Edgar Filing: AIR PRODUCTS & CHEMICALS INC /DE/

Document

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 2018



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-04534

AIR PRODUCTS AND CHEMICALS, INC.

(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 2018
Common Stock, $1 par value		219,193,653

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

INDEX




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
Consolidated Income Statements – Three and Six Months Ended 31 March 2018 and 2017	3
Consolidated Comprehensive Income Statements – Three and Six Months Ended 31 March 2018 and 2017	4
Consolidated Balance Sheets – 31 March 2018 and 30 September 2017	5
Consolidated Statements of Cash Flows – Six Months Ended 31 March 2018 and 2017	6
Notes to Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	53
Item 4. Controls and Procedures	53

PART II. OTHER INFORMATION

Item 5. Other Information	53
Item 6. Exhibits	54
Signature	55

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 and per share data)	2018		2017		2018			2017
Sales		$2,155.7		$1,980.1		$4,372.3			$3,862.6
Cost of sales	1,506.5		1,403.8		3,078.3			2,720.5
Selling and administrative	194.6		177.6		386.2			342.3
Research and development	14.5		14.8		29.1			29.8
Business separation costs	—		—		—			32.5
Cost reduction and asset actions	—		10.3		—			60.3
Other income (expense), net	15.3		22.0		37.4			46.7
Operating Income	455.4		395.6		916.1			723.9
Equity affiliates' income	43.7		34.2		57.5			72.2
Interest expense	30.4		30.5		60.2			60.0
Other non-operating income (expense), net	11.1		5.3		20.9			5.1
Income From Continuing Operations Before Taxes	479.8		404.6		934.3			741.2
Income tax provision	56.2		94.5		348.0			172.9
Income From Continuing Operations	423.6		310.1		586.3			568.3
Income (Loss) From Discontinued Operations, net of tax	—		1,825.6		(1.0		)	1,873.8
Net Income	423.6		2,135.7		585.3			2,442.1
Net Income Attributable to Noncontrolling Interests of Continuing Operations	7.2		5.7		14.3			12.3
Net Income Attributable to Air Products		$416.4		$2,130.0		$571.0			$2,429.8
Net Income Attributable to Air Products
Income from continuing operations		$416.4		$304.4		$572.0			$556.0
Income (Loss) from discontinued operations	—		1,825.6		(1.0		)	1,873.8
Net Income Attributable to Air Products		$416.4		$2,130.0		$571.0			$2,429.8
Basic Earnings Per Common Share Attributable to Air Products
Income from continuing operations		$1.90		$1.40		$2.61			$2.55
Income from discontinued operations	—		8.38		—			8.61
Net Income Attributable to Air Products		$1.90		$9.78		$2.61			$11.16
Diluted Earnings Per Common Share Attributable to Air Products
Income from continuing operations		$1.89		$1.39		$2.59			$2.53
Income from discontinued operations	—		8.31		—			8.53
Net Income Attributable to Air Products		$1.89		$9.70		$2.59			$11.06
Weighted Average Common Shares – Basic (in millions)	219.4		217.9		219.2			217.8
Weighted Average Common Shares – Diluted (in millions)	220.8		219.7		220.7			219.6
Dividends Declared Per Common Share – Cash		$1.10		$.95		$2.05			$1.81

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

(Unaudited)



	Three Months Ended
	31 March
(Millions of dollars)	2018			2017
Net Income		$423.6			$2,135.7
Other Comprehensive Income, net of tax:
Translation adjustments, net of tax of ($13.2) and ($8.0)	125.6			149.6
Net gain (loss) on derivatives, net of tax of $4.0 and ($5.7)	17.8			(15.4		)
Pension and postretirement benefits, net of tax of $– and $1.2	—			3.8
Reclassification adjustments:
Currency translation adjustment	—			49.1
Derivatives, net of tax of ($3.3) and $2.7	(7.5		)	5.8
Pension and postretirement benefits, net of tax of $7.9 and $13.7	26.6			30.1
Total Other Comprehensive Income	162.5			223.0
Comprehensive Income	586.1			2,358.7
Net Income Attributable to Noncontrolling Interests	7.2			5.7
Other Comprehensive Income Attributable to Noncontrolling Interests	2.2			5.0
Comprehensive Income Attributable to Air Products		$576.7			$2,348.0




	Six Months Ended
	31 March
(Millions of dollars)	2018			2017
Net Income		$585.3			$2,442.1
Other Comprehensive Income (Loss), net of tax:
Translation adjustments, net of tax of ($19.8) and $24.3	262.0			(131.6		)
Net gain (loss) on derivatives, net of tax of ($1.3) and ($16.4)	8.3			(25.2		)
Pension and postretirement benefits, net of tax of $– and $1.2	—			3.8
Reclassification adjustments:
Currency translation adjustment	3.1			49.1
Derivatives, net of tax of ($1.6) and $13.3	(6.7		)	31.4
Pension and postretirement benefits, net of tax of $18.9 and $26.6	49.5			57.5
Total Other Comprehensive Income (Loss)	316.2			(15.0		)
Comprehensive Income	901.5			2,427.1
Net Income Attributable to Noncontrolling Interests	14.3			12.3
Other Comprehensive Income Attributable to Noncontrolling Interests	4.1			1.9
Comprehensive Income Attributable to Air Products		$883.1			$2,412.9

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Unaudited)



	31 March			30 September
(Millions of dollars, except for share data)	2018			2017
Assets
Current Assets
Cash and cash items		$3,066.9			$3,273.6
Short-term investments	137.0			404.0
Trade receivables, net	1,252.3			1,174.0
Inventories	339.9			335.4
Contracts in progress, less progress billings	98.5			84.8
Prepaid expenses	131.2			191.4
Other receivables and current assets	370.5			403.3
Current assets of discontinued operations	—			10.2
Total Current Assets	5,396.3			5,876.7
Investment in net assets of and advances to equity affiliates	1,305.6			1,286.9
Plant and equipment, at cost	20,522.5			19,547.8
Less: accumulated depreciation	11,704.8			11,107.6
Plant and equipment, net	8,817.7			8,440.2
Goodwill, net	815.0			721.5
Intangible assets, net	444.4			368.3
Noncurrent capital lease receivables	1,128.5			1,131.8
Other noncurrent assets	603.6			641.8
Total Noncurrent Assets	13,114.8			12,590.5
Total Assets		$18,511.1			$18,467.2
Liabilities and Equity
Current Liabilities
Payables and accrued liabilities		$1,551.6			$1,814.3
Accrued income taxes	76.6			98.6
Short-term borrowings	112.5			144.0
Current portion of long-term debt	11.6			416.4
Current liabilities of discontinued operations	—			15.7
Total Current Liabilities	1,752.3			2,489.0
Long-term debt	3,442.4			3,402.4
Other noncurrent liabilities	1,923.5			1,611.9
Deferred income taxes	699.7			778.4
Total Noncurrent Liabilities	6,065.6			5,792.7
Total Liabilities	7,817.9			8,281.7
Commitments and Contingencies - See Note 12
Air Products Shareholders’ Equity
Common stock (par value $1 per share; issued 2018 and 2017 - 249,455,584 shares)	249.4			249.4
Capital in excess of par value	1,011.3			1,001.1
Retained earnings	12,966.5			12,846.6
Accumulated other comprehensive loss	(1,535.3		)	(1,847.4		)
Treasury stock, at cost (2018 - 30,261,931 shares; 2017 - 31,109,510 shares)	(2,111.1		)	(2,163.5		)
Total Air Products Shareholders’ Equity	10,580.8			10,086.2
Noncontrolling Interests	112.4			99.3
Total Equity	10,693.2			10,185.5
Total Liabilities and Equity		$18,511.1			$18,467.2

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended
	31 March
(Millions of dollars)	2018			2017
Operating Activities
Net income		$585.3			$2,442.1
Less: Net income attributable to noncontrolling interests of continuing operations	14.3			12.3
Net income attributable to Air Products	571.0			2,429.8
(Income) Loss from discontinued operations	1.0			(1,873.8		)
Income from continuing operations attributable to Air Products	572.0			556.0
Adjustments to reconcile income to cash provided by operating activities:
Depreciation and amortization	467.9			417.9
Deferred income taxes	(94.4		)	(68.6		)
Tax reform repatriation	310.3			—
Undistributed earnings of unconsolidated affiliates	3.1			(31.5		)
Gain on sale of assets and investments	(2.4		)	(6.5		)
Share-based compensation	22.5			18.5
Noncurrent capital lease receivables	47.2			45.4
Write-down of long-lived assets associated with cost reduction actions	—			45.7
Other adjustments	44.7			34.0
Working capital changes that provided (used) cash, excluding effects of acquisitions and divestitures:
Trade receivables	(30.2		)	(53.8		)
Inventories	5.5			20.7
Contracts in progress, less progress billings	(12.2		)	(5.0		)
Other receivables	23.2			118.4
Payables and accrued liabilities	(260.4		)	(178.6		)
Other working capital	13.3			(51.4		)
Cash Provided by Operating Activities	1,110.1			861.2
Investing Activities
Additions to plant and equipment	(572.5		)	(532.2		)
Acquisitions, less cash acquired	(271.4		)	—
Investment in and advances to unconsolidated affiliates	—			(8.9		)
Proceeds from sale of assets and investments	34.4			13.5
Purchases of investments	(345.7		)	(1,823.2		)
Proceeds from investments	612.9			400.0
Other investing activities	(2.6		)	(1.6		)
Cash Used for Investing Activities	(544.9		)	(1,952.4		)
Financing Activities
Long-term debt proceeds	.5			1.3
Payments on long-term debt	(409.2		)	(469.7		)
Net decrease in commercial paper and short-term borrowings	(22.4		)	(816.6		)
Dividends paid to shareholders	(415.5		)	(374.0		)
Proceeds from stock option exercises	52.7			19.9
Other financing activities	(21.7		)	(22.7		)
Cash Used for Financing Activities	(815.6		)	(1,661.8		)
Discontinued Operations
Cash used for operating activities	(3.1		)	(520.8		)
Cash provided by investing activities	18.6			3,750.6
Cash provided by financing activities	—			69.5
Cash Provided by Discontinued Operations	15.5			3,299.3
Effect of Exchange Rate Changes on Cash	28.2			(7.8		)
(Decrease) Increase in cash and cash items	(206.7		)	538.5
Cash and Cash items – Beginning of Year	3,273.6			1,330.8
Cash and Cash Items – End of Period		$3,066.9			$1,869.3

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

1. BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES

Refer to our 2017 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 2018 other than those detailed in Note 2, New Accounting Guidance, under Accounting Guidance Implemented in 2018. Certain prior year information has been reclassified to conform to the fiscal year 2018 presentation. The notes to the interim consolidated financial statements, unless otherwise indicated, are on a continuing operations basis.

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. In order to fully understand the basis of presentation, the consolidated financial statements and related notes included herein should be read in conjunction with the financial statements and notes thereto included in our 2017 Form 10-K. 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 2018

Income Taxes

In March 2018, the Financial Accounting Standards Board (FASB) issued an update for Staff Accounting Bulletin (SAB) No. 118 issued by the SEC in December 2017 related to the U.S. Tax Cuts and Jobs Act (“the Tax Act"). We adopted the SEC guidance under SAB No. 118 in the first quarter of fiscal year 2018. We continue to report the impacts of the Tax Act as provisional based on reasonable estimates as of 31 March 2018. The SEC guidance provides a one-year measurement period to complete accounting for provisional amounts. For additional details, see Note 17, Income Taxes.

Presentation of Net Periodic Pension and Postretirement Benefit Cost

In March 2017, the FASB issued guidance for 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 operating income line items as other compensation costs arising from services rendered by employees during the period. The non-service costs (e.g., interest cost, expected return on plan assets, amortization of actuarial gains/losses, settlements) should be presented in the income statement outside of operating income. The amendments also allow only the service cost component to be eligible for capitalization when applicable. We early adopted this guidance during the first quarter of fiscal year 2018. The amendments have been applied retrospectively for the income statement presentation requirements and prospectively for the limit on costs eligible for capitalization. The Company applied the practical expedient to use the amounts disclosed in its retirement benefits note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements.

Prior to adoption of the guidance, we classified all net periodic benefit costs within operating costs, primarily within "Cost of sales" and "Selling and administrative" on the consolidated income statements. The line item classification changes required by the new guidance did not impact the Company's pre‑tax earnings or net income; however, "Operating income" and "Other non-operating income (expense), net" changed by immaterial offsetting amounts.

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. We adopted this guidance in the first quarter of fiscal year 2018. This guidance did not have an 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 will adopt this guidance in fiscal year 2019 under the modified retrospective approach, which will result in a cumulative-effect adjustment as of 1 October 2018. We are in the process of evaluating our onsite gases, merchant gases, and sale of equipment contracts and implementing necessary changes to accounting policies, processes, controls, and systems to enable compliance with this new standard. We continue to evaluate the impact the adoption of this standard will have on our consolidated financial statements and related disclosures.

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, including the assessment of our current lease population 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.

Credit Losses on Financial Instruments

In June 2016, the FASB issued guidance 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 in fiscal year 2021, with early adoption permitted beginning in fiscal year 2020. We are currently evaluating the impact this guidance 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 plan to adopt this guidance in fiscal year 2019 and do not expect adoption to have a significant impact on our 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.

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, which we will adopt in 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.

Hedging Activities

In August 2017, the FASB issued guidance on hedging activities to expand the related presentation and disclosure requirements, change how companies assess effectiveness, and eliminate the separate measurement and reporting of hedge ineffectiveness. The guidance also enables more financial and nonfinancial hedging strategies to become eligible for hedge accounting. The guidance is effective in fiscal year 2020, with early adoption permitted. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment to eliminate the separate measurement of ineffectiveness within equity as of the beginning of the fiscal year the guidance is adopted. The amended presentation and disclosure guidance is applied prospectively. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued guidance allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The guidance is effective in fiscal year 2020 with early adoption permitted, including adoption in any interim period. If elected, the reclassification can be applied in either the period of adoption or retrospectively to the period of the Tax Act's enactment (i.e., our first quarter of fiscal year 2018). We are currently evaluating the adoption alternatives and the impact this guidance will have on our consolidated financial statements.

3. DISCONTINUED OPERATIONS

The results of our former Performance Materials Division (PMD) and Energy-from-Waste (EfW) segment are reflected in our consolidated financial statements as discontinued operations.

During the second quarter of fiscal year 2017, we completed the sale of PMD to Evonik Industries AG (Evonik) for $3.8 billion in cash. A gain of $2,870 ($1,833 after-tax, or $8.34 per share) was recognized on the sale, which closed on 3 January 2017.

In fiscal year 2016, we discontinued efforts to start up and operate two EfW projects located in Tees Valley, United Kingdom. During the first quarter of fiscal year 2017, we recorded a loss on disposal of $59.3 ($47.1 after-tax), primarily for land lease obligations and to update our estimate of the net realizable value of the plant assets. The loss on disposal was recorded as a component of discontinued operations while the liability associated with land lease obligations was and continues to be recorded in continuing operations. The liability recorded in continuing operations was approximately $68 as of 31 March 2018.

Summarized Financial Information of Discontinued Operations

For the three and six months ended 31 March 2018, the loss from discontinued operations, net of tax, on the consolidated income statements was $0.0 and $1.0, respectively. The year-to-date loss is related to EfW project exit activities and administrative costs.

The following table details 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 benefit	(.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	1,832.5			—			1,832.5
Income (Loss) From Discontinued Operations, net of tax		$1,828.1			($2.5	)		$1,825.6




	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 benefit^(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	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 lease obligations, administrative costs, and costs incurred for project exit activities.


^(B)	As a result of the expected gain on the 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.

There were no assets or liabilities presented in discontinued operations on the consolidated balance sheets as of 31 March 2018. Current assets of discontinued operations on the consolidated balance sheets of $10.2 as of 30 September 2017 related to EfW. Current liabilities of discontinued operations on the consolidated balance sheets of $15.7 as of 30 September 2017 primarily related to reserves associated with the disposition of PMD.

4. MATERIALS TECHNOLOGIES SEPARATION

In fiscal year 2017, we completed the separation of the divisions comprising the former Materials Technologies segment. As further discussed below, we completed the separation of the Electronic Materials Division (EMD) through the spin-off of Versum Materials, Inc. (Versum). For information on the disposition of PMD, refer to Note 3, Discontinued Operations.

Spin-off of EMD

On 1 October 2016 (the distribution date), Air Products completed the spin-off of Versum into a separate and independent public company. The spin-off was completed 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. The spin-off of Versum was treated as a noncash transaction in the consolidated statements of cash flows in fiscal year 2017. There has been no activity in discontinued operations on the consolidated income statements and no assets or liabilities presented in discontinued operations on the consolidated balance sheets related to EMD for the periods presented.

Business Separation Costs

In connection with the dispositions of EMD and PMD, we incurred net 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 year 2017. The net costs include legal and advisory fees of $32.5, which are reflected on the consolidated income statements as “Business separation costs,” and a pension settlement benefit of $2.3 that is now presented within "Other non-operating income (expense), net" as a result of the adoption of pension guidance at the beginning of fiscal year 2018. Refer to Note 2, New Accounting Guidance, for additional information.

No business separation costs were incurred during fiscal year 2018.

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, which included $45.7 for asset actions and $18.0 for severance and other benefits. These expenses were partially offset by the favorable settlement of the remaining accrual from prior year actions discussed below.

In fiscal year 2017, we recognized a net expense of $151.4. The net expense included a charge of $154.8 for actions taken during fiscal year 2017, including asset actions of $88.5 and severance and other benefits of $66.3, partially offset by the favorable settlement of the remaining $3.4 accrued balance associated with business restructuring actions taken in 2015. The 2017 charge related to the segments as follows: $39.3 in Industrial Gases – Americas, $77.9 in Industrial Gases – EMEA, $.9 in Industrial Gases – Asia, $2.5 in Industrial Gases – Global, and $34.2 in Corporate and other. 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 2018:



	Severance and Other Benefits			Asset Actions/Other			Total
30 September 2016		$12.3			$—			$12.3
2017 Charge	66.3			88.5			154.8
Noncash expenses	—			(84.2		)	(84.2		)
Amount reflected in pension liability	(2.0		)	—			(2.0		)
Amount reflected in other noncurrent liabilities	—			(2.2		)	(2.2		)
Cash expenditures	(35.7		)	(1.2		)	(36.9		)
Currency translation adjustment	(.3		)	—			(.3		)
30 September 2017		$40.6			$.9			$41.5
Amount reflected in pension liability	(.4		)	—			(.4		)
Cash expenditures	(23.9		)	(.2		)	(24.1		)
Currency translation adjustment	.7			—			.7
31 March 2018		$17.0			$.7			$17.7

6. BUSINESS COMBINATIONS

During the first half of fiscal year 2018, we completed five acquisitions with an aggregate purchase price, net of cash acquired, of $281.0. The largest acquisition was completed during the first quarter of fiscal year 2018 and consists primarily of three air separation units serving onsite and merchant customers in China. This acquisition is expected to strengthen our position in the region. The results of this business are consolidated within our Industrial Gases – Asia segment.

The 2018 acquisitions resulted in the recognition of $168.9 of plant and equipment, $62.9 of goodwill, $3.0 of which is deductible for tax purposes, and $65.3 of intangible assets, primarily customer relationships, having a weighted-average useful life of twelve years. The goodwill recognized on the transactions is attributable to expected growth and cost synergies and was recorded in the Industrial Gases – Asia and the Industrial Gases – EMEA segments.

These acquisitions did not materially impact our consolidated income statements for the periods presented.

Subsequent Event

On 10 September 2017, Air Products signed an agreement to form a joint venture, Air Products Lu’an (Changzhi) Co., Ltd. (“the JV”) with Lu’An Clean Energy Company ("Lu’An"). The JV will receive coal, steam and power from Lu’An and will supply syngas to Lu’An under a long-term onsite contract. On 26 April 2018, we completed the formation of the JV, which Air Products will consolidate and of which Air Products owns 60% and Lu’An owns 40%. Air Products contributed four large air separation units to the JV having a carrying value of approximately $300. In addition, on 26 April 2018 (“the acquisition date”), the JV acquired gasification and syngas clean-up assets from Lu’An (“the acquisition”). In connection with the closing of the acquisition, we paid cash of approximately 1.7 billion RMB (approximately $270) and expect to make a final payment of approximately 1.5 billion RMB (approximately $230 as of 26 April 2018) in the fourth quarter of 2018.

The transaction will be accounted for as a business combination. The JV will be consolidated within the results of the Industrial Gases – Asia segment following the acquisition date. The initial accounting for the business combination is incomplete as of the date of this report. In total, we expect the carrying value of the plant and equipment of the joint venture to be approximately $1.3 billion, subject to the completion of an asset valuation.

7. INVENTORIES

The components of inventories are as follows:



	31 March			30 September
	2018			2017
Finished goods		$134.3			$120.0
Work in process	16.1			15.7
Raw materials, supplies and other	213.6			223.0
Total FIFO cost		$364.0			$358.7
Less: Excess of FIFO cost over LIFO cost	(24.1		)	(23.3		)
Inventories		$339.9			$335.4

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

8. GOODWILL

Changes to the carrying amount of consolidated goodwill by segment for the six months ended 31 March 2018 are as follows:



	Industrial Gases– Americas		Industrial Gases– EMEA		Industrial Gases– Asia		Industrial Gases– Global		Total
Goodwill, net at 30 September 2017		$163.7		$402.4		$135.2		$20.2		$721.5
Acquisitions	—		27.7		35.2		—		62.9
Currency translation	3.5		22.0		5.0		.1		30.6
Goodwill, net at 31 March 2018		$167.2		$452.1		$175.4		$20.3		$815.0



	31 March			30 September
	2018			2017
Goodwill, gross		$1,257.0			$1,138.7
Accumulated impairment losses	(442.0		)	(417.2		)
Goodwill, net		$815.0			$721.5

We review goodwill for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying value of goodwill might not be recoverable.

The accumulated impairment losses of $442.0 as of 31 March 2018 are attributable to LASA within the Industrial Gases –Americas segment and include impairment charges recorded in previous years as well as the impacts of currency translation on the losses.

9. 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 seek 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 2018 is 2.0 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. The primary objective of these forward exchange contracts is to protect the value of foreign currency-denominated monetary assets and liabilities, primarily working capital, 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.

The table below summarizes our outstanding currency price risk management instruments:



	31 March 2018			30 September 2017
	US$ Notional		Years Average Maturity	US$ Notional		Years Average Maturity
Forward Exchange Contracts:
Cash flow hedges		$2,953.8	.4		$3,150.2	.4
Net investment hedges	369.5		2.5	675.5		3.0
Not designated	990.0		1.7	273.8		.1
Total Forward Exchange Contracts		$4,313.3	.9		$4,099.5	.8

The notional value of forward exchange contracts not designated increased from the prior year. As a result of changes in our currency exposures, we de-designated a portion of forward exchange contracts previously designated as net investment hedges. To eliminate any future earnings impact of the de-designated portion, we entered into equal and offsetting forward exchange contracts.

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 €914.6 million ($1,127.1) at 31 March 2018 and €912.2 million ($1,077.7) at 30 September 2017. 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 2018, 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.

The following table summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:



	31 March 2018							30 September 2017
	US$ Notional		Average Pay %		Average Receive %		Years Average Maturity	US$ Notional		Average Pay %		Average Receive %		Years Average Maturity
Interest rate swaps (fair value hedge)		$400.0	LIBOR		2.53	%	1.4		$600.0	LIBOR		2.28	%	1.3
Cross currency interest rate swaps (net investment hedge)		$688.7	3.73	%	2.76	%	2.3		$539.7	3.27	%	2.59	%	1.9
Cross currency interest rate swaps (cash flow hedge)		$1,014.6	5.01	%	2.75	%	2.4		$1,095.7	4.96	%	2.78	%	2.4
Cross currency interest rate swaps (not designated)		$39.5	3.16 <