Air Products & Chemicals, Inc. (APD) FY 2022 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about business outlook. These forward-looking statements are based on management’s expectations and assumptions as of the date of this Annual Report on Form 10-K and are not guarantees of future performance. Actual performance and financial results may differ materially from projections and estimates expressed in the forward-looking statements because of many factors not anticipated by management, including, without limitation, those described in "Forward-Looking Statements" and Item 1A, Risk Factors, of this Annual Report.

Our Management's Discussion and Analysis should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this Annual Report. Unless otherwise stated, financial information is presented in millions of dollars, except for per share data. Except for net income, which includes the results of discontinued operations, financial information is presented on a continuing operations basis.

The financial measures discussed below are presented in accordance with U.S. generally accepted accounting principles ("GAAP"), except as noted. We present certain financial measures on an "adjusted," or "non-GAAP," basis because we believe such measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance. For each non-GAAP financial measure, including adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate, and capital expenditures, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These reconciliations and explanations regarding the use of non-GAAP measures are presented under the heading “Reconciliations of Non-GAAP Financial Measures” beginning on page 35.

Comparisons included within the "Results of Operations" section below are for fiscal years 2022 versus ("vs.") 2021 and 2021 vs. 2020. We have updated our segment information to reflect the reorganization of our reporting segments effective 1 October 2021. We provide reconciliations for any adjusted measures discussed within the "Reconciliations of Non-GAAP Financial Measures" section. Comparisons for all other sections within this Management’s Discussion and Analysis are for fiscal years 2022 vs. 2021, while fiscal year 2021 vs. 2020 comparisons are available within Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended 30 September 2021, which was filed with the SEC on 18 November 2021.

For information concerning activity with our related parties, refer to Note 22, Supplemental Information, to the consolidated financial statements.

Russia's Invasion of Ukraine

In the fourth quarter of fiscal year 2022, we recorded a noncash charge of $73.7 ($61.0 after tax, or $0.27 per share) associated with the divestiture of our small industrial gas business in Russia, which generated annual sales of less than $25 in our Europe segment.

During the second quarter of fiscal year 2022, we suspended construction of a plant in Ukraine. Our ability to complete the project and recover the carrying value of the assets, which was approximately $45 as of 30 September 2022, could be impacted by future events. Annual sales generated from our business in Ukraine were less than $5 in our Europe segment.

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BUSINESS OVERVIEW

Air Products and Chemicals, Inc., a Delaware corporation originally founded in 1940, has built a reputation for its innovative culture, operational excellence, and commitment to safety and the environment. Our passionate, talented, and committed employees are from diverse backgrounds, but are driven by our higher purpose to create innovative solutions that benefit the environment, enhance sustainability, and address the challenges facing customers, communities, and the world.

We offer a unique portfolio of products, services, and solutions that include atmospheric gases, process and specialty gases, equipment, and related services. Focused on energy, environmental, and emerging markets, we serve customers in dozens of industries, including refining, chemicals, metals, electronics, manufacturing, medical, and food. Our gases, equipment, and applications expertise enable our customers to improve their sustainability performance by increasing productivity, producing better quality products, reducing energy use, and lowering emissions.

We also develop, engineer, build, own, and operate some of the world's largest industrial gas and carbon-capture projects, supplying clean hydrogen that will support global transportation, industrial markets, and the broader energy transition away from fossil fuels. We have built leading positions in several growth markets, such as hydrogen, helium, and liquefied natural gas ("LNG") process technology and equipment, and provide turbomachinery, membrane systems, and cryogenic containers globally.

With operations in over 50 countries, in fiscal year 2022 we had sales of $12.7 billion and assets of $27.2 billion. During the fiscal year ended 30 September 2022, we managed our operations, assessed performance, and reported earnings under the following five reporting segments:

•Americas;

•Asia;

•Europe;

•Middle East and India; and

•Corporate and other

This Management’s Discussion and Analysis discusses our results based on these operations. Refer to Note 23, Business Segment and Geographic Information, to the consolidated financial statements for additional details on our reportable business segments.

2022 IN SUMMARY

Our fiscal year 2022 results demonstrate our employees' commitment to excellence and service to our customers as our earnings grew despite economic headwinds. Our on-site business continued to provide stable cash flow due to the structure of our contracts, which generally contain fixed monthly charges and/or minimum purchase requirements. These contracts also protected us from energy price fluctuations, particularly in Europe, due to pass-through provisions that allow us to recover the cost of energy. Our merchant business also successfully implemented pricing actions to recover higher costs, including soaring energy prices, in our three largest regional segments and across most major product lines.

We also made progress on our growth strategy, including completion of an initial investment in the Jazan Integrated Gasification and Power Company ("JIGPC") joint venture. JIGPC acquired the first phase of assets for the gasification and power project and began contributing to our results through equity affiliates' income in late October 2021.

We shared the cash flows generated during fiscal year 2022 with our investors by increasing the quarterly dividend on our common stock to $1.62 per share, representing an 8% increase, or $0.12 per share, from the previous dividend of $1.50 per share. This is the 40th consecutive year that we have increased our quarterly dividend.

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Fiscal Year 2022 Highlights

•Sales of $12,698.6 increased 23%, or $2,375.6, due to higher energy cost pass-through to customers of 13%, higher volumes of 8%, and higher pricing of 6%, partially offset by unfavorable currency of 4% due to the strengthening of the U.S. Dollar. Volume growth was driven by recovery in hydrogen, new assets, better merchant demand, and higher sale of equipment project activity. In our merchant business, we successfully implemented pricing actions across the regional segments, particularly in Europe, to offset unprecedented power and fuel costs.

•Operating income of $2,338.8 increased 3%, or $57.4, as our pricing actions and higher volumes overcame unfavorable costs, including the loss on the divestiture of our Russia business, and currency. Operating margin of 18.4% decreased 370 basis points (bp) from the prior year, primarily due to higher energy cost pass-through to customers and unfavorable costs.

•Equity affiliates' income of $481.5 increased 64%, or $187.4, driven by the JIGPC joint venture. JIGPC began contributing to our results in the Middle East and India segment in late October 2021.

•Net income of $2,266.5 increased 7%, or $151.6, primarily due to higher pricing, net of power and fuel costs, higher volumes, and higher equity affiliates' income driven by JIGPC, partially offset by higher costs. Net income margin of 17.8% decreased 270 bp, primarily due to higher energy cost pass-through to customers, as unfavorable costs offset the impact of higher equity affiliates' income.

•Adjusted EBITDA of $4,247.0 increased 9%, or $363.8, while adjusted EBITDA margin of 33.4% decreased 420 bp.

•Diluted EPS of $10.08 increased 11%, or $0.96 per share, and adjusted diluted EPS of $10.41 increased 15%, or $1.39 per share. A summary table of changes in diluted EPS is presented below.

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Changes in Diluted EPS Attributable to Air Products

The per share impacts presented in the table below were calculated independently and do not sum to the total change in diluted EPS due to rounding.

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OUTLOOK

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

We are committed to efficiently operating and deploying capital to grow our core industrial gases business. While global economic challenges are likely to continue in fiscal year 2023, we remain focused on pricing actions to recover higher energy costs in our merchant business, pursuing additional volume opportunities, and closely monitoring our costs. We expect our onsite business model, which has contractual protection from energy cost fluctuations, to continue providing stable cash flow. This business consistently generates approximately half our total company sales. Further, we expect several new projects to contribute to our results in 2023, including the second phase of JIGPC's gasification and power project that we expect to commence in the second quarter.

Sustainability is our growth strategy at Air Products, and we have the financial capacity to support our zero- and low-carbon hydrogen projects. We believe there will be additional opportunities for clean hydrogen and carbon capture technologies, which are further supported by the U.S. Inflation Reduction Act of 2022 that was enacted in August. We anticipate benefits from tax incentives for carbon sequestration and clean hydrogen production in future years once our new projects in these areas come on-stream in the U.S. We continue to evaluate the impact this act could have on our business.

RESULTS OF OPERATIONS

DISCUSSION OF CONSOLIDATED RESULTS

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Sales

2022 vs. 2021

Sales of $12,698.6 increased 23%, or $2,375.6, due to higher energy cost pass-through to customers of 13%, higher volumes of 8%, and positive pricing of 6%, partially offset by unfavorable currency impacts of 4%. Energy costs were significantly higher versus the prior year, particularly in Europe and the Americas. Contractual provisions associated with our on-site business, which generates approximately half our total company sales, allow us to pass the higher energy costs through to our customers. Volume growth was driven by recovery in hydrogen, new assets, better merchant demand, and higher sale of equipment project activity. Continued focus on pricing actions in our merchant businesses, including those intended to recover escalating power and fuel costs, resulted in price improvement in our three largest segments. Currency was unfavorable as the U.S. Dollar strengthened against most major currencies.

2021 vs. 2020

Sales of $10,323.0 increased 17%, or $1,466.7, due to higher energy cost pass-through to customers of 6%, higher volumes of 5%, favorable currency impacts of 4%, and positive pricing of 2%. We experienced significantly higher energy costs in the second half of fiscal year 2021, particularly in North America and Europe, which were passed to our on-site customers. Positive volumes from new assets, our sale of equipment businesses, and merchant demand recovery from COVID-19 were partially offset by reduced contributions from our gasification joint venture with Lu'An Clean Energy Company. Favorable currency was driven by the appreciation of the British Pound Sterling, Chinese Renminbi, Euro, and South Korean Won against the U.S. Dollar. Continued focus on pricing actions, including energy cost recovery, in our merchant businesses resulted in price improvement in the Americas, Asia, and Europe segments.

Cost of Sales and Gross Margin

2022 vs. 2021

Cost of sales of $9,338.5 increased 30%, or $2,129.2, from total cost of sales of $7,209.3 in the prior year, which included a charge of $23.2 for a facility closure as discussed below. The increase was due to higher energy cost pass-through to customers of $1,263, unfavorable costs of $617, and higher costs associated with sales volumes of $575, partially offset by favorable currency impacts of $302. The unfavorable cost impact was driven by power for our merchant business, higher planned maintenance, inflation, and supply chain challenges. Additionally, we also incurred higher costs to support long-term growth, such as costs for resources needed to bring projects on-stream as well as costs for a helium storage cavern to support reliable helium supply to our customers globally. Gross margin of 26.5% decreased 370 bp from 30.2% in the prior year, primarily due to the unfavorable costs and higher energy cost pass-through to customers, partially offset by the positive impact of our pricing actions.

2021 vs. 2020

Total cost of sales of $7,209.3, including the facility closure discussed below, increased 23%, or $1,351.2. The increase from the prior year was primarily due to higher energy cost pass-through to customers of $479, higher costs associated with sales volumes of $433, unfavorable currency impacts of $233, and higher costs, including power and other cost inflation, of $183. Gross margin of 30.2% decreased 370 bp from 33.9% in the prior year, primarily due to higher energy cost pass-through to customers, higher costs, and a reduced contribution from our Lu'An joint venture, partially offset by the positive impact of our pricing actions.

Facility Closure

During the second quarter of fiscal year 2021, we recorded a charge of $23.2 ($17.4 after-tax, or $0.08 per share) primarily for a noncash write-down of assets associated with a contract termination in the Americas segment. This charge is reflected as "Facility closure" on our consolidated income statements for the fiscal year ended 30 September 2021 and was not recorded in segment results.

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Selling and Administrative

2022 vs. 2021

Selling and administrative expense of $900.6 increased 9%, or $72.2, primarily due to higher incentive compensation, depreciation expense associated with our new global headquarters, inflation, and increased headcount to support our growth strategy, partially offset by a favorable currency impact from the strengthening of the U.S. Dollar. Selling and administrative expense as a percentage of sales decreased to 7.1% from 8.0% in the prior year.

2021 vs. 2020

Selling and administrative expense of $828.4 increased 7%, or $52.5, primarily due to higher spending for business development resources to support our growth strategy and unfavorable currency impacts. Selling and administrative expense as a percentage of sales decreased to 8.0% in fiscal year 2021 from 8.8% in fiscal year 2020.

Research and Development

2022 vs. 2021

Research and development expense of $102.9 increased 10%, or $9.4. Research and development expense as a percentage of sales decreased to 0.8% from 0.9% in the prior year.

2021 vs. 2020

Research and development expense of $93.5 increased 11%, or $9.6. Research and development expense as a percentage of sales of 0.9% was flat versus fiscal year 2020.

Business and Asset Actions

During the fourth quarter of fiscal year 2022, we divested our small industrial gas business in Russia due to Russia's invasion of Ukraine. As a result, we recorded a noncash charge of $73.7 ($61.0 after tax, or $0.27 per share), which included transaction costs and cumulative currency translation losses. This charge is reflected as "Business and asset actions" on our consolidated income statement for the fiscal year ended 30 September 2022 and was not recorded in segment results.

Gain On Exchange With Joint Venture Partner

In the second quarter of fiscal year 2021, we recognized a gain of $36.8 ($27.3 after-tax, or $0.12 per share) on an exchange with the Tyczka Group, a former joint venture partner. As part of the exchange, we separated our 50/50 joint venture in Germany into two separate businesses so each party could acquire a portion of the business on a 100% basis. The gain included $12.7 from the revaluation of our previously held equity interest in the portion of the business that we retained and $24.1 from the sale of our interest in the remaining business. The gain is reflected as "Gain on exchange with joint venture partner" on our consolidated income statements for the fiscal year ended 30 September 2021 and was not recorded in segment results. Refer to Note 3, Acquisitions, to the consolidated financial statements for additional information.

Company Headquarters Relocation Income

In 2020, we sold property at our former corporate headquarters located in Trexlertown, Pennsylvania. We received net proceeds of $44.1 and recorded a gain of $33.8 ($25.6 after-tax, or $0.12 per share), which is reflected on our consolidated income statements as "Company headquarters relocation income (expense)" for the fiscal year ended 30 September 2020. The gain was not recorded in segment results.

Other Income (Expense), Net

2022 vs. 2021

Other income of $55.9 increased 6%, or $3.1, as higher income from the sale of assets in fiscal year 2022 was partially offset by a prior year settlement of a supply contract.

2021 vs. 2020

Other income of $52.8 decreased 19%, or $12.6. Fiscal year 2020 was favorably impacted by an adjustment for a benefit plan liability due to a change in plan terms. This impact was partially offset by the settlement of a supply contract in fiscal year 2021.

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Operating Income and Margin

2022 vs. 2021

Operating income of $2,338.8 increased 3%, or $57.4, as positive pricing, net of power and fuel costs, of $222 and higher volumes of $218 were partially offset by higher costs of $229 and an unfavorable currency impact of $66. Higher costs were primarily attributable to operating and distribution costs driven by higher planned maintenance and various external factors, including inflation and supply chain challenges, as well as higher incentive compensation. Additionally, we incurred higher costs in the current year to support long-term growth, such as costs for resources needed to bring projects on-stream. In fiscal year 2022, we also recorded a charge of $74 for business and asset actions associated with the divestiture of our Russia business. The prior year included a gain of $37 on an exchange with a joint venture partner and a charge of $23 associated with a facility closure.

Operating margin of 18.4% decreased 370 bp from 22.1% in the prior year, primarily due to higher energy cost pass-through to customers and unfavorable costs.

2021 vs. 2020

Operating income of $2,281.4 increased 2%, or $43.8, as favorable currency of $96, positive pricing, net of power and fuel costs, of $95, and a gain on an exchange with a joint venture partner of $37 were partially offset by higher operating costs of $127 and a facility closure of $23. Additionally, fiscal year 2020 included income of $34 associated with our company headquarters relocation. Despite higher sales volumes, the volume impact on operating income was minimal due to a reduced contribution from our Lu'An joint venture in fiscal year 2021. Unfavorable operating costs were driven by the addition of resources to support our growth strategy and higher planned maintenance activities.

Operating margin of 22.1% decreased 320 bp from 25.3% in fiscal year 2020, primarily due to the higher operating costs, higher energy cost pass-through to customers and the reduced contribution from our Lu'An joint venture, partially offset by positive pricing. The positive impact from a gain on an exchange with a joint venture partner in 2021 was offset by income in fiscal year 2020 associated with the company headquarters relocation.

Equity Affiliates’ Income

2022 vs. 2021

Equity affiliates' income of $481.5 increased 64%, or $187.4, driven by the JIGPC joint venture, which began contributing to our results in the Middle East and India segment in late October 2021. In the first quarter, we also recognized the remaining deferred profit associated with air separation units previously sold to Jazan Gas Project Company, net of other project finalization costs. These factors were partially offset by an impairment charge of $14.8 ($11.1 after tax, or $0.05 per share) related to two small affiliates in the Asia segment and lower contributions from several affiliates in our regional segments.

For additional information on our equity affiliates, refer to Note 7, Equity Affiliates, to the consolidated financial statements.

2021 vs. 2020

Equity affiliates' income of $294.1 increased 11%, or $29.3. Higher income from affiliates in the regional segments was partially offset by a benefit of $33.8 in fiscal year 2020 from the enactment of the India Finance Act 2020. Refer to Note 21, Income Taxes, to the consolidated financial statements for additional information.

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Interest Expense

2022 vs. 2021

Interest incurred decreased 1%, or $1.1, as the impacts of a lower debt balance and currency were mostly offset by a higher average interest rate on the debt portfolio. Capitalized interest increased 45%, or $12.7, due to a higher carrying value of projects under construction.

2021 vs. 2020

Interest incurred increased 36%, or $44.9, driven by a higher debt balance due to the issuance of U.S. Dollar- and Euro-denominated fixed-rate notes in the third quarter of fiscal year 2020. Capitalized interest increased $12.4 due to a higher carrying value of projects under construction.

Other Non-Operating Income (Expense), Net

2022 vs. 2021

Other non-operating income of $62.4 decreased 15%, or $11.3. Non-service pension income decreased $38 primarily due to lower expected returns on plan assets for the U.S. salaried pension plan and the U.K. pension plan. This impact was partially offset by higher interest income on cash and cash items due to higher interest rates and lower expense for excluded components of cash flow hedges of intercompany loans.

2021 vs. 2020

Other non-operating income of $73.7 increased $43.0. We recorded higher non-service pension income in 2021 due to lower interest costs and higher total assets, primarily for our U.S. pension plans. Fiscal year 2021 also included favorable currency impacts. These factors were partially offset by lower interest income on cash and cash items due to lower interest rates.

Discontinued Operations

In fiscal year 2022, income from discontinued operations, net of tax, was $12.6 ($0.06 per share). This primarily resulted from a net tax benefit recorded in the fourth quarter upon release of tax liabilities for uncertain tax positions associated with our former Performance Materials Division ("PMD") for which the statute of limitations expired.

In fiscal year 2021, income from discontinued operations, net of tax, was $70.3 ($0.32 per share). This included net tax benefits of $60.0 recorded for the release of tax reserves for uncertain tax positions, of which $51.8 ($0.23 per share) was recorded in the fourth quarter for liabilities associated with the 2017 sale of PMD and $8.2 was recorded in the third quarter for liabilities associated with our former Energy-from-Waste business. Additionally, we recorded a tax benefit from discontinued operations of $10.3 in the first quarter, primarily from the settlement of a state tax appeal related to the gain on the sale of PMD.

In fiscal year 2020, loss from discontinued operations, net of tax, was $14.3 ($0.06 per share). This resulted from a pre-tax loss of $19.0 recorded in the second quarter to increase our existing liability for retained environmental obligations associated with the sale of our former Amines business in September 2006. Refer to the Pace discussion within Note 16, Commitments and Contingencies, for additional information.

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Net Income and Net Income Margin

2022 vs. 2021

Net income of $2,266.5 increased 7%, or $151.6, primarily due to higher pricing, net of power and fuel costs, higher volumes, and higher equity affiliates' income driven by JIGPC, partially offset by higher costs, including charges for business and asset actions and the equity affiliate impairment, and unfavorable currency due to the strengthening of the U.S. dollar. Additionally, the prior year included higher net income from discontinued operations.

Net income margin of 17.8% decreased 270 bp from 20.5% in the prior year primarily due to higher energy cost pass-through to customers as the impact of higher equity affiliates' income was offset by unfavorable costs. Higher energy cost pass-through to customers accounted for approximately 200 bp of the decline.

2021 vs. 2020

Net income of $2,114.9 increased 10%, or $183.8. As discussed above, fiscal year 2021 included higher net income from discontinued operations. On a continuing operations basis, the increase was driven by positive pricing, net of power and fuel costs, favorable currency impacts, higher equity affiliates' income, and a gain on an exchange with a joint venture partner, partially offset by unfavorable operating costs and a loss from a facility closure. Additionally, less net income was attributable to noncontrolling interests, including our Lu'An joint venture partner. Fiscal year 2020 also included income associated with the company headquarters relocation and a net benefit from the India Finance Act 2020.

Net income margin of 20.5% decreased 130 bp from 21.8% in the prior year, primarily due to higher energy and natural gas cost pass-through to customers, which decreased margin by approximately 100 bp, and unfavorable net operating costs, partially offset by the impact from our pricing actions.

Adjusted EBITDA and Adjusted EBITDA Margin

2022 vs. 2021

Adjusted EBITDA of $4,247.0 increased 9%, or $363.8, primarily due to higher volumes, higher pricing, net of power and fuel costs, and higher equity affiliates' income, partially offset by higher costs and unfavorable currency. Adjusted EBITDA margin of 33.4% decreased 420 bp from 37.6% in the prior year primarily due to higher energy cost pass-through to customers as the impact of higher equity affiliates' income was offset by unfavorable costs. Higher energy cost pass-through to customers accounted for approximately 400 bp of the decline.

2021 vs. 2020

Adjusted EBITDA of $3,883.2 increased 7%, or $263.4, primarily due to favorable currency impacts, positive pricing, net of power and fuel costs, and higher equity affiliates' income, partially offset by unfavorable operating costs. Adjusted EBITDA margin of 37.6% decreased 330 bp from 40.9% in the prior year, primarily due to higher energy and natural gas cost pass-through to customers, which decreased margin by approximately 200 bp, and the unfavorable net operating costs.

Effective Tax Rate

The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. Refer to Note 21, Income Taxes, to the consolidated financial statements for details on factors affecting the effective tax rate.

2022 vs. 2021

Our effective tax rate was 18.2% and 18.5% for the fiscal years ended 30 September 2022 and 2021, respectively. The current year reflects a favorable effective tax rate impact from higher equity affiliates' income, which is primarily presented net of income taxes within income from continuing operations on our consolidated income statements. The higher equity affiliates' income was driven by the JIGPC joint venture, which began contributing to our results in late October 2021. The prior year included a tax benefit of $21.5 from the release of tax reserves established for uncertain tax positions. This included a benefit of $12.2 ($0.05 per share) for the release of reserves established in 2017 for a tax election related to a non-U.S. subsidiary and other previously disclosed items ("tax election benefit and other").

Our adjusted effective tax rate was 18.2% and 18.9% for the fiscal years ended 30 September 2022 and 2021, respectively.

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2021 vs. 2020

Our effective tax rate was 18.5% and 19.7% for the fiscal years ended 30 September 2021 and 2020, respectively. The fiscal year 2021 rate was lower primarily due to income tax benefits of $21.5 recorded upon expiration of the statute of limitations for tax reserves previously established for uncertain tax positions taken in prior years. This included a benefit of $12.2 ($0.05 per share) for release of reserves established in 2017 for a tax election related to a non-U.S. subsidiary and other previously disclosed items ("tax election benefit and other").

Additionally, the fiscal year 2020 effective tax rate reflected the unfavorable impact of India Finance Act 2020, which resulted in additional net income of $13.5 ($0.06 per share). This included an increase to equity affiliates' income of $33.8, partially offset by an increase to our income tax provision of $20.3 for changes in the future tax costs of repatriated earnings.

Our adjusted effective tax rate was 18.9% and 19.1% for the fiscal years ended 30 September 2021 and 2020, respectively.

DISCUSSION OF RESULTS BY BUSINESS SEGMENT

Prior year segment information presented below has been updated to reflect the reorganization of our reporting segments effective 1 October 2021. The reorganization included the separation of our former Industrial Gases – EMEA (Europe, Middle East, and Africa) segment into two separate reporting segments: (1) Europe and (2) Middle East and India. The results of an affiliate formerly reflected in the Asia segment are now reported in the Middle East and India segment. Additionally, the results of our Industrial Gases – Global operating segment are reflected in the Corporate and other segment. The reorganization did not impact the Americas segment.

Americas

The table below summarizes the major factors that impacted sales in the Americas segment for the periods presented:

2022 vs. 2021 (Americas)

Sales of $5,368.9 increased 29%, or $1,201.3, due to higher energy cost pass-through to customers of 16%, higher volumes of 8%, and positive pricing of 6%, partially offset by an unfavorable currency impact of 1%. Significantly higher energy costs increased contractual cost pass-through to our on-site customers. In our merchant business, we successfully implemented pricing actions across all major product lines. The volume improvement was driven by a recovery in hydrogen and better demand for merchant products in North America. The unfavorable currency impact was primarily attributable to the strengthening of the U.S. Dollar against the Chilean Peso.

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Operating income of $1,174.4 increased 10%, or $108.9, primarily from pricing, net of power and fuel costs, of $146 and favorable volumes of $68, partially offset by higher costs of $100. Higher costs were driven by supply chain challenges, including driver shortages that continue to impact the industry broadly, inflation, higher planned maintenance, and higher incentive compensation. Operating margin of 21.9% decreased 370 bp from 25.6% in the prior year, as higher energy cost pass-through to customers and higher costs were only partially offset by higher pricing. The higher energy cost pass-through to customers accounted for approximately 300 bp of the decline.

Equity affiliates’ income of $98.2 decreased 13%, or $14.3, driven by our Mexico affiliate.

2021 vs. 2020 (Americas)

Sales of $4,167.6 increased 15%, or $536.9, due to higher energy cost pass-through to customers of 11% and positive pricing of 4%, as volumes and currency were flat versus the prior year. Energy cost pass-through to customers was higher in fiscal year 2021 primarily due to natural gas prices, which rose significantly in the second quarter and remained elevated throughout the year. The pricing improvement was attributable to continued focus on pricing actions in our merchant business. Volumes were flat as positive contributions from new assets, including hydrogen assets we acquired in April 2020, were offset by lower hydrogen and merchant demand.

Operating income of $1,065.5 increased 5%, or $53.1, due to higher pricing, net of power and fuel costs, of $79 and favorable currency of $10, partially offset by higher operating costs, including planned maintenance, of $36. Operating margin of 25.6% decreased 230 bp from 27.9% in 2020 primarily due to higher energy cost pass-through to customers, which negatively impacted margin by approximately 250 bp, and higher operating costs, partially offset by the impact of our pricing actions.

Equity affiliates’ income of $112.5 increased 33%, or $28.2, driven by higher income from our Mexico affiliate.

Asia

The table below summarizes the major factors that impacted sales in the Asia segment for the periods presented:

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2022 vs. 2021 (Asia)

Sales of $3,143.3 increased 8%, or $222.5, due to higher volumes of 7%, positive pricing of 3%, and higher energy cost pass-through to customers of 1%, partially offset by unfavorable currency impacts of 3%. Volumes improved overall despite COVID-19 restrictions in certain parts of China and included contributions from several traditional industrial gas plants that were brought on-stream in our on-site business across the region. Pricing improved across all key countries and most major merchant product lines. The unfavorable currency impact was primarily attributable to the strengthening of the U.S. Dollar against the Chinese Renminbi and the South Korean Won.

Operating income of $898.3 increased 7%, or $60.0, as higher volumes of $104 and positive pricing, net of power and fuel costs, of $22 were partially offset by higher operating costs of $43 and an unfavorable currency impact of $23. Higher costs were driven by higher distribution and product sourcing costs, including those related to supply chain inefficiencies, inflation, higher incentive compensation, and resources needed to support new project start-ups. Operating margin of 28.6% decreased 10 bp from 28.7% in the prior year as the positive impact of our volume growth was mostly offset by the higher costs.

Equity affiliates’ income of $22.1 decreased 38%, or $13.8, driven by an affiliate in Thailand.

2021 vs. 2020 (Asia)

Sales of $2,920.8 increased 8%, or $204.3, due to favorable currency of 7% and positive pricing of 1%, as both volumes and energy cost pass-through to customers were flat versus 2020. Positive volume contributions from our base merchant business and new plants were offset by a reduced contribution from our Lu'An joint venture. The favorable currency impact was primarily attributable to the appreciation of the Chinese Renminbi and South Korean Won against the U.S. Dollar.

Operating income of $838.3 decreased 4%, or $32.0, primarily due to unfavorable volume mix of $62 and higher operating costs, including inflation and product sourcing costs, of $32, partially offset by favorable currency of $59. Operating margin of 28.7% decreased 330 bp from 32.0% in the prior year primarily due to a reduced contribution from our Lu'An joint venture.

Equity affiliates’ income of $35.9 increased 12%, or $3.8.

Europe

The table below summarizes the major factors that impacted sales in the Europe segment for the periods presented:

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2022 vs. 2021 (Europe)

Sales of $3,086.1 increased 32%, or $740.5, due to higher energy cost pass-through to customers of 27%, higher pricing of 15%, and higher volumes of 1%, partially offset by an unfavorable currency impact of 11%. Significantly higher energy costs across the region increased contractual cost pass-through to our on-site customers. In our merchant business, we successfully implemented pricing actions in all major product lines. While we experienced better demand for merchant products, volumes were relatively flat due to lower hydrogen demand. Additionally, sales in this region were negatively impacted by the strengthening of the U.S. Dollar against the Euro and the British Pound Sterling.

Operating income of $503.4 decreased 5%, or $26.0, due to unfavorable currency impacts of $37, higher costs of $31, and unfavorable volume mix of $19, partially offset by higher pricing, net of power and fuel costs, of $61. Higher costs were primarily attributable to inflation and distribution and sourcing costs. Operating margin of 16.3% decreased 630 bp from 22.6% in the prior year primarily due to higher energy cost pass-through to customers, which accounted for approximately 450 bp of the margin decline, and higher costs.

Equity affiliates’ income of $78.2 increased 25%, or $15.4, driven by an affiliate in Italy.

2021 vs. 2020 (Europe)

Sales of $2,345.6 increased 27%, or $498.6, due to higher volumes of 11%, favorable currency impacts of 7%, higher energy cost pass-through to customers of 6%, and positive pricing of 3%. The volume improvement was driven by our base merchant business and new assets, including those from a business in Israel that we acquired in the fourth quarter of 2020. While our liquid bulk business largely recovered from COVID-19 in fiscal year 2021, demand for packaged gases and hydrogen continued to be lower than pre-pandemic levels. Favorable currency impacts were primarily attributable to the appreciation of the British Pound Sterling and Euro against the U.S. Dollar. Energy cost pass-through to customers was higher primarily in the second half of the year as we had experienced significantly higher natural gas and electricity costs in Europe. The pricing improvement was primarily attributable to our merchant business.

Operating income of $529.4 increased 16%, or $74.6, due to higher volumes of $47, favorable currency impacts of $31, and positive pricing, net of power and fuel costs, of $13, partially offset by unfavorable costs of $16. Operating margin of 22.6% decreased 200 bp from 24.6% in the prior year, primarily due to impacts from higher energy cost pass-through to customers, which negatively impacted margin by approximately 100 bp, and unfavorable operating costs.

Equity affiliates’ income of $62.8 increased 21%, or $11.0, primarily due to higher income from affiliates in Italy and South Africa.

Middle East and India

2022 vs. 2021 (Middle East and India)

Sales of $129.5 increased 30%, or $30.2, primarily due to a new plant in India and a small acquisition. Operating income of $21.1 decreased 25%, or $6.9, due to unfavorable volume mix and higher costs. Equity affiliates' income of $293.9 increased $217.5 primarily from the JIGPC joint venture, which began contributing to our results in late October 2021, as well as recognition of the remaining deferred profit associated with air separation units previously sold to Jazan Gas Project Company, net of other project finalization costs, in the first quarter.

2021 vs. 2020 (Middle East and India)

Sales of $99.3 increased 25%, or $20.0, and operating income of $28.0 increased 51%, or $9.5, primarily due to a new plant in India. Equity affiliates’ income of $76.4 increased 47%, or $24.5, primarily due to higher income from an affiliate in India.

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Corporate and other

2022 vs. 2021 (Corporate and other)

Sales of $970.8 increased 23%, or $181.1, and operating loss of $184.7 decreased 4%, or $8.7, as the current year included higher sale of equipment project activity related to air separation equipment, completion of liquefaction equipment for an LNG project, as well as distribution equipment.

2021 vs. 2020 (Corporate and other)

Sales of $789.7 increased 36%, or $206.9, primarily due to higher project activity in our sale of equipment and turbo machinery equipment and services businesses. Despite higher sales, operating loss of $193.4 increased 27%, or $41.2, as higher project costs, product development spending, and corporate support costs were only partially offset by higher sale of equipment activity and a favorable settlement of a supply contract.

RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES

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

We present certain financial measures, other than in accordance with U.S. generally accepted accounting principles ("GAAP"), on an "adjusted" or "non-GAAP" basis. On a consolidated basis, these measures include adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate, and capital expenditures. On a segment basis, these measures include adjusted EBITDA and adjusted EBITDA margin. In addition to these measures, we also present certain supplemental non-GAAP financial measures to help the reader understand the impact that certain disclosed items, or "non-GAAP adjustments," have on the calculation of our adjusted diluted EPS. For each non-GAAP financial measure, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP.

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

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

We provide these non-GAAP financial measures to allow investors, potential investors, securities analysts, and others to evaluate the performance of our business in the same manner as our management. We believe these measures, when viewed together with 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. However, we caution readers not to consider these measures in isolation or as a substitute for the most directly comparable measures calculated in accordance with GAAP. Readers should also consider the limitations associated with these non-GAAP financial measures, including the potential lack of comparability of these measures from one company to another.

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Adjusted Diluted EPS

The table below provides a reconciliation to the most directly comparable GAAP measure for each of the major components used to calculate adjusted diluted EPS from continuing operations, which we view as a key performance metric. In periods that we have non-GAAP adjustments, we believe it is important for the reader to understand the per share impact of each such adjustment because management does not consider these impacts when evaluating underlying business performance. Per share impacts are calculated independently and may not sum to total diluted EPS and total adjusted diluted EPS due to rounding.

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Adjusted EBITDA and Adjusted EBITDA Margin

We define adjusted EBITDA as net income less income (loss) from discontinued operations, net of tax, and excluding certain items that we do not believe are indicative of underlying business trends, before interest expense, other non-operating income (expense), net, income tax provision, and depreciation and amortization expense. Adjusted EBITDA and adjusted EBITDA margin provide useful metrics for management to assess operating performance. Margins are calculated independently for each period by dividing each line item by consolidated sales for the respective period and may not sum to total margin due to rounding.

The tables below present consolidated sales and a reconciliation of net income on a GAAP basis to adjusted EBITDA and net income margin on a GAAP basis to adjusted EBITDA margin:

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The tables below present sales and a reconciliation of operating income and operating margin to adjusted EBITDA and adjusted EBITDA margin for each of our reporting segments for the fiscal years ended 30 September:

Americas

Asia

Europe

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Middle East and India

Corporate and other

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Adjusted Effective Tax Rate

The effective tax rate equals the income tax provision divided by income from continuing operations before taxes.

Capital Expenditures

We define capital expenditures as cash flows for additions to plant and equipment, including long-term deposits, acquisitions (less cash acquired), and investment in and advances to unconsolidated affiliates. A reconciliation of cash used for investing activities to our reported capital expenditures is provided below:

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LIQUIDITY AND CAPITAL RESOURCES

Our cash balance and cash flows from operations are our primary sources of liquidity and are generally sufficient to meet our liquidity needs. In addition, we have the flexibility to access capital through a variety of financing activities, including accessing the capital markets, drawing upon our credit facility, or alternatively, accessing the commercial paper markets. At this time, we have not utilized, nor do we expect to access, our credit facility for additional liquidity.

As of 30 September 2022, we had $1,611.1 of foreign cash and cash items compared to total cash and cash items of $2,711.0. We do not expect that a significant portion of the earnings of our foreign subsidiaries and affiliates will be subject to U.S. income tax upon repatriation to the U.S. Depending on the country in which the subsidiaries and affiliates reside, the repatriation of these earnings may be subject to foreign withholding and other taxes. However, since we have significant current investment plans outside the U.S., it is our intent to permanently reinvest the majority of our foreign cash and cash items that would be subject to additional taxes outside the U.S.

Cash Flows From Operations

For the fiscal year ended 30 September 2022, cash provided by operating activities was $3,170.6. Undistributed earnings of equity method investments reflects activity from the JIGPC joint venture, which began contributing to our results in late October 2021. We received cash distributions of approximately $155 from this joint venture during the fiscal year. Other adjustments of $304.9 included adjustments for noncash currency impacts of intercompany balances, deferred costs associated with new projects, contributions to pension plans, and payments made for leasing activities. The working capital accounts were a use of cash of $115.8, primarily driven by a use of cash of $475.2 from trade receivables, less allowances, $94.3 from inventory and $77.0 from other working capital, partially offset by a source of cash of $532.5 from payables and accrued liabilities. The use of cash within trade receivables includes the impacts of higher natural gas costs contractually passed through to customers and higher underlying sales. The source of cash within payables and accrued liabilities primarily resulted from higher natural gas costs and customer advances for sale of equipment projects. The use of cash within other working capital primarily relates to contract fulfillment costs and the timing of income tax payments.

For the fiscal year ended 30 September 2021, cash provided by operating activities was $3,335.2. Other adjustments of $116.7 included pension plan contributions of $44.6 and pension income of $38.9 that did not have a cash impact. The working capital accounts were a source of cash of $16.7, primarily driven by a $187.9 source of cash from payables and accrued liabilities, partially offset by a $130.5 use of cash from trade receivables, less allowances. The source of cash within payables and accrued liabilities primarily resulted from higher natural gas costs, which also drove the use of cash within trade receivables as we contractually passed through these higher costs to customers.

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Cash Flows From Investing Activities

For the fiscal year ended 30 September 2022, cash used for investing activities was $3,857.2. Capital expenditures primarily included $2,926.5 for additions to plant and equipment, including long-term deposits and $1,658.4 for investment in and advances to unconsolidated affiliates. Refer to the Capital Expenditures section below for further detail. Proceeds from investments of $2,377.4 resulted from maturities of time deposits and treasury securities with terms greater than three months but less than one year and exceeded purchases of investments of $1,637.8.

For the fiscal year ended 30 September 2021, cash used for investing activities was $2,732.9. Capital expenditures for plant and equipment, including long-term deposits, were $2,464.2. Purchases of investments with terms greater than three months but less than one year of $2,100.7 exceeded proceeds from investments of $1,875.2, which resulted from maturities of time deposits and treasury securities.

Capital Expenditures

Capital expenditures is a non-GAAP financial measure that we define as cash flows for additions to plant and equipment, including long-term deposits, acquisitions (less cash acquired), and investment in and advances to unconsolidated affiliates. The components of our capital expenditures are detailed in the table below. We also present a reconciliation of our capital expenditures to cash used for investing activities on page 40.

(A)Includes contributions from noncontrolling partners in consolidated subsidiaries as discussed below.

Capital expenditures in fiscal year 2022 totaled $4,650.0 compared to $2,550.7 in fiscal year 2021. The increase of $2,099.3 was primarily driven by our initial investment of $1.6 billion in the new JIGPC joint venture, which included approximately $130 from a non-controlling partner in one of our subsidiaries. We expect to make an additional investment of approximately $1 billion, which will also include a contribution from our non-controlling partner, for the second phase of the project, which we expect to occur in the second quarter of fiscal year 2023. Refer to Note 7, Equity Affiliates, to the consolidated financial statements for additional information.

Outlook for Investing Activities

We expect capital expenditures for fiscal year 2023 to be approximately $5 to $5.5 billion.

It is not possible, without unreasonable efforts, to reconcile our forecasted capital expenditures to future cash used for investing activities because we are unable to identify the timing or occurrence of our future investment activity, which is driven by our assessment of competing opportunities at the time we enter into transactions. These decisions, either individually or in the aggregate, could have a significant effect on our cash used for investing activities.

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

Cash Flows From Financing Activities

In fiscal year 2022, cash used for financing activities was $1,000.6. The use of cash was primarily driven by dividend payments to shareholders of $1,383.3 and payments on long-term debt of $400.0 for the repayment of a 3.0% Senior Note at maturity. These uses of cash were partially offset by long-term debt proceeds of $766.2.

In fiscal year 2021, cash used for financing activities was $1,420.9 and primarily included dividend payments to shareholders of $1,256.7 and payments on long-term debt of $462.9, partially offset by long-term debt proceeds of $178.9 and investments by noncontrolling interests of $136.6. The payments on long-term debt included the repayment of a 0.375% €350.0 million Eurobond ($428) in June 2021.

Financing and Capital Structure

Capital needs in fiscal year 2022 were satisfied with our cash balance and cash from operations. Total debt increased from $7,637.2 as of 30 September 2021 to $7,644.8 as of 30 September 2022. Total debt includes related party debt of $781.0 and $358.4 as of 30 September 2022 and 30 September 2021, respectively.

Various debt agreements to which we are a party include financial covenants and other restrictions, including restrictions pertaining to the ability to create property liens and enter into certain sale and leaseback transactions. As of 30 September 2022, we are in compliance with all of the financial and other covenants under our debt agreements.

Credit Facilities

On 31 March 2021, we entered into a five-year $2,500 revolving credit agreement maturing 31 March 2026 with a syndicate of banks (the “2021 Credit Agreement”), under which senior unsecured debt is available to us and certain of our subsidiaries. On 31 March 2022, we amended the 2021 Credit Agreement to exercise our option to increase the maximum borrowing capacity to $2,750 and transition the benchmark rate from the London Inter-Bank Offered Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR"). All other terms remain unchanged from the original agreement.

The only financial covenant in the 2021 Credit Agreement is a maximum ratio of total debt to total capitalization (equal to total debt plus total equity) not to exceed 70%. Total debt as of 30 September 2022 and 30 September 2021, expressed as a percentage of total capitalization, was 35.8% and 35.2%, respectively. No borrowings were outstanding under the 2021 Credit Agreement as of 30 September 2022.

We also have credit facilities available to certain of our foreign subsidiaries totaling $749.0, of which $457.5 was borrowed and outstanding as of 30 September 2022. The amount borrowed and outstanding as of 30 September 2021 was $176.2.

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Equity Securities

On 15 September 2011, the Board of Directors authorized the repurchase of up to $1,000 of our outstanding common stock. We did not purchase any of our outstanding shares in fiscal years 2022 or 2021. As of 30 September 2022, $485.3 in share repurchase authorization remained.

Dividends

The Board of Directors determines whether to declare cash dividends on our common stock and the timing and amount based on financial condition and other factors it deems relevant. Dividends are paid quarterly, usually during the sixth week after the close of the fiscal quarter. In fiscal year 2022, the Board of Directors increased the quarterly dividend on our common stock to $1.62 per share, representing an 8% increase, or $0.12 per share, from the previous dividend of $1.50 per share. This is the 40th consecutive year that we have increased our quarterly dividend. We expect to continue to pay cash dividends in the future at comparable or increased levels.

On 22 November 2022, the Board of Directors declared a quarterly dividend of $1.62 per share that is payable on 13 February 2023 to shareholders of record at the close of business on 3 January 2023.

Discontinued Operations

In fiscal year 2022, cash provided by operating activities of discontinued operations of $59.6 resulted from cash received as part of a state tax refund related to the sale of our former Performance Materials Division in fiscal year 2017.

In fiscal year 2021, cash provided by operating activities of discontinued operations of $6.7 resulted from cash received as part of a state tax settlement related to the sale of our former Performance Materials Division in fiscal year 2017.

PENSION BENEFITS

We and certain of our subsidiaries sponsor defined benefit pension plans and defined contribution plans that cover a substantial portion of our worldwide employees. The principal defined benefit pension plans are the U.S. salaried pension plan and the U.K. pension plan. These plans were closed to new participants in 2005, after which defined contribution plans were offered to new employees. The shift to defined contribution plans is expected to continue to reduce volatility of both plan expense and contributions. Refer to Note 15, Retirement Benefits, to the consolidated financial statements for additional disclosures on our postretirement benefits.

Net Periodic Benefit

The table below summarizes the components of net periodic benefit for our U.S. and international defined benefit pension plans for the fiscal years ended 30 September:

Net periodic benefit of $3.6 decreased from $37.3 in the prior year, primarily due to lower non-service related benefits. We increased the percentage of fixed income investments within the plan asset portfolios, which resulted in lower expected returns on plan assets for both the U.S. salaried and the U.K. pension plans. Additionally, a higher discount rate resulted in higher interest costs. These two reductions in non-service related benefits were only partially offset by lower actuarial loss amortization. Our non-service related benefits are reflected within "Other non-operating income (expense), net" on our consolidated income statements.

Service costs result from benefits earned by active employees and are reflected as operating expenses primarily within "Cost of sales" and "Selling and administrative" on our consolidated income statements. The amount of service costs capitalized in fiscal years 2022 and 2021 was not material.

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The table below summarizes the assumptions used in the calculation of net periodic benefit for the fiscal years ended 30 September:

2023 Outlook

In fiscal year 2023, we expect to recognize pension expense of approximately $110 to $120 primarily driven by non-service related costs, including higher interest cost and lower estimated expected returns on plan assets due to a smaller beginning balance of plan assets.

In fiscal year 2022, we recognized net actuarial losses of $143.5 in other comprehensive income. Actuarial gains and losses are amortized into pension expense over prospective periods to the extent they are not offset by future gains or losses. Future changes in the discount rate and actual returns on plan assets could impact the actuarial gain or loss and resulting amortization in years beyond fiscal year 2023.

Effective beginning in the first quarter of fiscal year 2023, management will review and disclose our adjusted results excluding the impact of non-service related costs as they are not indicative of the plans’ future contribution needs due to the funded status of the plans. Non-service related costs are driven by factors that are unrelated to our operations, such as recent changes to the allocation of our pension plan assets associated with de-risking as well as volatility in equity and debt markets.

Pension Funding

Funded Status

The projected benefit obligation represents the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future salary increases. The plan funded status is calculated as the difference between the projected benefit obligation and the fair value of plan assets at the end of the period.

The table below summarizes the project benefit obligation, the fair value of plan assets, and the funded status for our U.S. and international plans as of 30 September:

The net unfunded liability of $62.3 as of 30 September 2022 increased $6.1 from $56.2 as of 30 September 2021, primarily due to unfavorable asset experience, partially offset by a lower liability due to increased discount rates.

Company Contributions

Pension funding includes both contributions to funded plans and benefit payments for unfunded plans, which are primarily non-qualified plans. With respect to funded plans, our funding policy is that contributions, combined with appreciation and earnings, will be sufficient to pay benefits without creating unnecessary surpluses.

In addition, we make contributions to satisfy all legal funding requirements while managing our capacity to benefit from tax deductions attributable to plan contributions. With the assistance of third-party actuaries, we analyze the liabilities and demographics of each plan, which help guide the level of contributions. During 2022 and 2021, our cash contributions to funded plans and benefit payments for unfunded plans were $44.7 and $44.6, respectively.

Funding Outlook

For fiscal year 2023, cash contributions to defined benefit plans are estimated to be $25 to $35. The estimate is based on expected contributions to certain international plans and anticipated benefit payments for unfunded plans, which are dependent upon the timing of retirements. Actual future contributions will depend on future funding legislation, discount rates, investment performance, plan design, and various other factors.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Refer to Note 1, Basis of Presentation and Major Accounting Policies, and Note 2, New Accounting Guidance, to the consolidated financial statements for a description of our major accounting policies and information concerning implementation and impact of new accounting guidance.

The accounting policies discussed below are those policies that we consider to be the most critical to understanding our financial statements because they require management's most difficult, subjective, or complex judgments, often as the result of the need to make estimates about the effects of matters that are inherently uncertain. These estimates reflect our best judgment about current and/or future economic and market conditions and their effect based on information available as of the date of our consolidated financial statements. If conditions change, actual results may differ materially from these estimates. Our management has reviewed these critical accounting policies and estimates and related disclosures with the Audit and Finance Committee of our Board of Directors.

Depreciable Lives of Plant and Equipment

Plant and equipment, net at 30 September 2022 totaled $14,160.5, and depreciation expense totaled $1,302.7 during fiscal year 2022. Plant and equipment is recorded at cost and depreciated using the straight-line method, which deducts equal amounts of the cost of each asset from earnings every year over its estimated economic useful life.

Economic useful life is the duration of time an asset is expected to be productively employed by us, which may be less than its physical life. Assumptions on the following factors, among others, affect the determination of estimated economic useful life: wear and tear, obsolescence, technical standards, contract life, market demand, competitive position, raw material availability, and geographic location.

The estimated economic useful life of an asset is monitored to determine its appropriateness, especially when business circumstances change. For example, changes in technology, changes in the estimated future demand for products, excessive wear and tear, or unanticipated government actions may result in a shorter estimated useful life than originally anticipated. In these cases, we would depreciate the remaining net book value over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment to the useful life decreases depreciation expense per year on a prospective basis.

Our regional segments have numerous long-term customer supply contracts for which we construct an on-site plant adjacent to or near the customer’s facility. These contracts typically have initial contract terms of 10 to 20 years. Depreciable lives of the production assets related to long-term supply contracts are generally matched to the contract lives. Extensions to the contract term of supply frequently occur prior to the expiration of the initial term. As contract terms are extended, the depreciable life of the associated production assets is adjusted to match the new contract term, as long as it does not exceed the remaining physical life of the asset.

Our regional segments also have contracts for liquid or gaseous bulk supply and, for smaller customers, packaged gases. The depreciable lives of production facilities associated with these contracts are generally 15 years. These depreciable lives have been determined based on historical experience combined with judgment on future assumptions such as technological advances, potential obsolescence, competitors’ actions, etc.

In addition, we may purchase assets through transactions accounted for as either an asset acquisition or a business combination. Depreciable lives are assigned to acquired assets based on the age and condition of the assets, the remaining duration of long-term supply contracts served by the assets, and our historical experience with similar assets. Management monitors its assumptions and may potentially need to adjust depreciable life as circumstances change.

Impairment of Assets

There were no triggering events in fiscal year 2022 that would require impairment testing for any of our asset groups, reporting units that contain goodwill, or indefinite-lived intangibles assets. We completed our annual impairment tests for goodwill and other indefinite-lived intangible assets and concluded there were no indications of impairment.

In the fourth quarter of fiscal year 2022, we recorded a noncash charge of $14.8 for the other-than-temporary impairment of two small equity method investments in our Asia segment.

Refer to the “Impairment of Assets” subsections below for additional detail.

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Impairment of Assets – Plant and Equipment

Plant and equipment meeting the held for sale criteria are reported at the lower of carrying amount or fair value less cost to sell. Plant and equipment to be disposed of other than by sale may be reviewed for impairment upon the occurrence of certain triggering events, such as unexpected contract terminations or unexpected foreign government-imposed restrictions or expropriations. Plant and equipment held for use is grouped for impairment testing at the lowest level for which there is identifiable cash flows. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such circumstances may include:

•a significant decrease in the market value of a long-lived asset grouping;

•a significant adverse change in the manner in which the asset grouping is being used or in its physical condition;

•an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the long-lived asset;

•a reduction in revenues that is other than temporary;

•a history of operating or cash flow losses associated with the use of the asset grouping; or

•changes in the expected useful life of the long-lived assets.

If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by that asset group is compared to the carrying value to determine whether impairment exists. If an asset group is determined to be impaired, the loss is measured based on the difference between the asset group’s fair value and its carrying value. An estimate of the asset group’s fair value is based on the discounted value of its estimated cash flows.

The assumptions underlying the undiscounted future cash flow projections require significant management judgment. Factors that management must estimate include industry and market conditions, sales volume and prices, costs to produce, inflation, etc. The assumptions underlying the cash flow projections represent management’s best estimates at the time of the impairment review and could include probability weighting of cash flow projections associated with multiple potential future scenarios. Changes in key assumptions or actual conditions that differ from estimates could result in an impairment charge. We use reasonable and supportable assumptions when performing impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.

In fiscal year 2022, there was no need to test for impairment on any of our asset groupings as no events or changes in circumstances indicated that the carrying amount of our asset groupings may not be recoverable.

Impairment of Assets – Goodwill

The acquisition method of accounting for business combinations requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the aggregate purchase price (plus the fair value of any noncontrolling interest and previously held equity interest in the acquiree) over the fair value of identifiable net assets of an acquired entity. Goodwill was $823.0 as of 30 September 2022. Disclosures related to goodwill are included in Note 9, Goodwill, to the consolidated financial statements.

We review goodwill for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying value of goodwill might not be recoverable. The tests are done at the reporting unit level, which is defined as being equal to or one level below the operating segment for which discrete financial information is available and whose operating results are reviewed by segment managers regularly. We have five reportable business segments, seven operating segments and 11 reporting units, eight of which include a goodwill balance. Refer to Note 23, Business Segment and Geographic Information, for additional information. Reporting units are primarily based on products and subregions within each reportable segment. The majority of our goodwill is assigned to reporting units within our regional industrial gases segments.

As part of the goodwill impairment testing, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. However, we choose to bypass the qualitative assessment and conduct quantitative testing to determine if the carrying value of the reporting unit exceeds its fair value. An impairment loss will be recognized for the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

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To determine the fair value of a reporting unit, we initially use an income approach valuation model, representing the present value of estimated future cash flows. Our valuation model uses a discrete growth period and an estimated exit trading multiple. The income approach is an appropriate valuation method due to our capital-intensive nature, the long-term contractual nature of our business, and the relatively consistent cash flows generated by our reporting units. The principal assumptions utilized in our income approach valuation model include revenue growth rates, operating profit and/or adjusted EBITDA margins, discount rate, and exit multiple. Projected revenue growth rates and operating profit and/or adjusted EBITDA assumptions are consistent with those utilized in our operating plan and/or revised forecasts and long-term financial planning process. The discount rate assumption is calculated based on an estimated market-participant risk-adjusted weighted-average cost of capital, which includes factors such as the risk-free rate of return, cost of debt, and expected equity premiums. The exit multiple is determined from comparable industry transactions and where appropriate, reflects expected long-term growth rates.

If our initial review under the income approach indicates there may be impairment, we incorporate results under the market approach to further evaluate the existence of impairment. When the market approach is utilized, fair value is estimated based on market multiples of revenue and earnings derived from comparable publicly-traded industrial gases companies and/or regional manufacturing companies engaged in the same or similar lines of business as the reporting unit, adjusted to reflect differences in size and growth prospects. When both the income and market approach are utilized, we review relevant facts and circumstances and make a qualitative assessment to determine the proper weighting. Management judgment is required in the determination of each assumption utilized in the valuation model, and actual results could differ from the estimates.

During the fourth quarter of fiscal year 2022, we conducted our annual goodwill impairment test, noting no indications of impairment. The fair value of all of our reporting units substantially exceeded their carrying value.

Future events that could have a negative impact on the level of excess fair value over carrying value of the reporting units include, but are not limited to: long-term economic weakness, decline in market share, pricing pressures, inability to successfully implement cost improvement measures, increases to our cost of capital, changes in the strategy of the reporting unit, and changes to the structure of our business as a result of future reorganizations or divestitures of assets or businesses. Negative changes in one or more of these factors, among others, could result in impairment charges.

Impairment of Assets – Intangible Assets

Intangible assets, net with determinable lives at 30 September 2022 totaled $314.4 and consisted primarily of customer relationships, purchased patents and technology, and land use rights. These intangible assets are tested for impairment as part of the long-lived asset grouping impairment tests. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. See the impairment discussion above under "Impairment of Assets – Plant and Equipment" for a description of how impairment losses are determined.

Indefinite-lived intangible assets at 30 September 2022 totaled $33.1 and consisted of trade names and trademarks. Indefinite-lived intangibles are subject to impairment testing at least annually or more frequently if events or changes in circumstances indicate that potential impairment exists. The impairment test for indefinite-lived intangible assets involves calculating the fair value of the indefinite-lived intangible assets and comparing the fair value to their carrying value. If the fair value is less than the carrying value, the difference is recorded as an impairment loss. To determine fair value, we utilize the royalty savings method, a form of the income approach. This method values an intangible asset by estimating the royalties avoided through ownership of the asset.

Disclosures related to intangible assets other than goodwill are included in Note 10, Intangible Assets, to the consolidated financial statements.

In the fourth quarter of 2022, we conducted our annual impairment test of indefinite-lived intangibles which resulted in no impairment.

Impairment of Assets – Equity Method Investments

Investments in and advances to equity affiliates totaled $3,353.8 at 30 September 2022. The majority of our investments are ventures with other industrial gas companies. Summarized financial information of our equity affiliates is included in Note 7, Equity Affiliates, to the consolidated financial statements. We review our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.

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An impairment loss is recognized in the event that an other-than-temporary decline in fair value below the carrying value of an investment occurs. We estimate the fair value of our investments under the income approach, which considers the estimated discounted future cash flows expected to be generated by the investee, and/or the market approach, which considers market multiples of revenue and earnings derived from comparable publicly-traded industrial gas companies. Changes in key assumptions about the financial condition of an investee or actual conditions that differ from estimates could result in an impairment charge.

During the fourth quarter of fiscal year 2022, we determined there was an other-than-temporary impairment of our investments in two small equity affiliates in the Asia segment. As a result, we recorded a noncash charge of $14.8 ($11.1 after-tax, or $0.05 per share) to write down the full carrying value of the investments. This charge is reflected on our consolidated income statements within “Equity affiliates' income” and was not recorded in segment results. There were no events or changes in circumstances that indicated that the carrying amount of our other investments may not be recoverable.

Revenue Recognition – Cost Incurred Input Method

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

Accounting for contracts using the cost incurred input method requires management judgment relative to assessing risks and their impact on the estimates of revenues and costs. Our estimates are impacted by factors such as the potential for incentives or penalties on performance, schedule delays, technical issues, cost inflation, labor productivity, the complexity of work performed, the availability of materials, and performance of subcontractors. When adjustments in estimated total contract revenues or estimated total costs are required, any changes in the estimated profit from prior estimates are recognized in the current period for the inception-to-date effect of such change. When estimates of total costs to be incurred on a contract exceed estimates of total revenues to be earned, a provision for the entire estimated loss on the contract is recorded in the period in which the loss is determined.

In addition to the typical risks associated with underlying performance of project procurement and construction activities, our sale of equipment projects within our Corporate and other segment require monitoring of risks associated with schedule, geography, and other aspects of the contract and their effects on our estimates of total revenues and total costs to complete the contract.

Changes in estimates on projects accounted for under the cost incurred input method unfavorably impacted operating income by approximately $30 in fiscal year 2022 and $19 in fiscal year 2021. Our changes in estimates would not have significantly impacted amounts recorded in prior years.

We assess the performance of our sale of equipment projects as they progress. Our earnings could be positively or negatively impacted by changes to our forecast of revenues and costs on these projects.

Revenue Recognition – On-site Customer Contracts

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

Income Taxes

We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities measured using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As of 30 September 2022, accrued income taxes, including the amount recorded as noncurrent, was $269.8, and net deferred tax liabilities were $1,111.7. Tax liabilities related to uncertain tax positions as of 30 September 2022 were $103.5, excluding interest and penalties. Income tax expense for the fiscal year ended 30 September 2022 was $500.8. Disclosures related to income taxes are included in Note 21, Income Taxes, to the consolidated financial statements.

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

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

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

A 1% increase or decrease in our effective tax rate may result in a decrease or increase to net income, respectively, of approximately $28.

Pension and Other Postretirement Benefits

The amounts recognized in the consolidated financial statements for pension and other postretirement benefits are determined on an actuarial basis utilizing numerous assumptions. The discussion that follows provides information on the significant assumptions, expense, and obligations associated with the defined benefit plans.

Actuarial models are used in calculating the expense and liability related to the various defined benefit plans. These models have an underlying assumption that the employees render service over their service lives on a relatively consistent basis; therefore, the expense of benefits earned should follow a similar pattern.

Several assumptions and statistical variables are used in the models to calculate the expense and liability related to the plans. We determine assumptions about the discount rate, the expected rate of return on plan assets, and the rate of compensation increase. Note 15, Retirement Benefits, to the consolidated financial statements includes disclosure of these rates on a weighted-average basis for both the U.S. and international plans. The actuarial models also use assumptions about demographic factors such as retirement age, mortality, and turnover rates. Mortality rates are based on the most recent U.S. and international mortality tables. We believe the actuarial assumptions are reasonable. However, actual results could vary materially from these actuarial assumptions due to economic events and differences in rates of retirement, mortality, and turnover.

One of the assumptions used in the actuarial models is the discount rate used to measure benefit obligations. This rate reflects the prevailing market rate for high-quality, fixed-income debt instruments with maturities corresponding to the expected timing of benefit payments as of the annual measurement date for each of the various plans. We measure the service cost and interest cost components of pension expense by applying spot rates along the yield curve to the relevant projected cash flows. The rates along the yield curve are used to discount the future cash flows of benefit obligations back to the measurement date. These rates change from year to year based on market conditions that affect corporate bond yields. A higher discount rate decreases the present value of the benefit obligations and results in lower pension expense. With respect to impacts on pension benefit obligations, a 50 bp increase or decrease in the discount rate may result in a decrease or increase, respectively, to pension expense of approximately $20 per year.

The expected rate of return on plan assets represents an estimate of the long-term average rate of return to be earned by plan assets reflecting current asset allocations. In determining estimated asset class returns, we take into account historical and future expected long-term returns and the value of active management, as well as the interest rate environment. Asset allocation is determined based on long-term return, volatility and correlation characteristics of the asset classes, the profiles of the plans’ liabilities, and acceptable levels of risk. Lower returns on the plan assets result in higher pension expense. A 50 bp increase or decrease in the estimated rate of return on plan assets may result in a decrease or increase, respectively, to pension expense of approximately $23 per year.

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We use a market-related valuation method for recognizing certain investment gains or losses for our significant pension plans. Investment gains or losses are the difference between the expected return and actual return on plan assets. The expected return on plan assets is determined based on a market-related value of plan assets. This is a calculated value that recognizes investment gains and losses on equities over a five-year period from the year in which they occur and reduces year-to-year volatility. The market-related value for non-equity investments equals the actual fair value. Expense in future periods will be impacted as gains or losses are recognized in the market-related value of assets.

The expected rate of compensation increase is another key assumption. We determine this rate based on review of the underlying long-term salary increase trend characteristic of labor markets and historical experience, as well as comparison to peer companies. A 50 bp increase or decrease in the expected rate of compensation may result in an increase or decrease to pension expense, respectively, of approximately $7 per year.

Loss Contingencies

In the normal course of business, we encounter contingencies, or situations involving varying degrees of uncertainty as to the outcome and effect on our company. We accrue a liability for loss contingencies when it is considered probable that a liability has been incurred and the amount of loss can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued.

Contingencies include those associated with litigation and environmental matters, for which our accounting policy is discussed in Note 1, Basis of Presentation and Major Accounting Policies, to the consolidated financial statements, and details are provided in Note 16, Commitments and Contingencies, to the consolidated financial statements. Significant judgment is required to determine both the probability and whether the amount of loss associated with a contingency can be reasonably estimated. These determinations are made based on the best available information at the time. As additional information becomes available, we reassess probability and estimates of loss contingencies. Revisions to the estimates associated with loss contingencies could have a significant impact on our results of operations in the period in which an accrual for loss contingencies is recorded or adjusted. For example, due to the inherent uncertainties related to environmental exposures, a significant increase to environmental liabilities could occur if a new site is designated, the scope of remediation is increased, a different remediation alternative is identified, or our proportionate share of the liability increases. Similarly, a future charge for regulatory fines or damage awards associated with litigation could have a significant impact on our net income in the period in which it is recorded.