Quarterly Report (10-q)

Date : 04/26/2018 @ 1:48PM
Source : Edgar (US Regulatory)
Stock : Air Products And Chemicals, Inc. (APD)
Quote : 168.91  0.67 (0.40%) @ 12:48PM

Quarterly Report (10-q)

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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
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-04534
AIR PRODUCTS AND CHEMICALS, INC.
(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

2



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
(Unaudited)

Three Months Ended
Six Months Ended

31 March
31 March
(Millions of dollars, except for share 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.

3



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.

4



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.

5



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 .

6



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.


7



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.

8



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.

9



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.


10



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




11



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.


12



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.

13



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.

14



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
%
 
2.88
%
 
1.5
 

$41.6

 
3.28
%
 
2.32
%
 
1.7

The table below summarizes the fair value and balance sheet location of our outstanding derivatives:
 
Balance Sheet
Location
31 March 2018
30 September 2017
Balance Sheet
Location
31 March 2018
30 September 2017
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
Forward exchange contracts
Other receivables

$81.7


$81.7

Accrued liabilities

$31.6


$82.0

Interest rate management contracts
Other receivables
5.5

11.1

Accrued liabilities
19.4

10.7

Forward exchange contracts
Other noncurrent
assets
9.1

27.1

Other noncurrent
liabilities
19.7

13.8

Interest rate management contracts
Other noncurrent
assets
43.5

102.6

Other noncurrent
liabilities
58.1

22.2

Total Derivatives Designated as Hedging Instruments
 

$139.8


$222.5

 

$128.8


$128.7

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

$4.4


$1.1

Accrued liabilities

$5.4


$2.2

Interest rate management contracts
Other receivables


Accrued liabilities
.4

1.0

Forward exchange contracts
Other noncurrent
assets
9.5


Other noncurrent
liabilities
17.0


Interest rate management contracts
Other noncurrent
assets
3.9

4.2

Other noncurrent
liabilities


Total Derivatives Not Designated as Hedging Instruments
 

$17.8


$5.3

 

$22.8


$3.2

Total Derivatives
 

$157.6


$227.8

 

$151.6


$131.9


Refer to Note 10 , Fair Value Measurements , which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.

15



The table below summarizes the gain or loss related to our cash flow hedges, fair value hedges, net investment hedges, and derivatives not designated as hedging instruments:
 
Three Months Ended 31 March
 
Forward
Exchange Contracts
Foreign Currency
Debt
Other (A)
Total
 
2018
2017
2018
2017
2018
2017
2018
2017
Cash Flow Hedges, net of tax:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI (effective portion)

$31.9


$11.1


$—


$—


($14.1
)

($26.5
)

$17.8


($15.4
)
Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)
4.0

1.2





4.0

1.2

Net (gain) loss reclassified from OCI to other income (expense), net (effective portion)
(29.3
)
(10.8
)


15.8

15.8

(13.5
)
5.0

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

(1.6
)


.7

.7

2.3

(.9
)
Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion)
(.3
)
.5





(.3
)
.5

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

$—


$—


$—


$—


($3.6
)

($2.8
)

($3.6
)

($2.8
)
Net Investment Hedges, net of tax:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI

($15.2
)

($.8
)

($22.2
)

($7.8
)

($23.3
)

($6.5
)

($60.7
)

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

$1.6


($2.5
)

$—


$—


($2.2
)

($.6
)

($.6
)

($3.1
)
 
 
 
 
 
 
 
 
 
 
Six Months Ended 31 March
 
Forward
Exchange Contracts
Foreign Currency
Debt
Other (A)
Total
 
2018
2017
2018
2017
2018
2017
2018
2017
Cash Flow Hedges, net of tax:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI (effective portion)

$39.4


($48.3
)

$—


$—


($31.1
)

$23.1


$8.3


($25.2
)
Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)
5.0

5.8





5.0

5.8

Net (gain) loss reclassified from OCI to other income (expense), net (effective portion)
(46.9
)
38.7



32.2

(12.4
)
(14.7
)
26.3

Net (gain) loss reclassified from OCI to interest expense (effective portion)
2.2

(2.4
)


1.3

1.4

3.5

(1.0
)
Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion)
(.5
)
.3





(.5
)
.3

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

$—


$—


$—


$—


($6.8
)

($11.9
)

($6.8
)

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

($22.7
)

$27.1


($39.5
)

$34.0


($34.5
)

$6.6


($96.7
)

$67.7

Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in other income (expense), net (C)

$.1


($.4
)

$—


$—


($3.5
)

$.2


($3.4
)

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


16



The amount of cash flow hedges’ unrealized gains and losses at 31 March 2018 that are expected to be reclassified to earnings in the next twelve months is not material.
The cash flows related to all derivative contracts are reported in the operating activities section of the consolidated statements of cash flows.
Credit Risk-Related Contingent Features
Certain derivative instruments are executed under agreements that require us to maintain a minimum credit rating with both Standard & Poor’s and Moody’s. If our credit rating falls below this threshold, the counterparty to the derivative instruments has the right to request full collateralization on the derivatives’ net liability position. The net liability position of derivatives with credit risk-related contingent features was $116.9 as of 31 March 2018 and $34.6 as of 30 September 2017 . Because our current credit rating is above the various pre-established thresholds, no collateral has been posted on these liability positions.
Counterparty Credit Risk Management
We execute financial derivative transactions with counterparties that are highly rated financial institutions, all of which are investment grade at this time. Some of our underlying derivative agreements give us the right to require the institution to post collateral if its credit rating falls below the pre-established thresholds with Standard & Poor’s or Moody’s. The collateral that the counterparties would be required to post was $70.9 as of 31 March 2018 and $138.5 as of 30 September 2017 . No financial institution is required to post collateral at this time as all have credit ratings at or above threshold.

10 . FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
Level 1
— Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
— Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3
— Inputs that are unobservable for the asset or liability based on our own assumptions (about the assumptions market participants would use in pricing the asset or liability).
The methods and assumptions used to measure the fair value of financial instruments are as follows:
Short-term Investments
Short-term investments primarily include time deposits and treasury securities with original maturities greater than three months and less than one year. The estimated fair value of the short-term investments, which approximates carrying value as of 31 March 2018 and 30 September 2017 , was determined using level 2 inputs within the fair value hierarchy. Level 2 measurements were based on current interest rates for similar investments with comparable credit risk and time to maturity.
Derivatives
The fair value of our interest rate management contracts and forward exchange contracts are quantified using the income approach and are based on estimates using standard pricing models. These models take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. The computation of the fair values of these instruments is generally performed by the Company. These standard pricing models utilize inputs which are derived from or corroborated by observable market data such as interest rate yield curves as well as currency spot and forward rates. Therefore, the fair value of our derivatives is classified as a level 2 measurement. On an ongoing basis, we randomly test a subset of our valuations against valuations received from the transaction’s counterparty to validate the accuracy of our standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions.
Refer to Note 9 , Financial Instruments , for a description of derivative instruments, including details on the balance sheet line classifications.

17



Long-term Debt
The fair value of our debt is based on estimates using standard pricing models that take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. These standard valuation models utilize observable market data such as interest rate yield curves and currency spot rates. Therefore, the fair value of our debt is classified as a level 2 measurement. We generally perform the computation of the fair value of these instruments.
The carrying values and fair values of financial instruments were as follows:
 
 
31 March 2018
 
30 September 2017
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
Forward exchange contracts
 

$104.7

 

$104.7

 

$109.9

 

$109.9

Interest rate management contracts
 
52.9

 
52.9

 
117.9

 
117.9

Liabilities
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
Forward exchange contracts
 

$73.7

 

$73.7

 

$98.0

 

$98.0

Interest rate management contracts
 
77.9

 
77.9

 
33.9

 
33.9

Long-term debt, including current portion
 
3,454.0

 
3,459.5

 
3,818.8

 
3,928.2


The carrying amounts reported in the balance sheet for cash and cash items, short-term investments, trade receivables, payables and accrued liabilities, accrued income taxes, and short-term borrowings approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the above table.
The following table summarizes assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets:
 
31 March 2018
 
30 September 2017
 
Total
Level 1
Level 2
Level 3
 
Total
Level 1
Level 2
Level 3
Assets at Fair Value
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
Forward exchange contracts

$104.7


$—


$104.7


$—

 

$109.9


$—


$109.9


$—

Interest rate management contracts
52.9


52.9


 
117.9


117.9


Total Assets at Fair Value

$157.6


$—


$157.6


$—

 

$227.8


$—


$227.8


$—

Liabilities at Fair Value
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
Forward exchange contracts

$73.7


$—


$73.7


$—

 

$98.0


$—


$98.0


$—

Interest rate management contracts
77.9


77.9


 
33.9


33.9


Total Liabilities at Fair Value

$151.6


$—


$151.6


$—

 

$131.9


$—


$131.9


$—




18



11 . RETIREMENT BENEFITS
The components of net periodic benefit cost for the defined benefit pension plans for the three and six months ended 31 March 2018 and 2017 were as follows:
 
Pension Benefits
 
2018
 
2017
Three Months Ended 31 March
U.S.
 
International
 
U.S.
 
International
Service cost

$6.4

 

$6.6

 

$6.9

 

$6.3

Interest cost
26.8

 
9.6

 
27.6

 
7.9

Expected return on plan assets
(50.4
)
 
(21.1
)
 
(51.7
)
 
(18.3
)
Prior service cost amortization
.4

 

 
.6

 
(.1
)
Actuarial loss amortization
22.2

 
10.3

 
20.9

 
13.2

Settlements
1.5

 

 
4.1

 
4.0

Curtailment

 

 
.1

 
1.8

Special termination benefits
.4

 

 
(.1
)
 
.1

Other

 
.1

 

 
(2.2
)
Net Periodic Benefit Cost (Total)

$7.3

 

$5.5

 

$8.4

 

$12.7

Less: Discontinued Operations

 

 
(.1
)
 
(3.4
)
Net Periodic Benefit Cost (Continuing Operations)

$7.3

 

$5.5

 

$8.3

 

$9.3

 
 
 
 
 
 
 
 
 
Pension Benefits
 
2018
 
2017
Six Months Ended 31 March
U.S.
 
International
 
U.S.
 
International
Service cost (A)

$12.8

 

$12.9

 

$15.2

 

$13.0

Interest cost
53.5

 
18.8

 
52.5

 
15.5

Expected return on plan assets
(100.8
)
 
(41.3
)
 
(104.4
)
 
(36.8
)
Prior service cost amortization
.8

 

 
1.2

 
(.1
)
Actuarial loss amortization
43.9

 
20.3

 
47.0

 
27.1

Settlements
3.3

 

 
4.1

 
1.7

Curtailment

 

 
4.3

 
(1.3
)
Special termination benefits
.4

 

 
1.0

 
.5

Other

 
.6

 

 
.5

Net Periodic Benefit Cost (Total)

$13.9

 

$11.3

 

$20.9

 

$20.1

Less: Discontinued Operations

 

 
(.7
)
 
(4.1
)
Net Periodic Benefit Cost (Continuing Operations)

$13.9

 

$11.3

 

$20.2

 

$16.0


(A)  
Includes total service costs from discontinued operations of $1.3 for the six months ended 31 March 2017 .
As noted in Note 2 , New Accounting Guidance , we early adopted guidance on the presentation of net periodic pension and postretirement benefit cost during the first quarter of fiscal year 2018. The amendments require that the service cost component of the net periodic benefit cost be presented in the same line items as other compensation costs arising from services rendered by employees during the period. The non-service related costs are presented outside of operating income in "Other non-operating income (expense), net."
Service costs are primarily included in "Cost of sales" and "Selling and administrative" on our consolidated income statements. The costs capitalized in fiscal year 2018 and 2017 were not material.
For the six months ended 31 March 2018 and 2017 , our cash contributions to funded pension plans and benefit payments under unfunded pension plans were $35.9 and $40.8 , respectively. Total contributions for fiscal year 2018 are expected to be approximately $50 to $70 . During fiscal year 2017 , total contributions were $64.1 .


19



12 . COMMITMENTS AND CONTINGENCIES
Litigation
We are involved in various legal proceedings, including commercial, competition, environmental, health, safety, product liability, and insurance matters. In September 2010, the Brazilian Administrative Council for Economic Defense (CADE) issued a decision against our Brazilian subsidiary, Air Products Brasil Ltda., and several other Brazilian industrial gas companies for alleged anticompetitive activities. CADE imposed a civil fine of R$179.2 million (approximately $54 at 31 March 2018 ) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, whose investigation began in 2003, alleging violation of competition laws with respect to the sale of industrial and medical gases. The fines are based on a percentage of our total revenue in Brazil in 2003.
We have denied the allegations made by the authorities and filed an appeal in October 2010 with the Brazilian courts. On 6 May 2014, our appeal was granted and the fine against Air Products Brasil Ltda. was dismissed. CADE has appealed that ruling and the matter remains pending. We, with advice of our outside legal counsel, have assessed the status of this matter and have concluded that, although an adverse final judgment after exhausting all appeals is possible, such a judgment is not probable. As a result, no provision has been made in the consolidated financial statements. We estimate the maximum possible loss to be the full amount of the fine of R$179.2 million (approximately $54 at 31 March 2018 ) plus interest accrued thereon until final disposition of the proceedings.
Other than this matter, we do not currently believe there are any legal proceedings, individually or in the aggregate, that are reasonably possible to have a material impact on our financial condition, results of operations, or cash flows.
Environmental
In the normal course of business, we are involved in legal proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA: the federal Superfund law); Resource Conservation and Recovery Act (RCRA); and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Presently, there are 33 sites on which a final settlement has not been reached where we, along with others, have been designated a potentially responsible party by the Environmental Protection Agency or are otherwise engaged in investigation or remediation, including cleanup activity at certain of our current and former manufacturing sites. We continually monitor these sites for which we have environmental exposure.
Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The consolidated balance sheets at 31 March 2018 and 30 September 2017 included an accrual of $81.0 and $83.6 , respectively, primarily as part of other noncurrent liabilities. The environmental liabilities will be paid over a period of up to 30 years . We estimate the exposure for environmental loss contingencies to range from $80 to a reasonably possible upper exposure of $95 as of 31 March 2018 .
Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Using reasonably possible alternative assumptions of the exposure level could result in an increase to the environmental accrual. Due to the inherent uncertainties related to environmental exposures, a significant increase to the reasonably possible upper exposure level could occur if a new site is designated, the scope of remediation is increased, a different remediation alternative is identified, or a significant increase in our proportionate share occurs. We do not expect that any sum we may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse impact on our financial position or results of operations in any one year.
PACE
At 31 March 2018 , $28.2 of the environmental accrual was related to the Pace facility.
In 2006, we sold our Amines business, which included operations at Pace, Florida, and recognized a liability for retained environmental obligations associated with remediation activities at Pace. We are required by the Florida Department of Environmental Protection (FDEP) and the United States Environmental Protection Agency (USEPA) to continue our remediation efforts. We estimated that it would take a substantial period of time to complete the groundwater remediation, and the costs through completion were estimated to range from $42 to $52 . As no amount within the range was a better estimate than another, we recognized a pretax expense in fiscal 2006 of $42 as a component of income from discontinued operations and recorded an environmental accrual of $42 in continuing operations on the consolidated balance sheets. There has been no change to the estimated exposure range related to the Pace facility.

20



We have implemented many of the remedial corrective measures at the Pace facility required under 1995 Consent Orders issued by the FDEP and the USEPA. Contaminated soils have been bioremediated, and the treated soils have been secured in a lined on-site disposal cell. Several groundwater recovery systems have been installed to contain and remove contamination from groundwater. We completed an extensive assessment of the site to determine how well existing measures are working, what additional corrective measures may be needed, and whether newer remediation technologies that were not available in the 1990s might be suitable to more quickly and effectively remove groundwater contaminants. Based on assessment results, we completed a focused feasibility study that has identified alternative approaches that may more effectively remove contaminants. We continue to review alternative remedial approaches with the FDEP and have started additional field work to support the design of an improved groundwater recovery network with the objective of targeting areas of higher contaminant concentration and avoiding areas of high groundwater iron which has proven to be a significant operability issue for the project. In the first quarter of 2015, we entered into a new Consent Order with the FDEP requiring us to continue our remediation efforts at the Pace facility. The costs we are incurring under the new Consent Order are consistent with our previous estimates.
PIEDMONT
At 31 March 2018 , $16.2 of the environmental accrual was related to the Piedmont site.
On 30 June 2008, we sold our Elkton, Maryland, and Piedmont, South Carolina, production facilities and the related North American atmospheric emulsions and global pressure sensitive adhesives businesses. In connection with the sale, we recognized a liability for retained environmental obligations associated with remediation activities at the Piedmont site. This site is under active remediation for contamination caused by an insolvent prior owner. We are required by the South Carolina Department of Health and Environmental Control (SCDHEC) to address both contaminated soil and groundwater. Numerous areas of soil contamination have been addressed, and contaminated groundwater is being recovered and treated. On 13 June 2017, the SCDHEC issued its final approval to the site-wide feasibility study, and with that, we will be moving towards a record of decision for the Piedmont site and into the final remedial design phase of this project. We estimate that source area remediation and groundwater recovery and treatment will continue through 2029. Thereafter, we are expecting this site to go into a state of monitored natural attenuation through 2047. We recognized a pretax expense in 2008 of $24 as a component of income from discontinued operations and recorded an environmental liability of $24 in continuing operations on the consolidated balance sheets. There have been no significant changes to the estimated exposure.
PASADENA
At 31 March 2018 , $11.9 of the environmental accrual was related to the Pasadena site.
During the fourth quarter of 2012, management committed to permanently shutting down our polyurethane intermediates (PUI) production facility in Pasadena, Texas. In shutting down and dismantling the facility, we have undertaken certain obligations related to soil and groundwater contaminants. We have been pumping and treating groundwater to control off-site contaminant migration in compliance with regulatory requirements and under the approval of the Texas Commission on Environmental Quality (TCEQ). We estimate that the pump and treat system will continue to operate until 2042 . We plan to perform additional work to address other environmental obligations at the site. This additional work includes remediating, as required, impacted soils, investigating groundwater west of the former PUI facility, performing post closure care for two closed RCRA surface impoundment units, and establishing engineering controls. In 2012, we estimated the total exposure at this site to be $13 . There have been no significant changes to the estimated exposure.
Unconditional Purchase Obligations
Our unconditional purchase obligations for helium purchases were approximately $6,500 as of 31 March 2018. The majority of these obligations occur after fiscal year 2022. Helium purchases include crude feedstock supply to multiple helium refining plants in North America as well as refined helium purchases from sources around the world. As a rare byproduct of natural gas production in the energy sector, these helium sourcing agreements are medium- to long-term and contain take-if-tendered provisions. The refined helium is distributed globally and sold as a merchant gas, primarily under medium-term requirements contracts. While contract terms in the energy sector are longer than those in merchant, helium is a rare gas used in applications with few or no substitutions because of its unique physical and chemical properties.


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13 . SHARE-BASED COMPENSATION
We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. During the six months ended 31 March 2018 , we granted market-based and time-based deferred stock units. Under all programs, the terms of the awards are fixed at the grant date. We issue shares from treasury stock upon the payout of deferred stock units, the exercise of stock options, and the issuance of restricted stock awards. As of 31 March 2018 , there were 4,610,336 shares available for future grant under our Long-Term Incentive Plan (LTIP), which is shareholder approved.
Share-based compensation cost recognized in continuing operations on the consolidated income statements is summarized below:
 
 
Three Months Ended
 
Six Months Ended
 
 
31 March
 
31 March
 
 
2018
 
2017
 
2018
 
2017
Before-tax share-based compensation cost
 

$10.7

 

$9.5

 

$22.5

 

$18.5

Income tax benefit
 
(2.1
)
 
(3.3
)
 
(5.3
)
 
(6.3
)
After-tax share-based compensation cost
 

$8.6

 

$6.2

 

$17.2

 

$12.2


Before-tax share-based compensation cost is primarily included in "Selling and administrative" on our consolidated income statements. The amount of share-based compensation cost capitalized in the first six months of fiscal year 2018 and 2017 was not material.
Deferred Stock Units
During the six months ended 31 March 2018 , we granted 104,874 market-based deferred stock units. The market-based deferred stock units are earned out at the end of a performance period beginning 1 October 2017 and ending 30 September 2020, conditioned on the level of the Company’s total shareholder return in relation to a defined peer group over the three -year performance period.
The market-based deferred stock units had an estimated grant-date fair value of $202.50 per unit, which was estimated using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards. We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period. The calculation of the fair value of market-based deferred stock units used the following assumptions:
Expected volatility
 
18.7
%
Risk-free interest rate
 
1.9
%
Expected dividend yield
 
2.6
%

In addition, during the six months ended 31 March 2018 , we granted 138,340 time-based deferred stock units at a weighted average grant-date fair value of $162.12 .


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14 . EQUITY
The following is a summary of the changes in total equity: