AIR PRODUCTS & CHEMICALS INC /DE/ - FORM 10-Q - April 27, 2017

Attached files

file filename
EX-32 - EX-32 - AIR PRODUCTS & CHEMICALS INC /DE/apd-exhibit32x3312017.htm
EX-31.2 - EX-31.2 - AIR PRODUCTS & CHEMICALS INC /DE/apd-exhibit312x3312017.htm
EX-31.1 - EX-31.1 - AIR PRODUCTS & CHEMICALS INC /DE/apd-exhibit311x3312017.htm
EX-12 - EX-12 - AIR PRODUCTS & CHEMICALS INC /DE/apd-exhibit12x3312017.htm
EX-10.1 - EX-10.1 - AIR PRODUCTS & CHEMICALS INC /DE/apd-exhibit101x3312017.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 31 March 2017
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 1-4534
AIR PRODUCTS AND CHEMICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
23-1274455
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
7201 Hamilton Boulevard, Allentown, Pennsylvania
 
18195-1501
(Address of Principal Executive Offices)
 
(Zip Code)
610-481-4911
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ¨
 
 
(Do not check if a smaller reporting 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 Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at 31 March 2017
Common Stock, $1 par value

217,724,491



AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX

2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
 
Three Months Ended
Six Months Ended
 
31 March
31 March
(Millions of dollars, except for share data)
2017
2016
2017
2016
Sales
$
1,980.1

$
1,777.4

$
3,862.6

$
3,643.7

Cost of sales
1,403.8

1,213.0

2,721.9

2,508.9

Selling and administrative
177.9

167.8

343.6

341.7

Research and development
14.8

18.2

29.9

35.1

Business separation costs
—

7.4

30.2

19.4

Cost reduction and asset actions
10.3

10.7

60.3

10.7

Pension settlement loss
4.1

2.0

4.1

2.0

Other income (expense), net
22.0

13.3

46.7

18.2

Operating Income
391.2

371.6

719.3

744.1

Equity affiliates’ income
34.2

32.3

72.2

65.6

Interest expense
30.5

25.7

60.0

47.9

Other non-operating income (expense), net
9.7

—

9.7

—

Income From Continuing Operations Before Taxes
404.6

378.2

741.2

761.8

Income tax provision
94.5

93.5

172.9

189.9

Income from Continuing Operations
310.1

284.7

568.3

571.9

Income (Loss) From Discontinued Operations, net of tax
1,825.6

(750.2
)
1,873.8

(665.4
)
Net Income (Loss)
2,135.7

(465.5
)
2,442.1

(93.5
)
Net Income Attributable to Noncontrolling Interests of Continuing Operations
5.7

5.8

12.3

12.1

Net Income Attributable to Noncontrolling Interests of Discontinued Operations
—

2.0

—

4.1

Net Income (Loss) Attributable to Air Products
$
2,130.0

$
(473.3
)
$
2,429.8

$
(109.7
)
Net Income Attributable to Air Products
 
 
 
 
Income from continuing operations
$
304.4

$
278.9

$
556.0

$
559.8

Income (Loss) from discontinued operations
1,825.6

(752.2
)
1,873.8

(669.5
)
Net Income (Loss) Attributable to Air Products
$
2,130.0

$
(473.3
)
$
2,429.8

$
(109.7
)
Basic Earnings Per Common Share Attributable to Air Products
 
 
 
 
Income from continuing operations
$
1.40

$
1.29

$
2.55

$
2.59

Income (Loss) from discontinued operations
8.38

(3.48
)
8.61

(3.10
)
Net Income (Loss) Attributable to Air Products
$
9.78

$
(2.19
)
$
11.16

$
(.51
)
Diluted Earnings Per Common Share Attributable to Air Products
 
 
 
 
Income from continuing operations
$
1.39

$
1.28

$
2.53

$
2.57

Income (Loss) from discontinued operations
8.31

(3.45
)
8.53

(3.08
)
Net Income (Loss) Attributable to Air Products
$
9.70

$
(2.17
)
$
11.06

$
(.51
)
Weighted Average Common Shares – Basic (in millions)
217.9

216.1

217.8

215.9

Weighted Average Common Shares – Diluted (in millions)
219.7

217.9

219.6

217.8

Dividends Declared Per Common Share – Cash
$
.95

$
.86

$
1.81

$
1.67

The accompanying notes are an integral part of these statements.

3


AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(Unaudited)
 
 
Three Months Ended
 
 
31 March
(Millions of dollars)
 
2017
 
2016
Net Income (Loss)
 
$
2,135.7

 
$
(465.5
)
Other Comprehensive Income, net of tax:
 
 
 
 
Translation adjustments, net of tax of ($8.0) and ($19.1)
 
149.6

 
139.9

Net gain (loss) on derivatives, net of tax of ($5.7) and $10.2
 
(15.4
)
 
12.8

Pension and postretirement benefits, net of tax of $1.2
 
3.8

 
—

Reclassification adjustments:
 
 
 
 
Currency translation adjustment
 
49.1

 
.4

Derivatives, net of tax of $2.7 and ($0.5)
 
5.8

 
(11.1
)
Pension and postretirement benefits, net of tax of $13.7 and $11.3
 
30.1

 
22.7

Total Other Comprehensive Income
 
223.0

 
164.7

Comprehensive Income (Loss)
 
2,358.7

 
(300.8
)
Net Income Attributable to Noncontrolling Interests
 
5.7

 
7.8

Other Comprehensive Income Attributable to Noncontrolling Interests
 
5.0

 
2.8

Comprehensive Income (Loss) Attributable to Air Products
 
$
2,348.0

 
$
(311.4
)
 
 
 
 
 
 
 
Six Months Ended
 
 
31 March
(Millions of dollars)
 
2017
 
2016
Net Income (Loss)
 
$
2,442.1

 
$
(93.5
)
Other Comprehensive Income (Loss), net of tax:
 
 
 
 
Translation adjustments, net of tax of $24.3 and ($25.8)
 
(131.6
)
 
37.0

Net gain (loss) on derivatives, net of tax of ($16.4) and $15.0
 
(25.2
)
 
28.8

Pension and postretirement benefits, net of tax of $1.2
 
3.8

 
—

Reclassification adjustments:
 
 
 
 
Currency translation adjustment
 
49.1

 
2.8

Derivatives, net of tax of $13.3 and ($8.5)
 
31.4

 
(30.4
)
Pension and postretirement benefits, net of tax of $26.6 and $21.4
 
57.5

 
43.8

Total Other Comprehensive Income (Loss)
 
(15.0
)
 
82.0

Comprehensive Income (Loss)
 
2,427.1

 
(11.5
)
Net Income Attributable to Noncontrolling Interests
 
12.3

 
16.2

Other Comprehensive Income Attributable to Noncontrolling Interests
 
1.9

 
2.8

Comprehensive Income (Loss) Attributable to Air Products
 
$
2,412.9

 
$
(30.5
)
The accompanying notes are an integral part of these statements.


4



AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
31 March
 
30 September
(Millions of dollars, except for share data)
 
2017
 
2016
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash items
 
$
1,869.3

 
$
1,293.2

Short-term investments
 
1,423.2

 
—

Trade receivables, net
 
1,176.3

 
1,146.2

Inventories
 
322.8

 
255.0

Contracts in progress, less progress billings
 
68.8

 
64.6

Prepaid expenses
 
61.9

 
93.9

Other receivables and current assets
 
362.0

 
538.2

Current assets of discontinued operations
 
9.8

 
926.2

Total Current Assets
 
5,294.1

 
4,317.3

Investment in net assets of and advances to equity affiliates
 
1,296.3

 
1,283.6

Plant and equipment, at cost
 
18,716.2

 
18,660.2

Less: accumulated depreciation
 
10,518.0

 
10,400.5

Plant and equipment, net
 
8,198.2

 
8,259.7

Goodwill, net
 
827.2

 
845.1

Intangible assets, net
 
377.6

 
387.9

Noncurrent capital lease receivables
 
1,147.9

 
1,221.7

Other noncurrent assets
 
730.2

 
671.0

Noncurrent assets of discontinued operations
 
—

 
1,042.3

Total Noncurrent Assets
 
12,577.4

 
13,711.3

Total Assets
 
$
17,871.5

 
$
18,028.6

Liabilities and Equity
 
 
 
 
Current Liabilities
 
 
 
 
Payables and accrued liabilities
 
$
1,490.6

 
$
1,652.2

Accrued income taxes
 
544.8

 
117.9

Short-term borrowings
 
122.3

 
935.8

Current portion of long-term debt
 
420.5

 
365.4

Current liabilities of discontinued operations
 
24.1

 
211.8

Total Current Liabilities
 
2,602.3

 
3,283.1

Long-term debt
 
3,300.4

 
3,909.7

Other noncurrent liabilities
 
1,897.9

 
1,816.5

Deferred income taxes
 
650.7

 
710.4

Noncurrent liabilities of discontinued operations
 
—

 
1,095.5

Total Noncurrent Liabilities
 
5,849.0

 
7,532.1

Total Liabilities
 
8,451.3

 
10,815.2

Commitments and Contingencies – See Note 11
 

 

Air Products Shareholders’ Equity
 
 
 
 
Common stock (par value $1 per share; issued 2017 and 2016 - 249,455,584 shares)
 
249.4

 
249.4

Capital in excess of par value
 
975.5

 
970.0

Retained earnings
 
12,692.5

 
10,475.5

Accumulated other comprehensive loss
 
(2,393.7
)
 
(2,388.3
)
Treasury stock, at cost (2017 - 31,731,093 shares; 2016 - 32,104,759 shares)
 
(2,206.3
)
 
(2,227.0
)
Total Air Products Shareholders’ Equity
 
9,317.4

 
7,079.6

Noncontrolling Interests
 
102.8

 
133.8

Total Equity
 
9,420.2

 
7,213.4

Total Liabilities and Equity
 
$
17,871.5

 
$
18,028.6

The accompanying notes are an integral part of these statements.

5


AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
31 March
(Millions of dollars)
2017
2016
Operating Activities
 
 
Net income (loss)
$
2,442.1

$
(93.5
)
Less: Net income attributable to noncontrolling interests of continuing operations
12.3

12.1

Less: Net income attributable to noncontrolling interests of discontinued operations
—

4.1

Net income (loss) attributable to Air Products
2,429.8

(109.7
)
(Income) Loss from discontinued operations
(1,873.8
)
669.5

Income from continuing operations attributable to Air Products
556.0

559.8

Adjustments to reconcile income to cash provided by operating activities:
 
 
Depreciation and amortization
417.9

428.6

Deferred income taxes
(68.6
)
80.0

Undistributed earnings of unconsolidated affiliates
(31.5
)
(7.4
)
Gain on sale of assets and investments
(6.5
)
(2.3
)
Share-based compensation
18.5

16.4

Noncurrent capital lease receivables
45.4

40.6

Write-down of long-lived assets associated with restructuring
45.7

—

Other adjustments
34.0

37.8

Working capital changes that provided (used) cash, excluding effects of acquisitions and divestitures:
 
 
Trade receivables
(53.8
)
46.1

Inventories
20.7

(1.1
)
Contracts in progress, less progress billings
(5.0
)
(38.3
)
Other receivables
118.4

(54.4
)
Payables and accrued liabilities
(178.6
)
(191.5
)
Other working capital
(51.4
)
(24.3
)
Cash Provided by Operating Activities
861.2

890.0

Investing Activities
 
 
Additions to plant and equipment
(532.2
)
(472.0
)
Investment in and advances to unconsolidated affiliates
(8.9
)
(1.5
)
Proceeds from sale of assets and investments
13.5

38.1

Purchases of investments
(1,823.2
)
—

Proceeds from investments
400.0

—

Other investing activities
(1.6
)
(1.0
)
Cash Used for Investing Activities
(1,952.4
)
(436.4
)
Financing Activities
 
 
Long-term debt proceeds
1.3

—

Payments on long-term debt
(469.7
)
(65.6
)
Net decrease in commercial paper and short-term borrowings
(816.6
)
(1.6
)
Dividends paid to shareholders
(374.0
)
(349.1
)
Proceeds from stock option exercises
19.9

35.5

Other financing activities
(22.7
)
(21.0
)
Cash Used for Financing Activities
(1,661.8
)
(401.8
)
Discontinued Operations
 
 
Cash (used for) provided by operating activities
(520.8
)
182.1

Cash provided by (used for) investing activities
3,750.6

(127.3
)
Cash provided by (used for) investing activities
69.5

(6.8
)
Cash Provided by Discontinued Operations
3,299.3

48.0

Effect of Exchange Rate Changes on Cash
(7.8
)
6.9

Increase in Cash and Cash Items
538.5

106.7

Cash and Cash Items – Beginning of Year
1,330.8

206.4

Cash and Cash Items – End of Period
$
1,869.3

$
313.1

Less: Cash and Cash Items – Discontinued Operations
—

26.4

Cash and Cash Items – Continuing Operations
$
1,869.3

$
286.7

The accompanying notes are an integral part of these statements.

6


AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars unless otherwise indicated, except for share data)

1.
BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES
Refer to our 2016 Form 10-K for a description of major accounting policies. There have been no significant changes to these accounting policies during the first six months of fiscal year 2017 other than those detailed in Note 2, New Accounting Guidance. Certain prior year information has been reclassified to conform to the fiscal year 2017 presentation.
The results of our previous Material Technologies segment, which contained the Electronic Materials Division (EMD) and Performance Materials Division (PMD), and the former Energy-from-Waste segment have been presented as discontinued operations. Refer to Note 3, Discontinued Operations, for additional details. The results of operations and cash flows of these businesses have been removed from the results of continuing operations and segment results for all periods presented. The assets and liabilities of the discontinued operations have been reclassified and are segregated in the consolidated balance sheets. The comprehensive income related to these businesses has not been segregated and is included in the consolidated comprehensive income statement for all periods presented. The notes to the interim consolidated financial statements, unless otherwise indicated, are on a continuing operations basis.
As further discussed in Note 3, Discontinued Operations, we completed the sale of PMD to Evonik Industries AG on 3 January 2017. A portion of the proceeds from the sale have been included in "Short-term investments" on the consolidated balance sheets. Associated interest income has been reflected on the consolidated income statements as “Other non-operating income (expense), net."
The consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries (“we,” “our,” “us,” the “Company,” “Air Products,” or “registrant”) included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In our opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the notes. The interim results for the periods indicated herein, however, do not reflect certain adjustments, such as the valuation of inventories on the last-in, first-out (LIFO) cost basis, which are only finally determined on an annual basis. The consolidated financial statements and related notes included herein should be read in conjunction with the financial statements and notes thereto included in our latest Form 10-K in order to fully understand the basis of presentation. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

2.
NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented in 2017
Consolidation Analysis
In February 2015, the Financial Accounting Standards Board (FASB) issued an update to amend current consolidation guidance. The guidance impacts the analysis an entity must perform in determining if it should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures. We adopted this guidance in the first quarter of fiscal year 2017. This guidance did not have a significant impact on our consolidated financial statements upon adoption.

7


Debt Issuance Costs
In April 2015, the FASB issued guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt instead of as a separate deferred asset. In addition, guidance was issued to allow for a policy election on the presentation of debt issuance costs associated with a line-of-credit arrangement, regardless of whether there are any outstanding borrowings. We adopted the guidance during the first quarter of fiscal year 2017 on a retrospective basis. The guidance resulted in a reclassification adjustment that decreased other noncurrent assets by $17.0 with a corresponding decrease to long-term debt as of 30 September 2016. We will continue to present debt issuance costs associated with a line-of-credit arrangement as a deferred asset, regardless of whether there are any outstanding borrowings.
Adoption of this guidance also impacted the presentation of debt issuance costs related to our discontinued operations. As of 30 September 2016, noncurrent assets and noncurrent liabilities of discontinued operations were both reduced by $9.6.
Share-Based Compensation
In March 2016, the FASB issued an update to simplify the accounting for employee share-based payments, including the income tax impacts, the classification on the statement of cash flows, and forfeitures. We elected to early adopt this guidance in the first quarter of fiscal year 2017. The new guidance requires excess tax benefits and deficiencies to be recognized in the income statement rather than in additional paid-in capital on the balance sheet. As a result of applying this change, we recognized $2.7 and $9.7 of excess tax benefits in our provision for income taxes during the three and six months ended 31 March 2017, respectively. In addition, adoption of the new guidance resulted in a $8.8 cumulative-effect adjustment to retained earnings as of 1 October 2016 to recognize deferred taxes for U.S. state net operating loss and other carryforwards attributable to excess tax benefits. We retrospectively applied the guidance which requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Cash paid on employees’ behalf related to shares withheld for tax purposes continues to be classified as a financing activity. Forfeitures have not been significant historically. We have elected to account for forfeitures as they occur, rather than to estimate them.
Definition of a Business
In January 2017, the FASB issued guidance that clarifies the definition of a business in order to assist in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, fewer transactions are expected to be accounted for as business combinations. We elected to early adopt this guidance prospectively beginning in the first quarter of fiscal year 2017. This guidance did not have a significant impact on our consolidated financial statements upon adoption.
New Accounting Guidance to be Implemented
Revenue Recognition
In May 2014, the FASB issued guidance based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be entitled in exchange for the transfer of goods or services. We have the option to adopt the standard in either fiscal year 2018 or 2019 either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We intend to adopt this guidance in fiscal year 2019. We are currently evaluating the adoption alternatives allowed by the new standard and the impact the standard is expected to have on our consolidated financial statements. As the new standard will supersede substantially all existing revenue guidance affecting us under GAAP, it could impact the amount and timing of revenue that we recognize, in addition to our business processes and information technology systems. To date, we have focused on identifying potential impacts on our onsite gases and sales of equipment businesses and on efforts needed to meet the expanded disclosure requirements. Our evaluation of the effect of the new standard will extend over future periods.
Leases
In February 2016, the FASB issued guidance which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements. The guidance is effective in fiscal year 2020, with early adoption permitted, and must be applied using a modified retrospective approach. We are currently evaluating the impact of adopting this new guidance on the consolidated financial statements, and we have started the assessment process by evaluating the population of leases under the revised definition of what qualifies as a leased asset. The Company is the lessee under various agreements for real estate, distribution equipment, aircraft, and vehicles that are currently accounted for as operating leases. The new guidance will require the Company to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. The Company is considered the lessor under certain agreements associated with facilities that are built to provide product to a specific customer.

8


Derivative Contract Novations
In March 2016, the FASB issued guidance to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require re-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is effective in fiscal year 2018, with early adoption permitted. We do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.
Credit Losses on Financial Instruments
In June 2016, the FASB issued an update on the measurement of credit losses, which requires measurement and recognition of expected credit losses for financial assets, including trade receivables and capital lease receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The method to determine a loss is different from the existing guidance, which requires a credit loss to be recognized when it is probable. The guidance is effective beginning fiscal year 2021, with early adoption permitted beginning fiscal year 2020. We are currently evaluating the impact this update will have on our consolidated financial statements.
Cash Flow Statement Classification
In August 2016, the FASB issued guidance to reduce diversity in practice on how certain cash receipts and cash payments are classified in the statement of cash flows. The guidance is effective beginning fiscal year 2019, with early adoption permitted, and should be applied retrospectively. We are currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
Intra-Entity Asset Transfers
In October 2016, the FASB issued guidance on the accounting for the income tax effects of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party.  Under the new guidance, the income tax consequences of an intra-entity asset transfer are recognized when the transfer occurs. The guidance is effective beginning in fiscal year 2019, with early adoption permitted as of the beginning of an annual reporting period. The guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the date of adoption. We are currently evaluating the impact this guidance will have on our consolidated financial statements and plan to adopt the guidance in fiscal year 2019.
Simplifying Goodwill Impairment Test
In January 2017, the FASB issued guidance to simplify the test for goodwill impairment by eliminating Step 2, which measured the impairment loss based on the fair value of goodwill. Under the new guidance, an impairment loss will be recognized for the amount by which the carrying amount of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The guidance is effective for annual or interim goodwill impairments tests in fiscal year 2021 and should be applied prospectively. Early adoption is permitted for goodwill impairment tests performed on testing dates after 1 January 2017. We are currently evaluating the impact this update will have on our consolidated financial statements.
Derecognition of Nonfinancial Assets
In February 2017, the FASB issued an update to clarify the scope of guidance on gains and losses from the derecognition of nonfinancial assets and to add guidance for partial sales of nonfinancial assets. The update must be adopted at the same time as the new guidance on revenue recognition discussed above (i.e., intend to adopt fiscal year 2019). The guidance may be applied retrospectively or with a cumulative-effect adjustment to retained earnings at the date of adoption. We are currently evaluating the impact this update will have on our consolidated financial statements.
Presentation of Net Periodic Pension and Postretirement Benefit Cost
In March 2017, the FASB issued guidance on improving the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that the service cost component of the net periodic benefit cost be presented in the same line items as other compensation costs arising from services rendered by employees during the period. The other components of net periodic benefit cost (e.g., interest cost, expected return on plan assets, and amortization of actuarial gains/losses) should be presented in the income statement separately from the service cost component and outside of operating income. The amendments also allow only the service cost component to be eligible for capitalization when applicable. The guidance is effective beginning in fiscal year 2019, with early adoption permitted as of the beginning of fiscal year 2018. The amendments should be applied retrospectively for the presentation requirements and prospectively for the capitalization of the service cost component requirements. We are currently evaluating the impact this update will have on our consolidated financial statements.


9


3.
DISCONTINUED OPERATIONS
The divisions comprising the former Materials Technologies business and the Energy-from-Waste business have been accounted for as discontinued operations. The results of operations of these businesses have been removed from the results of continuing operations for all periods presented. The assets and liabilities of the discontinued operations have been reclassified and are segregated in the consolidated balance sheets.
Materials Technologies
On 16 September 2015, we announced plans to separate our Materials Technologies business, which contained two divisions, the Electronic Materials Division (EMD) and the Performance Materials Division (PMD). As further discussed below, we completed the separation of EMD through the spin-off of Versum Materials, Inc. (Versum) on 1 October 2016. In addition, we completed the sale of PMD to Evonik Industries AG (Evonik) on 3 January 2017. As a result, these divisions are reflected in our consolidated financial statements as discontinued operations for all periods presented.
Spin-off of Electronic Materials
On 1 October 2016 (the distribution date), Air Products completed the spin-off of Versum into a separate and independent public company by way of a distribution to Air Products’ stockholders of all of the then issued and outstanding shares of common stock of Versum on the basis of one share of Versum common stock for every two shares of Air Products’ common stock held as of the close of business on 21 September 2016 (the record date for the distribution). Fractional shares of Versum common stock were not distributed to Air Products' common stockholders. Air Products’ stockholders received cash in lieu of fractional shares. As a result of the distribution, Versum is now an independent public company and its common stock is listed under the symbol “VSM” on the New York Stock Exchange.
In connection with the spin-off, we entered into various agreements necessary to effect the spin-off and to govern the ongoing relationships between Air Products and Versum after the separation, including a transition services agreement by which we provide certain transition services to Versum, generally for no longer than 12 to 24 months. Balances due to/from Versum as of 31 March 2017 primarily related to the transition services agreement and were immaterial. In addition, Seifi Ghasemi, chairman, president and chief executive officer of Air Products, is serving as non-executive chairman of the Versum Board of Directors.
Sale of Performance Materials
On 3 January 2017, we completed the sale of PMD to Evonik for $3.8 billion in cash subject to customary post-closing adjustments, including working capital. A gain of $2,870 ($1,833 after-tax, or $8.34 per share) was recognized on the sale in the second quarter of fiscal year 2017. In connection with the sale, we entered into a transition services agreement by which we provide certain transition services to Evonik for no longer than 12 months.
Energy-from-Waste
On 29 March 2016, the Board of Directors approved the Company’s exit of its Energy-from-Waste (EfW) business. As a result, efforts to start up and operate the two EfW projects located in Tees Valley, United Kingdom, were discontinued. The decision to exit the business and stop development of the projects was based on continued difficulties encountered and the Company’s conclusion, based on testing and analysis completed during the second quarter of fiscal year 2016, that significant additional time and resources would be required to make the projects operational. Since that time, the EfW segment has been presented as a discontinued operation. During the second quarter of fiscal year 2016, a loss of $945.7 ($846.6 after-tax) was recorded to write down plant assets to their estimated net realizable value and record a liability for plant disposition and other costs. Income tax benefits related only to one of the projects, as the other did not qualify for a local tax deduction.
During the first quarter of fiscal year 2017, we determined that it is unlikely for a buyer to assume the remaining assets and contract obligations, including the related land lease. As a result, we recorded an additional loss of $59.3 ($47.1 after-tax), of which $53.0 was recorded primarily for land lease obligations and $6.3 was recorded to update our estimate of the net realizable value of the plant assets as of 31 December 2016. There have been no changes to our estimates during the second quarter of fiscal year 2017. We may incur additional exit costs in future periods related to other outstanding commitments.

10


The following table summarizes the carrying amount of the accrual for our actions to dispose of the EfW business at 31 March 2017:
 
 
Asset
Actions
 
Contract
Actions/Other
 
Total
Loss on disposal of business
 
$
913.5

 
$
32.2

 
$
945.7

Noncash expenses
 
(913.5
)
 
—

 
(913.5
)
Cash expenditures
 
—

 
(18.6
)
 
(18.6
)
Currency translation adjustment
 
—

 
(1.4
)
 
(1.4
)
30 September 2016
 
$
—

 
$
12.2

 
$
12.2

Loss on disposal of business
 
6.3

 
53.0

 
59.3

Noncash expenses
 
(6.3
)
 
—

 
(6.3
)
Cash expenditures
 
—

 
(1.4
)
 
(1.4
)
Currency translation adjustments
 
—

 
1.1

 
1.1

31 March 2017
 
$
—

 
$
64.9

 
$
64.9

The loss on disposal was recorded as a component of discontinued operations. Of the remaining accrual, approximately $60 is included in other noncurrent liabilities of continuing operations and primarily relates to land leases and $5 is included in current liabilities of discontinued operations.
The following tables detail the businesses and major line items that comprise income from discontinued operations, net of tax, on the consolidated income statements for the three and six months ended 31 March 2017:
 
Three Months Ended
 
31 March 2017
 
 
 
Total
 
Performance
Energy-
Discontinued
 
Materials
from-Waste(A)
Operations
Cost of sales
$
3.3

$
3.0

$
6.3

Selling and administrative
2.1

—

2.1

Other income (expense), net
.7

(.4
)
.3

Income (Loss) Before Taxes
(4.7
)
(3.4
)
(8.1
)
Income tax provision
(.3
)
(.9
)
(1.2
)
Income (Loss) From Operations of Discontinued Operations, net of tax
(4.4
)
(2.5
)
(6.9
)
Gain on Disposal, net of tax (C)
1,832.5

—

1,832.5

Income (Loss) from Discontinued Operations, net of tax
$
1,828.1

$
(2.5
)
$
1,825.6


11


 
Six Months Ended
 
31 March 2017
 
 
 
Total
 
Performance
Energy-
Discontinued
 
Materials
from-Waste(A)
Operations
Sales
$
254.8

$
—

$
254.8

Cost of sales
182.3

9.6

191.9

Selling and administrative
22.5

.2

22.7

Research and development
5.1

—

5.1

Other income (expense), net
.3

(.1
)
.2

Operating Income (Loss)
45.2

(9.9
)
35.3

Equity affiliates’ income
.3

—

.3

Income (Loss) Before Taxes
45.5

(9.9
)
35.6

Income tax provision(B)
(50.8
)
(2.0
)
(52.8
)
Income (Loss) From Operations of Discontinued Operations, net of tax
96.3

(7.9
)
88.4

Gain (Loss) on Disposal, net of tax(C)
1,832.5

(47.1
)
1,785.4

Income (Loss) from Discontinued Operations, net of tax
$
1,928.8

$
(55.0
)
$
1,873.8

(A) 
The loss from operations of discontinued operations for EfW primarily relates to land leases, administrative costs, and costs incurred for ongoing project exit activities.
(B) 
As a result of the expected gain on sale of PMD, we released valuation allowances related to capital loss and net operating loss carryforwards during the first quarter of 2017 that favorably impacted our income tax provision within discontinued operations by approximately $66.
(C) 
After-tax gain on sale of $1,832.5 includes expense for income tax reserves for uncertain tax positions of $26.1 gross ($19.1 net) in various jurisdictions.

The following tables detail the businesses and major line items that comprise income from discontinued operations, net of tax on the consolidated income statements for the three and six months ended 31 March 2016:
 
Three Months Ended
 
31 March 2016
 
 
 
 
Total

Electronic
Performance
Energy-
Discontinued
 
Materials
Materials
from-Waste(A)
Operations
Sales
$
230.7

$
263.1

$
—

$
493.8

Cost of sales
127.6

178.3

3.2

309.1

Selling and administrative
20.0

19.5

.9

40.4

Research and development
9.5

4.9

.3

14.7

Other income (expense), net
2.8

4.9

.6

8.3

Operating Income (Loss)
76.4

65.3

(3.8
)
137.9

Equity affiliates’ income
—

.2

—

.2

Income (Loss) Before Taxes(B)
76.4

65.5

(3.8
)
138.1

Income tax provision
16.7

22.3

2.7

41.7

Income (Loss) From Operations of Discontinued Operations
59.7

43.2

(6.5
)
96.4

Loss on Disposal, net of tax
—

—

(846.6
)
(846.6
)
Income (Loss) from Operations of Discontinued Operations, net of tax
59.7

43.2

(853.1
)
(750.2
)
Net Income Attributable to Noncontrolling Interests of Discontinued Operations
2.0

—

—

2.0

Net Income (Loss) From Discontinued Operations, net of tax
$
57.7

$
43.2

$
(853.1
)
$
(752.2
)

12


 
Six Months Ended
 
31 March 2016
 
 
 
 
Total
 
Electronic
Performance
Energy-
Discontinued
 
Materials
Materials
from-Waste(A)
Operations
Sales
$
473.3

$
510.0

$
—

$
983.3

Cost of sales
254.9

350.9

5.3

611.1

Selling and administrative
38.4

38.5

1.6

78.5

Research and development
19.6

9.9

.7

30.2

Other income (expense), net
5.0

3.7

(13.7
)
(5.0
)
Operating Income (Loss)
165.4

114.4

(21.3
)
258.5

Equity affiliates’ income
.2

.4

—

.6

Income (Loss) Before Taxes(B)
165.6

114.8

(21.3
)
259.1

Income tax provision
41.6

36.9

(.6
)
77.9

Income (Loss) From Operations of Discontinued Operations
124.0

77.9

(20.7
)
181.2

Loss on Disposal, net of tax
—

—

(846.6
)
(846.6
)
Income (Loss) from Operations of Discontinued Operations, net of tax
124.0

77.9

(867.3
)
(665.4
)
Net Income Attributable to Noncontrolling Interests of Discontinued Operations
4.1

—

—

4.1

Net Income (Loss) From Discontinued Operations, net of tax
$
119.9

$
77.9

$
(867.3
)
$
(669.5
)
(A) 
The loss from operations of discontinued operations for EfW primarily relates to project suspension costs, land leases, and administrative costs.
(B) 
For the three and six months ended 31 March 2016, income before taxes from operations of discontinued operations attributable to Air Products was $135.7 and $254.1, respectively.
The following table details the major line items that comprise total assets and total liabilities of discontinued operations on the consolidated balance sheets as of 31 March 2017:
 
31 March 2017
 
 
 
Total
 
Performance
Energy-
Discontinued
 
Materials
from-Waste
Operations
Assets
 
 
 
Current Assets
 
 
 
Plant and equipment, net
$
—

$
9.6

$
9.6

Other receivables and current assets
—

.2

.2

Total Current Assets
—

9.8

9.8

Total Assets
$
—

$
9.8

$
9.8

Liabilities
 


Current Liabilities
 
 
 
Payables and accrued liabilities (A)
$
17.4

$
6.7

$
24.1

Total Current Liabilities
17.4

6.7

24.1

Total Liabilities
$
17.4

$
6.7

$
24.1

(A) 
Includes reserves associated with disposition of businesses.

13


The following table details the major line items that comprise total assets and total liabilities of discontinued operations on the consolidated balance sheets as of 30 September 2016:
 
30 September 2016
 
 
 
 
Total
 
Electronic
Performance
Energy-
Discontinued
 
Materials
Materials
from-Waste
Operations
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash items
$
170.6

$
37.5

$
—

$
208.1

Trade receivables, net
134.7

159.0

—

293.7

Inventories
138.1

226.8

—

364.9

Plant and equipment, net
—

—

18.2

18.2

Other receivables and current assets
34.5

5.6

1.2

41.3

Total Current Assets
477.9

428.9

19.4

926.2

Plant and equipment, net
296.5

296.5

—

593.0

Goodwill, net
180.0

125.0

—

305.0

Intangible assets, net
75.1

25.0

—

100.1

Other noncurrent assets
37.5

6.7

—

44.2

Total Noncurrent Assets
589.1

453.2

—

1,042.3

Total Assets
$
1,067.0

$
882.1

$
19.4

$
1,968.5

Liabilities




Current Liabilities




Payables and accrued liabilities
$
85.8

$
72.5

$
19.0

$
177.3

Accrued income taxes
22.7

6.0

—

28.7

Current portion of long-term debt
5.8

—

—

5.8

Total Current Liabilities
114.3

78.5

19.0

211.8

Long-term debt
981.8

—

—

981.8

Deferred income taxes
50.3

6.4

—

56.7

Other noncurrent liabilities
47.4

9.6

—

57.0

Total Noncurrent Liabilities
1,079.5

16.0

—

1,095.5

Total Liabilities
$
1,193.8

$
94.5

$
19.0

$
1,307.3


4.
BUSINESS SEPARATION COSTS
In connection with the disposition of the two divisions comprising the former Materials Technologies segment, we incurred separation costs of $30.2 for the six months ended 31 March 2017. No business separation costs were incurred during the second quarter of fiscal 2017. For the three and six months ended 31 March 2016, we incurred separation costs of $7.4 and $19.4, respectively. These costs are reflected on the consolidated income statements as “Business separation costs” and include legal, advisory, and pension related costs. Refer to Note 3, Discontinued Operations, for additional information regarding the dispositions.


14


5.
COST REDUCTION AND ASSET ACTIONS
For the three months ended 31 March 2017, we recognized an expense of $10.3 for severance and other benefits related to cost reduction actions. For the six months ended 31 March 2017, we recognized a net expense of $60.3. The year-to-date net expense included a charge of $63.7 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. Asset actions taken in the first quarter of 2017 of $45.7 resulted from the write-down of an air separation unit in the Industrial Gases – EMEA segment that was constructed mainly to provide oxygen to one of the Energy-from-Waste plants. During the first six months of fiscal year 2017, severance and other benefits totaled $18.0 and related to the elimination of approximately 140 positions primarily in the Industrial Gases – EMEA and Corporate and other segments.
During fiscal year 2016, we incurred an expense of $34.5 for severance and other benefits related to the elimination of approximately 610 positions. Expense of $10.7 was recognized for the three and six months ended 31 March 2016. The fiscal year 2016 expenses primarily related to the Industrial Gases – Americas and Industrial Gases – EMEA segments.
The charges we record for cost reduction and asset actions have been excluded from segment operating income.
The following table summarizes the carrying amount of the accrual for cost reduction and asset actions at 31 March 2017:


 
Severance and
Other Benefits
 
Asset
Actions/Other
 
Total
2016 Charge
 
$
34.5

 
$
—

 
$
34.5

Amount reflected in pension liability
 
(.9
)
 
—

 
(.9
)
Cash expenditures
 
(21.6
)
 
—

 
(21.6
)
Currency translation adjustment
 
.3

 
—

 
.3

30 September 2016
 
$
12.3

 
$
—

 
$
12.3

2017 Charge
 
18.0

 
45.7

 
63.7

Noncash expenses
 
—

 
(45.7
)
 
(45.7
)
Amount reflected in pension liability
 
(.2
)
 
—

 
(.2
)
Cash expenditures
 
(18.8
)
 
—

 
(18.8
)
Currency translation adjustment
 
(.5
)
 
—

 
(.5
)
31 March 2017
 
$
10.8

 
$
—

 
$
10.8


6.
INVENTORIES
The components of inventories are as follows:
 
 
31 March
 
30 September
 
 
2017
 
2016
Finished goods
 
$
131.1

 
$
131.3

Work in process
 
17.4

 
18.3

Raw materials, supplies and other
 
189.4

 
117.1

 
 
$
337.9

 
$
266.7

Less: Excess of FIFO cost over LIFO cost
 
(15.1
)
 
(11.7
)
Inventories
 
$
322.8

 
$
255.0

First-in, first-out (FIFO) cost approximates replacement cost.


15


7.
GOODWILL
Changes to the carrying amount of consolidated goodwill by segment for the six months ended 31 March 2017 are as follows:
 
 
Industrial
Gases–
Americas
 
Industrial
Gases–
EMEA
 
Industrial
Gases–
Asia
 
Industrial
Gases–
Global
 
Total
Goodwill, net at 30 September 2016
 
$
309.1

 
$
380.6

 
$
135.2

 
$
20.2

 
$
845.1

Currency translation
 
(.9
)
 
(17.0
)
 
.3

 
(.3
)
 
(17.9
)
Goodwill, net at 31 March 2017
 
$
308.2

 
$
363.6

 
$
135.5

 
$
19.9

 
$
827.2

 
 
31 March
 
30 September
 
 
2017
 
2016
Goodwill, gross
 
$
1,084.7

 
$
1,103.7

Accumulated impairment losses(A)
 
(257.5
)
 
(258.6
)
Goodwill, net
 
$
827.2

 
$
845.1

(A) 
Amount is attributable to the Industrial Gases – Americas segment and includes currency translation of $47.7 and $46.6 as of 31 March 2017 and 30 September 2016, respectively.
We conduct goodwill impairment testing in the fourth quarter of each fiscal year and whenever events and changes in circumstances indicate that the carrying value of goodwill might not be recoverable.

8.
FINANCIAL INSTRUMENTS
Currency Price Risk Management
Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency-denominated transactions and net investments in foreign operations. It is our policy to minimize our cash flow volatility from changes in currency exchange rates. This is accomplished by identifying and evaluating the risk that our cash flows will change in value due to changes in exchange rates and by executing the appropriate strategies necessary to manage such exposures. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.
Forward Exchange Contracts
We enter into forward exchange contracts to reduce the cash flow exposure to foreign currency fluctuations associated with highly anticipated cash flows and certain firm commitments, such as the purchase of plant and equipment. We also enter into forward exchange contracts to hedge the cash flow exposure on intercompany loans. This portfolio of forward exchange contracts consists primarily of Euros and U.S. dollars. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 31 March 2017 is 2.3 years.
Forward exchange contracts are also used to hedge the value of investments in certain foreign subsidiaries and affiliates by creating a liability in a currency in which we have a net equity position. The primary currency pair in this portfolio of forward exchange contracts is Euros and U.S. dollars.
In addition to the forward exchange contracts that are designated as hedges, we utilize forward exchange contracts that are not designated as hedges. These contracts are used to economically hedge foreign currency-denominated monetary assets and liabilities, primarily working capital. The primary objective of these forward exchange contracts is to protect the value of foreign currency-denominated monetary assets and liabilities from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement. This portfolio of forward exchange contracts comprises many different foreign currency pairs, with a profile that changes from time to time depending on business activity and sourcing decisions.

16


The table below summarizes our outstanding currency price risk management instruments:
 
 
31 March 2017
 
30 September 2016
 
 
US$
Notional
 
Years
Average
Maturity
 
US$
Notional
 
Years
Average
Maturity
Forward Exchange Contracts:
 
 
 
 
 
 
 
 
Cash flow hedges
 
$
3,472.9

 
.5

 
$
4,130.3

 
.5

Net investment hedges
 
664.4

 
3.2

 
968.2

 
2.7

Not designated
 
1,526.1

 
.3

 
2,648.3

 
.4

Total Forward Exchange Contracts
 
$
5,663.4

 
.7

 
$
7,746.8

 
.7

The notional value of forward exchange contracts not designated in the table above includes forward contracts which were hedging intercompany loans that were repaid prior to their original maturity dates in anticipation of the spin-off of Versum. The forward exchange contracts no longer qualified as cash flow hedges due to the early repayment of the loans. We entered into additional forward exchange contracts to offset these outstanding positions to eliminate any future earnings impact. The decrease in notional value from 30 September 2016 to 31 March 2017 is primarily due to the maturity of several of the aforementioned intercompany loan hedges and their offsetting positions.
In addition to the above, we use foreign currency-denominated debt to hedge the foreign currency exposures of our net investment in certain foreign subsidiaries. The designated foreign currency-denominated debt and related accrued interest included €919.1 million ($979.0) at 31 March 2017 and €920.7 million ($1,034.4) at 30 September 2016. The designated foreign currency-denominated debt is located on the balance sheet in the long-term debt line item.
Debt Portfolio Management
It is our policy to identify on a continuing basis the need for debt capital and evaluate the financial risks inherent in funding the Company with debt capital. Reflecting the result of this ongoing review, the debt portfolio and hedging program are managed with the objectives and intent to (1) reduce funding risk with respect to borrowings made by us to preserve our access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) manage the aggregate interest rate risk and the debt portfolio in accordance with certain debt management parameters.
Interest Rate Management Contracts
We enter into interest rate swaps to change the fixed/variable interest rate mix of our debt portfolio in order to maintain the percentage of fixed- and variable-rate debt within the parameters set by management. In accordance with these parameters, the agreements are used to manage interest rate risks and costs inherent in our debt portfolio. Our interest rate management portfolio generally consists of fixed-to-floating interest rate swaps (which are designated as fair value hedges), pre-issuance interest rate swaps and treasury locks (which hedge the interest rate risk associated with anticipated fixed-rate debt issuances and are designated as cash flow hedges), and floating-to-fixed interest rate swaps (which are designated as cash flow hedges). At 31 March 2017, the outstanding interest rate swaps were denominated in U.S. dollars. The notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. When interest rate swaps are used to hedge variable-rate debt, the indices of the swaps and the debt to which they are designated are the same. It is our policy not to enter into any interest rate management contracts which lever a move in interest rates on a greater than one-to-one basis.
Cross Currency Interest Rate Swap Contracts
We enter into cross currency interest rate swap contracts when our risk management function deems necessary. These contracts may entail both the exchange of fixed- and floating-rate interest payments periodically over the life of the agreement and the exchange of one currency for another currency at inception and at a specified future date. The contracts are used to hedge either certain net investments in foreign operations or non-functional currency cash flows related to intercompany loans. The current cross currency interest rate swap portfolio consists of fixed-to-fixed swaps primarily between U.S. dollars and offshore Chinese Renminbi, U.S. dollars and Chilean Pesos, and U.S. dollars and British Pound Sterling.

17


The following table summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:
 
 
31 March 2017
 
30 September 2016
 
 
US$
Notional
 
Average
Pay %
 
Average
Receive
%
 
Years
Average
Maturity
 
US$
Notional
 
Average
Pay %
 
Average
Receive
%
 
Years
Average
Maturity
Interest rate swaps
(fair value hedge)
 
$
600.0

 
LIBOR

 
2.28
%
 
1.8
 
$
600.0

 
LIBOR

 
2.28
%
 
2.3
Cross currency interest rate swaps
(net investment hedge)
 
$
503.4

 
3.24
%
 
2.39
%
 
2.0
 
$
517.7

 
3.24
%
 
2.43
%
 
2.6
Cross currency interest rate swaps
(cash flow hedge)
 
$
1,088.9

 
4.77
%
 
2.72
%
 
2.8
 
$
1,088.9

 
4.77
%
 
2.72
%
 
3.3
Cross currency interest rate swaps
(not designated)
 
$
41.7

 
3.40
%
 
1.78
%
 
1.9
 
$
27.4

 
3.62
%
 
.81
%
 
1.8
The table below summarizes the fair value and balance sheet location of our outstanding derivatives:
 
Balance Sheet
Location
31 March 2017
30 September 2016
Balance Sheet
Location
31 March 2017
30 September 2016
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
Forward exchange contracts
Other receivables
$
36.3

$
72.3

Accrued liabilities
$
76.7

$
44.0

Interest rate management contracts
Other receivables
37.6

19.9

Accrued liabilities
.4

—

Forward exchange contracts
Other noncurrent
assets
72.6

44.4

Other noncurrent
liabilities
1.2

9.1

Interest rate management contracts
Other noncurrent
assets
155.0

160.0

Other noncurrent
liabilities
22.5

12.0

Total Derivatives Designated as Hedging Instruments
 
$
301.5

$
296.6

 
$
100.8

$
65.1

Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
Forward exchange contracts
Other receivables
$
20.3

$
77.1

Accrued liabilities
$
13.1

$
29.5

Interest rate management contracts
Other noncurrent
assets
3.7

—

Other noncurrent
liabilities
.8

.7

Total Derivatives Not Designated as Hedging Instruments
 
$
24.0

$
77.1

 
$
13.9

$
30.2

Total Derivatives
 
$
325.5

$
373.7

 
$
114.7

$
95.3

Refer to Note 9, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.

18


The table below summarizes the gain or loss related to our cash flow hedges, fair value hedges, net investment hedges, and derivatives not designated as hedging instruments:
 
Three Months Ended 31 March
 
Forward
Exchange Contracts
Foreign Currency
Debt
Other (A)
Total
 
2017
2016
2017
2016
2017
2016
2017
2016
Cash Flow Hedges, net of tax:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI (effective portion)
$
11.1

$
32.5

$
—

$
—

$
(26.5
)
$
(19.7
)
$
(15.4
)
$
12.8

Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)
1.2

.5

—

—

—

—

1.2

.5

Net (gain) loss reclassified from OCI to other income (expense), net (effective portion)
(10.8
)
(30.2
)
—

—

15.8

16.5

5.0

(13.7
)
Net (gain) loss reclassified from OCI to interest expense (effective portion)
(1.6
)
1.2

—

—

.7

.8

(.9
)
2.0

Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion)
.5

.1

—

—

—

—

.5

.1

Fair Value Hedges:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in interest expense(B) 
$
—

$
—

$
—

$
—

$
(2.8
)
$
7.2

$
(2.8
)
$
7.2

Net Investment Hedges, net of tax:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI
$
(.8
)
$
(9.4
)
$
(7.8
)
$
(17.9
)
$
(6.5
)
$
1.9

$
(15.1
)
$
(25.4
)
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in other income (expense), net(C)
$
(2.5
)
$
.2

$
—

$
—

$
(.6
)
$
(.6
)
$
(3.1
)
$
(.4
)
 
 
 
 
 
 
 
 
 
 
Six Months Ended 31 March
 
Forward
Exchange Contracts
Foreign Currency
Debt
Other (A)
Total
 
2017
2016
2017
2016
2017
2016
2017
2016
Cash Flow Hedges, net of tax:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI (effective portion)
$
(48.3
)
$
27.8

$
—

$
—

$
23.1

$
1.0

$
(25.2
)
$
28.8

Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)
5.8

1.4

—

—

—

—

5.8

1.4

Net (gain) loss reclassified from OCI to other income (expense), net (effective portion)
38.7

(32.0
)
—

—

(12.4
)
(3.7
)
26.3

(35.7
)
Net (gain) loss reclassified from OCI to interest expense (effective portion)
(2.4
)
2.6

—

—

1.4

1.6

(1.0
)
4.2

Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion)
.3

(.3
)
—

—

—

—

.3

(.3
)
Fair Value Hedges:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in interest expense(B) 
$
—

$
—

$
—

$
—

$
(11.9
)
$
(1.8
)
$
(11.9
)
$
(1.8
)
Net Investment Hedges, net of tax:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI
$
27.1

$
(6.4
)
$
34.0

$
(10.3
)
$
6.6

$
8.4

$
67.7

$
(8.3
)
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in other income (expense), net(C)
$
(.4
)
$
(.2
)
$
—

$
—

$
.2

$
(.6
)
$
(.2
)
$
(.8
)
(A) 
Other includes the impact on other comprehensive income (OCI) and earnings primarily related to interest rate and cross currency interest rate swaps.
(B) 
The impact of fair value hedges noted above was largely offset by recognized gains and losses resulting from the impact of changes in related interest rates on outstanding debt.
(C) 
The impact of the non-designated hedges noted above was largely offset by recognized gains and losses resulting from the impact of changes in exchange rates on assets and liabilities denominated in non-functional currencies.

19



The amount of cash flow hedges’ unrealized gains and losses at 31 March 2017 that are expected to be reclassified to earnings in the next twelve months is not material.
The cash flows related to all derivative contracts are reported in the operating activities section of the consolidated statements of cash flows.
Credit Risk-Related Contingent Features
Certain derivative instruments are executed under agreements that require us to maintain a minimum credit rating with both Standard & Poor’s and Moody’s. If our credit rating falls below this threshold, the counterparty to the derivative instruments has the right to request full collateralization on the derivatives’ net liability position. The net liability position of derivatives with credit risk-related contingent features was $23.4 as of 31 March 2017 and $11.2 as of 30 September 2016. Because our current credit rating is above the various pre-established thresholds, no collateral has been posted on these liability positions.
Counterparty Credit Risk Management
We execute financial derivative transactions with counterparties that are highly rated financial institutions, all of which are investment grade at this time. Some of our underlying derivative agreements give us the right to require the institution to post collateral if its credit rating falls below the pre-established thresholds with Standard & Poor’s or Moody’s. The collateral that the counterparties would be required to post was $265.3 as of 31 March 2017 and $267.6 as of 30 September 2016. No financial institution is required to post collateral at this time, as all have credit ratings at or above threshold.

9.
FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
Level 1
— Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
— Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3
— Inputs that are unobservable for the asset or liability based on our own assumptions (about the assumptions market participants would use in pricing the asset or liability).
The methods and assumptions used to measure the fair value of financial instruments are as follows:
Short-term Investments
Short-term investments include time deposits, certificates of deposit, and repurchase agreement funds with original maturities greater than 90 days and less than one year. The estimated fair value of the short-term investments, which approximates carrying value as of 31 March 2017 and 30 September 2016, was determined using level 1 or level 2 inputs within the fair value hierarchy. Level 1 measurements were based on observed net asset values, and level 2 measurements were based on current interest rates for similar investments with comparable credit risk and time to maturity.
Derivatives
The fair value of our interest rate management contracts and forward exchange contracts are quantified using the income approach and are based on estimates using standard pricing models. These models take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. The computation of the fair values of these instruments is generally performed by the Company. These standard pricing models utilize inputs which are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. Therefore, the fair value of our derivatives is classified as a level 2 measurement. On an ongoing basis, we randomly test a subset of our valuations against valuations received from the transaction’s counterparty to validate the accuracy of our standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions.
Refer to Note 8, Financial Instruments, for a description of derivative instruments, including details on the balance sheet line classifications.

20


Long-term Debt
The fair value of our debt is based on estimates using standard pricing models that take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. These standard valuation models utilize observable market data such as interest rate yield curves and currency spot rates. Therefore, the fair value of our debt is classified as a level 2 measurement. We generally perform the computation of the fair value of these instruments.
The carrying values and fair values of financial instruments were as follows:
 
 
31 March 2017
 
30 September 2016
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
Forward exchange contracts
 
$
129.2

 
$
129.2

 
$
193.8

 
$
193.8

Interest rate management contracts
 
196.3

 
196.3

 
179.9

 
179.9

Liabilities
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
Forward exchange contracts
 
$
91.0

 
$
91.0

 
$
82.6

 
$
82.6

Interest rate management contracts
 
23.7

 
23.7

 
12.7

 
12.7

Long-term debt, including current portion
 
3,720.9

 
3,823.0

 
4,275.1

 
4,450.5

The carrying amounts reported in the balance sheet for cash and cash items, short-term investments, trade receivables, payables and accrued liabilities, accrued income taxes, and short-term borrowings approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the above table.
The following table summarizes assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets:
 
31 March 2017
 
30 September 2016
 
Total
Level 1
Level 2
Level 3
 
Total
Level 1
Level 2
Level 3
Assets at Fair Value
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
Forward exchange contracts
$
129.2

$
—

$
129.2

$
—

 
$
193.8

$
—

$
193.8

$
—

Interest rate management contracts
196.3

—

196.3

—

 
179.9

—

179.9

—

Total Assets at Fair Value
$
325.5

$
—

$
325.5

$
—

 
$
373.7

$
—

$
373.7

$
—

Liabilities at Fair Value
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
Forward exchange contracts
$
91.0

$
—

$
91.0

$
—

 
$
82.6

$
—

$
82.6

$
—

Interest rate management contracts
23.7

—

23.7

—

 
12.7

—

12.7

—

Total Liabilities at Fair Value
$
114.7

$
—

$
114.7

$
—

 
$
95.3

$
—

$
95.3

$
—


21


The following is a tabular presentation of nonrecurring fair value measurements along with the level within the fair value hierarchy in which the fair value measurement in its entirety falls:
 
31 December 2016
2017 Loss
 
Total
 
Level 1
Level 2
Level 3
Plant and Equipment – Continuing operations(A)
$
1.4

 
$
—

$
—

$
1.4

$
45.7

Plant and Equipment – Discontinued operations(A)
$
11.0

 
$
—

$
—

$
11.0

$
6.3

(A) 
We assessed the recoverability of the carrying value of assets associated with the EfW discontinued operation, including the air separation unit within continuing operations of our Industrial Gases – EMEA segment. We based our estimates primarily on an orderly liquidation valuation which resulted in losses for the difference between the orderly liquidation value and net book value of the assets as of 31 December 2016. There have been no significant updates to our estimates as of 31 March 2017. For additional information, see Note 3, Discontinued Operations and Note 5, Cost Reduction and Asset Actions.


22


10.
RETIREMENT BENEFITS
The components of net periodic benefit cost for the defined benefit pension and other postretirement benefit plans for the three and six months ended 31 March 2017 and 2016 were as follows:
 
 
Pension Benefits
 
Other Benefits
 
 
2017
 
2016
 
2017
 
2016
Three Months Ended 31 March
 
U.S.
 
International
 
U.S.
 
International
 
 
 
 
Service cost
 
$
6.9

 
$
6.3

 
$
9.3

 
$
6.1

 
$
.2

 
$
.6

Interest cost
 
27.6

 
7.9

 
27.7

 
11.1

 
.4

 
.5

Expected return on plan assets
 
(51.7
)
 
(18.3
)
 
(50.5
)
 
(19.6
)
 
—

 
—

Prior service cost amortization
 
.6

 
(.1
)
 
.8

 
(.1
)
 
—

 
—

Actuarial loss amortization
 
20.9

 
13.2

 
21.5

 
9.1

 
—

 
.1

Settlements
 
4.1

 
4.0

 
2.6

 
—

 
—

 
—

Curtailment
 
.1

 
1.8

 
—

 
—

 
—

 
—

Special termination benefits
 
(.1
)
 
.1

 
.6

 
—

 
—

 
—

Other
 
—

 
(2.2
)
 
—

 
.5

 
—

 
—

Net periodic benefit cost (Total)
 
$
8.4

 
$
12.7

 
$
12.0

 
$
7.1

 
$
.6

 
$
1.2

Less: Discontinued Operations
 
(.1
)
 
(3.4
)
 
(2.1
)
 
(.2
)
 
—

 
—

Net periodic benefit cost (Continuing Operations)
 
$
8.3

 
$
9.3

 
$
9.9

 
$
6.9

 
$
.6

 
$
1.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
 
2017
 
2016
 
2017
 
2016
Six Months Ended 31 March
 
U.S.
 
International
 
U.S.
 
International
 

 

Service cost
 
$
15.2

 
$
13.0

 
$
18.3

 
$
12.3

 
$
.7

 
$
1.1

Interest cost
 
52.5

 
15.5

 
55.4

 
22.7

 
.8

 
1.0

Expected return on plan assets
 
(104.4
)
 
(36.8
)
 
(101.0
)
 
(40.3
)
 
—

 
—

Prior service cost amortization
 
1.2

 
(.1
)
 
1.5

 
(.1
)
 
—

 
—

Actuarial loss amortization
 
47.0

 
27.1

 
42.6

 
18.3

 
.2

 
.3

Settlements
 
4.1

 
1.7

 
2.6

 
—

 
—

 
—

Curtailment
 
4.3

 
(1.3
)
 
—

 
—

 
—

 
—

Special termination benefits
 
1.0

 
.5

 
.6

 
—

 
—

 
—

Other
 
—

 
.5

 
—

 
1.0

 
—

 
—

Net periodic benefit cost (Total)
 
$
20.9

 
$
20.1

 
$
20.0

 
$
13.9

 
$
1.7

 
$
2.4

Less: Discontinued Operations
 
(.7
)
 
(4.1
)
 
(3.9
)
 
(1.6
)
 
—

 
—

Net periodic benefit cost (Continuing Operations)
 
$
20.2

 
$
16.0

 
$
16.1

 
$
12.3

 
$
1.7

 
$
2.4

Net periodic benefit cost is primarily included in cost of sales and selling and administrative expense on our consolidated income statements. The increase in pension expense in fiscal year 2017 is primarily related to recognition of settlement, curtailment and special termination benefits. The amount of net periodic benefit cost capitalized in fiscal year 2017 and 2016 was not material.
Certain of our pension plans provide for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after their retirement date. A participant's vested benefit is considered settled upon cash payment of the lump sum. We recognize pension settlement losses when cash payments exceed the sum of the service and interest cost components of net periodic benefit cost of the plan for the fiscal year. For the three and six months ended 31 March 2017 and 2016, we recognized $4.1 and $2.0 of settlement losses in results of continuing operations, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss associated with the U.S. Supplementary Pension Plan.
In connection with the disposition of the two divisions comprising the Materials Technologies segment, we incurred settlement, curtailment, and special termination benefits totaling $3.5 and $6.0 for the three and six months ended 31 March 2017,

23


respectively. Costs recorded during the second quarter were recorded in the results of discontinued operations. Otherwise, the costs were reflected on the consolidated income statements as "Business separation costs".
As discussed in Note 3, Discontinued Operations, we completed the separation of EMD through the spin-off of Versum on 1 October 2016. In connection with the spin-off, the Company transferred defined benefit pension assets and obligations to Versum resulting in a net decrease in the underfunded status of the Company's sponsored pension plans of $24. As a result of the transfer of unrecognized losses to Versum, accumulated other comprehensive loss, net of tax, decreased by approximately $5. In addition, we completed the sale of PMD to Evonik Industries AG on 3 January 2017. In connection with the sale, the Company transferred defined benefit pension obligations to Evonik resulting in a net decrease in the underfunded status of the Company's sponsored pension plans of approximately $7.
For the six months ended 31 March 2017 and 2016, our cash contributions to funded pension plans and benefit payments under unfunded pension plans were $40.8 and $60.2, respectively. Total contributions for fiscal 2017 are expected to be approximately $65 to $85. During fiscal 2016, total contributions were $79.3.

11.
COMMITMENTS AND CONTINGENCIES
Litigation
We are involved in various legal proceedings, including commercial, competition, environmental, health, safety, product liability, and insurance matters. 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 $57 at 31 March 2017) 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 our total revenue in Brazil in 2003.
We have denied the allegations made by the authorities and filed an appeal in October 2010 with 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. We, with advice of our outside legal counsel, have assessed the status of this matter and have 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. We estimate the maximum possible loss to be the full amount of the fine of R$179.2 million (approximately $57 at 31 March 2017) plus interest accrued thereon until final disposition of the proceedings.
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.
Environmental
In the normal course of business, we are involved in legal proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA: the federal Superfund law); Resource Conservation and Recovery Act (RCRA); and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Presently, there are approximately 33 sites on which a final settlement has not been reached where we, along with others, have been designated a potentially responsible party by the Environmental Protection Agency or are otherwise engaged in investigation or remediation, including cleanup activity at certain of our current and former manufacturing sites. We continually monitor these sites for which we have environmental exposure.
Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The consolidated balance sheets at 31 March 2017 and 30 September 2016 included an accrual of $86.1 and $81.4, respectively, primarily as part of other noncurrent liabilities. The environmental liabilities will be paid over a period of up to 30 years. We estimate the exposure for environmental loss contingencies to range from $86 to a reasonably possible upper exposure of $99 as of 31 March 2017.
Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Using reasonably possible alternative assumptions of the exposure level could result in an increase to the environmental accrual. Due to the inherent uncertainties related to environmental exposures, a significant increase to the reasonably possible upper exposure level could occur if a new site is designated, the scope of remediation is increased, a different remediation alternative is identified, or a significant increase in our proportionate share occurs. We do not expect that any sum we may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse impact on our financial position or results of operations in any one year.

24


PACE
At 31 March 2017, $29.5 of the environmental accrual was related to the Pace facility.
In 2006, we sold our Amines business, which included operations at Pace, Florida, and recognized a liability for retained environmental obligations associated with remediation activities at Pace. We are required by the Florida Department of Environmental Protection (FDEP) and the United States Environmental Protection Agency (USEPA) to continue our remediation efforts. We estimated that it would take 20 years to complete the groundwater remediation, and the costs through completion were estimated to range from $42 to $52. As no amount within the range was a better estimate than another, we recognized a pretax expense in fiscal 2006 of $42 as a component of income from discontinued operations and recorded an environmental accrual of $42 in continuing operations on the consolidated balance sheets. There has been no change to the estimated exposure range related to the Pace facility.
We have implemented many of the remedial corrective measures at the Pace facility required under 1995 Consent Orders issued by the FDEP and the USEPA. Contaminated soils have been bioremediated, and the treated soils have been secured in a lined on-site disposal cell. Several groundwater recovery systems have been installed to contain and remove contamination from groundwater. We completed an extensive assessment of the site to determine how well existing measures are working, what additional corrective measures may be needed, and whether newer remediation technologies that were not available in the 1990s might be suitable to more quickly and effectively remove groundwater contaminants. Based on assessment results, we completed a focused feasibility study that has identified alternative approaches that may more effectively remove contaminants. We continue to review alternative remedial approaches with the FDEP. In the first quarter of 2015, we entered into a new Consent Order with the FDEP requiring us to continue our remediation efforts at the Pace facility. The costs we are incurring under the new Consent Order are expected to be consistent with our previous estimates.
PIEDMONT
At 31 March 2017, $17.1 of the environmental accrual was related to the Piedmont site.
On 30 June 2008, we sold our Elkton, Maryland, and Piedmont, South Carolina, production facilities and the related North American atmospheric emulsions and global pressure sensitive adhesives businesses. In connection with the sale, we recognized a liability for retained environmental obligations associated with remediation activities at the Piedmont site. This site is under active remediation for contamination caused by an insolvent prior owner. We are required by the South Carolina Department of Health and Environmental Control to address both contaminated soil and groundwater. Numerous areas of soil contamination have been addressed, and contaminated groundwater is being recovered and treated. We estimate that it will take until 2019 to complete source area remediation with groundwater recovery and treatment, continuing through 2029. Thereafter, we are expecting this site to go into a state of monitored natural attenuation through 2047. We recognized a pretax expense in 2008 of $24 as a component of income from discontinued operations and recorded an environmental liability of $24 in continuing operations on the consolidated balance sheets. There have been no significant changes to the estimated exposure.
PASADENA
At 31 March 2017, $12.3 of the environmental accrual was related to the Pasadena site.
During the fourth quarter of 2012, management committed to permanently shutting down our polyurethane intermediates (PUI) production facility in Pasadena, Texas. In shutting down and dismantling the facility, we have undertaken certain obligations related to soil and groundwater contaminants. We have been pumping and treating groundwater to control off-site contaminant migration in compliance with regulatory requirements and under the approval of the Texas Commission on Environmental Quality (TCEQ). We estimate that the pump and treat system will continue to operate until 2042. We plan to perform additional work to address other environmental obligations at the site. This additional work includes remediating, as required, impacted soils, investigating groundwater west of the former PUI facility, performing post closure care for two closed RCRA surface impoundment units, and establishing engineering controls. In 2012, we estimated the total exposure at this site to be $13. There have been no significant changes to the estimated exposure.

12.
SHARE-BASED COMPENSATION
We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. During the six months ended 31 March 2017, we granted market-based and time-based deferred stock units. Under all programs, the terms of the awards are fixed at the grant date. We issue shares from treasury stock upon the payout of deferred stock units, the exercise of stock options, and the issuance of restricted stock awards. As of 31 March 2017, there were 4,815,869 shares available for future grant under our Long-Term Incentive Plan (LTIP), which is shareholder approved.

25


As discussed in Note 3, Discontinued Operations, we completed the separation of EMD through the spin-off of Versum on 1 October 2016. In connection with the spin-off, the Company adjusted the number of deferred stock units and stock options pursuant to existing anti-dilution provisions in the LTIP, to preserve the intrinsic value of the awards immediately before and after the separation. The outstanding awards will continue to vest over the original vesting period defined at the grant date. Outstanding awards at the time of spin-off were primarily converted into awards of the holder’s employer following the separation. The adjustment to the awards did not result in incremental fair value and no incremental compensation expense was recorded related to the conversion of these awards.
Share-based compensation cost recognized in continuing operations on the consolidated income statements is summarized below:
 
 
Three Months Ended
 
Six Months Ended
 
 
31 March
 
31 March
 
 
2017
 
2016
 
2017
 
2016
Before-Tax Share-Based Compensation Cost
 
$
9.5

 
$
8.1

 
$
18.5

 
$
16.4

Income Tax Benefit
 
(3.3
)
 
(2.7
)
 
(6.3
)
 
(5.5
)
After-Tax Share-Based Compensation Cost
 
$
6.2

 
$
5.4

 
$
12.2

 
$
10.9

Before-tax share-based compensation cost is primarily included in selling and administrative expense on our consolidated income statements. The amount of share-based compensation cost capitalized in fiscal year 2017 and 2016 was not material.
Deferred Stock Units
During the six months ended 31 March 2017, we granted 116,740 market-based deferred stock units. The market-based deferred stock units are earned out at the end of a performance period beginning 1 October 2016 and ending 30 September 2019, conditioned on the level of the Company’s total shareholder return in relation to a defined peer group over the three-year performance period.
The market-based deferred stock units had an estimated grant-date fair value of $156.87 per unit, which was estimated using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards. We generally expense the grant-date fair value of these awards on a straight line basis over the vesting period. The calculation of the fair value of market-based deferred stock units used the following assumptions:
Expected volatility
 
20.6
%
Risk-free interest rate
 
1.4
%
Expected dividend yield
 
2.5
%
In addition, during the six months ended 31 March 2017, we granted 152,541 time-based deferred stock units at a weighted average grant-date fair value of $143.66.


26


13.
EQUITY
The following is a summary of the changes in total equity:
 
Three Months Ended 31 March
 
2017
 
2016
 
Air
Products
Non-
controlling
Interests
Total
Equity
 
Air
Products
Non-
controlling
Interests
Total
Equity
Balance at 31 December
$
7,161.5

$
99.6

$
7,261.1

 
$
7,367.1

$
131.9

$
7,499.0

Net income (loss)
2,130.0

5.7

2,135.7

 
(473.3
)
7.8

(465.5
)
Other comprehensive income
218.0

5.0

223.0

 
161.9

2.8

164.7

Dividends on common stock (per share $0.95, $0.86)
(206.9
)
—

(206.9
)
 
(185.8
)
—

(185.8
)
Dividends to noncontrolling interests
—

(7.5
)
(7.5
)
 
—

(6.3
)
(6.3
)
Share-based compensation
9.5

—

9.5

 
8.1

—

8.1

Treasury shares for stock option and award plans
7.9

—

7.9

 
32.8

—

32.8

Tax benefit of stock option and award plans
—

—

—

 
4.8

—

4.8

Other equity transactions
(2.6
)
—

(2.6
)
 
1.0

.3

1.3

Balance at 31 March
$
9,317.4

$
102.8

$
9,420.2

 
$
6,916.6

$
136.5

$
7,053.1

 
 
 
 
 
 
 
 
 
Six Months Ended 31 March
 
2017
 
2016
 
Air
Products
Non-
controlling
Interests
Total
Equity
 
Air
Products
Non-
controlling
Interests
Total
Equity
Balance at 30 September
$
7,079.6

$
133.8

$
7,213.4

 
$
7,249.0

$
132.1

$
7,381.1

Net income (loss)
2,429.8

12.3

2,442.1

 
(109.7
)
16.2

(93.5
)
Other comprehensive income (loss)
(16.9
)
1.9

(15.0
)
 
79.2

2.8

82.0

Dividends on common stock (per share $1.81, $1.67)
(394.0
)
—

(394.0
)
 
(360.5
)
—

(360.5
)
Dividends to noncontrolling interests
—

(11.7
)
(11.7
)
 
—

(14.8
)
(14.8
)
Share-based compensation
18.5

—

18.5

 
16.4

—

16.4

Treasury shares for stock option and award plans
7.6

—

7.6

 
30.8

—

30.8

Tax benefit of stock option and award plans
—

—

—

 
9.7

—

9.7

Spin-off of Versum
186.5

(33.9
)
152.6

 
—

—

—

Cumulative change in accounting principle (Note 2)
8.8

—

8.8

 
—

—

—

Other equity transactions
(2.5
)
.4

(2.1
)
 
1.7

.2

1.9

Balance at 31 March
$
9,317.4

$
102.8

$
9,420.2

 
$
6,916.6

$
136.5

$
7,053.1



27


14.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The tables below summarize changes in accumulated other comprehensive loss (AOCL), net of tax, attributable to Air Products for the three and six months ended 31 March 2017:
 
Net loss on
derivatives
qualifying as
hedges

Foreign
currency
translation
adjustments

Pension and
postretirement
benefits

Total

Balance at 31 December 2016
$
(49.0
)
$
(1,221.4
)
$
(1,341.3
)
$
(2,611.7
)
Other comprehensive income (loss) before reclassifications
(15.4
)
149.6

3.8

138.0

Amounts reclassified from AOCL
5.8

49.1

30.1

85.0

Net current period other comprehensive income (loss)
(9.6
)
198.7

33.9

223.0

Amount attributable to noncontrolling interests
(.1
)
5.0

.1

5.0

Balance at 31 March 2017
$
(58.5
)
$
(1,027.7
)
$
(1,307.5
)
$
(2,393.7
)
 
 
 
 
 
 
Net loss on
derivatives
qualifying
as hedges

Foreign
currency
translation
adjustments

Pension and
postretirement
benefits

Total

Balance at 30 September 2016
$
(65.0
)
$
(949.3
)
$
(1,374.0
)
$
(2,388.3
)
Other comprehensive income (loss) before reclassifications
(25.2
)
(131.6
)
3.8

(153.0
)
Amounts reclassified from AOCL
31.4

49.1

57.5

138.0

Net current period other comprehensive income (loss)
6.2

(82.5
)
61.3

(15.0
)
Spin-off of Versum
.2

6.0

5.3

11.5

Amount attributable to noncontrolling interests
(.1
)
1.9

.1

1.9

Balance at 31 March 2017
$
(58.5
)
$
(1,027.7
)
$
(1,307.5
)
$
(2,393.7
)

The table below summarizes the reclassifications out of accumulated other comprehensive loss and the affected line item on the consolidated income statements:
 
Three Months Ended
Six Months Ended
 
31 March
31 March
 
2017
2016
2017
2016
(Gain) Loss on Cash Flow Hedges, net of tax
 
 
 
 
Sales/Cost of sales
$
1.2

$
.5

$
5.8

$
1.4

Other income (expense), net
5.5

(13.6
)
26.6

(36.0
)
Interest expense
(.9
)
2.0

(1.0
)
4.2

Total (Gain) Loss on Cash Flow Hedges, net of tax
$
5.8

$
(11.1
)
$
31.4

$
(30.4
)
Currency Translation Adjustment(A)
$
49.1

$
.4

$
49.1

$
2.8

Pension and Postretirement Benefits, net of tax(B)
$
30.1

$
22.7

$
57.5

$
43.8

(A) 
The impact is reflected in "Income from discontinued operations, net of tax." The fiscal year 2017 impact relates to the sale of PMD during the second quarter. The fiscal year 2016 impact primarily relates to the sale of an equity affiliate in the first quarter.
(B) 
The components include items such as prior service cost amortization, actuarial loss amortization, and settlements and are reflected in net periodic benefit cost. Refer to Note 10, Retirement Benefits.


28


15.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
 
 
Three Months Ended
 
Six Months Ended
 
 
31 March
 
31 March
 
 
2017
 
2016
 
2017
 
2016
Numerator
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
304.4

 
$
278.9

 
$
556.0

 
$
559.8

Income (Loss) from discontinued operations
 
1,825.6

 
(752.2
)
 
1,873.8

 
(669.5
)
Net Income (Loss) Attributable to Air Products
 
$
2,130.0

 
$
(473.3
)
 
$
2,429.8

 
$
(109.7
)
Denominator (in millions)
 
 
 
 
 
 
 
 
Weighted average common shares — Basic
 
217.9

 
216.1

 
217.8

 
215.9

Effect of dilutive securities
 
 
 
 
 
 
 
 
Employee stock option and other award plans
 
1.8

 
1.8

 
1.8

 
1.9

Weighted average common shares — Diluted
 
219.7

 
217.9

 
219.6

 
217.8

Basic Earnings Per Common Share Attributable to Air Products
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
1.40

 
$
1.29

 
$
2.55

 
$
2.59

Income (Loss) from discontinued operations
 
8.38

 
(3.48
)
 
8.61

 
(3.10
)
Net Income (Loss) Attributable to Air Products
 
$
9.78

 
$
(2.19
)
 
$
11.16

 
$
(.51
)
Diluted Earnings Per Common Share Attributable to Air Products
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
1.39

 
$
1.28

 
$
2.53

 
$
2.57

Income (Loss) from discontinued operations
 
8.31

 
(3.45
)
 
8.53

 
(3.08
)
Net Income (Loss) Attributable to Air Products
 
$
9.70

 
$
(2.17
)
 
$
11.06

 
$
(.51
)
Outstanding share-based awards of .1 million shares were antidilutive and therefore excluded from the computation of diluted earnings per share for the six months ended 31 March 2017. For the three months ended 31 March 2017, there were no antidilutive outstanding share-based awards. Outstanding share-based awards of .2 million shares were antidilutive and therefore excluded from the computation of diluted earnings per share for the three and six months ended 31 March 2016.

16.
SUPPLEMENTAL INFORMATION
Cash Paid for Taxes (Net of Cash Refunds)
On a total company basis, income tax payments, net of refunds, were $784.7 and $177.9 for the six months ended 31 March 2017 and 2016, respectively.
Credit Agreement
On 31 March 2017, we entered into a five-year $2,500.0 revolving credit agreement with a syndicate of banks (the “2017 Credit Agreement”), under which senior unsecured debt is available to both the Company and certain of its subsidiaries. The 2017 Credit Agreement provides a source of liquidity for the Company and supports its commercial paper program. The Company’s only financial covenant is a maximum ratio of total debt to total capitalization (total debt plus total equity) no greater than 70%. No borrowings were outstanding under the 2017 Credit Agreement as of 31 March 2017.
The 2017 Credit Agreement terminates and replaces our previous $2,690.0 revolving credit agreement (the “2013 Credit Agreement”), which was to mature 30 April 2018. No borrowings were outstanding under the previous agreement at the time of its termination, and no early termination penalties were incurred.


29


17.
BUSINESS SEGMENT INFORMATION
Our reporting segments reflect the manner in which our chief operating decision maker reviews results and allocates resources. Except in the Corporate and other segment, each reporting segment meets the definition of an operating segment and does not include the aggregation of multiple operating segments. Our liquefied natural gas (LNG) and helium storage and distribution sale of equipment businesses are aggregated within the Corporate and other segment.
Our reporting segments are:
•
Industrial Gases – Americas
•
Industrial Gases – EMEA (Europe, Middle East, and Africa)
•
Industrial Gases – Asia
•
Industrial Gases – Global
•
Corporate and other
The results of the Corporate and other segment include stranded costs related to the presentation of the two divisions comprising the former Materials Technologies segment as discontinued operations. The majority of these costs are expected to be reimbursed to Air Products pursuant to short-term transition services agreements under which Air Products will provide transition services to Versum for EMD and to Evonik for PMD.
 
Industrial
Gases–
Americas
Industrial
Gases–
EMEA
Industrial
Gases–
Asia
Industrial
Gases–
Global
Corporate
and other
Segment
Total
Three Months Ended 31 March 2017
Sales
$
890.1

$
414.2

$
435.9

$
216.5

$
23.4

$
1,980.1

Operating income (loss)
224.5

86.5

112.0

22.8

(40.2
)
405.6

Depreciation and amortization
116.0

41.6

49.3

1.7

3.2

211.8

Equity affiliates' income
13.0

8.3

12.9

—

—

34.2

Three Months Ended 31 March 2016
Sales
$
798.1

$
421.8

$
407.9

$
86.6

$
63.0

$
1,777.4

Operating income (loss)
223.5

90.0

105.0

(10.8
)
(16.0
)
391.7

Depreciation and amortization
109.8

48.2

48.8

1.8

5.3

213.9

Equity affiliates' income
7.7

7.2

17.4

—

—

32.3

 
 
 
 
 
 
 
Six Months Ended 31 March 2017
Sales
$
1,754.0

$
813.9

$
874.2

$
364.4

$
56.1

$
3,862.6

Operating income (loss)
448.3

174.5

230.1

31.0

(70.0
)
813.9

Depreciation and amortization
227.8

83.8

96.0

3.7

6.6

417.9

Equity affiliates' income
27.7

17.8

26.4

.3

—

72.2

Six Months Ended 31 March 2016
Sales
$
1,634.4

$
861.4

$
822.5

$
190.9

$
134.5

$
3,643.7

Operating income (loss)
435.1

182.3

222.3

(30.1
)
(33.4
)
776.2

Depreciation and amortization
218.8

95.0

100.7

3.9

10.2

428.6

Equity affiliates' income (loss)
22.2

14.8

29.1

(.5
)
—

65.6

Total Assets
31 March 2017
$
5,898.8

$
3,100.8

$
4,248.1

$
328.9

$
4,285.1

$
17,861.7

30 September 2016
5,896.7

3,178.6

4,232.7

367.6

2,384.5

16,060.1



30


The sales information noted above relates to external customers only. All intersegment sales are eliminated in consolidation. For the three and six months ended 31 March 2017, the Industrial Gases – Global segment had intersegment sales of $61.0 and $122.0, respectively. For the three and six months ended 31 March 2016, the Industrial Gases – Global segment had intersegment sales of $56.6 and $111.2, respectively. These sales are generally transacted at market pricing. For all other segments, intersegment sales are not material for all periods presented. Equipment manufactured for our industrial gases segments is generally transferred at cost and not reflected as an intersegment sale.
Changes in estimates on projects accounted for under the percentage-of-completion method favorably impacted operating income by approximately $12 during the second quarter of fiscal year 2017.
Below is a reconciliation of segment total operating income to consolidated operating income:
 
Three Months Ended
Six Months Ended
 
31 March
31 March
Operating Income
2017
2016
2017
2016
Segment total
$
405.6

$
391.7

$
813.9

$
776.2

Business separation costs
—

(7.4
)
(30.2
)
(19.4
)
Cost reduction and asset actions
(10.3
)
(10.7
)
(60.3
)
(10.7
)
Pension settlement loss
(4.1
)
(2.0
)
(4.1
)
(2.0
)
Consolidated Total
$
391.2

$
371.6

$
719.3

$
744.1

Below is a reconciliation of segment total assets to consolidated total assets:
 
31 March
30 September
Total Assets
2017
2016
Segment total
$
17,861.7

$
16,060.1

Discontinued operations
9.8

1,968.5

Consolidated Total
$
17,871.5

$
18,028.6



31


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Millions of dollars, except for share data)
The disclosures in this quarterly report are complementary to those made in our 2016 Form 10-K. An analysis of results for the second quarter and first six months of 2017 is provided in the Management’s Discussion and Analysis to follow.
On 1 October 2016, we completed the separation of EMD through the spin-off of Versum Materials, Inc. (Versum). On 3 January 2017, we completed the sale of PMD to Evonik Industries AG for $3.8 billion in cash subject to customary post-closing adjustments, including working capital. As a result, these divisions are reflected in our consolidated financial statements as discontinued operations for all periods presented.
The discussion that follows, unless otherwise indicated, is 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.
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” throughout this Management’s Discussion and Analysis, unless otherwise stated.
The discussion of results that follows includes comparisons to non-GAAP financial measures. The presentation of non-GAAP measures is intended to enhance the usefulness of financial information by providing measures which, when viewed together with our financial results reported in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. The reconciliation of reported GAAP results to non-GAAP measures is presented on pages 46-51. Descriptions of the excluded items appear on pages 35 and 42.
SECOND QUARTER 2017 VS. SECOND QUARTER 2016
SECOND QUARTER 2017 IN SUMMARY
•
Sales of $1,980.1 increased 11%, or $202.7 from higher volumes of 7% and higher energy contractual pass-through to customers of 5%, partially offset by 1% of unfavorable currency impacts.
•
Operating income of $391.2 increased 5%, or $19.6, and operating margin of 19.8% decreased 110 basis points (bp). On a non-GAAP basis, operating income of $405.6 increased 4%, or $13.9, and operating margin of 20.5% decreased 150 bp.
•
Adjusted EBITDA of $651.6 increased 2%, or $13.7. Adjusted EBITDA margin of 32.9% decreased 300 bp.
•
Income from continuing operations of $304.4 increased 9%, or $25.5, and diluted earnings per share of $1.39 increased 9%, or $.11. On a non-GAAP basis, income from continuing operations of $314.2 increased 5%, or $16.3, and diluted earnings per share of $1.43 increased 4%, or $.06. A summary table of changes in diluted earnings per share is presented below.
•
We completed the sale of PMD to Evonik Industries AG on 3 January 2017.
•
We increased our quarterly dividend by 10% from $.86 to $.95 per share. This represents the 35th consecutive year that we have increased our dividend payment.

32


Changes in Diluted Earnings per Share Attributable to Air Products
 
 
Three Months Ended
 
 
 
 
31 March
 
Increase
 
 
2017
 
2016
 
(Decrease)
Diluted Earnings per Share
 
 
 
 
 
 
Net Income (Loss)
 
$
9.70

 
$
(2.17
)
 
$
11.87

Income (Loss) from Discontinued Operations
 
8.31

 
(3.45
)
 
11.76

Income from Continuing Operations – GAAP Basis
 
$
1.39

 
$
1.28

 
$
.11

Operating Income Impact (after-tax)
 
 
 
 
 
 
Underlying business
 
 
 
 
 
 
Volume
 
 
 
 
 
$
.08

Price/raw materials
 
 
 
 
 
(.03
)
Costs
 
 
 
 
 
—

Currency
 
 
 
 
 
—

Business separation costs
 
 
 
 
 
.04

Cost reduction and asset actions
 
 
 
 
 
.01

Operating Income
 
 
 
 
 
$
.10

Other (after-tax)
 
 
 
 
 
 
Equity affiliates' income
 
 
 
 
 
.01

Interest expense
 
 
 
 
 
(.02
)
Other non-operating income (expense), net
 
 
 
 
 
.03

Income tax
 
 
 
 
 
—

Weighted average diluted shares
 
 
 
 
 
(.01
)
Other
 
 
 
 
 
$
.01

Total Change in Diluted Earnings per Share from Continuing Operations – GAAP Basis
 
 
 
 
 
$
.11


 
 
Three Months Ended
 
 
 
 
31 March
 
Increase

 
 
2017
 
2016
 
(Decrease)

Income from Continuing Operations – GAAP Basis
 
$
1.39

 
$
1.28

 
$
.11

Business separation costs
 
—

 
.04

 
(.04
)
Cost reduction and asset actions
 
.03

 
.04

 
(.01
)
Pension settlement loss
 
.01

 
.01

 
—

Income from Continuing Operations – Non-GAAP Basis
 
$
1.43

 
$
1.37

 
$
.06



33


RESULTS OF OPERATIONS
Discussion of Consolidated Results
 
 
Three Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
Change
Sales
 
$
1,980.1

 
$
1,777.4

 
$
202.7

 
11
%
Operating income
 
391.2

 
371.6

 
19.6

 
5
%
Operating margin
 
19.8
%
 
20.9
%
 


 
(110 bp)

Equity affiliates’ income
 
34.2

 
32.3

 
1.9

 
6
%
Non-GAAP Basis
 
 
 
 
 
 
 
 
Adjusted EBITDA
 
$
651.6

 
$
637.9

 
$
13.7

 
2
%
Adjusted EBITDA margin
 
32.9
%
 
35.9
%
 
 
 
(300 bp)

Adjusted Operating income
 
405.6

 
391.7

 
13.9

 
4
%
Adjusted Operating margin
 
20.5
%
 
22.0
%
 
 
 
(150 bp)

Sales
 
% Change from
Prior Year
Underlying business
 
Volume
7
 %
Price
—
 %
Currency
(1
)%
Energy and natural gas cost pass-through
5
 %
Total Consolidated Change
11
 %
Underlying sales were up 7% due to higher volumes as price was flat. Taken together, higher sale of equipment volumes from the Industrial Gases Global segment, including the Jazan project, and lower LNG sales in the Corporate and other segment, increased volumes by 5%. Volumes in the regional Industrial Gases segments grew by 2%. Unfavorable currency impacts, primarily from the British Pound Sterling and the Chinese Renminbi, reduced sales by 1%. Higher energy and natural gas cost pass-through to customers increased sales by 5%.
Operating Income and Margin
Operating income of $391.2 increased 5%, or $19.6, as favorable volumes of $23, were partially offset by unfavorable price net of power and fuel costs of $8 and higher pension settlement loss of $2. In addition, the prior year included business separation costs of $7. Operating margin of 19.8% decreased 110 bp primarily due to higher energy and natural gas cost pass-through, unfavorable volume mix, and unfavorable price net of power and fuel costs. The unfavorable volume mix primarily resulted from both a reduction in liquefied natural gas project activity and an increase in air separation unit project activity.
On a non-GAAP basis, operating income of $405.6 increased $13.9. Operating margin of 20.5% decreased 150 bp.
Adjusted EBITDA
We define Adjusted EBITDA as income from continuing operations (including noncontrolling interests) excluding certain disclosed items, which the Company does not believe to be indicative of underlying business trends, before interest expense, other non-operating income (expense), net, income tax provision, and depreciation and amortization expense. Adjusted EBITDA provides a useful metric for management to assess operating performance.
Adjusted EBITDA of $651.6 increased 2%, or $13.7, primarily due to favorable volumes. Adjusted EBITDA margin of 32.9% decreased 300 bp primarily due to higher energy and natural gas cost pass-through, unfavorable volume mix, and unfavorable price net of power and fuel costs.
Equity Affiliates’ Income
Income from equity affiliates of $34.2 increased $1.9 primarily due to higher income from Industrial Gases – Americas affiliates, partially offset by lower income from Industrial Gases – Asia affiliates.

34


Cost of Sales and Gross Margin
Cost of sales of $1,403.8 increased $190.8, due to higher costs attributable to sales volumes of $118, higher energy and natural gas costs of $90, and higher operating costs of $7, partially offset by favorable currency impacts of $24.
Gross margin of 29.1% decreased 270 bp, primarily due to unfavorable costs, including higher energy and natural gas cost pass-through of 200bp and volume mix of 120 bp, partially offset by favorable currency.
Selling and Administrative Expense
Selling and administrative expense of $177.9 increased $10.1, primarily due to higher costs in support of transition services agreements in which the reimbursement is reflected in other income (expense), net. Selling and administrative expense, as a percent of sales, decreased from 9.4% to 9.0%.
Research and Development
Research and development expense of $14.8 decreased $3.4. Research and development expense, as a percent of sales, decreased from 1.0% to .7%.
Business Separation Costs
In connection with the disposition of the two divisions comprising the former Materials Technologies segment, we incurred separation costs of $7.4 ($8.9 after-tax, or $.04 per share) for the three months ended 31 March 2016. No business separation costs were incurred during the second quarter of fiscal 2017. These costs are reflected on the consolidated income statements as “Business separation costs” and include legal and advisory costs. A significant portion of these costs were not tax deductible because they were directly related to the plan for the tax-free spin-off of Versum. Refer to Note 3, Discontinued Operations, for additional information regarding the dispositions.
Cost Reduction and Asset Actions
During the three months ended 31 March 2017 and 2016, we recognized expenses of $10.3 ($7.2 after-tax, or $.03 per share) and $10.7 ($8.8 after-tax, or $.04 per share) for severance and other benefits related to cost reduction actions, respectively. Refer to Note 5, Cost Reduction and Asset Actions, for additional details.
Pension Settlement Losses
Certain of our pension plans provide for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after their retirement date. A participant's vested benefit is considered settled upon cash payment of the lump sum. We recognize pension settlement losses when cash payments exceed the sum of the service and interest cost components of net periodic benefit cost of the plan for the fiscal year. During the three months ended 31 March 2017 and 2016, we recognized $4.1 ($2.6 after-tax, or $.01 per share) and $2.0 ($1.3 after-tax, or $.01 per share) of settlement charges, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss associated with the U.S. Supplementary Pension Plan. We expect that additional settlement losses will be recognized during the second half of fiscal year 2017.
Other Income (Expense), Net
Other income (expense), net of $22.0 increased $8.7 primarily due to income from the transition services agreements with Versum for EMD and Evonik for PMD and a favorable foreign exchange impact, partially offset by contract settlement gains in the prior year.
Interest Expense
 
 
Three Months Ended
 
 
31 March
 
 
2017
 
2016
Interest incurred
 
$
36.4

 
$
36.2

Less: capitalized interest
 
5.9

 
10.5

Interest expense
 
$
30.5

 
$
25.7

Interest incurred increased $.2 as the impact from a higher average interest rate on the debt portfolio was mostly offset by the impact from a lower average debt balance. The change in capitalized interest was driven by a decrease in the carrying value of projects under construction, primarily as a result of our decision to exit from the Energy-from-Waste business in the second quarter of fiscal year 2016.

35


Other Non-Operating Income (Expense), net
Other non-operating income (expense), net of $9.7 primarily resulted from interest income on cash, time deposits, and other short-term investments, which are comprised primarily of proceeds from the sale of PMD that was completed during the second quarter of fiscal year 2017.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. The effective tax rate was 23.4% and 24.7% in the second quarter of 2017 and 2016, respectively. The decrease included a 70 bp impact from excess tax benefits on shared-based compensation in accordance with our adoption of new accounting guidance. In addition, the prior year included business separation costs for which a tax benefit was not available. On a non-GAAP basis, the effective tax rate was 23.7% and 23.8% in 2017 and 2016, respectively. Refer to Note 2, New Accounting Guidance, for additional information on our adoption of the share based compensation accounting guidance.
Discontinued Operations
The results of our previous Materials Technologies segment, which contained EMD and PMD, and the former Energy-from-Waste segment have been presented as discontinued operations. Refer to Note 3, Discontinued Operations, for additional information, including detail of the major line items that comprise income from discontinued operations, net of tax, on the consolidated income statements for the three months ended 31 March 2017 and 2016.
Materials Technologies
On 16 September 2015, we announced plans to separate our Materials Technologies business, which contained EMD and PMD. On 1 October 2016, we completed the separation of EMD through the spin-off of Versum. On 3 January 2017, we completed the sale of PMD to Evonik Industries AG for $3.8 billion in cash subject to customary post-closing adjustments, including working capital. A gain of $2,870 ($1,833 after-tax, or $8.34 per share) was recognized on the sale in the second quarter of fiscal year 2017.
Energy-from-Waste
During the second quarter of fiscal year 2016, the Board of Directors approved the Company’s exit of its Energy-from-Waste (EfW) business. As a result, efforts to start up and operate its two EfW projects located in Tees Valley, United Kingdom, had been discontinued and a loss on disposal of $945.7 ($846.6 after-tax) was recorded to write down assets to their estimated net realizable value and record a liability for plant disposition and other costs.
Segment Analysis
Industrial Gases – Americas
 
 
Three Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
 
$
890.1

 
$
798.1

 
$
92.0

 
12%
Operating income
 
224.5

 
223.5

 
1.0

 
—%
Operating margin
 
25.2
%
 
28.0
%
 
 
 
(280 bp)
Equity affiliates’ income
 
13.0

 
7.7

 
5.3

 
69%
Adjusted EBITDA
 
353.5

 
341.0

 
12.5

 
4%
Adjusted EBITDA margin
 
39.7
%
 
42.7
%
 
 
 
(300 bp)
Industrial Gases – Americas Sales
 
% Change from
Prior Year
Underlying business
 
Volume
1
%
Price
1
%
Currency
1
%
Energy and natural gas cost pass-through
9
%
Total Industrial Gases – Americas Sales Change
12
%

36


Underlying sales were up 2%. Higher volumes and higher price each contributed 1%. In North America, volumes increased 1% as the impacts from a new hydrogen plant in Canada and stronger argon and helium merchant volumes were partially offset by the impact of planned customer maintenance outages. Latin America volumes were down 3%, primarily due to weakness in hardgoods. Favorable currency impacts increased sales by 1%. Higher energy and natural gas cost pass-through to customers increased sales by 9%. Due to recent volume weakness in Latin America, we will be assessing implications on future business performance.
Industrial Gases – Americas Operating Income and Margin
Operating income of $224.5 increased $1.0, as favorable volumes and currency of $2 each were partially offset by higher costs of $3. Operating costs were higher primarily from higher maintenance costs due to the planned customer maintenance outages. Operating margin of 25.2% decreased 280 bp from the prior year primarily due to higher energy and natural gas cost pass-through and unfavorable costs.
Industrial Gases – Americas Equity Affiliates’ Income
Equity affiliates’ income of $13.0 increased $5.3 primarily due to lower maintenance expense.
Industrial Gases – Europe, Middle East, and Africa (EMEA)
 
 
Three Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
 
$
414.2

 
$
421.8

 
$
(7.6
)
 
(2)%
Operating income
 
86.5

 
90.0

 
(3.5
)
 
(4)%
Operating margin
 
20.9
%
 
21.3
%
 
 
 
(40 bp)
Equity affiliates’ income
 
8.3

 
7.2

 
1.1

 
15%
Adjusted EBITDA
 
136.4

 
145.4

 
(9.0
)
 
(6)%
Adjusted EBITDA margin
 
32.9
%
 
34.5
%
 
 
 
(160 bp)
Industrial Gases – EMEA Sales
 
% Change from
Prior Year
Underlying business
 
Volume
1
 %
Price
—
 %
Currency
(6
)%
Energy and natural gas cost pass-through
3
 %
Total Industrial Gases – EMEA Sales Change
(2
)%
Underlying sales were up 1% from higher volumes as pricing was flat. Volumes increased from stronger packaged gas and retail liquid bulk demand. Unfavorable currency impacts, primarily from the British Pound Sterling, reduced sales by 6%. Higher energy and natural gas cost pass-through to customers increased sales by 3%.
Industrial Gases – EMEA Operating Income and Margin
Operating income of $86.5 decreased by 4%, or $3.5, primarily due to unfavorable currency impacts of $7 and lower price net of power and fuel costs of $5, partially offset by favorable volumes of $8. Operating margin of 20.9% decreased 40 bp from the prior year, primarily due to higher energy and natural gas cost pass-through.
Industrial Gases – EMEA Equity Affiliates’ Income
Equity affiliates’ income of $8.3 increased $1.1.

37


Industrial Gases – Asia
 
 
Three Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
 
$
435.9

 
$
407.9

 
$
28.0

 
7%
Operating income
 
112.0

 
105.0

 
7.0

 
7%
Operating margin
 
25.7
%
 
25.7
%
 
 
 
— bp
Equity affiliates’ income
 
12.9

 
17.4

 
(4.5
)
 
(26)%
Adjusted EBITDA
 
174.2

 
171.2

 
3.0

 
2%
Adjusted EBITDA margin
 
40.0
%
 
42.0
%
 
 
 
(200 bp)
Industrial Gases – Asia Sales
 
% Change from
Prior Year
Underlying business
 
Volume
8
 %
Price
—
 %
Currency
(1
)%
Energy and natural gas cost pass-through
—
 %
Total Industrial Gases – Asia Sales Change
7
 %
Underlying sales were up 8% from higher volumes. Volumes increased primarily due to new plants, including the increase in volume of pass-through utilities, and base business growth driven by higher merchant volumes across Asia. Unfavorable currency impacts, primarily from the Chinese Renminbi, partially offset by strengthening of the South Korean Won and Taiwan Dollar, reduced sales by 1%.
Industrial Gases – Asia Operating Income and Margin
Operating income of $112.0 increased 7%, or $7.0, primarily due to higher volumes of $7 and lower operating costs of $3, partially offset by unfavorable price net of power and fuel costs of $3. Operating margin of 25.7% was flat from the prior year, as higher utility pass through on new plants and unfavorable price net of power and fuel costs was offset by favorable cost performance.
Industrial Gases – Asia Equity Affiliates’ Income
Equity affiliates’ income of $12.9 decreased $4.5 primarily due to a favorable contract termination in the prior year.
Industrial Gases – Global
 
 
Three Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
 
$
216.5

 
$
86.6

 
$
129.9

 
150%
Operating income (loss)
 
22.8

 
(10.8
)
 
33.6

 
311%
Adjusted EBITDA
 
24.5

 
(9.0
)
 
33.5

 
372%
Industrial Gases – Global Sales and Operating Income (Loss)
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 regional Industrial Gases segments.
Sales of $216.5 increased $129.9, or 150%. The increase in sales was driven by a sale of equipment contract for multiple air separation units that will serve Saudi Aramco’s Jazan oil refinery and power plant in Saudi Arabia, which more than offset the decrease in small equipment and other air separation unit sales.

38


Operating income of $22.8 increased $33.6 from an operating loss in the prior year, primarily from income on the Jazan project.
Corporate and other
 
 
Three Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
 
$
23.4

 
$
63.0

 
$
(39.6
)
 
(63)%
Operating loss
 
(40.2
)
 
(16.0
)
 
(24.2
)
 
(151)%
Adjusted EBITDA
 
(37.0
)
 
(10.7
)
 
(26.3
)
 
(246)%
Corporate and other Sales and Operating Loss
Sales of $23.4 decreased $39.6 primarily due to lower liquefied natural gas (LNG) project activity. We expect delays in new LNG project orders due to continued weakness in energy markets. Operating loss of $40.2 increased $24.2 due to lower LNG activity, partially offset by income from the transition service agreements with Versum and Evonik.
FIRST SIX MONTHS 2017 VS. FIRST SIX MONTHS 2016
FIRST SIX MONTHS 2017 IN SUMMARY
•
Sales of $3,862.6 increased 6%, or $218.9, as underlying sales growth of 5% and higher energy and natural gas cost pass-through to customers of 3% were partially offset by unfavorable currency impacts of 2%. The underlying sales growth was primarily from higher volumes in the Industrial Gases – Global and Industrial Gases – Asia segments.
•
Operating income of $719.3 decreased 3%, or $24.8, and operating margin of 18.6% decreased 180 bp. On a non-GAAP basis, operating income of $813.9 increased 5%, or $37.7, and operating margin of 21.1% decreased 20 bp.
•
Adjusted EBITDA of $1,304.0, increased 3%, or $33.6, primarily due to favorable cost performance. Adjusted EBITDA margin of 33.8% decreased 110 bp.
•
Income from continuing operations of $556.0 decreased 1%, or $3.8, and diluted earnings per share of $2.53 decreased 2%, or $.04. On a non-GAAP basis, income from continuing operations of $636.2 increased 8%, or $45.4, and diluted earnings per share of $2.90 increased 7%, or $.19. A summary table of changes in diluted earnings per share is presented below.
•
We completed the spin-off of EMD as Versum Materials, Inc. on 1 October 2016.
•
We completed the sale of PMD to Evonik Industries AG on 3 January 2017.
•
We increased our quarterly dividend by 10% from $.86 to $.95 per share. This represents the 35th consecutive year that we have increased our dividend payment.

39


Changes in Diluted Earnings per Share Attributable to Air Products
 
 
Six Months Ended
 
 
 
 
31 March
 
Increase
 
 
2017

2016
 
(Decrease)
Diluted Earnings per Share
 
 
 
 
 
 
Net Income (Loss)
 
$
11.06

 
$
(.51
)
 
$
11.57

Income (Loss) from Discontinued Operations
 
8.53

 
(3.08
)
 
11.61

Income from Continuing Operations – GAAP Basis
 
$
2.53

 
$
2.57

 
$
(.04
)
Operating Income Impact (after-tax)
 
 
 
 
 
 
Underlying business
 
 
 
 
 
 
Volume
 
 
 
 
 
$
.01

Price/raw materials
 
 
 
 
 
(.03
)
Costs
 
 
 
 
 
.20

Currency
 
 
 
 
 
(.04
)
Business separation costs
 
 
 
 
 
(.03
)
Cost reduction and asset actions
 
 
 
 
 
(.19
)
Operating Income
 
 
 
 
 
$
(.08
)
Other (after-tax)
 
 
 
 
 
 
Equity affiliates' income
 
 
 
 
 
.02

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

Income tax
 
 
 
 
 
.06

Tax costs associated with business separation
 
 
 
 
 
(.01
)
Weighted average diluted shares
 
 
 
 
 
(.02
)
Other
 
 
 
 
 
$
.04

Total Change in Diluted Earnings per Share from Continuing Operations – GAAP Basis
 
 
 
 
 
$
(.04
)

 
 
Six Months Ended
 
 
 
 
31 March
 
Increase
 
 
2017
 
2016
 
(Decrease)
Income from Continuing Operations – GAAP Basis
 
$
2.53

 
$
2.57

 
$
(.04
)
Business separation costs
 
.12

 
.09

 
.03

Tax costs associated with business separation
 
.01

 
—

 
.01

Cost reduction and asset actions
 
.23

 
.04

 
.19

Pension settlement loss
 
.01

 
.01

 
—

Income from Continuing Operations – Non-GAAP Basis
 
$
2.90

 
$
2.71

 
$
.19



40


RESULTS OF OPERATIONS
Discussion of Consolidated Results
 
 
Six Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
Change
Sales
 
$
3,862.6

 
$
3,643.7

 
$
218.9

 
6
 %
Operating income
 
719.3

 
744.1

 
(24.8
)
 
(3
)%
Operating margin
 
18.6
%
 
20.4
%
 
 
 
(180 bp)

Equity affiliates’ income
 
72.2

 
65.6

 
6.6

 
10
 %
Non-GAAP Basis
 
 
 
 
 
 
 
 
Adjusted EBITDA
 
1,304.0

 
1,270.4

 
33.6

 
3
 %
Adjusted EBITDA margin
 
33.8
%
 
34.9
%
 
 
 
(110 bp)

Adjusted Operating income
 
813.9

 
776.2

 
37.7

 
5
 %
Adjusted Operating margin
 
21.1
%
 
21.3
%
 
 
 
(20 bp)

Sales
 
% Change from
Prior Year
Underlying business
 
Volume
5
 %
Price
—

Currency
(2
)%
Energy and natural gas cost pass-through
3
 %
Total Consolidated Change
6
 %
Underlying sales were up 5% due to higher volumes as price was flat. Taken together, higher sale of equipment volumes from the Industrial Gases Global segment, including the Jazan project, and lower LNG sales in the Corporate and other segment, increased volumes by 3%. Volumes in the regional Industrial Gases segments grew by 2%, driven primarily by higher volumes in Industrial Gases- Asia. Unfavorable currency impacts reduced sales by 2% and higher energy and natural gas cost pass-through to customers increased sales by 3%.
Operating Income and Margin
Operating income of $719.3 decreased 3%, or $24.8, as higher cost reduction and asset actions of $50, unfavorable price net of power and fuel costs of $11, unfavorable currency impacts of $11, higher business separation costs of $11, and higher pension settlement losses of $2, were partially offset by favorable net operating costs of $58 and favorable volumes of $2. Net operating costs were lower primarily due to benefits from operational improvements and higher other income. Operating margin of 18.6% decreased 180bp primarily due to higher cost reduction and asset actions and business separation costs.
On a non-GAAP basis, operating income of $813.9 increased 5%, or $37.7, and operating margin of 21.1% decreased 20bp primarily due to unfavorable volume mix and higher energy and natural gas cost pass-through, mostly offset by favorable cost performance from operational improvements.
Adjusted EBITDA
Adjusted EBITDA of $1,304.0 increased 3%, or $33.6, primarily due to favorable costs. Adjusted EBITDA margin of 33.8% decreased 110bp.
Equity Affiliates’ Income
Income from equity affiliates of $72.2 increased $6.6, primarily due to higher income from Industrial Gases – Americas and Industrial Gases – EMEA affiliates, partially offset by lower income from Industrial Gases – Asia affiliates.
Cost of Sales and Gross Margin
Cost of sales of $2,721.9 increased $213.0, due to higher costs attributable to sales volumes of $170 and higher energy and natural gas costs of $128, partially offset by favorable currency impacts of $68 and lower operating costs of $17.

41


Gross margin of 29.5% decreased 160 bp, primarily due to unfavorable volume mix and higher energy and natural gas cost pass-through.
Selling and Administrative Expense
Selling and administrative expense of $343.6 increased $1.9. Selling and administrative expense, as a percent of sales, decreased from 9.4% to 8.9%.
Research and Development
Research and development expense of $29.9 decreased $5.2 due to lower costs. Research and development expense, as a percent of sales, decreased from 1.0% to .8%.
Business Separation Costs
In connection with the disposition of the two divisions comprising the former Materials Technologies segment, we incurred separation costs of $30.2 ($26.5 after-tax, or $.12 per share) and $19.4 ($20.9 including tax impact, or $.09 per share), for the six months ended 31 March 2017 and 2016, respectively. These costs are reflected on the consolidated income statements as “Business separation costs” and include legal, advisory, and pension related costs. A significant portion of these costs were not tax deductible because they were directly related to the plan for the tax-free spin-off of Versum. In addition, our income tax provision for the six months ended 31 March 2017 includes additional tax expense related to the separation of $2.7 ($.01 per share). Refer to the discussion on Discontinued Operations below and Note 3, Discontinued Operations, to the consolidated financial statements for additional information regarding the dispositions.
Cost Reduction and Asset Actions
During the six months ended 31 March 2017, we recognized a net expense of $60.3 ($48.4 after-tax, or $.23 per share). This expense included $45.7 from the first quarter write-down of an air separation unit in the Industrial Gases – EMEA segment that was constructed mainly to provide oxygen to one of the Energy-from-Waste plants and expense for severance and other benefits.
Through fiscal year 2016, we incurred severance and other benefits related to the elimination of approximately 610 positions. During the six months ended 31 March 2016, we recognized an expense of $10.7 ($8.8 after-tax, or $.04 per share) for severance and other benefits related to cost reduction actions. The fiscal year 2016 expenses primarily related to the Industrial Gases – Americas and the Industrial Gases – EMEA segments.
Refer to Note 5, Cost Reduction and Asset Actions, for additional details.
Pension Settlement Losses
Certain of our pension plans provide for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after their retirement date. A participant's vested benefit is considered settled upon cash payment of the lump sum. We recognize pension settlement losses when cash payments exceed the sum of the service and interest cost components of net periodic benefit cost of the plan for the fiscal year. During the six months ended 31 March 2017 and 2016, we recognized $4.1 ($2.6 after-tax, or $.01 per share) and $2.0 ($1.3 after-tax, or $.01 per share) of settlement charges, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss associated with the U.S. Supplementary Pension Plan. We expect that additional settlement losses will be recognized during the second half of fiscal year 2017.
Other Income (Expense), Net
Other income (expense), net of $46.7 increased $28.5, primarily due to income from the transition services agreements with Versum for EMD and Evonik for PMD, higher gains from asset sales, and a favorable foreign exchange impact.
Interest Expense
 
 
Six Months Ended
 
 
31 March
 
 
2017
 
2016
Interest incurred
 
$
72.2

 
$
72.0

Less: capitalized interest
 
12.2

 
24.1

Interest expense
 
$
60.0

 
$
47.9

Interest incurred increased $.2 as the impact from a higher average interest rate on the debt portfolio was mostly offset by the impact from a lower average debt balance. The change in capitalized interest was driven by a decrease in the carrying value of

42


projects under construction, primarily as a result of our decision to exit from the Energy-from-Waste business in the second quarter of fiscal year 2016.
Other Non-Operating Income (Expense), net
Other non-operating income (expense), net of $9.7 for the six months ended 31 March 2017 primarily resulted from interest income on cash, time deposits, and other short-term investments, which are comprised primarily of proceeds from the sale of PMD that was completed during the second quarter of fiscal year 2017.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. The effective tax rate was 23.3% and 24.9% for the six months ended 31 March 2017 and 2016, respectively. The decrease included a 130 bp impact from excess tax benefits on share-based compensation in accordance with our adoption of new accounting guidance. In addition, benefits related to foreign tax law changes were substantially offset by higher business separation costs for which a tax benefit was not available. On a non-GAAP basis, the effective tax rate was 22.4% and 24.1% for the six months ended 31 March 2017 and 2016, respectively, primarily due to the benefits on share-based compensation and foreign tax law changes.
Discontinued Operations
The results of our previous Materials Technologies segment, which contained EMD and PMD, and the former Energy-from-Waste segment have been presented as discontinued operations. Refer to Note 3, Discontinued Operations, for additional information, including detail of the major line items that comprise income from discontinued operations, net of tax, on the consolidated income statements for the six months ended 31 March 2017 and 2016.
Materials Technologies
On 16 September 2015, we announced plans to separate our Materials Technologies business, which contained EMD and PMD. On 1 October 2016, we completed the separation of EMD through the spin-off of Versum. On 3 January 2017, we completed the sale of PMD to Evonik Industries AG for $3.8 billion in cash subject to customary post-closing adjustments, including working capital. A gain of $2,870.0 ($1,833 after-tax, or $8.34 per share) was recognized on the sale in the second quarter of fiscal year 2017. As a result of the dispositions, both EMD and PMD are reflected in our consolidated financial statements as discontinued operations for all periods presented.
Energy-from-Waste
During the second quarter of fiscal year 2016, the Board of Directors approved the Company’s exit of its Energy-from-Waste (EfW) business. As a result, efforts to start up and operate its two EfW projects located in Tees Valley, United Kingdom, had been discontinued and a loss on disposal of $945.7 ($846.6 after-tax) was recorded to write down plant assets to their estimated net realizable value and record a liability for plant disposition and other costs.
During the first quarter of fiscal year 2017, we determined that it is unlikely for a buyer to assume the remaining assets and contract obligations, including the related land lease. As a result, we recorded an additional loss of $59.3 ($47.1 after-tax) in results of discontinued operations, of which $53.0 was recorded primarily for land lease obligations and $6.3 was recorded to update our estimate of the net realizable value of the plant assets as of 31 December 2016. There have been no changes to our estimates during the second quarter of fiscal year 2017.
Segment Analysis
Industrial Gases – Americas
 
 
Six Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
 
$
1,754.0

 
$
1,634.4

 
$
119.6

 
7
%
Operating income
 
448.3

 
435.1

 
13.2

 
3
%
Operating margin
 
25.6
%
 
26.6
%
 
 
 
(100 bp)

Equity affiliates’ income
 
27.7

 
22.2

 
5.5

 
25
%
Adjusted EBITDA
 
703.8

 
676.1

 
27.7

 
4
%
Adjusted EBITDA margin
 
40.1
%
 
41.4
%
 
 
 
(130 bp)


43


Industrial Gases – Americas Sales
 
% Change from
Prior Year
Underlying business
 
Volume
(1
)%
Price
—
 %
Currency
1
 %
Energy and natural gas cost pass-through
7
 %
Total Industrial Gases – Americas Sales Change
7
 %
Underlying sales were down 1% primarily from lower volumes in Latin America. Favorable currency impacts increased sales by 1%. Higher energy and natural gas cost pass-through to customers increased sales by 7%.
Industrial Gases – Americas Operating Income and Margin
Operating income of $448.3 increased 3%, or $13.2, primarily due to lower operating costs of $24 and higher price, net of power and fuel costs, of $2, partially offset by lower volumes of $14. Operating costs were lower due to benefits from productivity improvements. Operating margin decreased 100bp from the prior year due to higher energy and natural gas pass-through and lower volumes, partially offset by favorable cost performance.
Industrial Gases – Americas Equity Affiliates’ Income
Equity affiliates’ income of $27.7 increased $5.5 primarily due to lower maintenance expense.
Industrial Gases – EMEA
 
 
Six Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
 
$
813.9

 
$
861.4

 
$
(47.5
)
 
(6
)%
Operating income
 
174.5

 
182.3

 
(7.8
)
 
(4
)%
Operating margin
 
21.4
%
 
21.2
%
 
 
 
20 bp

Equity affiliates’ income
 
17.8

 
14.8

 
3.0

 
20
 %
Adjusted EBITDA
 
276.1

 
292.1

 
(16.0
)
 
(5
)%
Adjusted EBITDA margin
 
33.9
%
 
33.9
%
 
 
 
— bp

Industrial Gases – EMEA Sales
 
% Change from
Prior Year
Underlying business
 
Volume
(1
)%
Price
—
 %
Currency
(6
)%
Energy and natural gas cost pass-through
1
 %
Total Industrial Gases – EMEA Sales Change
(6
)%
Underlying sales were down 1% due to lower volumes. Volumes decreased primarily due to lower liquid volumes across all regions. Unfavorable currency effects, primarily from the British Pound Sterling, reduced sales by 6%. Higher energy and natural gas cost pass-through to customers increased sales by 1%.
Industrial Gases – EMEA Operating Income and Margin
Operating income of $174.5 decreased by 4%, or $7.8, primarily due to unfavorable currency impacts of $14 and lower price, net of power and fuel costs, of $7, partially offset by lower operating costs of $9 and higher volumes of $4. Operating margin increased 20bp from the prior year, primarily due to favorable cost performance and higher volumes, mostly offset by lower price net of power and fuel costs and unfavorable currency.

44


Industrial Gases – EMEA Equity Affiliates’ Income
Equity affiliates’ income of $17.8 increased $3.0.
Industrial Gases – Asia
 
 
Six Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
 
$
874.2

 
$
822.5

 
$
51.7

 
6
 %
Operating income
 
230.1

 
222.3

 
7.8

 
4
 %
Operating margin
 
26.3
%
 
27.0
%
 
 
 
(70 bp)

Equity affiliates’ income
 
26.4

 
29.1

 
(2.7
)
 
(9
)%
Adjusted EBITDA
 
352.5

 
352.1

 
.4

 
—
 %
Adjusted EBITDA margin
 
40.3
%
 
42.8
%
 
 
 
(250 bp)

Industrial Gases – Asia Sales
 
% Change from
Prior Year
Underlying business
 
Volume
9
 %
Price
(1
)%
Currency
(2
)%
Energy and natural gas cost pass-through
—

Total Industrial Gases – Asia Sales Change
6
 %
Underlying sales were up 8% from higher volumes of 9%, partially offset by lower pricing of 1%. Volumes increased primarily due to new plants, including the commencement of a utility pass-through, and base business growth driven by higher merchant volumes across Asia. Pricing was down slightly primarily due to helium pricing. Unfavorable currency impacts reduced sales by 2% primarily from the Chinese Renminbi, partially offset by strengthening of the South Korean Won and Taiwan Dollar.
Industrial Gases – Asia Operating Income and Margin
Operating income of $230.1 increased 4%, or $7.8, primarily due to higher volumes of $14 and lower operating costs of $4, partially offset by lower price net of power and fuel costs of $6 and an unfavorable currency impact of $4. Operating margin decreased 70bp from the prior year, primarily due to higher utility pass through on new plants and lower price net of power and fuel costs, partially offset by favorable cost performance.
Industrial Gases – Asia Equity Affiliates’ Income
Equity affiliates’ income of $26.4 decreased $2.7, primarily due to a favorable contract termination in the prior year.
Industrial Gases – Global
 
 
Six Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
 
$
364.4

 
$
190.9

 
$
173.5

 
91
%
Operating income (loss)
 
31.0

 
(30.1
)
 
61.1

 
203
%
Adjusted EBITDA
 
35.0

 
(26.7
)
 
61.7

 
231
%
Industrial Gases – Global Sales and Operating Income (Loss)
Sales of $364.4 increased $173.5, or 91%. The increase in sales was driven by a sale of equipment contract for multiple air separation units that will serve Saudi Aramco’s Jazan oil refinery and power plant in Saudi Arabia which more than offset the decrease in small equipment and other air separation unit sales.
Operating income of $31.0 increased $61.1 from an operating loss in the prior year, primarily from income on the Jazan project and productivity improvements.

45


Corporate and other
 
 
Six Months Ended
 
 
 
 
 
 
31 March
 
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
 
$
56.1

 
$
134.5

 
$
(78.4
)
 
(58
)%
Operating income (loss)
 
(70.0
)
 
(33.4
)
 
(36.6
)
 
(110
)%
Adjusted EBITDA
 
(63.4
)
 
(23.2
)
 
(40.2
)
 
(173
)%
Corporate and other Sales and Operating Loss
Sales of $56.1 decreased $78.4, primarily due to lower LNG project activity. We expect delays in new LNG project orders due to continued weakness in energy markets. Operating loss of $70.0 increased $36.6 due to lower LNG activity, partially offset by productivity improvements and income from the transition service agreements with Versum and Evonik.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Millions of dollars unless otherwise indicated, except for share data)
The Company has presented certain financial measures on a non-GAAP (“adjusted”) basis and has provided a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These financial measures are not meant to be considered in isolation or as a substitute for the most directly comparable financial measure calculated in accordance with GAAP. The Company believes these non-GAAP measures provide investors, potential investors, securities analysts, and others with useful information to evaluate the performance of the business because such measures, when viewed together with our financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results.
In many cases, our non-GAAP measures are determined by adjusting the most directly comparable GAAP financial measure to exclude certain disclosed items (“non-GAAP adjustments”) that we believe are not representative of the underlying business performance. For example, Air Products has executed its strategic plan to restructure the Company and, as part of this plan, is now focusing on the Company’s core Industrial Gases businesses, which will continue to result in significant cost reduction and asset actions that we believe are important for investors to understand separately from the performance of the underlying business. The tax impact of our non-GAAP adjustments reflects the expected current and deferred income tax expense impact of the transactions and is impacted primarily by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions. In evaluating these financial measures, the reader should be aware that we may incur expenses similar to those eliminated in this presentation in the future. Investors should also consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another.

46


Presented below are reconciliations of the reported GAAP results to the non-GAAP measures:
CONSOLIDATED RESULTS
 
Continuing Operations
 
Three Months Ended 31 March
2017 vs. 2016
Operating
Income
Operating
Margin (A)
Income Tax
Provision(B)
Net
Income
Diluted
EPS
2017 GAAP
$
391.2

19.8
%
$
94.5

$
304.4

$
1.39

2016 GAAP
371.6

20.9
%
93.5

278.9

1.28

Change GAAP
$
19.6

(110
)bp
$
1.0

$
25.5

$
.11

% Change GAAP
5
%
 
 
9
%
9
%
2017 GAAP
$
391.2

19.8
%
$
94.5

$
304.4

$
1.39

Cost reduction and asset actions
10.3

.5
%
3.1

7.2

.03

Pension settlement loss
4.1

.2
%
1.5

2.6

.01

2017 Non-GAAP Measure
$
405.6

20.5
%
$
99.1

$
314.2

$
1.43

2016 GAAP
$
371.6

20.9
%
$
93.5

$
278.9

$
1.28

Business separation costs
7.4

.4
%
(1.5
)
8.9

.04

Cost reduction and asset actions
10.7

.6
%
1.9

8.8

.04

Pension settlement loss
2.0

.1
%
.7

1.3

.01

2016 Non-GAAP Measure
$
391.7

22.0
%
$
94.6

$
297.9

$
1.37

Change Non-GAAP Measure
$
13.9

(150
)bp
$
4.5

$
16.3

$
.06

% Change Non-GAAP Measure
4
%
 
 
5
%
4
%
 
 
 
 
 
 
 
Continuing Operations
 
Six Months Ended 31 March
2017 vs. 2016
Operating
Income
Operating
Margin(A)
Income Tax
Provision(B)
Net
Income
Diluted
EPS
2017 GAAP
$
719.3

18.6
%
$
172.9

$
556.0

$
2.53

2016 GAAP
744.1

20.4
%
189.9

559.8

2.57

Change GAAP
$
(24.8
)
(180
)bp
$
(17.0
)
$
(3.8
)
$
(.04
)
% Change GAAP
(3
)%
 
 
(1
)%
(2
)%
2017 GAAP
$
719.3

18.6
%
$
172.9

$
556.0

$
2.53

Business separation costs
30.2

.8
%
3.7

26.5

.12

Tax costs associated with business separation
—

—
%
(2.7
)
2.7

.01

Cost reduction and asset actions
60.3

1.6
%
11.9

48.4

.23

Pension settlement loss
4.1

.1
%
1.5

2.6

.01

2017 Non-GAAP Measure
$
813.9

21.1
%
$
187.3

$
636.2

$
2.90

2016 GAAP
$
744.1

20.4
%
$
189.9

$
559.8

$
2.57

Business separation costs
19.4

.5
%
(1.5
)
20.9

.09

Cost reduction and asset actions
10.7

.3
%
1.9

8.8

.04

Pension settlement loss
2.0

.1
%
.7

1.3

.01

2016 Non-GAAP Measure
$
776.2

21.3
%
$
191.0

$
590.8

$
2.71

Change Non-GAAP Measure
$
37.7

(20
)bp
$
(3.7
)
$
45.4

$
.19

% Change Non-GAAP Measure
5
 %
 
 
8
 %
7
 %
(A) 
Operating margin is calculated by dividing operating income by sales.
(B) 
The tax impact of our non-GAAP adjustments reflects the expected current and deferred income tax expense impact of the transactions and is impacted primarily by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions.


47


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:
 
Three Months Ended
Six Months Ended
 
31 March
31 March
 
2017
2016
2017
2016
Income from Continuing Operations(A)
$
310.1

$
284.7

$
568.3

$
571.9

Add: Interest expense
30.5

25.7

60.0

47.9

Less: Other non-operating income (expense), net
9.7

—

9.7

—

Add: Income tax provision
94.5

93.5

172.9

189.9

Add: Depreciation and amortization
211.8

213.9

417.9

428.6

Add: Business separation costs
—

7.4

30.2

19.4

Add: Cost reduction and asset actions
10.3

10.7

60.3

10.7

Add: Pension settlement loss
4.1

2.0

4.1

2.0

Adjusted EBITDA
$
651.6

$
637.9

$
1,304.0

$
1,270.4

Change GAAP
 
 
 
 
Income from continuing operations change
$
25.4

 
$
(3.6
)
 
Income from continuing operations % change
9
%
 
(1
)%
 
Change Non-GAAP
 
 
 
 
Adjusted EBITDA change
$
13.7

 
$
33.6

 
Adjusted EBITDA % change
2
%
 
3
 %
 
(A) 
Includes net income attributable to noncontrolling interests.

48


Below is a reconciliation of segment operating income to Adjusted EBITDA:
  
Industrial
Gases–
Americas
Industrial
Gases–
EMEA
Industrial
Gases–
Asia
Industrial
Gases–
Global
Corporate
and other
Segment
Total
GAAP MEASURE
 
 
 
 
 
 
Three Months Ended 31 March 2017
Operating income (loss)
$
224.5

$
86.5

$
112.0

$
22.8

$
(40.2
)
$
405.6

Operating margin
25.2
%
20.9
 %
25.7
%
 
 
20.5
%
Three Months Ended 31 March 2016
Operating income (loss)
$
223.5

$
90.0

$
105.0

$
(10.8
)
$
(16.0
)
$
391.7

Operating margin
28.0
%
21.3
 %
25.7
%
 
 
22.0
%
Operating income (loss) change
$
1.0

$
(3.5
)
$
7.0

$
33.6

$
(24.2
)
$
13.9

Operating income (loss) % change
—
%
(4
)%
7
%
311
%
(151
)%
4
%
Operating margin change
(280
) bp
(40
) bp
—

 
 
(150
) bp
NON-GAAP MEASURE
 
 
 
 
 
 
Three Months Ended 31 March 2017
Operating income (loss)
$
224.5

$
86.5

$
112.0

$
22.8

$
(40.2
)
$
405.6

Add: Depreciation and amortization
116.0

41.6

49.3

1.7

3.2

211.8

Add: Equity affiliates' income
13.0

8.3

12.9

—

—

34.2

Adjusted EBITDA
$
353.5

$
136.4

$
174.2

$
24.5

$
(37.0
)
$
651.6

Adjusted EBITDA margin
39.7
%
32.9
 %
40.0
%
 
 
32.9
%
Three Months Ended 31 March 2016
Operating income (loss)
$
223.5

$
90.0

$
105.0

$
(10.8
)
$
(16.0
)
$
391.7

Add: Depreciation and amortization
109.8

48.2

48.8

1.8

5.3

213.9

Add: Equity affiliates' income
7.7

7.2

17.4

—

—

32.3

Adjusted EBITDA
$
341.0

$
145.4

$
171.2

$
(9.0
)
$
(10.7
)
$
637.9

Adjusted EBITDA margin
42.7
%
34.5
 %
42.0
%
 
 
35.9
%
Adjusted EBITDA change
$
12.5

$
(9.0
)
$
3.0

$
33.5

$
(26.3
)
$
13.7

Adjusted EBITDA % change
4
%
(6
)%
2
%
372
%
(246
)%
2
%
Adjusted EBITDA margin change
(300
) bp
(160
) bp
(200
) bp
 
 
(300
) bp

49


  
Industrial
Gases–
Americas
Industrial
Gases–
EMEA
Industrial
Gases–
Asia
Industrial
Gases–
Global
Corporate
and other
Segment
Total
GAAP MEASURE
 
 
 
 
 
 
Six Months Ended 31 March 2017
Operating income (loss)
$
448.3

$
174.5

$
230.1

$
31.0

$
(70.0
)
$
813.9

Operating margin
25.6
%
21.4
 %
26.3
%
 
 
21.1
%
Six Months Ended 31 March 2016
Operating income (loss)
$
435.1

$
182.3

$
222.3

$
(30.1
)
$
(33.4
)
$
776.2

Operating margin
26.6
%
21.2
 %
27.0
%
 
 
21.3
%
Operating income (loss) change
$
13.2

$
(7.8
)
$
7.8

$
61.1

$
(36.6
)
$
37.7

Operating income (loss) % change
3
%
(4
)%
4
%
203
%
(110
)%
5
%
Operating margin change
(100
) bp
20
 bp
(70
) bp
 
 
(20
) bp
NON-GAAP MEASURE
 
 
 
 
 
 
Six Months Ended 31 March 2017
Operating income (loss)
$
448.3

$
174.5

$
230.1

$
31.0

$
(70.0
)
$
813.9

Add: Depreciation and amortization
227.8

83.8

96.0

3.7

6.6

417.9

Add: Equity affiliates' income
27.7

17.8

26.4

.3

—

72.2

Adjusted EBITDA
$
703.8

$
276.1

$
352.5

$
35.0

$
(63.4
)
$
1,304.0

Adjusted EBITDA margin
40.1
%
33.9
 %
40.3
%
 
 
33.8
%
Six Months Ended 31 March 2016
Operating income (loss)
$
435.1

$
182.3

$
222.3

$
(30.1
)
$
(33.4
)
$
776.2

Add: Depreciation and amortization
218.8

95.0

100.7

3.9

10.2

428.6

Add: Equity affiliates' income (loss)
22.2

14.8

29.1

(.5
)
—

65.6

Adjusted EBITDA
$
676.1

$
292.1

$
352.1

$
(26.7
)
$
(23.2
)
$
1,270.4

Adjusted EBITDA margin
41.4
%
33.9
 %
42.8
%
 
 
34.9
%
Adjusted EBITDA change
$
27.7

$
(16.0
)
$
.4

$
61.7

$
(40.2
)
$
33.6

Adjusted EBITDA % change
4
%
(5
)%
—
%
231
%
(173
)%
3
%
Adjusted EBITDA margin change
(130
) bp
—

(250
) bp
 
 
(110
) bp

Below is a reconciliation of segment total operating income to consolidated operating income:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
31 March
 
31 March
Operating Income
 
2017
 
2016
 
2017
 
2016
Segment total
 
$
405.6

 
$
391.7

 
$
813.9

 
$
776.2

Business separation costs
 
—

 
(7.4
)
 
(30.2
)
 
(19.4
)
Cost reduction and asset actions
 
(10.3
)
 
(10.7
)
 
(60.3
)
 
(10.7
)
Pension settlement loss
 
(4.1
)
 
(2.0
)
 
(4.1
)
 
(2.0
)
Consolidated Total
 
$
391.2

 
$
371.6

 
$
719.3

 
$
744.1



50


INCOME TAXES
The tax impact of our non-GAAP adjustments reflects the expected current and deferred income tax expense impact of the transactions and is impacted primarily by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions.
 
Effective Tax Rate
 
Three Months Ended
31 March
 
Six Months Ended
31 March
  
2017
2016
 
2017
2016
Income Tax Provision—GAAP
$
94.5

$
93.5

 
$
172.9

$
189.9

Income From Continuing Operations Before Taxes—GAAP
$
404.6

$
378.2

 
$
741.2

$
761.8

Effective Tax Rate—GAAP
23.4
%
24.7
%
 
23.3
%
24.9
%
Income Tax Provision—GAAP
$
94.5

$
93.5

 
$
172.9

$
189.9

Business separation costs
—

(1.5
)
 
3.7

(1.5
)
Tax costs associated with business separation
—

—

 
(2.7
)
—

Cost reduction and asset actions
3.1

1.9

 
11.9

1.9

Pension settlement loss
1.5

.7

 
1.5

.7

Income Tax Provision—Non-GAAP Measure
$
99.1

$
94.6

 
$
187.3

$
191.0

Income From Continuing Operations Before Taxes—GAAP
$
404.6

$
378.2

 
$
741.2

$
761.8

Business separation costs
—

7.4

 
30.2

19.4

Cost reduction and asset actions
10.3

10.7

 
60.3

10.7

Pension settlement loss
4.1

2.0

 
4.1

2.0

Income From Continuing Operations Before Taxes—Non-GAAP Measure
$
419.0

$
398.3

 
$
835.8

$
793.9

Effective Tax Rate—Non-GAAP Measure
23.7
%
23.8
%
 
22.4
%
24.1
%

PENSION BENEFITS
For the six months ended 31 March 2017 and 2016, we recognized net periodic benefit cost of $36.2 and $28.4, respectively, in continuing operations. The increase in pension expense in fiscal year 2017 is primarily related to recognition of settlement, curtailment and special termination benefits. The amount of net periodic benefit cost capitalized in fiscal year 2017 and 2016 was not material.
Certain of our pension plans provide for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after their retirement date. A participant's vested benefit is considered settled upon cash payment of the lump sum. We recognize pension settlement losses when cash payments exceed the sum of the service and interest cost components of net periodic benefit cost of the plan for the fiscal year. For the three and six months ended 31 March 2017 and 2016, we recognized $4.1 and $2.0 of settlement losses, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss associated with the U.S. Supplementary Pension Plan. We expect that additional settlement losses will be recognized during the second half of fiscal year 2017.
In connection with the disposition of the two divisions comprising the former Materials Technologies segment, we incurred settlement, curtailment, and special termination benefits totaling $3.5 and $6.0 for the three and six months ended 31 March 2017, respectively. Costs recorded during the second quarter were recorded in the results of discontinued operations. Otherwise, the costs were reflected on the consolidated income statements as "Business separation costs".
Upon completion of the separation of EMD on 1 October 2016, the Company transferred defined benefit pension assets and obligations to the Versum plans resulting in a net decrease in the underfunded status of the sponsored pension plans of $24. As a result of the transfer of unrecognized losses to Versum, accumulated other comprehensive loss, net of tax, decreased by approximately $5. In addition, upon completion of the sale of PMD to Evonik Industries AG on 3 January 2017, the Company transferred defined benefit pension obligations to Evonik resulting in a net decrease in the underfunded status of the Company's sponsored pension plans of approximately $7.
Management considers various factors when making pension funding decisions, including tax, cash flow, and regulatory implications. For the six months ended 31 March 2017 and 2016, our cash contributions to funded pension plans and benefit

51


payments under unfunded pension plans were $40.8 and $60.2, respectively. Total contributions for fiscal 2017 are expected to be approximately $65 to $85. During fiscal 2016, total contributions were $79.3.
Refer to Note 10, Retirement Benefits, to the consolidated financial statements for details on pension cost and cash contributions.
LIQUIDITY AND CAPITAL RESOURCES
We have consistent access to commercial paper markets, and our cash balance and cash flows from operations and financing activities are expected to meet liquidity needs for the foreseeable future.
As of 31 March 2017, we had $524.6 of foreign cash and cash items compared to total cash and cash items of $1,869.3. If we needed foreign cash for operations in the U.S. or we otherwise elect to repatriate the funds, we may be required to accrue and pay U.S. taxes on those amounts. However, since we have significant current investment plans outside the U.S., it is our intent to permanently reinvest the majority of our foreign cash and cash items outside the U.S. Current financing alternatives do not require the additional repatriation of foreign funds.
Operating Activities
For the first six months of 2017, cash provided by operating activities was $861.2. Income from continuing operations of $556.0 included the non-cash write-down of an air separation unit in the Industrial Gases – EMEA segment that was constructed mainly to provide oxygen to one of the Energy-from-Waste plants. Other adjustments included depreciation and amortization, deferred income taxes, share-based compensation, noncurrent capital lease receivables, and undistributed earnings of unconsolidated affiliates. The working capital accounts were a use of cash of $149.7 which was primarily driven by payables and accrued liabilities, trade receivables, and other working capital partially offset by other receivables. The decrease in payables and accrued liabilities of $178.6 was primarily driven by a decrease in customer advances of $85.1 related to our joint venture in Jazan, Saudi Arabia, and a $75.8 decrease in accrued incentive compensation due to payments on the 2016 plan. The decrease in trade receivables of $53.8 includes amounts billed to our joint venture in Jazan, Saudi Arabia. Other working capital was a use of $51.4 primarily driven by payments for accrued income taxes. The decrease in other receivables, which resulted in a source of $118.4, was primarily due to the maturity of forward foreign exchange contracts that hedged intercompany loans.
For the first six months of 2016, cash provided by operating activities was $890.0, which includes income from continuing operations of $559.8. Other adjustments were a source of cash of $37.8, which was primarily driven by the remeasurement of intercompany transactions as the related hedging instruments that eliminate the earnings impact are included in other receivables and payables and accrued liabilities. The change in payables and accrued liabilities of $191.5 was primarily driven by a decrease in the accrual for incentive compensation due to payments on the 2015 plan.
We estimate that cash paid for taxes, net of refunds, on a continuing operations basis, were $275.0 and $150.1 for the six months ended 31 March 2017 and 2016, respectively.
Investing Activities
For the first six months of 2017, cash used for investing activities was $1,952.4. Purchases of investments of $1,823.2 include time deposits, certificates of deposit, and repurchase agreement funds with original maturities greater than 90 days and less than one year. Proceeds from investments of $400.0 resulted from an early call on an instrument which had an original term greater than 90 days but less than one year. These proceeds were reinvested in a new short-term investment, which is included in the purchase of investments. Capital expenditures for plant and equipment were $532.2.
For the first six months of 2016, cash used for investing activities was $436.4, primarily driven by capital expenditures for plant and equipment of $472.0. Proceeds from the sale of assets and investments of $38.1 were primarily driven by the receipt of $30.0 for our rights to a corporate aircraft that was under construction.

52


Capital expenditures are detailed in the table below:
 
 
Six Months Ended
 
 
31 March
 
 
2017
 
2016
Additions to plant and equipment
 
$532.2
 
$472.0
Investment in and advances to unconsolidated affiliates
 
8.9

 
1.5

Capital expenditures on a GAAP basis
 
$541.1
 
$473.5
Capital lease expenditures(A)
 
5.8

 
18.6

Capital expenditures on a Non-GAAP basis
 
$546.9
 
$492.1
(A) 
We utilize a non-GAAP measure in the computation of capital expenditures and include spending associated with facilities accounted for as capital leases. Certain contracts associated with facilities that are built to provide product to a specific customer are required to be accounted for as leases, and such spending is reflected as a use of cash within cash provided by operating activities if the arrangement qualifies as a capital lease. The presentation of this non-GAAP measure is intended to enhance the usefulness of information by providing a measure that our management uses internally to evaluate and manage our expenditures.
We expect capital expenditures of approximately $1,000 in fiscal year 2017.
On 19 April 2015, a joint venture between Air Products and ACWA Holding entered into a 20-year oxygen and nitrogen supply agreement to supply Saudi Aramco’s oil refinery and power plant being built in Jazan, Saudi Arabia. Air Products owns 25% of the joint venture and expects to invest approximately $100. Air Products has also entered into a sale of equipment contract with the joint venture to engineer, procure, and construct the industrial gas facilities that will supply the gases to Saudi Aramco.
Sales backlog represents our estimate of revenue to be recognized in the future on sale of equipment orders and related process technologies that are under firm contracts. The sales backlog for the Company at 31 March 2017 was $717, compared to $1,057 at 30 September 2016.
Financing Activities
For the first six months of 2017, cash used for financing activities was $1,661.8. This consisted primarily of repayments of commercial paper and short-term borrowings of $816.6, payments on long-term debt of $469.7, and dividend payments of $374.0. Payments on long-term debt primarily consisted of the repayment of a 4.625% Eurobond of €300 million ($317.2) that matured on 15 March 2017 and $138.0 for the repayment of industrial revenue bonds.
For the first six months of 2016, cash used for financing activities was $401.8 and included dividend payments of $349.1 and $65.6 of payments on long-term debt.
Discontinued Operations
For the first six months of 2017, cash flows of discontinued operations primarily include impacts associated with the spin-off of EMD as Versum on 1 October 2016 and the sale of PMD on 3 January 2017. Cash used for operating activities of $520.8 was primarily driven by taxes paid on the gain on sale of PMD. Cash provided by investing activities of $3,750.6 primarily resulted from the proceeds on the sale of PMD. Cash provided by financing activities resulted from a $69.5 receipt of cash from Versum related to finalization of the spin-off. Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional information.
For the first six months of 2016, cash provided by discontinued operations of $48.0 was primarily driven by the results of EMD, PMD, and the Energy-from-Waste business.
Financing and Capital Structure
Capital needs were satisfied primarily with cash from operations. Total debt at 31 March 2017 and 30 September 2016, expressed as a percentage of the sum of total debt and total capitalization (total debt plus total equity), was 29.0% and 41.9%, respectively. Total debt decreased from $5,210.9 at 30 September 2016 to $3,843.2 at 31 March 2017 as a result of the repayment of commercial paper, the 4.625% Eurobond, and the industrial revenue bonds.
On 31 March 2017, we entered into a five-year $2,500.0 revolving credit agreement with a syndicate of banks (the “2017 Credit Agreement”), under which senior unsecured debt is available to the Company and certain of its subsidiaries. The 2017 Credit Agreement provides a source of liquidity for the Company and supports its commercial paper program. The Company’s only financial covenant is a maximum ratio of total debt to total capitalization (total debt plus total equity) no greater than 70%. No borrowings were outstanding under the 2017 Credit Agreement as of 31 March 2017.

53


The 2017 Credit Agreement terminates and replaces our previous $2,690.0 revolving credit agreement (the “2013 Credit Agreement”), which was to mature 30 April 2018. No borrowings were outstanding under the previous agreement at the time of its termination, and no early termination penalties were incurred.
Commitments totaling $35.8 are maintained by our foreign subsidiaries, all of which was borrowed and outstanding at 31 March 2017.
As of 31 March 2017, we are in compliance with all of the financial and other covenants under our debt agreements.
On 15 September 2011, the Board of Directors authorized the repurchase of up to $1,000 of our outstanding common stock. During the first six months of fiscal year 2017, we did not purchase any of our outstanding shares. At 31 March 2017, $485.3 in share repurchase authorization remained.
CONTRACTUAL OBLIGATIONS
We are obligated to make future payments under various contracts, such as debt agreements, lease agreements, unconditional purchase obligations, and other long-term obligations. There have been no material changes to contractual obligations since 30 September 2016.
COMMITMENTS AND CONTINGENCIES
There have been no material changes to commitments and contingencies since 30 September 2016. For current updates on Litigation and Environmental matters, refer to Note 11, Commitments and Contingencies, in this quarterly filing.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes to off-balance sheet arrangements since 30 September 2016. We are not a primary beneficiary in any material variable interest entity. Our off-balance sheet arrangements are not reasonably likely to have a material impact on financial condition, changes in financial condition, results of operations, or liquidity.
RELATED PARTY TRANSACTIONS
Our principal related parties are equity affiliates operating in the industrial gas business. In 2015, we entered into a long-term sale of equipment contract to engineer, procure, and construct industrial gas facilities with a 25% owned joint venture for Saudi Aramco’s Jazan oil refinery and power plant in Saudi Arabia. The agreement included terms that are consistent with those that we believe would have been negotiated at an arm’s length with an independent party. Sales related to this contract are included in the results of our Industrial Gases – Global segment. During the three and six months ended 31 March 2017, sales were approximately $170 and $280, respectively, related to this contract. During the three and six months ended 31 March 2016, sales were approximately $30 and $90, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of our financial condition and results of operations is based on the consolidated financial statements and accompanying notes that have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
During the six months ended 31 March 2017, we assessed the recoverability of the carrying value of the assets associated with the Energy-from-Waste discontinued operation, including an air separation unit within continuing operations of our Industrial Gases – EMEA segment, and recorded losses to reduce the carrying value of the assets as of 31 December 2016 to their estimated net realizable value. There have been no changes to our estimates as of 31 March 2017. Refer to Note 9, Fair Value Measurements, for additional information.
Revenue from equipment sale contracts is recorded primarily using the percentage-of-completion method. During the second quarter of 2017, changes in estimates on projects accounted for under this method favorably impacted operating income by approximately $12. We assess the performance of our sale of equipment projects as they progress. Our earnings could be positively or negatively impacted by changes to our forecast of revenues and costs on these projects in the future.
Information concerning the implementation and impact of new accounting standards issued by the Financial Accounting Standards Board (FASB) is included in Note 2, New Accounting Guidance, to the consolidated financial statements.
Otherwise, there have been no changes in accounting policy or accounting estimate in the current period that had a significant impact on our financial condition, change in financial condition, liquidity, or results of operations.

54


NEW ACCOUNTING GUIDANCE
See Note 2, New Accounting Guidance, to the consolidated financial statements for information concerning the implementation and impact of new accounting guidance.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about business outlook. These forward-looking statements are based on management’s reasonable expectations and assumptions as of the date of this report. Actual performance and financial results may differ materially from projections and estimates expressed in the forward-looking statements because of many factors not anticipated by management, including, without limitation, global or regional economic conditions (including, as to the United Kingdom and Europe, the impact of “Brexit”) and supply and demand dynamics in market segments into which the Company sells; political risks, including the risks of unanticipated government actions; acts of war or terrorism; customer decisions on awarding projects under development and our success in negotiating the terms of such projects; the inability to eliminate stranded costs previously allocated to the Company’s Electronic Materials and Performance Materials divisions which have been divested and other unexpected impacts of the divestitures; significant fluctuations in interest rates and foreign currencies from that currently anticipated; future financial and operating performance of major customers; unanticipated contract terminations or customer cancellations or postponement of projects and sales; our ability to execute the projects in our backlog; asset impairments due to economic conditions or specific events; the impact of price fluctuations in natural gas and disruptions in markets and the economy due to oil price volatility; costs and outcomes of litigation or regulatory investigations; the success of productivity and operational improvement programs; the timing, impact, and other uncertainties of future acquisitions or divestitures, including reputational impacts; the impact of changes in environmental, tax or other legislation and regulatory activities in jurisdictions in which the Company and its affiliates operate; and other risk factors described in the Company’s Form 10-K for its fiscal year ended 30 September 2016. The Company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in this report to reflect any change in the Company’s assumptions, beliefs or expectations or any change in events, conditions, or circumstances upon which any such forward-looking statements are based.

55


Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information on our utilization of financial instruments and an analysis of the sensitivity of these instruments to selected changes in market rates and prices is included in our 2016 Form 10-K. The disclosures about market risk that follow are on a continuing operations basis.
The net financial instrument position decreased from a liability of $4,172.1 at 30 September 2016 to a liability of $3,612.2 at 31 March 2017. The decrease was due primarily to the repayment of long-term debt.
Interest Rate Risk
Our debt portfolio as of 30 September 2016, including the effect of currency and interest rate swap agreements, was composed of 55% fixed-rate debt and 45% variable-rate debt. Our debt portfolio as of 31 March 2017, including the effect of currency and interest rate swap agreements, was composed of 64% fixed-rate debt and 36% variable-rate debt. The change in debt portfolio composition was due primarily to the repayment of commercial paper.
The sensitivity analysis related to the interest rate risk on the fixed portion of our debt portfolio assumes an instantaneous 100 bp move in interest rates from the level at period end, with all other variables held constant. A 100 bp increase in market interest rates would result in a decrease of $116 and $137 in the net liability position of financial instruments at 31 March 2017 and 30 September 2016, respectively. A 100 bp decrease in market interest rates would result in an increase of $124 and $148 in the net liability position of financial instruments at 31 March 2017 and 30 September 2016, respectively.
Based on the variable-rate debt included in our debt portfolio, including the interest rate swap agreements, a 100 bp increase in interest rates would result in an additional $14 and $24 of interest incurred per year at the end of 31 March 2017 and 30 September 2016, respectively. A 100 bp decline in interest rates would lower interest incurred by $14 and $24 per year at 31 March 2017 and 30 September 2016, respectively.
Foreign Currency Exchange Rate Risk
The sensitivity analysis related to foreign currency exchange rates assumes an instantaneous 10% change in the foreign currency exchange rates from their levels at period end, with all other variables held constant. A 10% strengthening or weakening of the functional currency of an entity versus all other currencies would result in a decrease or increase, respectively, of $292 and $422 in the net liability position of financial instruments at 31 March 2017 and 30 September 2016, respectively. The change in exchange rate sensitivity from 30 September 2016 to 31 March 2017 was due primarily to a reduction in our portfolio of forward exchange contracts. Refer to Note 8, Financial Instruments, for additional information about our outstanding forward exchange contracts.


56


Item 4. Controls and Procedures
We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). As of 31 March 2017 (the Evaluation Date), an evaluation of the effectiveness of our disclosure controls and procedures was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective.
On 1 October 2016, Air Products completed the spin-off of Versum into a separate and independent public company.  On 3 January 2017, we completed the sale of PMD to Evonik Industries AG. In connection with these transactions, staffing changes, including the consolidation of certain positions and transition of responsibilities, resulted in changes in certain individuals responsible for executing internal controls. 
During the quarter ended on the Evaluation Date, other than the above, no other change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION
Item 5. Other Information
Not applicable.


57


Item 6. Exhibits.
Exhibits required by Item 601 of Regulation S-K
10.1
Revolving Credit Agreement dated as of March 31, 2017 for $2,500,000,000
 
 
12.
Computation of Ratios of Earnings to Fixed Charges.
 
 
31.1
Certification by the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.
Certification by the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
† The certification attached as Exhibit 32 that accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Air Products and Chemicals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

58


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Air Products and Chemicals, Inc.
 
(Registrant)
 
 
 
Date: April 27, 2017
By:
/s/ M. Scott Crocco
 
 
M. Scott Crocco
 
 
Executive Vice President and Chief Financial Officer


59


EXHIBIT INDEX
10.1
Revolving Credit Agreement dated as of March 31, 2017 for $2,500,000,000
 
 
12.
Computation of Ratios of Earnings to Fixed Charges.
 
 
31.1
Certification by the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.
Certification by the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
† The certification attached as Exhibit 32 that accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Air Products and Chemicals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

60

AIR PRODUCTS & CHEMICALS INC /DE/ Reports