are also involved in proceedings, investigations, and audits involving governmental authorities in connection with environmental, health, safety, competition, and tax matters.
The Company is a party to proceedings under CERCLA, the RCRA, and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Presently there are 32 sites on which a final settlement has not been reached where the Company, along with others, has been designated a potentially responsible party by the Environmental Protection Agency or is otherwise engaged in investigation or remediation, including cleanup activity at certain of its current and former manufacturing sites. We do not expect that any sums we may have to pay in connection with these environmental matters would have a material adverse impact on our consolidated financial position. Additional information on the Company’s environmental exposure is included under Item 1. Business, Environmental Controls.
In September 2010, the Brazilian Administrative Council for Economic Defense ("CADE") issued a decision against our Brazilian subsidiary, Air Products Brasil Ltda., and several other Brazilian industrial gas companies for alleged anticompetitive activities. CADE imposed a civil fine of R$179.2 million (approximately $44 million at 30 September 2018 ) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, whose investigation began in 2003, alleging violation of competition laws with respect to the sale of industrial and medical gases. The fines are based on a percentage of the Company’s total revenue in Brazil in 2003.
We have denied the allegations made by the authorities and filed an appeal in October 2010 to the Brazilian courts. On 6 May 2014, our appeal was granted and the fine against Air Products Brasil Ltda. was dismissed. CADE has appealed that ruling and the matter remains pending. The Company, with advice of its outside legal counsel, has assessed the status of this matter and has concluded that, although an adverse final judgment after exhausting all appeals is possible, such a judgment is not probable. As a result, no provision has been made in the consolidated financial statements.
Other than this matter, we do not currently believe there are any legal proceedings, individually or in the aggregate, that are reasonably possible to have a material impact on our financial condition, results of operations, or cash flows. However, a future charge for regulatory fines or damage awards could have a significant impact on our net income in the period in which it is recorded.

15



ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable

PART II


ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock (ticker symbol APD) is listed on the New York Stock Exchange. Our transfer agent and registrar is Broadridge Corporate Issuer Solutions, Inc., P.O. Box 1342, Brentwood, New York 11717, telephone (844) 318-0129 (U.S.) or (720) 358-3595 (all other locations); website, http://shareholder.broadridge.com/airproducts; and e-mail address, shareholder@broadridge.com. As of 31 October 2018 , there were 5,391 record holders of our common stock.
Cash dividends on the Company’s common stock are paid quarterly. It is our expectation that we will continue to pay cash dividends in the future at comparable or increased levels. The Board of Directors determines whether to declare dividends and the timing and amount based on financial condition and other factors it deems relevant. Dividend information for each quarter of fiscal years 2018 and 2017 is summarized below:
 
2018

2017

First quarter

$.95


$.86

Second quarter
1.10

.95

Third quarter
1.10

.95

Fourth quarter
1.10

.95

Total

$4.25


$3.71

Purchases of Equity Securities by the Issuer
On 15 September 2011, the Board of Directors authorized the repurchase of up to $1.0 billion of our outstanding common stock. This program does not have a stated expiration date. We repurchase shares pursuant to Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, through repurchase agreements established with one or more brokers. There were no purchases of stock during fiscal year 2018 . At 30 September 2018 , $485.3 million in share repurchase authorization remained. Additional purchases will be completed at the Company’s discretion while maintaining sufficient funds for investing in its businesses and growth opportunities.

16


Performance Graph
The performance graph below compares the five-year cumulative returns of the Company’s common stock with those of the Standard & Poor’s 500 Index (S&P 500 Index) and the Standard & Poor’s 500 Materials Index (S&P 500 Materials Index). The figures assume an initial investment of $100 and the reinvestment of all dividends.
COMPARISON OF FIVE YEAR CUMULATIVE SHAREHOLDER RETURN
Air Products, S&P 500 Index, and S&P 500 Materials Index
Comparative Growth of a $100 Investment
(Assumes Reinvestment of All Dividends)
CHART-8BE20C861A9853FDB1F.JPG
 
Sept 2013
Sept 2014
Sept 2015
Sept 2016
Sept 2017
Sept 2018
Air Products
100
128
122
149
168
191
S&P 500 Index
100
120
116
137
161
191
S&P 500 Materials Index
100
122
96
120
146
152

17



ITEM 6.    SELECTED FINANCIAL DATA
Unless otherwise indicated, information presented is on a continuing operations basis.
(Millions of dollars, except for share and per share data)
2018 (A)

2017 (A)

2016 (A)

2015 (A)

2014 (A)

Operating Results
 
 
 
 
 
Sales

$8,930


$8,188


$7,504


$7,824


$8,384

Cost of sales (B)
6,190

5,752

5,177

5,584

6,178

Selling and administrative (B)
761

714

684

765

876

Research and development
65

58

72

76

78

Cost reduction and asset actions

151

35

180

11

Operating income (B)
1,966

1,440

1,535

1,276

976

Equity affiliates’ income (C)
175

80

147

152

149

Income from continuing operations attributable to Air Products
1,456

1,134

1,100

933

697

Net income attributable to Air Products (D)
1,498

3,000

631

1,278

992

Basic earnings per common share attributable to Air Products:
 
 
 
 
 
Income from continuing operations
6.64

5.20

5.08

4.34

3.28

Net income (D)
6.83

13.76

2.92

5.95

4.66

Diluted earnings per common share attributable to Air Products:
 
 
 
 
 
Income from continuing operations
6.59

5.16

5.04

4.29

3.24

Net income (D)
6.78

13.65

2.89

5.88

4.61

Year-End Financial Position
 
 
 
 
 
Plant and equipment, at cost

$21,490


$19,548


$18,660


$17,999


$18,180

Total assets (D)
19,178

18,467

18,029

17,317

17,648

Working capital (D)
2,744

3,388

1,034

(851
)
199

Total debt (E)
3,813

3,963

5,211

5,856

6,081

Air Products shareholders’ equity (D)
10,858

10,086

7,080

7,249

7,366

Total equity (D)
11,176

10,186

7,213

7,381

7,521

Financial Ratios
 
 
 
 
 
Return on average Air Products shareholders’ equity (F)
13.9
%
13.2
%
15.4
%
12.7
%
9.5
%
Operating margin (B)
22.0
%
17.6
%
20.5
%
16.3
%
11.6
%
Selling and administrative as a percentage of sales (B)
8.5
%
8.7
%
9.1
%
9.8
%
10.4
%
Total debt to total capitalization (E)(G)
25.4
%
28.0
%
41.9
%
44.2
%
43.8
%
Other Data
 
 
 
 
 
Income from continuing operations including noncontrolling interests

$1,491


$1,155


$1,122


$966


$691

Adjusted EBITDA (B)(H)
3,116

2,799

2,622

2,422

2,322

Adjusted EBITDA margin (B)
34.9
%
34.2
%
34.9
%
31.0
%
27.7
%
Depreciation and amortization
971

866

855

859

876

Capital expenditures on a GAAP basis (I)
1,914

1,056

908

1,201

1,297

Capital expenditures on a non-GAAP basis (I)
1,934

1,066

935

1,575

1,498

Cash provided by operating activities
2,555

2,534

2,259

2,047

1,862

Cash used for investing activities
(1,649
)
(1,418
)
(865
)
(1,147
)
(1,257
)
Cash used for financing activities
(1,360
)
(2,041
)
(860
)
(960
)
(524
)
Dividends declared per common share
4.25

3.71

3.39

3.20

3.02

Weighted Average Common Shares – Basic (in millions)
219

218

216

215

213

Weighted Average Common Shares – Diluted (in millions)
221

220

218

217

215

Book value per common share at year-end

$49.46


$46.19


$32.57


$33.66


$34.49

Shareholders at year-end
5,500

5,700

6,000

6,400

6,600

Employees at year-end (J)
16,300

15,300

18,600

19,700

21,200


18


(A)  
Unless otherwise stated, selected financial data is presented in accordance with U.S. generally accepted accounting principles (GAAP). The Company has presented certain financial measures on a non-GAAP (“adjusted”) basis to exclude items which management does not believe to be indicative of ongoing business trends. Refer to pages 33-39 for reconciliations of the GAAP to non-GAAP measures for fiscal years 2018 , 2017 , and 2016 . Descriptions of the excluded items appear on pages 25-28 . For fiscal year 2015 , these items include: (i) a charge to operating income of $8 ($.03 per share) related to business separation costs, (ii) a charge to operating income of $180 ($133 after-tax, or $.61 per share) related to business restructuring and cost reduction actions, (iii) a gain of $18 ($11 after tax, or $.05 per share) reflected in operating income related to the gain on previously held equity interest in a liquefied atmospheric industrial gases production joint venture, (iv) a gain of $34 ($28 after tax, or $.13 per share) reflected in operating income resulting from the sale of two parcels of land, and (v) a charge to other non-operating income (expense), net related to pension settlement losses of $19 ($12 after-tax, or $.06 per share). For fiscal year 2014 , these items include: (i) a charge to operating income of $11 ($7 after-tax, or $.03 per share) related to business restructuring and cost reduction actions, (ii) a charge to operating income of $310 ($275 attributable to Air Products, after-tax, or $1.27 per share) related to the impairment of goodwill and intangible assets, and (iii) a charge to other non-operating income (expense), net related to pension settlement losses of $5 ($3 after-tax, or $.02 per share).
(B)  
Reflects adoption of guidance on presentation of net periodic pension and postretirement benefit cost on a retrospective basis during the first quarter of fiscal year 2018. Refer to Note 2 , New Accounting Guidance , to the consolidated financial statements for additional information.
(C)  
Fiscal year 2017 includes the third quarter impact of an other-than-temporary noncash impairment charge of $79.5 ($.36 per share) on our investment in Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (AHG), a 25%‑owned equity affiliate in our Industrial Gases – EMEA segment.
(D)  
Information presented on a total company basis, which includes both continuing and discontinued operations.
(E)  
Total debt includes long-term debt, including debt to related parties, current portion of long-term debt, and short-term borrowings as of the end of the year for continuing operations.
(F)  
Calculated using income from continuing operations attributable to Air Products and five-quarter average Air Products shareholders’ equity.
(G)  
Total capitalization includes total debt for continuing operations plus total equity plus redeemable noncontrolling interest as of the end of the year. Redeemable noncontrolling interest was $287 as of 30 September 2014. There was no redeemable noncontrolling interest for the other periods presented.
(H)  
A reconciliation of income from continuing operations on a GAAP basis to adjusted EBITDA is presented on pages 36-39 .
(I)  
Capital expenditures presented on a GAAP basis include additions to plant and equipment, acquisitions, less cash acquired, and investment in and advances to unconsolidated affiliates. The Company utilizes a non-GAAP measure in the computation of capital expenditures and includes spending associated with facilities accounted for as capital leases and purchases of noncontrolling interests. Refer to page 41 for a reconciliation of the GAAP to non-GAAP measures for fiscal years 2018 , 2017 , and 2016 . In fiscal year 2015 , the GAAP measure was adjusted by $96 and $278 for spending associated with facilities accounted for as capital leases and purchases of noncontrolling interests, respectively. In fiscal year 2014 , the GAAP measure was adjusted by $200 for spending associated with facilities accounted for as capital leases.
(J)  
Includes full- and part-time employees from continuing and discontinued operations.

19


ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management’s Discussion and Analysis contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about business outlook. These forward-looking statements are based on management’s expectations and assumptions as of the date of this report and are not guarantees of future performance. Actual performance and financial results may differ materially from projections and estimates expressed in the forward-looking statements because of many factors not anticipated by management, including, without limitation, those described in our Forward-Looking Statements and Part I, Item 1A. Risk Factors, of this Annual Report on Form 10-K.
The following discussion should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this report. Unless otherwise indicated, financial information is presented on a continuing operations basis. All comparisons in the discussion are to the corresponding prior year, unless otherwise stated. All amounts presented are in accordance with U.S. generally accepted accounting principles (GAAP), except as noted. All amounts are presented in millions of dollars, except for per share data, unless otherwise indicated.
Captions such as income from continuing operations attributable to Air Products, net income attributable to Air Products, and diluted earnings per share attributable to Air Products are simply referred to as “income from continuing operations,” “net income,” and “diluted earnings per share (EPS)” throughout this Management’s Discussion and Analysis, unless otherwise stated.
The discussion of results that follows includes comparisons to certain non-GAAP ("adjusted") financial measures. The presentation of non-GAAP measures is intended to provide investors, potential investors, securities analysts, and others with useful supplemental information to evaluate the performance of the business because such measures, when viewed together with our financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. The reconciliations of reported GAAP results to non-GAAP measures are presented on pages 33-39 . Descriptions of the excluded items appear on pages 25-28 .
BUSINESS OVERVIEW
Air Products and Chemicals, Inc. is a world-leading Industrial Gases company in operation for over 75 years. The Company’s core industrial gases business provides atmospheric, process, and specialty gases and related equipment to many industries including refining, chemical, gasification, metals, electronics, manufacturing, and food and beverage. Air Products is also the world’s leading supplier of liquefied natural gas (LNG) process technology and equipment. With operations in 50 countries, in fiscal year 2018 we had sales of $8.9 billion , assets of $19.2 billion , and a worldwide workforce of approximately 16,300 full- and part-time employees.
As of 30 September 2018 , our operations were organized into five reportable business segments: Industrial Gases – Americas; Industrial Gases – EMEA (Europe, Middle East, and Africa); Industrial Gases – Asia; Industrial Gases – Global; and Corporate and other. The financial statements and analysis that follow discuss our results based on these operations. Refer to Note 25 , Business Segment and Geographic Information, to the consolidated financial statements for additional details on our reportable business segments.

20



2018 IN SUMMARY
In fiscal year 2018 , we delivered strong safety and financial results. Sales of $8.9 billion increased nine percent over the prior year primarily driven by higher volumes from base business growth and new, large industrial gas project onstreams. The higher regional volumes were partially offset by lower sale of equipment activity on our Jazan project as we near project completion. In addition, we began to execute our gasification strategy with the completion and onstream of the Lu'An acquisition and our announcements of the Jazan gasifier/power project in Jazan, Saudi Arabia, the Yankuang coal-to-syngas production facility in Yulin City, Shaanxi Province, China, and the Jiutai coal-to-syngas project in Hohhot, China.
We delivered operating margin of  22.0% and adjusted EBITDA margin of  34.9% . Diluted EPS of  $6.59 increased 28%  from the prior year. On a non-GAAP basis, adjusted diluted EPS of  $7.45   increased   18% .
Highlights for 2018
Sales of $8,930.2 increased 9% , or $742.6 , from underlying sales growth of 7% and favorable currency impacts of 2% . The underlying sales growth was primarily driven by higher volumes across all regional Industrial Gases segments, partially offset by lower sale of equipment activity in the Industrial Gases – Global segment.
Operating income of $1,965.6 increased 37% , or $525.6 , and operating margin of 22.0% increased 440 bp. On a non‑GAAP basis, adjusted operating income of $1,941.5 increased 9% , or $167.7 , and adjusted operating margin of  21.7%   was flat .
Income from continuing operations of $1,455.6 increased 28% , or $321.2 , and diluted EPS of $6.59 increased 28% , or $1.43 . On a non-GAAP basis, adjusted income from continuing operations of $1,644.7 increased 19% , or $258.8 , and adjusted diluted EPS of $7.45 increased 18% , or $1.14 . A summary table of changes in diluted earnings per share is presented on the following page.
Adjusted EBITDA of  $3,115.5 increased   11% , or  $316.3 . Adjusted EBITDA margin of  34.9%   increased   70 bp.
We completed the formation of a syngas supply joint venture with Lu'An, including the acquisition of Lu'An's gasification and syngas purification assets.
We increased our quarterly dividend by 16% from $.95 to $1.10 per share, or $4.40 per share annually, the largest increase in Company history. This represents the 36th consecutive year that we have increased our dividend payment.

21


Changes in Diluted Earnings per Share Attributable to Air Products
 
 
 
 
 
 
Increase
 
 
2018
 
2017
 
(Decrease)
Diluted Earnings per Share
 
 
 
 
 
 
Net income
 

$6.78

 

$13.65

 

($6.87
)
Income from discontinued operations
 
.19

 
8.49

 
(8.30
)
Income from Continuing Operations – GAAP
 

$6.59

 

$5.16

 

$1.43

Operating Income Impact (after-tax)
 
 
 
 
 
 
Underlying business
 
 
 
 
 
 
Volume
 
 
 
 
 

$.71

Price/raw materials
 
 
 
 
 
.16

Costs
 
 
 
 
 
(.45
)
Currency
 
 
 
 
 
.16

Change in inventory valuation method
 
 
 
 
 
.08

Business separation costs
 
 
 
 
 
.12

Cost reduction and asset actions
 
 
 
 
 
.49

Goodwill and intangible asset impairment charge
 
 
 
 
 
.70

Gain on land sale
 
 
 
 
 
(.03
)
Total Operating Income Impact (after-tax)
 
 
 
 
 

$1.94

Other Impact (after-tax)
 
 
 
 
 
 
Equity affiliates' income
 
 
 
 
 
.15

Equity method investment impairment charge
 
 
 
 
 
.36

Interest expense
 
 
 
 
 
(.03
)
Other non-operating income (expense), net
 
 
 
 
 
(.04
)
Income tax
 
 
 
 
 
.44

Tax reform repatriation
 
 
 
 
 
(2.16
)
Tax reform benefit related to deemed foreign dividends
 
 
 
 
 
.25

Tax reform rate change and other
 
 
 
 
 
.96

Tax restructuring
 
 
 
 
 
.16

Tax benefit associated with business separation
 
 
 
 
 
(.02
)
Tax election benefit
 
 
 
 
 
(.50
)
Noncontrolling interests
 
 
 
 
 
(.05
)
Weighted average diluted shares
 
 
 
 
 
(.03
)
Total Other Impact (after-tax)
 
 
 
 
 

($.51
)
Total Change in Diluted Earnings per Share from Continuing Operations – GAAP Measure
 
 
 
 
 

$1.43


22


 
 
 
 
 
 
Increase
 
 
2018
 
2017
 
(Decrease)
Income from Continuing Operations – GAAP Basis
 

$6.59

 

$5.16

 

$1.43

Change in inventory valuation method
 
(.08
)
 

 

($.08
)
Business separation costs
 

 
.12

 
(.12
)
Tax benefit associated with business separation
 

 
(.02
)
 
.02

Cost reduction and asset actions
 

 
.49

 
(.49
)
Goodwill and intangible asset impairment charge
 

 
.70

 
(.70
)
Gain on land sale
 

 
(.03
)
 
.03

Equity method investment impairment charge
 

 
.36

 
(.36
)
Pension settlement loss
 
.15

 
.03

 
.12

Tax reform repatriation
 
2.16

 

 
2.16

Tax reform benefit related to deemed foreign dividends
 
(.25
)
 

 
(.25
)
Tax reform rate change and other
 
(.96
)
 

 
(.96
)
Tax restructuring
 
(.16
)
 

 
(.16
)
Tax election benefit
 

 
(.50
)
 
.50

Income from Continuing Operations – Non-GAAP Measure
 

$7.45

 

$6.31

 

$1.14

2019 OUTLOOK
In fiscal year 2019, we intend to grow our earnings by continuing to improve our base businesses and by bringing new, large projects onstream. We expect the full year impact of the Lu'An project to be a large contributor to our earnings growth. Backed by our strong financial position, we will strive to continue to win and invest in key growth projects, including large gasification projects that are consistent with our onsite business model. In addition, we expect lower sale of equipment activity from our Jazan project as it nears completion.
The above guidance should be read in conjunction with the section entitled “Forward-Looking Statements” of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Discussion of Consolidated Results
 
2018

2017

2016

Sales

$8,930.2


$8,187.6


$7,503.7

Operating income
1,965.6

1,440.0

1,535.1

Operating margin
22.0
%
17.6
%
20.5
%
Equity affiliates’ income
174.8

80.1

147.0

Income from continuing operations
1,455.6

1,134.4

1,099.5

Non-GAAP Measures
 
 
 
Adjusted EBITDA

$3,115.5


$2,799.2


$2,621.8

Adjusted EBITDA margin
34.9
%
34.2
%
34.9
%
Adjusted operating income
1,941.5

1,773.8

1,620.2

Adjusted operating margin
21.7
%
21.7
%
21.6
%
Adjusted equity affiliates' income
203.3

159.6

147.0


23


 
% Change from Prior Year  
Sales
2018

2017

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

2018 vs. 2017
Sales of $8,930.2 increased 9% , or $742.6 . Underlying sales increased 7% from higher volumes of 6% and higher pricing of 1% . Volumes were higher across all regional Industrial Gases segments driven by new project onstreams, primarily in the Industrial Gases – Asia and Industrial Gases – EMEA segments, underlying base business growth, and an equipment sale resulting from the termination of a contract in the Industrial Gases – Asia segment. The regional volume increase was partially offset by lower sale of equipment activity in the Industrial Gases – Global segment. The pricing improvement was primarily attributable to the China and Europe merchant businesses. Energy and natural gas cost pass-through to customers was flat versus the prior year. Favorable currency impacts, primarily from the Euro, the British Pound Sterling, and the Chinese Renminbi, increased sales by 2% .
2017 vs. 2016
Sales of $8,187.6 increased 9.0% , or $683.9 . Underlying sales increased 7% from higher volumes of 6% and higher pricing of 1%. Higher volumes, primarily due to new project onstreams, underlying base business growth across the Industrial Gases regions, and continued progress on the Jazan project within our Industrial Gases – Global segment, were partially offset by lower LNG project activity in the Corporate and other segment. The pricing improvement was primarily attributable to the Industrial Gases – Asia segment. Higher energy and natural gas cost pass-through to customers increased sales by 3%, and unfavorable currency effects reduced sales by 1%.
Operating Income and Margin
2018 vs. 2017
Operating income of $1,965.6 increased 37% , or $525.6 , due to higher volumes of $204, a prior year goodwill and intangible asset impairment charge of $162, prior year cost reduction and asset actions of $151 , favorable currency impacts of $47, favorable pricing, net of energy, fuel, and raw material costs, of $47, prior year business separation costs of $33 , and a favorable impact from the change in inventory valuation method of $24 , partially offset by unfavorable net operating costs of $130 and a prior year gain on land sale of $12 . The increase in net operating costs was primarily driven by higher planned maintenance costs, lower cost reimbursement, including costs for transitions services, and higher costs to support growth opportunities. Operating margin of 22.0% increased 440 bp, primarily due to the goodwill and intangible asset impairment charge, cost reduction and asset actions, and business separation costs in the prior year.
On a non-GAAP basis, adjusted operating income of $1,941.5 increased 9% , or $167.7 , primarily due to higher volumes, favorable currency impacts, and favorable pricing, net of energy, fuel, and raw material costs, partially offset by unfavorable net operating costs. Adjusted operating margin of  21.7%   was flat as higher volumes and favorable pricing, net of power costs, were mostly offset by higher costs.
2017 vs. 2016
Operating income of $1,440.0 decreased 6% , or $95.1 , as a goodwill and intangible asset impairment charge of $162 , higher cost reduction and asset actions of $117 , and unfavorable currency impacts of $9 were partially offset by favorable volumes of $83, favorable net operating costs of $73, lower business separation costs of $18 , a gain on sale of land of $12 , and favorable pricing, net of energy, fuel, and raw material costs of $7. Operating margin of 17.6% decreased 290 bp, primarily due to the goodwill and intangible asset impairment charge and higher cost reduction and asset actions.
On a non-GAAP basis, adjusted operating income of $1,773.8 increased 9% , or $153.6 , primarily due to higher volumes and favorable cost performance. Adjusted operating margin of 21.7% increased 10 bp as lower costs were partially offset by higher energy and natural gas pass-through to customers.

24


Adjusted EBITDA
We define Adjusted EBITDA as income from continuing operations (including noncontrolling interests) excluding certain disclosed items, which the Company does not believe to be indicative of underlying business trends, before interest expense, other non-operating income (expense), net, income tax provision, and depreciation and amortization expense. Adjusted EBITDA provides a useful metric for management to assess operating performance.
2018 vs. 2017
Adjusted EBITDA of $3,115.5 increased 11% , or $316.3 , primarily due to higher volumes, favorable currency, positive pricing, and income from regional industrial gases equity affiliates, partially offset by higher costs. Adjusted EBITDA margin of 34.9% increased 70 bp , primarily due to higher volumes and income from regional industrial gases equity affiliates, partially offset by higher costs.
2017 vs. 2016
Adjusted EBITDA of $2,799.2 increased 7% , or $177.4 , primarily due to higher volumes and favorable cost performance. Adjusted EBITDA margin of 34.2% decreased 70 bp, primarily due to a 90 bp impact from higher energy pass-through to customers.
Equity Affiliates’ Income
2018 vs. 2017
Income from equity affiliates of $174.8 increased $94.7 . The fiscal year 2017 income included a noncash impairment charge of $79.5 ($.36 per share) on our investment in Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (AHG), a 25%-owned equity affiliate in our Industrial Gases – EMEA segment. This charge has been excluded from segment results. Refer to Note 8 , Summarized Financial Information of Equity Affiliates , to the consolidated financial statements for additional information. Fiscal year 2018 included an expense of  $28.5  resulting from the U.S. Tax Cuts and Jobs Act. Refer to Note  22 , Income Taxes, to the consolidated financial statements for additional information. On a non-GAAP basis, adjusted equity affiliates' income of $203.3 increased 27% , or $43.7 , primarily driven by Industrial Gases – Americas and Industrial Gases – EMEA affiliates.
2017 vs. 2016
Income from equity affiliates of $80.1 decreased $66.9 , primarily due to a noncash impairment charge of $79.5 ($.36 per share) on our investment in AHG in fiscal year 2017. On a non-GAAP basis, adjusted equity affiliates' income of $159.6 increased 9%, or $12.6.
Cost of Sales and Gross Margin
2018 vs. 2017
Cost of sales of $6,189.5 increased 8% , or $438.0 , primarily due to higher costs attributable to sales volumes of $225, unfavorable currency impacts of $133, and higher other costs, including maintenance costs, of $97, partially offset by the benefit from the change in inventory valuation method from a last-in, first-out (LIFO) basis to a first-in, first-out (FIFO) basis of $24 in fiscal year 2018. For additional information on the change in inventory valuation method, refer to Note 1 , Major Accounting Policies , and Note 7 , Inventories , to the consolidated financial statements.
Gross margin of 30.7% increased 90 bp , primarily due to higher volumes, favorable pricing, net of raw materials, and the benefit from the change in inventory valuation adjustment, partially offset by higher other costs.
2017 vs. 2016
Cost of sales of $5,751.5 increased 11% , or $574.2 , due to higher costs attributable to sales volumes of $418, higher energy and natural gas cost pass-through to customers of $218, and higher other costs of $21, partially offset by favorable currency impacts of $83.
Gross margin of 29.8% decreased 120 bp , primarily due to higher energy and natural gas cost pass-through to customers and unfavorable volume mix.

25


Selling and Administrative Expense
2018 vs. 2017
Selling and administrative expense of $760.8 increased 7% , or $47.3 , primarily driven by unfavorable currency impacts and higher costs to support growth opportunities, partially offset by cost reductions associated with the completion of transition services agreements with Versum and Evonik. Selling and administrative expense as a percent of sales decreased to 8.5% in fiscal year 2018 from 8.7% in fiscal year 2017 .
2017 vs. 2016
Selling and administrative expense of $713.5 increased 4% , or $29.7 , primarily due to costs in support of transition services agreements with Versum and Evonik, for which the reimbursement is reflected in "Other income (expense), net." Selling and administrative expense as a percent of sales decreased to 8.7% in fiscal year 2017 from 9.1% in fiscal year 2016 .
Research and Development
2018 vs. 2017
Research and development expense of $64.5 increased 12% , or $6.9 . Research and development expense as a percent of sales in fiscal years 2018 and 2017 was .7% .
2017 vs. 2016
Research and development expense of $57.6 decreased 20% , or $14.2 . Research and development expense as a percent of sales decreased to .7% in fiscal year 2017 from 1.0% in fiscal year 2016 .
Business Separation Costs
In fiscal year 2017, we completed the separation of the divisions comprising the former Materials Technologies segment through the spin-off of the Electronics Materials Division (EMD) as Versum Materials, Inc. (Versum) and the sale of the Performance Materials Division (PMD) to Evonik Industries AG (Evonik). For additional information on the dispositions, refer to Note 3 , Discontinued Operations , to the consolidated financial statements.
In connection with the dispositions, we incurred net separation costs of $30.2 ( $26.5 after-tax, or $.12 per share) in fiscal year 2017. The net costs include legal and advisory fees of $32.5 , which are reflected on the consolidated income statements as “Business separation costs,” and a pension settlement benefit of $2.3 presented within "Other non-operating income (expense), net." Our fiscal year 2017 income tax provision includes net tax benefits of $5.5 ( $.02 per share), primarily related to changes in tax positions on business separation activities.
In fiscal year 2016, we incurred business separation costs of $50.6 ( $46.7 after-tax, or $.21 per share) for legal and advisory fees. Our fiscal year 2016 income tax provision includes additional tax expense related to the separation of $51.8 ( $.24 per share), of which $45.7 resulted from a dividend to repatriate $443.8 from a subsidiary in South Korea to the U.S. in anticipation of the separation of EMD from the industrial gases business in South Korea.
Cost Reduction and Asset Actions
In fiscal year 2017, we recognized a net expense of $ 151.4 ($109.3 attributable to Air Products, after-tax, or  $.49 per  share) for cost reduction and asset actions. The year-to-date net expense included a charge of $154.8 for actions taken during fiscal year 2017, partially offset by the favorable settlement of the remaining $3.4 accrued balance associated with business restructuring actions taken in 2015. The charge included asset actions of $88.5 and severance actions of $66.3.
In fiscal year 2016, we recognized an expense of $34.5 ($24.7 after-tax, or $.11 per share) for severance and other benefits.
The charges we record for cost reduction and asset actions have been excluded from segment operating income. Refer to Note 5 , Cost Reduction and Asset Actions , to the consolidated financial statements for additional details on these actions.

26


Goodwill and Intangible Asset Impairment Charge
During the third quarter of fiscal year 2017, we determined that the goodwill and indefinite-lived intangible assets (primarily acquired trade names) associated with our Latin America reporting unit of our Industrial Gases – Americas segment were impaired. We recorded a noncash impairment charge of $162.1 ($154.1 attributable to Air Products, after-tax, or $.70 per share), which was driven by lower economic growth and profitability in the region. This impairment charge has been excluded from segment results. Refer to Note  10 Goodwill , and Note  11 , Intangible Assets , to the consolidated financial statements for additional information.
Other Income (Expense), Net
Items recorded to "Other income (expense), net" arise from transactions and events not directly related to our principal income earning activities. The detail of "Other income (expense), net" is presented in Note 23 , Supplemental Information , to the consolidated financial statements.
2018 vs. 2017
Other income (expense), net of $50.2 decreased $70.8 , primarily due to lower income from the transition services agreements with Versum and Evonik, lower income from the sale of assets and investments, lower favorable contract settlements, and an unfavorable foreign exchange impact.
2017 vs. 2016
Other income (expense), net of $121.0 increased $71.6 , primarily due to income from transition services agreements with Versum and Evonik, income from the sale of assets and investments, including a gain of $12.2 ($7.6 after-tax, or $.03 per share) resulting from the sale of a parcel of land, and a favorable foreign exchange impact.
Interest Expense
 
2018

2017

2016

Interest incurred

$150.0


$139.6


$147.9

Less: Capitalized interest
19.5

19.0

32.7

Interest Expense

$130.5


$120.6


$115.2

2018 vs. 2017
Interest incurred increased $10.4 as project financing associated with the Lu'An joint venture and a higher average interest rate on the debt portfolio were partially offset by the impact from a lower average debt balance. The change in capitalized interest was driven by an increase in the carrying value of projects under construction.
2017 vs. 2016
Interest incurred decreased $8.3 as the impact from a lower average debt balance of $26 was partially offset by the impact from a higher average interest rate on the debt portfolio of $19. The change in capitalized interest was driven by a decrease in the carrying value of projects under construction, primarily as a result of our decision to exit from the EfW business.
Other Non-Operating Income (Expense), Net
2018 vs. 2017
Other non-operating income (expense), net of  $5.1 decreased $11.5 . During the fourth quarter of fiscal year 2018, we recognized a pension settlement loss of $43.7 ( $33.2 after-tax, or $.15 per share) that primarily resulted from the transfer of certain pension payment obligations to an insurer for our U.S. salaried and hourly plans through the purchase of an irrevocable, nonparticipating group annuity contract with plan assets. For additional information, refer to Note 16 , Retirement Benefits , to the consolidated financial statements. This loss was partially offset by higher interest income on cash and cash items and short-term investments and lower other non-service pension expense. The prior year pension expense included a settlement loss of $10.5 ($6.6 after-tax, or $.03 per share) associated with the U.S. Supplementary Pension Plan and a settlement benefit of $2.3 related to the disposition of EMD and PMD.

27


2017 vs. 2016
Other non-operating income of $16.6 increased $22.0 from an expense of $5.4 in fiscal year 2016, primarily due to interest income on cash and time deposits, which are comprised primarily of proceeds from the sale of PMD. Fiscal year 2016 included a pension settlement loss of $5.1 ( $3.3 after-tax, or $.02 per share) to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss, primarily associated with the U.S. Supplementary Pension Plan. In fiscal year 2016, interest income was included in "Other income (expense), net" and was not material.
Loss on Extinguishment of Debt
On 30 September 2016, in anticipation of the spin-off of EMD, Versum issued $425.0 of notes to Air Products, who then exchanged these notes with certain financial institutions for $418.3 of Air Products’ outstanding commercial paper. This noncash exchange, which was excluded from the consolidated statements of cash flows, resulted in a loss of $6.9 ($4.3 after-tax, or $.02 per share). This loss was deductible for tax purposes.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. Refer to Note 22 , Income Taxes , to the consolidated financial statements for details on factors affecting the effective tax rate.
2018 vs. 2017
The effective tax rate was 26.0% and 18.4% in fiscal years 2018 and 2017 , respectively. The current year rate was higher primarily due to the enactment of the U.S. Tax Cuts and Jobs Act ("the Tax Act") in the first quarter of fiscal year 2018, which significantly changed existing U.S. tax laws, including a reduction in the federal corporate income tax rate from 35% to 21% that became effective 1 January 2018, a deemed repatriation tax on unremitted foreign earnings, as well as other changes. As a result of the Tax Act, our income tax provision for fiscal year 2018 reflects a discrete net income tax expense of $180.6 . This included a deemed repatriation tax on accumulated unremitted foreign earnings and adjustments to the future cost of repatriation from foreign investments of  $448.6 , partially offset by a benefit of $56.2 related to the U.S. taxation of deemed foreign dividends under the Tax Act. This benefit may be eliminated by future legislation. Fiscal year 2018 tax expense also includes a benefit of  $211.8 , primarily from the re-measurement of our net U.S. deferred tax liabilities at the lower corporate tax rate. In fiscal year 2018, we also recorded a tax benefit of  $35.7 from the restructuring of foreign subsidiaries.
The income tax provision in fiscal year 2017 included a net income tax benefit of $111.4 resulting from a tax election related to a non-U.S. subsidiary. The effective tax rate in the prior year was also impacted by a goodwill impairment charge of $145.3 in our Latin America reporting unit and an impairment of $79.5 of an equity method investment for which no tax benefits were available.
On a non-GAAP basis, the adjusted effective tax rate decreased from 23.2% in fiscal year 2017 to 18.6% in fiscal year 2018 . We estimate that the lower U.S. federal statutory rate and other impacts of the Tax Act reduced our fiscal year 2018 adjusted effective tax rate by approximately 3.5%. The current year rate was also lower due to a benefit of $9.1 related to a final foreign tax audit settlement.
We are reporting the impacts of the Tax Act provisionally based upon reasonable estimates as of 30 September 2018 . The impacts are not yet finalized as they are dependent on factors and analysis not yet known or fully completed, including but not limited to, further book to U.S. tax adjustments for the earnings of foreign entities, the issuance of additional guidance, as well as our ongoing analysis of the Tax Act. 
As a fiscal year-end taxpayer, certain provisions of the Tax Act became effective in our fiscal year 2018, while other provisions do not become effective until fiscal year 2019. The corporate tax rate reduction is effective as of 1 January 2018 and, accordingly, reduces our 2018 fiscal year U.S. federal statutory rate to a blended rate of approximately 24.5%.

28


2017 vs. 2016
The effective tax rate was 18.4% and 27.8% in fiscal years 2017 and 2016 , respectively. The 2017 rate included an impact of approximately 700 bp from a net income tax benefit resulting from a tax election related to a non-U.S. subsidiary and an impact of approximately 100 bp from excess tax benefits on share-based compensation resulting from the adoption of new accounting guidance in the first quarter of fiscal year 2017. These impacts were partially offset by an increase of approximately 200 bp due to both a goodwill impairment charge in our Latin America reporting unit and an impairment of an equity method investment for which no tax benefits were available. The 2016 rate included a 330 bp impact from tax costs associated with business separation, primarily resulting from a dividend declared in 2016 to repatriate cash from a foreign subsidiary as discussed above under Business Separation Costs. The remaining change was primarily due to the impact of business separation costs for which a tax benefit was estimated to not be available. On a non-GAAP basis, the adjusted effective tax rate decreased from 24.2% in fiscal year 2016 to 23.2% in fiscal year 2017 , primarily due to excess tax benefits on share-based compensation.
Discontinued Operations
In fiscal year 2018, income from discontinued operations, net of tax, of $42.2 includes an income tax benefit of  $25.6  resulting from the resolution of uncertain tax positions taken in conjunction with the disposition of our former European Homecare business in fiscal year 2012. In addition, we recorded an after-tax benefit of  $17.6  resulting from the resolution of certain post-closing adjustments associated with the sale of PMD. Refer to Note  22 , Income Taxes, to the consolidated financial statements for additional information. These benefits were partially offset by an after-tax loss of  $1.0  related to EfW project exit activities, which were completed during the first quarter of fiscal year 2018.
In fiscal year 2017, income from discontinued operations, net of tax, of $1,866.0 includes a gain of $2,870 ( $1,828 after-tax, or $8.32 per share) for the sale of PMD to Evonik. The sale closed on 3 January 2017 for  $3.8 billion  in cash. In addition, we recorded a loss on the disposal of EfW of  $59.3  ( $47.1  after-tax) during the first quarter of 2017, primarily for land lease obligations and to update our estimate of the net realizable value of the plant assets.
In fiscal year 2016, the loss from discontinued operations, net of tax, of $460.5 includes a loss of $945.7 ( $846.6 after-tax) from the write down of EfW plant assets to their estimated net realizable value and a liability recorded for plant disposition and other costs. This loss was partially offset by the results of PMD and EMD.
Refer to Note 3 , Discontinued Operations , to the consolidated financial statements for additional information.
Segment Analysis
Industrial Gases – Americas
 
2018

2017

2016

Sales

$3,758.8


$3,637.0


$3,344.1

Operating income
927.9

946.1

891.3

Operating margin
24.7
%
26.0
%
26.7
%
Equity affiliates’ income
82.0

58.1

52.7

Adjusted EBITDA
1,495.2

1,468.6

1,387.6

Adjusted EBITDA margin
39.8
%
40.4
%
41.5
%
 
% Change from Prior Year  
Sales
2018

2017

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

29


2018 vs. 2017
Sales of $3,758.8 increased 3% , or $121.8 . Underlying sales were up 4% from higher volumes, primarily in our onsite and merchant businesses, as pricing was flat. The onsite increase was primarily driven by higher hydrogen volumes in North America. Lower energy and natural gas cost pass-through to customers decreased sales by 1% . Currency was flat versus the prior year.
Operating income of $927.9 decreased 2% , or $18.2 , primarily due to higher costs of $84 and lower pricing, net of power and fuel costs, of $13, partially offset by higher volumes of $76 and favorable currency impacts of $3. The higher costs included higher maintenance and supply chain costs. Operating margin of 24.7% decreased 130  bp from the prior year, primarily due to higher costs, partially offset by favorable volumes.
Equity affiliates’ income of $82.0 increased 41% , or $23.9 , primarily due to volume growth.
2017 vs. 2016
Underlying sales were up 2% from stronger hydrogen volumes and a new hydrogen plant in Canada. Higher energy and natural gas cost pass-through to customers increased sales by 6%. Favorable currency effects, primarily from the Chilean Peso, increased sales by 1%.
Operating income of  $946.1   increased   6% , or  $54.8 , primarily due to lower operating costs of $35 and higher volumes of $18. Operating costs were lower due to benefits from productivity improvements. Operating margin  decreased   70  bp from the prior year primarily due to higher energy and natural gas pass-through to customers, partially offset by favorable cost performance.
Equity affiliates’ income of $58.1 increased $5.4, primarily due to lower maintenance expense and a new plant onstream.
Industrial Gases – EMEA
 
2018

2017

2016

Sales

$2,193.3


$1,780.4


$1,704.4

Operating income
445.8

395.5

387.0

Operating margin
20.3
%
22.2
%
22.7
%
Equity affiliates’ income
61.1

47.1

36.5

Adjusted EBITDA
705.5

619.7

609.2

Adjusted EBITDA margin
32.2
%
34.8
%
35.7
%
 
% Change from Prior Year
Sales
2018

2017

Underlying business
 
 
Volume
12
%
6
 %
Price
1
%
 %
Energy and raw material cost pass-through
3
%
1
 %
Currency
7
%
(3
)%
Total Industrial Gases – EMEA Sales Change
23
%
4
 %
2018 vs. 2017
Sales of $2,193.3 increased 23% , or $412.9 . Underlying sales were up 13% from higher volumes of 12% and higher pricing of 1% . The volume increase was primarily driven by a hydrogen plant in India and higher merchant volumes. Higher energy and natural gas cost pass-through to customers  increased sales by 3% . Favorable currency impacts, primarily from the Euro and British Pound Sterling, increased sales by 7% .
Operating income of $445.8 increased 13% , or $50.3 , due to higher volumes of $38, favorable currency impacts of $26, and higher pricing, net of power and fuel costs, of $4, partially offset by unfavorable costs $18. Operating margin of 20.3% decreased 190 bp from the prior year, primarily due to unfavorable costs and lower margins on the hydrogen volumes in India.
Equity affiliates’ income of $61.1 increased 30% , or $14.0 , primarily due to volume growth, lower costs, and favorable currency.

30


2017 vs. 2016
Underlying sales were up 6% from higher volumes as pricing was flat. Volumes increased primarily due to a new plant onstream in India. Higher energy and natural gas cost pass-through to customers increased sales by 1%. Unfavorable currency effects, primarily from the British Pound Sterling, reduced sales by 3%.
Operating income of  $395.5   increased   2% , or  $8.5 , primarily due to lower operating costs of $27 and higher volumes, including a new plant onstream, of $15, partially offset by lower price net of power costs of $18 and unfavorable currency impacts of $15. Operating costs were lower primarily due to benefits from operational improvements. Operating margin  decreased   50  bp from the prior year, as lower price net of power costs, higher energy and natural gas pass-through to customers, and unfavorable currency impacts were partially offset by favorable cost performance.
Equity affiliates’ income of $47.1 increased $10.6, primarily due to higher volumes.
Industrial Gases – Asia
 
2018

2017

2016

Sales

$2,458.0


$1,964.7


$1,720.4

Operating income
689.9

532.6

452.8

Operating margin
28.1
%
27.1
%
26.3
%
Equity affiliates’ income
58.3

53.5

57.8

Adjusted EBITDA
1,014.0

789.3

708.5

Adjusted EBITDA margin
41.3
%
40.2
%
41.2
%

 
% Change from Prior Year
Sales
2018

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

2018 vs. 2017
Sales of $2,458.0 increased 25% , or $493.3 . Underlying sales were up 21% from higher volumes of 17% and higher pricing of 4% . The volume increase was primarily driven by new plant onstreams, including the Lu'An project, an equipment sale resulting from the termination of a contract in the first quarter of fiscal year 2018, and higher merchant volumes, partially offset by the impact of short-term sale of equipment activity in fiscal year 2017. Pricing improved across Asia driven primarily by the China merchant market. Energy and natural gas cost pass-through to customers was flat versus the prior year. Favorable currency impacts, primarily from the Chinese Renminbi, South Korean Won, and Taiwan Dollar, increased sales by 4% .
Operating income of $689.9 increased 30% , or $157.3 , due to higher volumes of $107, favorable price, net of power costs, of $53, and favorable currency impacts of $21, partially offset by higher operating costs of $24. Operating margin of 28.1% increased 100 bp as favorable price, net of power costs, and higher volumes were partially offset by unfavorable cost performance.
Equity affiliates’ income of $58.3 increased 9% , or $4.8 , primarily due to higher volumes.
2017 vs. 2016
Underlying sales were up 15% from higher volumes of 14% and higher pricing of 1%. Volumes increased primarily due to new plant onstreams, sale of equipment activity, and base business growth driven by higher merchant volumes across Asia. Pricing was up 1% primarily due to increases in China wholesale, spot, and underlying prices during the second half of the year across all merchant liquid product lines. Unfavorable currency effects reduced sales by 1%, primarily from the Chinese Renminbi, partially offset by strengthening of the South Korean Won and Taiwan Dollar.

31


Operating income of  $532.6   increased   18% , or  $79.8 , due to higher volumes of $68 and higher price net of power costs of $24, partially offset by higher operating costs of $8 and an unfavorable currency impact of $4. Operating margin  increased   80 bp, primarily due to higher price net of power costs and favorable volumes partially offset by unfavorable cost performance.
Equity affiliates’ income of $53.5 decreased $4.3, primarily due to favorable contract and insurance settlements in fiscal year 2016.
Industrial Gases – Global
The Industrial Gases – Global segment includes sales of cryogenic and gas processing equipment for air separation and centralized global costs associated with management of all the Industrial Gases segments.
 
2018

2017

2016

Sales

$436.1


$722.9


$498.8

Operating income (loss)
53.9

71.1

(21.5
)
Adjusted EBITDA
63.9

80.9

(13.6
)
2018 vs. 2017
Sales of $436.1 decreased 40% , or $286.8 . The decrease in sales was primarily driven by lower sale of equipment activity on the multiple air separation units that will serve Saudi Aramco’s Jazan oil refinery and power plant in Saudi Arabia. We expect to complete this project in 2019.
Operating income of $53.9 decreased 24% , or $17.2 , primarily due to the lower sale of equipment activity.
2017 vs. 2016
Sales of $722.9 increased $224.1, or 45%. The increase in sales was primarily driven by higher sales activity for our Jazan sale of equipment project.
Operating income of  $71.1   increased   $92.6  from an operating loss in fiscal year 2016, primarily from income on the Jazan project and productivity improvements.
Corporate and other
The Corporate and other segment includes our LNG and helium storage and distribution sale of equipment businesses and corporate support functions that benefit all segments. The results of the Corporate and other segment also include income and expense that is not directly associated with the other segments, such as foreign exchange gains and losses and stranded costs related to the former Materials Technologies segment, which is presented within discontinued operations. Stranded costs primarily relate to costs in support of transition services agreements with Versum and Evonik, the majority of which were reimbursed to Air Products. All transition services were completed during fiscal year 2018.
 
2018

2017

2016

Sales

$84.0


$82.6


$236.0

Operating loss
(176.0
)
(171.5
)
(89.4
)
Adjusted EBITDA
(163.1
)
(159.3
)
(69.9
)
2018 vs. 2017
Sales of $84.0 increased 2% , or $1.4 . Operating loss of $176.0 increased 3% , or $4.5 .
2017 vs. 2016
Sales of $82.6 decreased $153.4, primarily due to lower LNG activity. Operating loss of  $171.5   increased $82.1  due to lower LNG activity, partially offset by productivity improvements and income from transition service agreements with Versum and Evonik.

32


RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Millions of dollars unless otherwise indicated, except for per share data)
The Company has presented certain financial measures on a non-GAAP (“adjusted”) basis and has provided a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These financial measures are not meant to be considered in isolation or as a substitute for the most directly comparable financial measure calculated in accordance with GAAP. The Company believes these non-GAAP measures provide investors, potential investors, securities analysts, and others with useful information to evaluate the performance of the business because such measures, when viewed together with our financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results.
In many cases, our non-GAAP measures are determined by adjusting the most directly comparable GAAP financial measure to exclude certain disclosed items (“non-GAAP adjustments”) that we believe are not representative of the underlying business performance. For example, in fiscal years 2017 and 2016, we restructured the Company to focus on its core Industrial Gases business. This resulted in significant cost reduction and asset actions that we believe were important for investors to understand separately from the performance of the underlying business. Additionally, in fiscal year 2018, we recorded discrete impacts associated with the Tax Act . The reader should be aware that we may incur similar expenses in the future.
The tax impact on our pre-tax non-GAAP adjustments reflects the expected current and deferred income tax expense impact of the transactions and is impacted primarily by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions. Investors should also consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another.
During the first quarter of fiscal year 2018, we adopted accounting guidance on the presentation of net periodic pension and postretirement benefit cost. Certain prior year information has been reclassified to conform to the fiscal year 2018 presentation. Refer to Note 2 , New Accounting Guidance , to the consolidated financial statements for additional information.

33


Presented below are reconciliations of the reported GAAP results to the non-GAAP measures:
CONSOLIDATED RESULTS
 
Continuing Operations
 
Operating
Income
Operating
Margin (A)
Equity Affiliates' Income
Income Tax Provision
Net
Income
Diluted
EPS
2018 GAAP

$1,965.6

22.0
 %

$174.8


$524.3


$1,455.6


$6.59

2017 GAAP
1,440.0

17.6
 %
80.1

260.9

1,134.4

5.16

Change GAAP

$525.6

440
bp

$94.7


$263.4


$321.2


$1.43

% Change GAAP
37
%
 
118
%
101
 %
28
%
28
%
2018 GAAP

$1,965.6

22.0
 %

$174.8


$524.3


$1,455.6


$6.59

Change in inventory valuation method
(24.1
)
(.3
)%

(6.6
)
(17.5
)
(.08
)
Pension settlement loss (B)

 %

10.5

33.2

.15

Tax reform repatriation

 %
28.5

(448.6
)
477.1

2.16

Tax reform benefit related to deemed foreign dividends

 %

56.2

(56.2
)
(.25
)
Tax reform rate change and other

 %

211.8

(211.8
)
(.96
)
Tax restructuring

 %

35.7

(35.7
)
(.16
)
2018 Non-GAAP Measure

$1,941.5

21.7
 %

$203.3


$383.3


$1,644.7


$7.45

2017 GAAP

$1,440.0

17.6
 %

$80.1


$260.9


$1,134.4


$5.16

Business separation costs
32.5

.4
 %

3.7

26.5

.12

Tax benefit associated with business separation

 %

5.5

(5.5
)
(.02
)
Cost reduction and asset actions (C)
151.4

1.8
 %

41.6

109.3

.49

Goodwill and intangible asset impairment charge (D)
162.1

2.0
 %

4.6

154.1

.70

Gain on land sale
(12.2
)
(.1
)%

(4.6
)
(7.6
)
(.03
)
Equity method investment impairment charge

 %
79.5


79.5

.36

Pension settlement loss (B)

 %

3.9

6.6

.03

Tax election benefit

 %

111.4

(111.4
)
(.50
)
2017 Non-GAAP Measure

$1,773.8

21.7
 %

$159.6


$427.0


$1,385.9


$6.31

Change Non-GAAP Measure

$167.7



$43.7


($43.7
)

$258.8


$1.14

% Change Non-GAAP Measure
9
%
 
27
%
(10
)%
19
%
18
%


34


 
Continuing Operations
 
Operating
Income
Operating
Margin (A)
Equity Affiliates' Income
Income Tax Provision
Net
Income
Diluted
EPS
2017 GAAP

$1,440.0

17.6
 %

$80.1


$260.9


$1,134.4


$5.16

2016 GAAP
1,535.1

20.5
 %
147.0

432.6

1,099.5

5.04

Change GAAP

($95.1
)
(290
)bp

($66.9
)

($171.7
)

$34.9


$.12

% Change GAAP
(6
)%
 
(46
)%
(40
)%
3
%
2
%
2017 GAAP

$1,440.0

17.6
 %

$80.1


$260.9


$1,134.4


$5.16

Business separation costs
32.5

.4
 %

3.7

26.5

.12

Tax benefit associated with business separation

 %

5.5

(5.5
)
(.02
)
Cost reduction and asset actions (C)
151.4

1.8
 %

41.6

109.3

.49

Goodwill and intangible asset impairment charge (D)
162.1

2.0
 %

4.6

154.1

.70

Gain on land sale
(12.2
)
(.1
)%

(4.6
)
(7.6
)
(.03
)
Equity method investment impairment charge

 %
79.5


79.5

.36

Pension settlement loss (B)

 %

3.9

6.6

.03

Tax election benefit

 %

111.4

(111.4
)
(.50
)
2017 Non-GAAP Measure

$1,773.8

21.7
 %

$159.6


$427.0


$1,385.9


$6.31

2016 GAAP

$1,535.1

20.5
 %

$147.0


$432.6


$1,099.5


$5.04

Business separation costs
50.6

.7
 %

3.9

46.7

.21

Tax costs associated with business separation

 %

(51.8
)
51.8

.24

Cost reduction and asset actions
34.5

.4
 %

9.8

24.7

.11

Pension settlement loss (B)

 %

1.8

3.3

.02

Loss on extinguishment of debt (E)

 %

2.6

4.3

.02

2016 Non-GAAP Measure

$1,620.2

21.6
 %

$147.0


$398.9


$1,230.3


$5.64

Change Non-GAAP Measure

$153.6

10
bp

$12.6


$28.1


$155.6


$.67

% Change Non-GAAP Measure
9
 %
 
9
 %
7
 %
13
%
12
%
(A)  
Operating margin is calculated by dividing operating income by sales.
(B)  
Reflected on the consolidated income statements in "Other non-operating income (expense), net." Fiscal year 2018 includes a before-tax impact of $43.7 primarily resulting from the transfer of certain pension payment obligations to an insurer through the purchase of an irrevocable, nonparticipating group annuity contract during the fourth quarter.
(C)  
Noncontrolling interests impact of $.5 in fiscal year 2017.
(D)  
Noncontrolling interests impact of $3.4 in fiscal year 2017.
(E)  
Income from continuing operations before taxes impact of $6.9 in fiscal year 2016.

35


ADJUSTED EBITDA
We define Adjusted EBITDA as income from continuing operations (including noncontrolling interests) excluding certain disclosed items, which the Company does not believe to be indicative of underlying business trends, before interest expense, other non-operating income (expense), net, income tax provision, and depreciation and amortization expense. Adjusted EBITDA provides a useful metric for management to assess operating performance.
Below is a reconciliation of income from continuing operations on a GAAP basis to adjusted EBITDA:
 
2018
2017
2016
2015
2014
Income From Continuing Operations (A)

$1,490.7


$1,155.2


$1,122.0


$965.9


$691.0

Less: Change in inventory valuation method
24.1





Add: Interest expense
130.5

120.6

115.2

102.8

124.0

Less: Other non-operating income (expense), net
5.1

16.6

(5.4
)
(42.3
)
(51.7
)
Add: Income tax provision
524.3

260.9

432.6

300.2

258.1

Add: Depreciation and amortization
970.7

865.8

854.6

858.5

875.6

Add: Business separation costs

32.5

50.6

7.5


Add: Cost reduction and asset actions

151.4

34.5

180.1

11.1

Add: Goodwill and intangible asset impairment charge

162.1



310.1

Less: Gain on previously held equity interest



17.9


Less: Gain on land sales

12.2


33.6