NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except for share and per share data)
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1
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2
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7
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9
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10
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11
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12
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13
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14
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15
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16
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17
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18
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19
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20
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21
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22
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23
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24
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25
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1
.
MAJOR ACCOUNTING POLICIES
Basis of Presentation and Consolidation Principles
The accompanying consolidated financial statements of Air Products and Chemicals, Inc. were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Air Products and Chemicals, Inc. and those of its controlled subsidiaries (“we,” “our,” “us,” the “Company,” “Air Products,” or “registrant”), which are generally majority owned. Intercompany transactions and balances are eliminated in consolidation.
We consolidate all entities that we control. The general condition for control is ownership of a majority of the voting interests of an entity. Control may also exist in arrangements where we are the primary beneficiary of a variable interest entity (VIE). An entity that has both the power to direct the activities that most significantly impact the economic performance of a VIE and the obligation to absorb losses or receive benefits significant to the VIE is considered the primary beneficiary of that entity. We have determined that we are not a primary beneficiary in any material VIE.
The results of operations and cash flows for our discontinued operations have been segregated from the results of continuing operations and segment results for all periods presented. The assets and liabilities of the discontinued operations are segregated in the consolidated balance sheets. The comprehensive income related to discontinued operations has not been segregated and is included in the consolidated comprehensive income statement for all periods presented. Refer to Note
3
,
Discontinued Operations
, for detail of the businesses presented in discontinued operations.
The notes to the consolidated financial statements, unless otherwise indicated, are on a continuing operations basis. The term "total company" includes both continuing and discontinued operations.
Reclassifications
The consolidated financial statements and accompanying notes reflect accounting guidance that was adopted during fiscal year
2018
. Refer to Note
2
,
New Accounting Guidance
, for additional information. Certain prior year information has been reclassified to conform to the fiscal year
2018
presentation.
Estimates and Assumptions
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized as risk and title to the product transfer to the customer (which generally occurs at the time shipment is made), the sales price is fixed or determinable, and collectability is reasonably assured. Sales returns and allowances are not a business practice in the industry.
Revenue from equipment sale contracts is recorded primarily using the percentage-of-completion method. Under this method, revenue from the sale of major equipment, such as liquefied natural gas (LNG) heat exchangers and large air separation units, is primarily recognized based on costs incurred to date compared with total estimated costs to be incurred. 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. Changes in estimates on projects accounted for under the percentage-of-completion method favorably impacted operating income by approximately
$38
,
$27
, and
$20
in fiscal years
2018
,
2017
, and
2016
, respectively. Our changes in estimates would not have significantly impacted amounts recorded in prior years.
Certain contracts associated with facilities that are built to provide product to a specific customer are required to be accounted for as leases. In cases where operating lease treatment is appropriate, there is no difference in revenue recognition over the life of the contract as compared to accounting for the contract as product sales. In cases where capital lease treatment is appropriate, the timing of revenue and expense recognition is impacted. Revenue and expense are recognized up front for the sale of equipment component of the contract as compared to revenue recognition over the life of the arrangement under contracts not qualifying as capital leases. Additionally, a portion of the revenue representing interest income from the financing component of the lease receivable is reflected as sales over the life of the contract. Allowances for credit losses associated with capital lease receivables are recorded using the specific identification method. As of
30 September 2018
and
2017
, the credit quality of capital lease receivables did not require a material allowance for credit losses.
If an arrangement involves multiple deliverables, the delivered items are considered separate units of accounting if the items have value on a stand-alone basis. Revenues are allocated to each deliverable based upon relative selling prices derived from company specific evidence.
Amounts billed for shipping and handling fees are classified as sales in the consolidated income statements.
Amounts billed for sales and use taxes, value-added taxes, and certain excise and other specific transactional taxes imposed on revenue-producing transactions are presented on a net basis and excluded from sales in the consolidated income statements. We record a liability until remitted to the respective taxing authority.
Cost of Sales
Cost of sales predominantly represents the cost of tangible products sold. These costs include labor, raw materials, plant engineering, power, depreciation, production supplies and materials packaging costs, and maintenance costs. Costs incurred for shipping and handling are also included in cost of sales.
Depreciation
Depreciation is recorded using the straight-line method, which deducts equal amounts of the cost of each asset from earnings every year over its expected economic useful life. The principal lives for major classes of plant and equipment are summarized in Note
9
,
Plant and Equipment, net
.
Selling and Administrative
The principal components of selling and administrative expenses are compensation, advertising, and promotional costs. Selling and administrative expenses also include costs for functional support previously provided to the former Electronic Materials and Performance Materials Divisions and in support of transition services agreements with Versum and with Evonik, for which the reimbursement is reflected in "Other income (expense), net" on our consolidated income statements.
Postemployment Benefits
We provide termination benefits to employees as part of ongoing benefit arrangements and record a liability for termination benefits when probable and estimable. These criteria are met when management, with the appropriate level of authority, approves and commits to its plan of action for termination; the plan identifies the employees to be terminated and their related benefits; and the plan is to be completed within one year. We do not provide material one-time benefit arrangements.
Fair Value Measurements
We are required to measure certain assets and liabilities at fair value, either upon initial measurement or for subsequent accounting or reporting. For example, fair value is used in the initial measurement of assets and liabilities acquired in a business combination; on a recurring basis in the measurement of derivative financial instruments; and on a nonrecurring basis when long-lived assets are written down to fair value when held for sale or determined to be impaired. Refer to Note
14
,
Fair Value Measurements
, and Note
16
, Retirement Benefits, for information on the methods and assumptions used in our fair value measurements.
Financial Instruments
We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The types of derivative financial instruments permitted for such risk management programs are specified in policies set by management. Refer to Note
13
,
Financial Instruments
, for further detail on the types and use of derivative instruments into which we enter.
Major financial institutions are counterparties to all of these derivative contracts. We have established counterparty credit guidelines and generally enter into transactions with financial institutions of investment grade or better. Management believes the risk of incurring losses related to credit risk is remote, and any losses would be immaterial to the consolidated financial results, financial condition, or liquidity.
We recognize derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, we generally designate the derivative as either (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), (2) a hedge of a net investment in a foreign operation (net investment hedge), or (3) a hedge of the fair value of a recognized asset or liability (fair value hedge).
The following details the accounting treatment of our cash flow, fair value, net investment, and non-designated hedges:
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Changes in the fair value of a derivative that is designated as and meets the cash flow hedge criteria are recorded in accumulated other comprehensive loss (AOCL) to the extent effective and then recognized in earnings when the hedged items affect earnings.
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•
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Changes in the fair value of a derivative that is designated as and meets all the required criteria for a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings.
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•
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Changes in the fair value of a derivative and foreign currency debt that are designated as and meet all the required criteria for a hedge of a net investment are recorded as translation adjustments in AOCL.
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•
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Changes in the fair value of a derivative that is not designated as a hedge are recorded immediately in earnings.
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We formally document the relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. This process includes relating derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also formally assess, at the inception of the hedge and on an ongoing basis, whether derivatives are highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we will discontinue hedge accounting with respect to that derivative prospectively.
Foreign Currency
Since we do business in many foreign countries, fluctuations in currency exchange rates affect our financial position and results of operations.
In most of our foreign operations, the local currency is considered the functional currency. Foreign subsidiaries translate their assets and liabilities into U.S. dollars at current exchange rates in effect at the end of the fiscal period. The gains or losses that result from this process are shown as translation adjustments in AOCL in the equity section of the balance sheet.
The revenue and expense accounts of foreign subsidiaries are translated into U.S. dollars at the average exchange rates that prevail during the period. Therefore, the U.S. dollar value of these items on the consolidated income statements fluctuates from period to period, depending on the value of the dollar against foreign currencies. Some transactions are made in currencies different from an entity’s functional currency. Gains and losses from these foreign currency transactions are generally reflected in "Other income (expense), net" on our consolidated income statements as they occur.
Environmental Expenditures
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. Remediation costs are capitalized if the costs improve the Company’s property as compared with the condition of the property when originally constructed or acquired, or if the costs prevent environmental contamination from future operations. We expense environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. The amounts charged to income from continuing operations related to environmental matters totaled
$12.8
,
$11.4
, and
$12.2
in fiscal years
2018
,
2017
, and
2016
, respectively.
The measurement of environmental liabilities is based on an evaluation of currently available information with respect to each individual site and considers factors such as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. An environmental liability related to cleanup of a contaminated site might include, for example, a provision for one or more of the following types of costs: site investigation and testing costs, remediation costs, post-remediation monitoring costs, natural resource damages, and outside legal fees. These liabilities include costs related to other potentially responsible parties to the extent that we have reason to believe such parties will not fully pay their proportionate share. They do not consider any claims for recoveries from insurance or other parties and are not discounted.
As assessments and remediation progress at individual sites, the amount of projected cost is reviewed, and the liability is adjusted to reflect additional technical and legal information that becomes available. Management has an established process in place to identify and monitor the Company’s environmental exposures. An environmental accrual analysis is prepared and maintained that lists all environmental loss contingencies, even where an accrual has not been established. This analysis assists in monitoring the Company’s overall environmental exposure and serves as a tool to facilitate ongoing communication among the Company’s technical experts, environmental managers, environmental lawyers, and financial management to ensure that required accruals are recorded and potential exposures disclosed.
Given inherent uncertainties in evaluating environmental exposures, actual costs to be incurred at identified sites in future periods may vary from the estimates. Refer to Note
17
,
Commitments and Contingencies
, for additional information on the Company’s environmental loss contingencies.
The accruals for environmental liabilities are reflected in the consolidated balance sheets, primarily as part of other noncurrent liabilities.
Litigation
In the normal course of business, we are involved in legal proceedings. We accrue a liability for such matters when it is 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. The accrual for a litigation loss contingency includes estimates of potential damages and other directly related costs expected to be incurred. Refer to Note
17
,
Commitments and Contingencies
, for additional information on our current legal proceedings.
Share-Based Compensation
We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. We expense the grant-date fair value of these awards over the vesting period during which employees perform related services. Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. Refer to Note
19
,
Share-Based Compensation
, for additional information regarding these awards and the models and assumptions used to determine the grant-date fair value of our awards.
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 using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. A principal temporary difference results from the excess of tax depreciation over book depreciation because accelerated methods of depreciation and shorter useful lives are used for income tax purposes. The cumulative impact of a change in tax rates or regulations is included in income tax expense in the period that includes the enactment date. We recognize deferred tax assets net of existing valuation allowances to the extent we believe that these assets are more likely than not to be realized considering all available evidence.
A tax benefit for an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination based on its technical merits. This position is measured as the largest amount of tax benefit that is greater than 50% likely of being realized. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense. For additional information regarding our income taxes, refer to Note
22
,
Income Taxes
.
Other Non-Operating Income (Expense), net
Beginning in the second quarter of fiscal year 2017, other non-operating income (expense), net includes interest income associated with our cash and cash items and short-term investments. Interest income in previous periods was included in "Other income (expense), net." In addition, other non-operating income (expense), net includes non-service cost components of net periodic pension and postretirement benefit cost. Our non-service costs primarily include interest cost, expected return on plan assets, amortization of actuarial gains and losses, and settlements.
Cash and Cash Items
Cash and cash items include cash, time deposits, treasury securities, and certificates of deposit acquired with an original maturity of three months or less.
Short-term Investments
Short-term investments include time deposits and certificates of deposit with original maturities greater than three months and less than one year.
Trade Receivables, net
Trade receivables comprise amounts owed to us through our operating activities and are presented net of allowances for doubtful accounts. The allowances for doubtful accounts represent estimated uncollectible receivables associated with potential customer defaults on contractual obligations. A provision for customer defaults is made on a general formula basis when it is determined that the risk of some default is probable and estimable but cannot yet be associated with specific customers. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience, and existing economic conditions. The allowance also includes amounts for certain customers where a risk of default has been specifically identified, considering factors such as the financial condition of the customer and customer disputes over contractual terms and conditions. Allowances for doubtful accounts were
$91.3
and
$93.5
as of
30 September 2018
and
2017
, respectively. Provisions to the allowance for doubtful accounts charged against income were
$24.0
,
$45.8
, and
$21.8
in fiscal years
2018
,
2017
, and
2016
, respectively.
Inventories
We carry inventory on our consolidated balance sheets that is comprised of finished goods, work-in-process, raw materials and supplies. Inventories are stated at the lower of cost or net realizable value. We write down our inventories for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions.
Effective 1 July 2018, we changed our accounting method for U.S. industrial gases inventories from a last-in, first-out basis (LIFO) to a first-in, first-out basis (FIFO). Previously, the LIFO method was used to determine the cost of industrial gases inventories in the United States. We believe this change in accounting method is preferable as it is consistent with how we manage our business, results in a uniform method to value our inventory across all regions of our business, improves comparability with our peers, and is expected to better reflect the current value of inventory on the consolidated balance sheets. We applied this accounting change as a cumulative effect adjustment to cost of sales in the fourth quarter of fiscal year 2018 and did not restate prior period financial statements because the impact was not material. Refer to Note
7
,
Inventories
, for additional information.
Equity Investments
The equity method of accounting is used when we exercise significant influence but do not have operating control, generally assumed to be 20% – 50% ownership. Under the equity method, original investments are recorded at cost and adjusted by our share of undistributed earnings or losses of these companies. Equity investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.
Plant and Equipment, Net
Plant and equipment, net is stated at cost less accumulated depreciation. Construction costs, labor, and applicable overhead related to installations are capitalized. Expenditures for additions and improvements that extend the lives or increase the capacity of plant assets are capitalized. The costs of maintenance and repairs of plant and equipment are charged to expense as incurred.
Fully depreciated assets are retained in the gross plant and equipment and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets, and related depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income. Refer to Note
9
,
Plant and Equipment, net
, for further detail.
Computer Software
We capitalize costs incurred to purchase or develop software for internal use. Capitalized costs include purchased computer software packages, payments to vendors/consultants for development and implementation or modification to a purchased package to meet our requirements, payroll and related costs for employees directly involved in development, and interest incurred while software is being developed. Capitalized computer software costs are reflected in "Plant and equipment, net" on the consolidated balance sheets and are depreciated over the estimated useful life of the software, generally a period of
three
to
five
years.
Capitalized Interest
As we build new plant and equipment, we include in the cost of these assets a portion of the interest payments we make during the year. The amount of capitalized interest was
$19.5
,
$19.0
, and
$32.7
in fiscal years
2018
,
2017
, and
2016
, respectively.
Impairment of Long-Lived Assets
Long-lived assets are grouped for impairment testing at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets and liabilities and are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. We assess recoverability by comparing the carrying amount of the asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If an asset group is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset group’s carrying amount exceeds its fair value. Long-lived assets meeting the held for sale criteria are reported at the lower of carrying amount or fair value less cost to sell.
Asset Retirement Obligations
The fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred. The fair value of the liability is measured using discounted estimated cash flows and is adjusted to its present value in subsequent periods as accretion expense is recorded. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s useful life. Our asset retirement obligations are primarily associated with on-site long-term supply contracts under which we have built a facility on land owned by the customer and are obligated to remove the facility at the end of the contract term. Our asset retirement obligations totaled
$190.4
and
$144.7
at
30 September 2018
and
2017
, respectively.
Goodwill
Business combinations are accounted for using the acquisition method. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price (plus the fair value of any noncontrolling interest and previously held equity interest in the acquiree) over the fair market value of the net assets acquired, including identified intangibles, is recorded as goodwill. Preliminary purchase price allocations are made at the date of acquisition and finalized when information about facts and circumstances that existed as of the acquisition date needed to finalize underlying estimates is obtained or when we determine that such information is not obtainable, within a maximum allocation period of
one
year.
Goodwill is subject to impairment testing at least annually. In addition, goodwill is tested more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. Refer to Note
10
,
Goodwill
, for further detail.
Intangible Assets
Intangible assets with determinable lives primarily consist of customer relationships, purchased patents and technology, and land use rights. The cost of intangible assets with determinable lives is amortized on a straight-line basis over the estimated period of economic benefit.
No
residual value is estimated for these intangible assets. Indefinite-lived intangible assets consist of trade names and trademarks. Indefinite-lived intangibles are subject to impairment testing at least annually. In addition, intangible assets are tested more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists.
Customer relationships are generally amortized over periods of
five
to
twenty-five
years. Purchased patents and technology and other are generally amortized over periods of
five
to
fifteen
years. Land use rights, which are included in other intangibles, are generally amortized over a period of
fifty
years. Amortizable lives are adjusted whenever there is a change in the estimated period of economic benefit. Refer to Note
11
,
Intangible Assets
, for further detail.
Retirement Benefits
The cost of pension benefits is recognized over the employees’ service period. We use actuarial methods and assumptions in the valuation of defined benefit obligations and the determination of expense. Differences between actual and expected results or changes in the value of obligations and plan assets are not recognized in earnings as they occur but, rather, systematically and gradually over subsequent periods. Refer to Note
16
,
Retirement Benefits
, for disclosures related to our pension and other postretirement benefits.
2
.
NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented in Fiscal Year
2018
Disclosure Simplification
In August 2018, the SEC issued a final rule on disclosure update and simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. This rule was effective on 5 November 2018. We adopted the amended guidance, which reduced or eliminated certain annual disclosure requirements outside the consolidated financial statements, including the elimination of the ratio of earnings to fixed charges previously filed under Exhibit 12. However, the amendments expanded interim disclosure requirements that will be adopted in our Form 10-Q for our first fiscal quarter ended 31 December 2018, including those related to the analysis of shareholders' equity.
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 30 September 2018. We are continuing to gather additional information and expect to complete our accounting by the first quarter of fiscal year 2019, within the prescribed one-year measurement period. For additional details, see Note 22, 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 the service cost component of net periodic benefit cost to 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 consolidated income statements 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. We applied the practical expedient to use the amounts disclosed in our 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 our pre-tax earnings or net income; however, "Operating income" and "Other non-operating income (expense), net" changed by immaterial offsetting amounts.
Derivative Contract Novations
In March 2016, the FASB issued guidance to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require re-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. We adopted this guidance in the first quarter of fiscal year 2018. This guidance did not have an impact on our consolidated financial statements upon adoption.
New Accounting Guidance to be Implemented
Revenue Recognition
In May 2014, the FASB issued guidance based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be entitled in exchange for the transfer of goods or services. We will adopt this guidance in fiscal year 2019 under the modified retrospective approach. Upon adoption, we will no longer present "Contracts in progress, less progress billings" on our consolidated balance sheets and will have expanded disclosure requirements. Otherwise, we do not expect adoption of this guidance to have a material impact on our consolidated financial statements.
The expected balance sheet impacts of no longer presenting "Contracts in progress, less progress billings" are summarized below:
|
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|
|
|
|
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30 September 2018
|
|
New Revenue Standard Adjustments
|
|
1 October 2018
|
|
Assets
|
|
|
|
Current Assets
|
|
|
|
Cash and cash items
|
|
$2,791.3
|
|
|
$—
|
|
|
$2,791.3
|
|
Short-term investments
|
184.7
|
|
—
|
|
184.7
|
|
Trade receivables, net
|
1,207.2
|
|
—
|
|
1,207.2
|
|
Inventories
|
396.1
|
|
—
|
|
396.1
|
|
Contracts in progress, less progress billings
|
77.5
|
|
(77.5
|
)
|
—
|
|
Prepaid expenses
|
129.6
|
|
—
|
|
129.6
|
|
Other receivables and current assets
|
295.8
|
|
103.7
|
|
399.5
|
|
Total Current Assets
|
5,082.2
|
|
26.2
|
|
5,108.4
|
|
Total Noncurrent Assets
|
14,096.1
|
|
—
|
|
14,096.1
|
|
Total Assets
|
|
$19,178.3
|
|
|
$26.2
|
|
|
$19,204.5
|
|
Liabilities and Equity
|
|
|
|
Current Liabilities
|
|
|
|
Payables and accrued liabilities
|
|
$1,817.8
|
|
|
$26.2
|
|
|
$1,844.0
|
|
Accrued income taxes
|
59.6
|
|
—
|
|
59.6
|
|
Short-term borrowings
|
54.3
|
|
—
|
|
54.3
|
|
Current portion of long-term debt
|
406.6
|
|
—
|
|
406.6
|
|
Total Current Liabilities
|
2,338.3
|
|
26.2
|
|
2,364.5
|
|
Total Noncurrent Liabilities
|
5,663.7
|
|
—
|
|
5,663.7
|
|
Total Liabilities
|
8,002.0
|
|
26.2
|
|
8,028.2
|
|
Total Equity
|
11,176.3
|
|
—
|
|
11,176.3
|
|
Total Liabilities and Equity
|
|
$19,178.3
|
|
|
$26.2
|
|
|
$19,204.5
|
|
Our expanded disclosure requirements will include the disaggregation of revenue and disclosure of the fixed transaction price allocated to remaining performance obligations. We intend to disaggregate our revenue by supply mode. Our fixed transaction price allocated to remaining performance obligations will primarily relate to our onsite gases business.
Leases
In February 2016, the FASB issued guidance that 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. The guidance must be applied using a modified retrospective approach with the option to apply either at the adoption date or at the earliest comparative period presented in the consolidated financial statements.
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 all leases, including operating leases, on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations.
We will adopt this guidance in fiscal year 2020 and are currently evaluating the impact it will have on our consolidated financial statements, including the assessment of our current lease population under the revised definition of what qualifies as a leased asset. In addition, we are implementing a new application to administer the accounting and disclosure requirements under the new guidance.
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 in 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 accounting for the income tax effects of intra-entity transfers of assets other than inventory. Current guidance 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 to retained earnings as of the date of adoption. We will adopt the guidance in fiscal year 2019 and do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.
Derecognition of Nonfinancial Assets
In February 2017, the FASB issued an update to clarify the scope of guidance on gains and losses from the derecognition of nonfinancial assets and to add guidance for partial sales of nonfinancial assets. We will adopt this guidance in fiscal year 2019 under the modified retrospective approach. We do not expect this update to have a significant impact on our consolidated financial statements.
Hedging Activities
In August 2017, the FASB issued guidance on hedging activities to expand the related presentation and disclosure requirements, change how companies assess effectiveness, and eliminate the separate measurement and reporting of hedge ineffectiveness. The guidance also enables more financial and nonfinancial hedging strategies to become eligible for hedge accounting. The guidance is effective in fiscal year 2020, with early adoption permitted. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment to eliminate the separate measurement of ineffectiveness within equity as of the beginning of the fiscal year the guidance is adopted. The amended presentation and disclosure guidance is applied prospectively. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued guidance allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The guidance is effective in fiscal year 2020, with early adoption permitted, including adoption in any interim period. If elected, the reclassification can be applied in either the period of adoption or retrospectively to the period of the Tax Act's enactment (i.e., our first quarter of fiscal year 2018). We are currently evaluating the adoption alternatives and the impact this guidance will have on our consolidated financial statements.
Fair Value Measurement Disclosures
In August 2018, the FASB issued guidance which modifies the disclosure requirements for fair value measurements. The guidance is effective in fiscal year 2021, with early adoption permitted. Certain amendments must be applied prospectively and other amendments retrospectively. We are currently evaluating the impact this guidance will have on the disclosures in the notes to our consolidated financial statements.
Retirement Benefit Disclosures
In August 2018, the FASB issued guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance is effective in fiscal year 2021, with early adoption permitted, and must be applied on a retrospective basis. We are currently evaluating the impact this guidance will have on the disclosures in the notes to our consolidated financial statements.
Cloud Computing Implementation Costs
In August 2018, the FASB issued guidance which aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software. The guidance is effective in fiscal year 2021, with early adoption permitted, and may be applied either prospectively or retrospectively. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
Related Party Guidance for Variable Interest Entities
In October 2018, the FASB issued an update which amends the guidance for determining whether a decision-making fee is a variable interest. The amendments require consideration of indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety as currently required. The guidance is effective in fiscal year 2021, with early adoption permitted. The amendments must be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
3
.
DISCONTINUED OPERATIONS
In fiscal year 2018, income from discontinued operations, net of tax, of
$42.2
includes an income tax benefit of
$25.6
resulting from the resolution of uncertain tax positions taken in conjunction with the disposition of our former European Homecare business in fiscal year 2012. In addition, we recorded an after-tax benefit of
$17.6
resulting from the resolution of certain post-closing adjustments associated with the sale of our former Performance Materials Division (PMD). Refer to Note
22
, Income Taxes, for additional information. These benefits were partially offset by an after-tax loss of
$1.0
related to Energy-from-Waste (EfW) project exit activities, which were completed during the first quarter of fiscal year 2018.
There were
no
assets or liabilities presented in discontinued operations on the consolidated balance sheets as of 30 September 2018. As of 30 September 2017, current assets of discontinued operations of
$10.2
related to EfW and current liabilities of discontinued operations of
$15.7
primarily related to reserves associated with the disposition of PMD.
The following table details income from discontinued operations, net of tax, on the consolidated income statements for fiscal year 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Performance
|
Energy-from-
|
Discontinued
|
Year Ended 30 September 2017
|
Materials
|
Waste
(A)
|
Operations
|
Sales
|
|
$254.8
|
|
|
$—
|
|
|
$254.8
|
|
Cost of sales
|
182.3
|
|
13.8
|
|
196.1
|
|
Selling and administrative
|
22.5
|
|
.7
|
|
23.2
|
|
Research and development
|
5.1
|
|
—
|
|
5.1
|
|
Other income (expense), net
|
.3
|
|
(2.0
|
)
|
(1.7
|
)
|
Operating Income (Loss)
|
45.2
|
|
(16.5
|
)
|
28.7
|
|
Equity affiliates’ income
|
.3
|
|
—
|
|
.3
|
|
Income (Loss) Before Taxes
|
45.5
|
|
(16.5
|
)
|
29.0
|
|
Income tax benefit
(B)
|
(50.8
|
)
|
(5.7
|
)
|
(56.5
|
)
|
Income (Loss) From Operations of Discontinued Operations, net of tax
|
96.3
|
|
(10.8
|
)
|
85.5
|
|
Gain (Loss) on disposal of business, net of tax
(C)
|
1,827.6
|
|
(47.1
|
)
|
1,780.5
|
|
Income (Loss) From Discontinued Operations, net of tax
|
|
$1,923.9
|
|
|
($57.9
|
)
|
|
$1,866.0
|
|
|
|
(A)
|
The loss from operations of discontinued operations for EfW primarily relates to costs incurred for ongoing project exit activities, administrative costs, and land lease obligations.
|
|
|
(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 primarily during the first quarter of 2017 that favorably impacted our income tax provision within discontinued operations by approximately
$69
.
|
|
|
(C)
|
After-tax gain on sale of
$1,827.6
includes expense for income tax reserves for uncertain tax positions of
$28.0
gross (
$21.0
net) in various jurisdictions.
|
In fiscal year 2017, income from discontinued operations, net of tax, of
$1,866.0
includes a gain of
$2,870
(
$1,828
after-tax, or
$8.32
per share) for the sale of PMD to Evonik Industries AG (Evonik). The sale closed on 3 January 2017 for
$3.8 billion
in cash. In addition, we recorded a loss on the disposal of EfW of
$59.3
(
$47.1
after-tax) during the first quarter of 2017, primarily for land lease obligations and to update our estimate of the net realizable value of the plant assets. 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. As of 30 September 2018, liabilities associated with EfW recorded in continuing operations were approximately
$63
and primarily related to the land lease obligations.
On 1 October 2016 (the distribution date), Air Products completed the spin-off of its Electronic Materials Division (EMD) as Versum Materials, Inc. (Versum), 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. Subsequent to the distribution, Versum became an independent public company, and its common stock is listed under the symbol “VSM” on the New York Stock Exchange. The spin-off of Versum was treated as a noncash transaction in the consolidated statements of cash flows in fiscal year 2017. Seifi Ghasemi, Director, Chairman, President, and Chief Executive Officer of Air Products, continues to serve as non-executive chairman of the Versum Board of Directors.
The following table details the loss from discontinued operations, net of tax, on the consolidated income statements for fiscal year 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Electronic
|
Performance
|
Energy-from-
|
Discontinued
|
Year Ended 30 September 2016
|
Materials
|
Materials
|
Waste
(A)
|
Operations
|
Sales
|
|
$961.6
|
|
|
$1,059.1
|
|
|
$—
|
|
|
$2,020.7
|
|
Cost of sales
|
521.6
|
|
704.5
|
|
24.6
|
|
1,250.7
|
|
Selling and administrative
|
87.7
|
|
76.6
|
|
2.8
|
|
167.1
|
|
Research and development
|
40.8
|
|
19.6
|
|
.9
|
|
61.3
|
|
Other income (expense), net
|
2.2
|
|
4.2
|
|
(12.7
|
)
|
(6.3
|
)
|
Operating Income (Loss)
|
313.7
|
|
262.6
|
|
(41.0
|
)
|
535.3
|
|
Equity affiliates’ income
|
.2
|
|
1.4
|
|
—
|
|
1.6
|
|
Interest expense
|
.3
|
|
—
|
|
—
|
|
.3
|
|
Income (Loss) Before Taxes
(B)
|
313.6
|
|
264.0
|
|
(41.0
|
)
|
536.6
|
|
Income tax provision (benefit)
|
73.4
|
|
80.5
|
|
(3.4
|
)
|
150.5
|
|
Income (Loss) From Operations of Discontinued Operations, net of tax
|
240.2
|
|
183.5
|
|
(37.6
|
)
|
386.1
|
|
Loss on disposal of business, net of tax
|
—
|
|
—
|
|
(846.6
|
)
|
(846.6
|
)
|
Income (Loss) From Discontinued Operations, net of tax
|
240.2
|
|
183.5
|
|
(884.2
|
)
|
(460.5
|
)
|
Net Income Attributable to Noncontrolling Interests of Discontinued Operations
|
7.9
|
|
—
|
|
—
|
|
7.9
|
|
Net Income (Loss) From Discontinued Operations
|
|
$232.3
|
|
|
$183.5
|
|
|
($884.2
|
)
|
|
($468.4
|
)
|
|
|
(A)
|
The loss from operations of discontinued operations for EfW primarily relates to project suspension costs, land lease obligations, and administrative costs.
|
|
|
(B)
|
In fiscal year
2016
, income before taxes from operations of discontinued operations attributable to Air Products was
$527.1
.
|
In fiscal year 2016, the Company's Board of Directors approved the exit of the EfW business, and efforts to start up the two EfW projects located in Tees Valley, United Kingdom, were discontinued. The loss from discontinued operations, net of tax, of
$460.5
includes a loss of
$945.7
(
$846.6
after-tax) from the write down of the EfW plant assets to their estimated net realizable value and a liability recorded for plant disposition and other costs. Income tax benefits related only to one of the projects as the other did not qualify for a local tax deduction. We estimated the net realizable value of the projects assuming an orderly liquidation of assets capable of being marketed on a secondary equipment market based on market quotes and our experience with selling similar equipment. An asset’s orderly liquidation value is the amount that could be realized from a liquidation sale, given a reasonable period of time to find a buyer, selling the asset in the existing condition where it is located, and assuming the highest and best use of the asset by market participants. A valuation allowance of
$58.0
and unrecognized tax benefits of
$7.9
were recorded relating to deferred tax assets on capital assets generated from the loss.
Fiscal year 2016 also includes the results of PMD and EMD prior to their dispositions.
4
.
MATERIALS TECHNOLOGIES SEPARATION
In fiscal year 2017, we completed the separation of the divisions comprising the former Materials Technologies segment through the spin-off of EMD as Versum and the sale of PMD to Evonik. For additional information on the dispositions, refer to Note
3
,
Discontinued Operations
.
Business Separation Costs
In connection with the dispositions of EMD and PMD, we incurred net separation costs of
$30.2
in fiscal year 2017. The net costs include legal and advisory fees of
$32.5
, which are reflected on the consolidated income statements as “Business separation costs,” and a pension settlement benefit of
$2.3
presented within "Other non-operating income (expense), net." Our fiscal year 2017 income tax provision includes net tax benefits of
$5.5
, primarily related to changes in tax positions on business separation activities.
In fiscal year 2016, we incurred business separation costs of
$50.6
for legal and advisory fees. Our fiscal year 2016 income tax provision includes additional tax expense related to the separation of
$51.8
, of which
$45.7
resulted from a dividend that was declared in June 2016 to repatriate
$443.8
from a subsidiary in South Korea to the U.S. in anticipation of the separation of EMD from the industrial gases business in South Korea.
Transition Services Agreements
We entered into transition services agreements by which we provided certain transition services to Versum for EMD and to Evonik for PMD subsequent to their respective separation dates. The reimbursement for costs in support of the agreements has been reflected on the consolidated income statements within “Other income (expense), net.” All transition services were completed during fiscal year 2018.
Loss on Extinguishment of Debt
On 30 September 2016, in anticipation of the spin-off, Versum entered into certain financing transactions to allow for a cash distribution of
$550.0
and a distribution in-kind of senior unsecured notes (the "Notes") issued by Versum with an aggregate principal amount of
$425.0
to Air Products. Air Products then exchanged these Notes with certain financial institutions for
$418.3
of Air Products’ outstanding commercial paper. This noncash exchange, which was excluded from the consolidated statements of cash flows, resulted in a loss of
$6.9
that has been reflected on the consolidated income statements as “Loss on extinguishment of debt.” This loss was deductible for tax purposes.
5
.
COST REDUCTION AND ASSET ACTIONS
In fiscal year 2017, we recognized a net expense of $
151.4
. The year-to-date net expense included a charge of
$154.8
for actions taken during fiscal year 2017, partially offset by the favorable settlement of the remaining
$3.4
accrued balance associated with business restructuring actions taken in 2015. The charge included asset actions of
$88.5
and severance actions of
$66.3
. The asset actions included charges resulting from the write-down of an air separation unit in the Industrial Gases – EMEA segment that was constructed mainly to provide oxygen to one of the Energy-from-Waste plants, the planned sale of a non-industrial gas hardgoods business in the Industrial Gases – Americas segment, and the closure of a facility in the Corporate and other segment that manufactured LNG heat exchangers. The severance actions related to the elimination or planned elimination of approximately
625
positions, primarily in the Corporate and other segment and in the Industrial Gases – EMEA segment. The actions in the Corporate and other segment were driven by the reorganization of our engineering, manufacturing, and technology functions.
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.
In fiscal year 2016, we recognized an expense of
$34.5
for severance and other benefits related to cost reduction actions which resulted in the elimination of approximately
610
positions. The expenses related primarily to the Industrial Gases – Americas segment and the Industrial Gases – EMEA segment.
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 actions at
30 September 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
Other Benefits
|
|
Asset
Actions/Other
|
|
Total
|
2016 Charge
|
|
|
$34.5
|
|
|
|
$—
|
|
|
|
$34.5
|
|
Cash expenditures
|
|
(21.6
|
)
|
|
—
|
|
|
(21.6
|
)
|
Amount reflected in pension liability
|
|
(.9
|
)
|
|
—
|
|
|
(.9
|
)
|
Currency translation adjustment
|
|
.3
|
|
|
—
|
|
|
.3
|
|
30 September 2016
|
|
|
$12.3
|
|
|
|
$—
|
|
|
|
$12.3
|
|
2017 Charge
|
|
66.3
|
|
|
88.5
|
|
|
154.8
|
|
Noncash expenses
|
|
—
|
|
|
(84.2
|
)
|
|
(84.2
|
)
|
Cash expenditures
|
|
(35.7
|
)
|
|
(1.2
|
)
|
|
(36.9
|
)
|
Amount reflected in pension liability
|
|
(2.0
|
)
|
|
—
|
|
|
(2.0
|
)
|
Amount reflected in other noncurrent liabilities
|
|
—
|
|
|
(2.2
|
)
|
|
(2.2
|
)
|
Currency translation adjustment
|
|
(.3
|
)
|
|
—
|
|
|
(.3
|
)
|
30 September 2017
|
|
|
$40.6
|
|
|
|
$.9
|
|
|
|
$41.5
|
|
Cash expenditures
|
|
(30.3
|
)
|
|
(.9
|
)
|
|
(31.2
|
)
|
Amount reflected in pension liability
|
|
(.4
|
)
|
|
—
|
|
|
(.4
|
)
|
30 September 2018
|
|
|
$9.9
|
|
|
|
$—
|
|
|
|
$9.9
|
|
6
.
ACQUISITIONS
Asset Acquisition
On 9 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"). On 26 April 2018 ("the acquisition date"), we completed the formation of the JV, of which Air Products owns
60%
and Lu’An owns
40%
. The JV receives coal, steam and power from Lu’An and supplies syngas to Lu’An under a long-term onsite contract. The JV is consolidated within the results of the Industrial Gases – Asia segment.
Air Products contributed four large air separation units to the JV with a carrying value of approximately
$300
, and the JV acquired gasification and syngas clean-up assets from Lu’An for
7.9 billion
RMB (approximately
$1.2 billion
). As a result, the carrying value of the plant and equipment of the JV was approximately
$1.5 billion
at the acquisition date.
We accounted for the acquisition of the gasification and syngas clean-up assets as an asset acquisition. In connection with closing the acquisition, we paid net cash of approximately
1.5 billion
RMB (
$235
) and issued equity of
1.4 billion
RMB (
$227
) to Lu'An for their noncontrolling interest in the JV.
In addition, Lu'An made a loan of
2.6 billion
RMB to the JV with regularly scheduled principal and interest payments at a fixed interest rate of
5.5%
, and we established a liability of
2.3 billion
RMB for cash payments expected to be made to or on behalf of Lu'An in fiscal year 2019.
As of 30 September 2018, long-term debt payable to Lu'An of
2.6 billion
RMB (
$384
) is presented on the consolidated balance sheets as "
Long-term debt – related party
," and our expected remaining cash payments of approximately
2.2 billion
RMB (
$330
) are presented within "Payables and accrued liabilities."
The issuance of equity to Lu'An for their noncontrolling interest, the long-term debt, and the liability for the remaining cash payments were noncash transactions; therefore, they have been excluded from the consolidated statement of cash flows for the fiscal year ended 30 September 2018.
Business Combinations
In fiscal year 2018, we completed
eight
acquisitions that were accounted for as business combinations. These acquisitions had an aggregate purchase price, net of cash acquired, of
$355.4
. The largest of the acquisitions was completed during the first quarter of fiscal year 2018 and consisted 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.
Our fiscal year 2018 business combinations resulted in the recognition of
$178.4
of plant and equipment,
$78.0
of goodwill,
$17.7
of which is deductible for tax purposes, and
$105.8
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 primarily recorded in the Industrial Gases – Asia and the Industrial Gases – EMEA segments.
Our 2018 business combinations did not materially impact our consolidated income statements for the periods presented.
7
.
INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
30 September
|
|
2018
|
|
|
2017
|
|
Finished goods
|
|
|
$125.4
|
|
|
|
$120.0
|
|
Work in process
|
|
21.2
|
|
|
15.7
|
|
Raw materials, supplies and other
|
|
249.5
|
|
|
223.0
|
|
Total FIFO Cost
|
|
396.1
|
|
|
358.7
|
|
Less: Excess of FIFO cost over LIFO cost
|
|
—
|
|
|
(23.3
|
)
|
Inventories
|
|
|
$396.1
|
|
|
|
$335.4
|
|
As discussed in Note
1
,
Major Accounting Policies
, we changed our accounting method for U.S. inventories from a LIFO basis to a FIFO basis effective 1 July 2018. As of 30 September 2017, inventories valued using the LIFO method comprised approximately
49%
of consolidated inventories before LIFO adjustment. Liquidation of LIFO inventory layers prior to our change in accounting policy in fiscal year 2018 and in fiscal years 2017 and 2016 did not materially affect the results of operations.
We did not restate prior period financial statements for the change in U.S. inventories as the impact was not material. Instead, the Company applied the accounting change as a cumulative effect adjustment to cost of sales in the fourth quarter of fiscal year 2018. This change increased inventories by
$24.1
at 1 July 2018 and increased pre-tax income from continuing operations by
$24.1
for the quarter and fiscal year ended 30 September 2018.
8
.
SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATES
The summarized financial information below is on a combined 100% basis and has been compiled based on financial statements of the companies accounted for by the equity method. The amounts presented include the accounts of the following equity affiliates:
|
|
|
|
Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (25%);
|
|
INOX Air Products Limited (50%);
|
Air Products South Africa (Proprietary) Limited (50%);
|
|
Jazan Gas Projects Company (25%);
|
Bangkok Cogeneration Company Limited (49%);
|
|
Kulim Industrial Gases Sdn. Bhd. (50%);
|
Bangkok Industrial Gases Co., Ltd. (49%);
|
|
Sapio Produzione Idrogeno Ossigeno S.r.l. (49%);
|
Chengdu Air & Gas Products Ltd. (50%);
|
|
Tecnologia en Nitrogeno S. de R.L. de C.V. (50%);
|
Helios S.p.A. (49%);
|
|
Tyczka Industrie-Gases GmbH (50%);
|
High-Tech Gases (Beijing) Co., Ltd. (50%);
|
|
WuXi Hi-Tech Gas Co., Ltd. (50%);
|
INFRA Group (40%);
|
|
and principally, other industrial gas producers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
|
|
2018
|
|
|
2017
|
|
Current assets
|
|
|
|
|
$1,556.9
|
|
|
|
$1,333.2
|
|
Noncurrent assets
|
|
|
|
4,340.8
|
|
|
4,026.9
|
|
Current liabilities
|
|
|
|
635.7
|
|
|
666.8
|
|
Noncurrent liabilities
|
|
|
|
2,652.5
|
|
|
2,194.3
|
|
|
|
|
|
|
|
|
Year Ended 30 September
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
|
$2,663.1
|
|
|
|
$2,343.3
|
|
|
|
$2,271.6
|
|
Sales less cost of sales
|
|
1,050.6
|
|
|
878.6
|
|
|
871.5
|
|
Operating income
|
|
635.3
|
|
|
509.5
|
|
|
482.1
|
|
Net income
|
|
388.0
|
|
|
343.5
|
|
|
334.1
|
|
Dividends received from equity affiliates were
$122.5
,
$99.5
, and
$95.9
in fiscal years
2018
,
2017
, and
2016
, respectively.
The investment in net assets of and advances to equity affiliates as of
30 September 2018
and
2017
included investment in foreign affiliates of
$1,276.0
and
$1,285.1
, respectively.
As of
30 September 2018
and
2017
, the amount of investment in companies accounted for by the equity method included equity method goodwill of
$42.4
and
$45.8
, respectively.
U.S. Tax Cuts and Jobs Act
For the year ended 30 September 2018, equity affiliates' income includes an expense of
$28.5
for our proportionate share of the impact of the U.S. Tax Cuts and Jobs Act primarily recorded during the first quarter of fiscal year 2018. This expense is included in the fiscal year 2018 net income on a 100% basis in the table above. Refer to Note
22
,
Income Taxes
, for additional information.
Equity Affiliate Impairment Charge
During the third quarter of fiscal year 2017, we recorded an other-than-temporary impairment charge of
$79.5
on our investment in Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (AHG), a
25%
-owned equity affiliate in our Industrial Gases – EMEA segment. The impairment charge is reflected on our consolidated income statements within “Equity affiliates' income." This charge was not deductible for tax purposes and has been excluded from segment results.
The decline in value resulted from expectations for lower future cash flows to be generated by AHG, primarily due to challenging economic conditions in Saudi Arabia, including the impacts of lower prices in the oil and gas industry, increased competition, and capital project growth opportunities not materializing as anticipated.
The AHG investment was valued based on the results of the income and market valuation approaches. The income approach utilized a discount rate based on a market-participant, risk-adjusted weighted average cost of capital, which considers industry required rates of return on debt and equity capital for a target industry capital structure adjusted for risks associated with size and geography. Other significant estimates and assumptions that drove our updated valuation of AHG included revenue growth rates and profit margins that were lower than those upon acquisition and our assessment of AHG's business improvement plan effectiveness. Under the market approach, we estimated fair value based on market multiples of revenue and earnings derived from publicly-traded industrial gases companies engaged in similar lines of business, adjusted to reflect differences in size and growth prospects.
Jazan
On 19 April 2015, a joint venture between Air Products and ACWA Holding entered into a
20
-year oxygen and nitrogen supply agreement to supply Saudi Aramco’s oil refinery and power plant being built in Jazan, Saudi Arabia. Air Products owns
25%
of the joint venture and guarantees the repayment of its share of an equity bridge loan. ACWA also guarantees their share of the loan. We determined that the joint venture is a variable interest entity, for which we are not the primary beneficiary.
As of
30 September 2018
and
2017
, other noncurrent liabilities included
$94.4
for our obligation to make future equity contributions in 2020 based on our proportionate share of the advances received by the joint venture under the loan. During fiscal year 2016, we recorded a noncash transaction that resulted in an increase of
$26.9
to our investment in net assets of and advances to equity affiliates. This noncash transaction has been excluded from the consolidated statement of cash flows. In total, we expect to invest approximately
$100
in this joint venture. There has been
no
change to our investment during fiscal years
2018
and 2017.
9
.
PLANT AND EQUIPMENT, NET
The major classes of plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
Useful Life
in years
|
|
2018
|
|
|
2017
|
|
Land
|
|
|
|
|
|
|
$269.4
|
|
|
|
$231.0
|
|
Buildings
|
|
|
|
30
|
|
988.6
|
|
|
977.8
|
|
Production facilities
(A)
|
|
10
|
to
|
20
|
|
15,082.8
|
|
|
13,577.1
|
|
Distribution and other machinery and equipment
(B)
|
|
5
|
to
|
25
|
|
4,400.9
|
|
|
3,944.0
|
|
Construction in progress
|
|
|
|
|
|
748.5
|
|
|
817.9
|
|
Plant and equipment, at cost
|
|
|
|
|
|
21,490.2
|
|
|
19,547.8
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
11,566.5
|
|
|
11,107.6
|
|
Plant and equipment, net
|
|
|
|
|
|
|
$9,923.7
|
|
|
|
$8,440.2
|
|
|
|
(A)
|
Depreciable lives of production facilities related to long-term customer supply contracts are matched to the contract lives.
|
|
|
(B)
|
The depreciable lives for various types of distribution equipment are
10
to
25 years
for cylinders, depending on the nature and properties of the product;
20 years
for tanks;
7.5 years
for customer stations; and
5
to
15 years
for tractors and trailers.
|
The increase in our production facilities during fiscal year 2018 primarily relates to the Lu'An asset acquisition completed in April 2018. Refer to Note
6
,
Acquisitions
, for additional information.
Depreciation expense was
$940.7
,
$843.2
, and
$832.3
in fiscal years
2018
,
2017
, and
2016
, respectively.
10
.
GOODWILL
Changes to the carrying amount of consolidated goodwill by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases–
Americas
|
Industrial
Gases–
EMEA
|
Industrial
Gases–
Asia
|
Industrial
Gases–
Global
|
Corporate and other
|
Total
|
Goodwill, net at 30 September 2016
|
|
$309.1
|
|
|
$380.6
|
|
|
$135.2
|
|
|
$20.2
|
|
|
$—
|
|
|
$845.1
|
|
Impairment loss
|
(145.3
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(145.3
|
)
|
Acquisitions
|
—
|
|
3.5
|
|
—
|
|
—
|
|
—
|
|
3.5
|
|
Currency translation
|
(.1
|
)
|
18.3
|
|
—
|
|
—
|
|
—
|
|
18.2
|
|
Goodwill, net at 30 September 2017
|
|
$163.7
|
|
|
$402.4
|
|
|
$135.2
|
|
|
$20.2
|
|
|
$—
|
|
|
$721.5
|
|
Acquisitions
|
—
|
|
29.5
|
|
38.1
|
|
—
|
|
10.4
|
|
78.0
|
|
Currency translation
|
(1.6
|
)
|
(7.5
|
)
|
(1.4
|
)
|
(.1
|
)
|
—
|
|
(10.6
|
)
|
Goodwill, net at 30 September 2018
|
|
$162.1
|
|
|
$424.4
|
|
|
$171.9
|
|
|
$20.1
|
|
|
$10.4
|
|
|
$788.9
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
2018
|
|
2017
|
|
2016
|
|
Goodwill, gross
|
|
$1,194.7
|
|
|
$1,138.7
|
|
|
$1,103.7
|
|
Accumulated impairment losses
(A)
|
(405.8
|
)
|
(417.2
|
)
|
(258.6
|
)
|
Goodwill, net
|
|
$788.9
|
|
|
$721.5
|
|
|
$845.1
|
|
|
|
(A)
|
Accumulated impairment losses include the impacts of currency translation. These losses are attributable to our Latin America reporting unit (LASA) within the Industrial Gases – Americas segment.
|
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 impairment test for goodwill involves calculating the fair value of each reporting unit and comparing that value to the carrying value. If the fair value of the reporting unit is less than its carrying value, the difference is recorded as a goodwill impairment charge, not to exceed the total amount of goodwill allocated to that reporting unit. During the fourth quarter of fiscal year
2018
, we conducted our annual goodwill impairment test and determined that the fair value of all our reporting units exceeded their carrying value.
During the third quarter of fiscal year 2017, we conducted an interim impairment test of the goodwill associated with our Latin America Reporting unit (LASA) within the Industrial Gases – Americas segment. This was driven by Management's decision to lower long-term growth projections in response to declining volumes and weak economic conditions in Latin America during fiscal year 2017. We determined that the fair value of LASA was less than its carrying value and recorded a noncash impairment charge of
$145.3
, which is reflected on our consolidated income statements within “Goodwill and intangible asset impairment charge.” This charge was not deductible for tax purposes and has been excluded from segment operating income.
LASA includes assets and goodwill associated with operations in Chile and other Latin American countries. We estimated the fair value of LASA based on two valuation approaches, the income approach and the market approach. We reviewed relevant facts and circumstances in determining the weighting of the approaches.
Under the income approach, we estimated the fair value of LASA based on the present value of estimated future cash flows. Cash flow projections were based on management’s estimates of revenue growth rates and EBITDA margins, taking into consideration business and market conditions for the Latin American countries and markets in which we operate. We calculated the discount rate based on a market-participant, risk-adjusted weighted average cost of capital, which considers industry‑specific rates of return on debt and equity capital for a target industry capital structure, adjusted for risks associated with business size and geography.
Under the market approach, we estimated fair value based on market multiples of revenue and earnings derived from publicly-traded industrial gases companies and regional manufacturing companies, adjusted to reflect differences in size and growth prospects.
Management judgment is required in the determination of each assumption utilized in the valuation model, and actual results could differ from our estimates.
11
.
INTANGIBLE ASSETS
The table below provides details of acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September 2018
|
|
30 September 2017
|
|
|
Gross
|
|
|
Accumulated
Amortization/
Impairment
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
Amortization/
Impairment
|
|
|
Net
|
|
Customer relationships
|
|
|
$491.9
|
|
|
|
($165.5
|
)
|
|
|
$326.4
|
|
|
|
$424.1
|
|
|
|
($142.3
|
)
|
|
|
$281.8
|
|
Patents and technology
|
|
34.0
|
|
|
(11.9
|
)
|
|
22.1
|
|
|
13.4
|
|
|
(10.6
|
)
|
|
2.8
|
|
Other
|
|
72.6
|
|
|
(33.8
|
)
|
|
38.8
|
|
|
73.4
|
|
|
(36.6
|
)
|
|
36.8
|
|
Total finite-lived intangibles
|
|
598.5
|
|
|
(211.2
|
)
|
|
387.3
|
|
|
510.9
|
|
|
(189.5
|
)
|
|
321.4
|
|
Trade names and trademarks, indefinite-lived
|
|
64.8
|
|
|
(13.6
|
)
|
|
51.2
|
|
|
67.8
|
|
|
(20.9
|
)
|
|
46.9
|
|
Total Intangible Assets
|
|
|
$663.3
|
|
|
|
($224.8
|
)
|
|
|
$438.5
|
|
|
|
$578.7
|
|
|
|
($210.4
|
)
|
|
|
$368.3
|
|
The
increase
in net intangible assets during fiscal year
2018
is primarily attributable to intangible assets acquired through business combinations, partially offset by amortization. For additional information on intangible assets acquired, refer to Note 6, Acquisitions.
Amortization expense for intangible assets was
$30.0
,
$22.6
, and
$22.3
in fiscal years
2018
,
2017
, and
2016
, respectively. Refer to Note
1
,
Major Accounting Policies
, for amortization periods associated with our intangible assets.
Projected annual amortization expense for intangible assets as of
30 September 2018
is as follows:
|
|
|
|
|
2019
|
|
$32.7
|
|
2020
|
32.4
|
|
2021
|
30.5
|
|
2022
|
27.8
|
|
2023
|
27.3
|
|
Thereafter
|
236.6
|
|
Total
|
|
$387.3
|
|
Indefinite-lived intangible assets 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. During the fourth quarter of fiscal year
2018
, we conducted our annual impairment test of indefinite-lived intangible assets and determined that the fair value of all our intangible assets exceeded their carrying value.
During the third quarter of fiscal year 2017, we conducted an interim impairment test of the indefinite-lived intangible assets associated with LASA within the Industrial Gases – Americas segment and recorded a noncash impairment charge of
$16.8
to write down the carrying value of the trade names and trademarks to their fair value. The impairment charge has been excluded from segment operating income and is reflected on our consolidated income statements within “Goodwill and intangible asset impairment charge." As discussed in Note 10, Goodwill, the reduction in value resulted from lowered long-term growth projections. We estimated the fair value of the indefinite-lived intangibles associated with LASA utilizing the royalty savings method, a form of the income approach.
In addition, we tested the recoverability of LASA long-lived assets, including finite-lived intangible assets subject to amortization, in fiscal year 2017 and concluded that they were recoverable from expected future undiscounted cash flows.
12
.
LEASES
Lessee Accounting
Capital leases, primarily for the right to use machinery and equipment, are included with owned plant and equipment within "Plant and Equipment, net" on the consolidated balance sheets in the amount of
$21.6
and
$22.3
at
30 September 2018
and
2017
, respectively. Related amounts of accumulated depreciation are
$6.1
and
$5.3
, respectively.
Operating leases principally relate to real estate and also include aircraft, distribution equipment, and vehicles. Certain leases include escalation clauses, renewal, and/or purchase options. Rent expense is recognized on a straight-line basis over the minimum lease term. Rent expense under operating leases, including month-to-month agreements, was
$82.7
,
$65.8
, and
$67.6
in fiscal years
2018
,
2017
, and
2016
, respectively.
At
30 September 2018
, minimum payments due under leases associated with continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
2019
|
|
|
$1.7
|
|
|
|
$65.9
|
|
2020
|
|
1.4
|
|
|
50.4
|
|
2021
|
|
2.9
|
|
|
41.4
|
|
2022
|
|
1.3
|
|
|
30.4
|
|
2023
|
|
1.2
|
|
|
23.3
|
|
Thereafter
|
|
14.3
|
|
|
123.0
|
|
Total
|
|
|
$22.8
|
|
|
|
$334.4
|
|
The present value of the above future capital lease payments totaled
$10.5
. Refer to Note
15
,
Debt
.
Included in the operating lease payments disclosed above are future minimum payments due under leases related to the Energy-from-Waste discontinued operations (i.e., Tees Valley, United Kingdom) of approximately
$2
in each of the next
five
years and
$40
thereafter, for a total lease commitment of approximately
$50
. As discussed in Note 3, Discontinued Operations, during the first quarter of 2017, we recorded an accrual for these lease obligations to other noncurrent liabilities in continuing operations.
Lessor Accounting
As discussed under Revenue Recognition in Note
1
,
Major Accounting Policies
, certain contracts associated with facilities that are built to provide product to a specific customer are required to be accounted for as leases.
Operating Leases
Assets subject to operating lease treatment in which we are the lessor are recorded within "Plant and equipment, net" on the consolidated balance sheets. As of 30 September 2018, plant and equipment, at cost, was
$2.4
billion, and accumulated depreciation was
$.4
billion. Assets subject to operating leases include those of the Lu’An joint venture, which is discussed in Note 6, Acquisitions.
At 30 September 2018, minimum lease payments expected to be collected are as follows:
|
|
|
|
|
|
2019
|
|
$261.5
|
|
|
2020
|
259.1
|
|
|
2021
|
255.8
|
|
|
2022
|
251.5
|
|
|
2023
|
244.9
|
|
|
Thereafter
|
2,904.8
|
|
|
Total
|
|
$4,177.6
|
|
|
Capital Leases
Lease receivables, net, are primarily included within "Noncurrent capital lease receivables" on our consolidated balance sheets, with the remaining balance in "Other receivables and current assets."
The components of lease receivables were as follows:
|
|
|
|
|
|
|
|
|
|
30 September
|
|
2018
|
|
|
2017
|
|
Gross minimum lease payments receivable
|
|
|
$1,673.7
|
|
|
|
$1,897.0
|
|
Unearned interest income
|
|
(568.3
|
)
|
|
(671.9
|
)
|
Lease Receivables, net
|
|
|
$1,105.4
|
|
|
|
$1,225.1
|
|
Lease payments collected in fiscal years
2018
,
2017
, and
2016
were
$182.7
,
$183.6
, and
$186.0
, respectively. These payments reduced the lease receivable balance by
$97.4
,
$92.2
, and
$85.5
in fiscal years
2018
,
2017
, and
2016
, respectively.
At
30 September 2018
, minimum lease payments expected to be collected are as follows:
|
|
|
|
|
2019
|
|
$172.5
|
|
2020
|
167.8
|
|
2021
|
161.9
|
|
2022
|
150.6
|
|
2023
|
144.3
|
|
Thereafter
|
876.6
|
|
Total
|
|
$1,673.7
|
|
13
.
FINANCIAL INSTRUMENTS
Currency Price Risk Management
Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency-denominated transactions and net investments in foreign operations. It is our policy to minimize our cash flow volatility from changes in currency exchange rates. This is accomplished by identifying and evaluating the risk that our cash flows will change in value due to changes in exchange rates and by executing the appropriate strategies necessary to manage such exposures. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.
Forward Exchange Contracts
We enter into forward exchange contracts to reduce the cash flow exposure to foreign currency fluctuations associated with highly anticipated cash flows and certain firm commitments, such as the purchase of plant and equipment. We also enter into forward exchange contracts to hedge the cash flow exposure on intercompany loans. This portfolio of forward exchange contracts consists primarily of Euros and U.S. Dollars. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at
30 September 2018
is
1.9 years
.
Forward exchange contracts are also used to hedge the value of investments in certain foreign subsidiaries and affiliates by creating a liability in a currency in which we have a net equity position. The primary currency pair in this portfolio of forward exchange contracts is Euros and U.S. Dollars.
In addition to the forward exchange contracts that are designated as hedges, we utilize forward exchange contracts that are not designated as hedges. These contracts are used to economically hedge foreign currency-denominated monetary assets and liabilities, primarily working capital. The primary objective of these forward exchange contracts is to protect the value of foreign currency-denominated monetary assets and liabilities from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement. This portfolio of forward exchange contracts consists of many different foreign currency pairs, with a profile that changes from time to time depending on business activity and sourcing decisions.
The table below summarizes our outstanding currency price risk management instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September 2018
|
|
30 September 2017
|
|
|
US$
Notional
|
|
|
Years
Average
Maturity
|
|
US$
Notional
|
|
|
Years
Average
Maturity
|
Forward Exchange Contracts
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
$2,489.1
|
|
|
0.4
|
|
|
$3,150.2
|
|
|
0.4
|
Net investment hedges
|
|
457.5
|
|
|
1.7
|
|
675.5
|
|
|
3.0
|
Not designated
|
|
1,736.1
|
|
|
0.8
|
|
273.8
|
|
|
0.1
|
Total Forward Exchange Contracts
|
|
|
$4,682.7
|
|
|
0.7
|
|
|
$4,099.5
|
|
|
0.8
|
The notional value of forward exchange contracts not designated in the table above increased as a result of repayment of intercompany loans prior to their original maturity dates. The outstanding forward exchange contracts no longer qualified as cash flow hedges due to the early repayment of the loans. In addition, 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 from these items, 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
€908.8 million
(
$1,054.6
) at
30 September 2018
and
€912.2 million
(
$1,077.7
) at
30 September 2017
. The designated foreign currency-denominated debt is located on the balance sheets 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
30 September 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 nonfunctional 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 Chinese Renminbi, U.S. Dollars and Chilean Pesos, and U.S. Dollars and Indian Rupee.
The following table summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September 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)
|
|
|
$600.0
|
|
|
LIBOR
|
|
|
2.60
|
%
|
|
1.6
|
|
|
$600.0
|
|
|
LIBOR
|
|
|
2.28
|
%
|
|
1.3
|
Cross currency interest rate swaps (net investment hedge)
|
|
|
$201.7
|
|
|
4.42
|
%
|
|
2.97
|
%
|
|
3.1
|
|
|
$539.7
|
|
|
3.27
|
%
|
|
2.59
|
%
|
|
1.9
|
Cross currency interest rate swaps (cash flow hedge)
|
|
|
$1,052.7
|
|
|
4.99
|
%
|
|
2.89
|
%
|
|
2.3
|
|
|
$1,095.7
|
|
|
4.96
|
%
|
|
2.78
|
%
|
|
2.4
|
Cross currency interest rate swaps (not designated)
|
|
|
$80.2
|
|
|
4.88
|
%
|
|
3.43
|
%
|
|
3.9
|
|
|
$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
|
|
30 September
|
|
Balance Sheet
|
|
30 September
|
|
|
Location
|
|
2018
|
|
|
2017
|
|
|
Location
|
|
2018
|
|
|
2017
|
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
Other receivables
|
|
|
$24.9
|
|
|
|
$81.7
|
|
|
Accrued liabilities
|
|
|
$37.0
|
|
|
|
$82.0
|
|
Interest rate management contracts
|
|
Other receivables
|
|
24.3
|
|
|
11.1
|
|
|
Accrued liabilities
|
|
2.3
|
|
|
10.7
|
|
Forward exchange contracts
|
|
Other noncurrent assets
|
|
19.8
|
|
|
27.1
|
|
|
Other noncurrent
liabilities
|
|
4.6
|
|
|
13.8
|
|
Interest rate management contracts
|
|
Other noncurrent assets
|
|
48.7
|
|
|
102.6
|
|
|
Other noncurrent
liabilities
|
|
11.6
|
|
|
22.2
|
|
Total Derivatives Designated as Hedging Instruments
|
|
|
|
|
$117.7
|
|
|
|
$222.5
|
|
|
|
|
|
$55.5
|
|
|
|
$128.7
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
Other receivables
|
|
7.9
|
|
|
1.1
|
|
|
Accrued liabilities
|
|
|
$14.9
|
|
|
|
$2.2
|
|
Interest rate management contracts
|
|
Other receivables
|
|
4.0
|
|
|
—
|
|
|
Accrued liabilities
|
|
—
|
|
|
1.0
|
|
Forward exchange contracts
|
|
Other noncurrent assets
|
|
16.2
|
|
|
—
|
|
|
Other noncurrent liabilities
|
|
23.7
|
|
|
—
|
|
Interest rate management contracts
|
|
Other noncurrent assets
|
|
.3
|
|
|
4.2
|
|
|
Other noncurrent
liabilities
|
|
—
|
|
|
—
|
|
Total Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
$28.4
|
|
|
|
$5.3
|
|
|
|
|
|
$38.6
|
|
|
|
$3.2
|
|
Total Derivatives
|
|
|
|
|
$146.1
|
|
|
|
$227.8
|
|
|
|
|
|
$94.1
|
|
|
|
$131.9
|
|
Refer to Note
14
,
Fair Value Measurements
, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 30 September
|
|
|
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)
|
|
|
$2.4
|
|
|
|
$.3
|
|
|
|
$—
|
|
|
|
$—
|
|
|
|
$43.5
|
|
|
|
($12.9
|
)
|
|
|
$45.9
|
|
|
|
($12.6
|
)
|
Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)
|
|
7.1
|
|
|
18.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.1
|
|
|
18.3
|
|
Net (gain) loss reclassified from OCI to other income (expense), net (effective portion)
|
|
(7.8
|
)
|
|
(3.8
|
)
|
|
—
|
|
|
—
|
|
|
(33.8
|
)
|
|
10.5
|
|
|
(41.6
|
)
|
|
6.7
|
|
Net (gain) loss reclassified from OCI to interest expense (effective portion)
|
|
1.2
|
|
|
(2.1
|
)
|
|
—
|
|
|
—
|
|
|
3.9
|
|
|
2.9
|
|
|
5.1
|
|
|
.8
|
|
Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion)
|
|
(.5
|
)
|
|
(1.6
|
)
|
|
—
|
|
|
—
|
|
|
(.5
|
)
|
|
—
|
|
|
(1.0
|
)
|
|
(1.6
|
)
|
Fair Value Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in interest expense
(B)
|
|
|
$—
|
|
|
|
$—
|
|
|
|
$—
|
|
|
|
$—
|
|
|
|
($10.1
|
)
|
|
|
($14.7
|
)
|
|
|
($10.1
|
)
|
|
|
($14.7
|
)
|
Net Investment Hedges, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in OCI
|
|
|
($.6
|
)
|
|
|
($11.1
|
)
|
|
|
$10.2
|
|
|
|
($32.8
|
)
|
|
|
$11.0
|
|
|
|
($15.6
|
)
|
|
|
$20.6
|
|
|
|
($59.5
|
)
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in other income (expense), net
(C)
|
|
|
($4.0
|
)
|
|
|
$4.1
|
|
|
|
$—
|
|
|
|
$—
|
|
|
|
($.8
|
)
|
|
|
($2.4
|
)
|
|
|
($4.8
|
)
|
|
|
$1.7
|
|
|
|
(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 nonfunctional currencies.
|
The amount of cash flow hedges’ unrealized gains and losses at
30 September 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
$33.4
as of
30 September 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
$97.6
as of
30 September 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 the threshold.
14
.
FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
|
|
|
|
Level 1—
|
Quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
Level 2—
|
Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
|
|
|
Level 3—
|
Inputs that are unobservable for the asset or liability based on our own assumptions (about the assumptions market participants would use in pricing the asset or liability).
|
The methods and assumptions used to measure the fair value of financial instruments are as follows:
Short-term Investments
Short-term investments include time deposits 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
30 September 2018
and
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
13
,
Financial Instruments
, for a description of derivative instruments, including details on the balance sheet line classifications.
Long-term Debt, Including Related Party
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September 2018
|
|
30 September 2017
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Assets
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
|
$68.8
|
|
|
|
$68.8
|
|
|
|
$109.9
|
|
|
|
$109.9
|
|
Interest rate management contracts
|
|
77.3
|
|
|
77.3
|
|
|
117.9
|
|
|
117.9
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
|
$80.2
|
|
|
|
$80.2
|
|
|
|
$98.0
|
|
|
|
$98.0
|
|
Interest rate management contracts
|
|
13.9
|
|
|
13.9
|
|
|
33.9
|
|
|
33.9
|
|
Long-term debt, including current portion
|
|
3,758.3
|
|
|
3,788.2
|
|
|
3,818.8
|
|
|
3,928.2
|
|
The carrying amounts reported on the consolidated balance sheets 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September 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
|
|
|
$68.8
|
|
|
|
$—
|
|
|
|
$68.8
|
|
|
|
$—
|
|
|
|
$109.9
|
|
|
|
$—
|
|
|
|
$109.9
|
|
|
|
$—
|
|
Interest rate management contracts
|
|
77.3
|
|
|
—
|
|
|
77.3
|
|
|
—
|
|
|
117.9
|
|
|
—
|
|
|
117.9
|
|
|
—
|
|
Total Assets at Fair Value
|
|
|
$146.1
|
|
|
|
$—
|
|
|
|
$146.1
|
|
|
|
$—
|
|
|
|
$227.8
|
|
|
|
$—
|
|
|
|
$227.8
|
|
|
|
$—
|
|
Liabilities at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
|
$80.2
|
|
|
|
$—
|
|
|
|
$80.2
|
|
|
|
$—
|
|
|
|
$98.0
|
|
|
|
$—
|
|
|
|
$98.0
|
|
|
|
$—
|
|
Interest rate management contracts
|
|
13.9
|
|
|
—
|
|
|
13.9
|
|
|
—
|
|
|
33.9
|
|
|
—
|
|
|
33.9
|
|
|
—
|
|
Total Liabilities at Fair Value
|
|
|
$94.1
|
|
|
|
$—
|
|
|
|
$94.1
|
|
|
|
$—
|
|
|
|
$131.9
|
|
|
|
$—
|
|
|
|
$131.9
|
|
|
|
$—
|
|
The following is a tabular presentation of nonrecurring fair value measurements along with the level within the fair value hierarchy in which the fair value measurement in its entirety falls:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 June 2017
|
2017 Loss
|
|
Total
|
|
Level 1
|
Level 2
|
Level 3
|
Investment in Equity Affiliate
(A)
|
|
$68.5
|
|
|
|
$—
|
|
|
$—
|
|
|
$68.5
|
|
|
$79.5
|
|
|
|
(A)
|
In fiscal year 2017, we assessed the recoverability of the carrying value of our equity investment in AHG. We estimated the fair value of our investment using weighting of the results of the income and market approaches. An impairment loss was recognized for the difference between the carrying amount and the fair value of the investment as of 30 June 2017. There have been no events during fiscal year 2018 requiring reassessment of our investment. For additional information, see Note
8
,
Summarized Financial Information of Equity Affiliates
.
|
During the third quarter ended 30 June 2017, we recognized a goodwill impairment charge of
$145.3
and an intangible asset impairment charge of
$16.8
associated with our LASA reporting unit. Refer to Note
10
,
Goodwill
, and Note
11
,
Intangible Assets
, for more information related to these charges and the associated fair value measurement methods and significant inputs/assumptions, which were classified as Level 3 since unobservable inputs were utilized in the fair value measurements.
15
.
DEBT
The tables below summarize our outstanding debt at
30 September 2018
and
2017
:
Total Debt
|
|
|
|
|
|
|
|
|
|
30 September
|
|
2018
|
|
|
2017
|
|
Short-term borrowings
|
|
|
$54.3
|
|
|
|
$144.0
|
|
Current portion of long-term debt
|
|
406.6
|
|
|
416.4
|
|
Long-term debt
|
|
2,967.4
|
|
|
3,402.4
|
|
Long-term debt – related party
(A)
|
|
384.3
|
|
|
—
|
|
Total Debt
|
|
|
$3,812.6
|
|
|
|
$3,962.8
|
|
|
|
(A)
|
Refer to Note
6
,
Acquisitions
, for additional information regarding related party debt.
|
Short-term Borrowings
Short-term borrowings consisted of bank obligations of
$54.3
and
$144.0
at
30 September 2018
and
2017
, respectively. The weighted average interest rate of short-term borrowings outstanding at
30 September 2018
and
2017
was
5.0%
and
4.6%
, respectively.
Long-term Debt
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
Fiscal Year
Maturities
|
|
2018
|
|
|
2017
|
|
Payable in U.S. Dollars
|
|
|
|
|
|
|
Debentures
|
|
|
|
|
|
|
8.75%
|
|
2021
|
|
|
$18.4
|
|
|
|
$18.4
|
|
Medium-term Notes (weighted average rate)
|
|
|
|
|
|
|
Series E 7.6%
|
|
2026
|
|
17.2
|
|
|
17.2
|
|
Senior Notes
|
|
|
|
|
|
|
Note 1.2%
|
|
2018
|
|
—
|
|
|
400.0
|
|
Note 4.375%
|
|
2019
|
|
400.0
|
|
|
400.0
|
|
Note 3.0%
|
|
2022
|
|
400.0
|
|
|
400.0
|
|
Note 2.75%
|
|
2023
|
|
400.0
|
|
|
400.0
|
|
Note 3.35%
|
|
2024
|
|
400.0
|
|
|
400.0
|
|
Other
(weighted average rate)
|
|
|
|
|
|
|
Variable-rate industrial revenue bonds 1.51%
|
|
2035 to 2050
|
|
631.9
|
|
|
631.9
|
|
Other .25%
|
|
2019 to 2022
|
|
.9
|
|
|
10.9
|
|
Payable in Other Currencies
|
|
|
|
|
|
|
Eurobonds 2.0%
|
|
2020
|
|
348.1
|
|
|
354.4
|
|
Eurobonds .375%
|
|
2021
|
|
406.2
|
|
|
413.5
|
|
Eurobonds 1.0%
|
|
2025
|
|
348.1
|
|
|
354.4
|
|
Other 4.3%
|
|
2019 to 2023
|
|
8.0
|
|
|
25.8
|
|
Related Party
(A)
|
|
|
|
|
|
|
Chinese Renminbi 5.5%
|
|
2020 to 2026
|
|
384.3
|
|
|
—
|
|
Capital Lease Obligations
|
|
|
|
|
|
|
United States 5.0%
|
|
2018
|
|
—
|
|
|
.2
|
|
Foreign 10.4%
|
|
2019 to 2036
|
|
10.5
|
|
|
10.6
|
|
Total Principal Amount
|
|
|
|
3,773.6
|
|
|
3,837.3
|
|
Less: Unamortized discount and debt issuance costs
|
|
|
|
(15.3
|
)
|
|
(18.5
|
)
|
Total Long-term Debt
|
|
|
|
3,758.3
|
|
|
3,818.8
|
|
Less: Current portion of long-term debt
|
|
|
|
(406.6
|
)
|
|
(416.4
|
)
|
Less: Long-term debt – related party
|
|
|
|
(384.3
|
)
|
|
—
|
|
Long-term Debt
|
|
|
|
|
$2,967.4
|
|
|
|
$3,402.4
|
|
|
|
(A)
|
Refer to Note
6
,
Acquisitions
, for additional information regarding related party debt.
|
Maturities of long-term debt, including related party, in each of the next
five
years and beyond are as follows:
|
|
|
|
|
2019
|
|
$406.6
|
|
2020
|
380.9
|
|
2021
|
473.9
|
|
2022
|
448.3
|
|
2023
|
448.8
|
|
Thereafter
|
1,615.1
|
|
Total
|
|
$3,773.6
|
|
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 2018
, we are in compliance with all the financial and other covenants under our debt agreements.
Additional commitments totaling
$7.0
are maintained by our foreign subsidiaries, all of which were borrowed and outstanding at
30 September 2018
.
Cash paid for interest, net of amounts capitalized, was
$123.1
,
$125.9
, and
$120.6
in fiscal years
2018
,
2017
, and
2016
, respectively.
2017
Credit Agreement
On 31
March 2017
, we entered into a
five
-year
$2,500.0
revolving credit agreement maturing 31
March 2022
with a syndicate of banks (the “
2017
Credit Agreement”), under which senior unsecured debt is available to both the Company and certain of its subsidiaries. On 28 September 2018, we amended the
2017
Credit Agreement to reduce the maximum borrowing capacity to
$2,300.0
. No other terms were impacted by the amendment.
The
2017
Credit Agreement provides a source of liquidity for the Company and supports its commercial paper program. The Company’s only financial covenant under the 2017 Credit Agreement is a maximum ratio of total debt to total capitalization (total debt plus total equity) no greater than
70%
.
No
borrowings were outstanding under the
2017
Credit Agreement as of
30 September 2018
.
Loss on Extinguishment of Debt
In September 2016, we exchanged notes issued to us by Versum in anticipation of the spin-off. The exchange resulted in a loss of
$6.9
. Refer to Note
4
,
Materials Technologies Separation
, for additional information.
16
.
RETIREMENT BENEFITS
The Company and certain of its subsidiaries sponsor defined benefit pension plans and defined contribution plans that cover a substantial portion of its 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 principal defined contribution plan is the Retirement Savings Plan, in which a substantial portion of the U.S. employees participate. A similar plan is offered to U.K. employees. We also provide other postretirement benefits consisting primarily of healthcare benefits to U.S. retirees who meet age and service requirements.
Defined Benefit Pension Plans
Pension benefits earned are generally based on years of service and compensation during active employment. The cost of our defined benefit pension plans in fiscal years
2018
,
2017
, and
2016
included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
U.S.
|
|
International
|
|
|
U.S.
|
|
International
|
|
|
U.S.
|
|
International
|
|
Service cost
|
|
$25.5
|
|
|
$25.5
|
|
|
|
$29.0
|
|
|
$25.9
|
|
|
|
$36.5
|
|
|
$24.3
|
|
Interest cost
|
107.2
|
|
37.3
|
|
|
107.5
|
|
32.2
|
|
|
110.7
|
|
44.3
|
|
Expected return on plan assets
|
(201.6
|
)
|
(81.7
|
)
|
|
(207.7
|
)
|
(75.2
|
)
|
|
(202.0
|
)
|
(78.3
|
)
|
Amortization
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
87.4
|
|
40.2
|
|
|
88.7
|
|
54.7
|
|
|
85.3
|
|
35.6
|
|
Prior service cost (credit)
|
1.6
|
|
—
|
|
|
2.3
|
|
(.1
|
)
|
|
2.8
|
|
(.2
|
)
|
Settlements
|
45.0
|
|
3.5
|
|
|
10.5
|
|
1.7
|
|
|
5.1
|
|
1.3
|
|
Curtailments
|
—
|
|
—
|
|
|
4.3
|
|
(1.3
|
)
|
|
—
|
|
(1.1
|
)
|
Special termination benefits
|
.4
|
|
—
|
|
|
2.8
|
|
.4
|
|
|
2.0
|
|
—
|
|
Other
|
—
|
|
1.5
|
|
|
—
|
|
1.1
|
|
|
(.3
|
)
|
2.1
|
|
Net Periodic Benefit Cost – Total
|
|
$65.5
|
|
|
$26.3
|
|
|
|
$37.4
|
|
|
$39.4
|
|
|
|
$40.1
|
|
|
$28.0
|
|
Less: Discontinued Operations
|
—
|
|
—
|
|
|
(.7
|
)
|
(4.1
|
)
|
|
(7.9
|
)
|
(4.4
|
)
|
Net Periodic Benefit Cost – Continuing Operations
|
|
$65.5
|
|
|
$26.3
|
|
|
|
$36.7
|
|
|
$35.3
|
|
|
|
$32.2
|
|
|
$23.6
|
|
As discussed 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 the service cost component of net periodic benefit cost to be presented within the same line items as other compensation costs arising from services rendered by employees during the period. Accordingly, our service costs are primarily included within "Cost of sales" and "Selling and administrative expense" on our consolidated income statements. The non-service related costs, including pension settlement losses, are presented outside operating income within "Other non-operating income (expense), net." The amount of service costs capitalized in fiscal year
2018
and the amount of net periodic benefit costs capitalized in fiscal years
2017
and
2016
were not material.
During the fourth quarter of fiscal year 2018, we recognized a pension settlement loss of
$43.7
primarily resulting from the transfer of certain pension payment obligations for our U.S. salaried and hourly plans to an insurer through the purchase of an irrevocable, nonparticipating group annuity contract with plan assets on 17 September 2018. The transaction does not change the amount of the monthly pension benefits received by affected retirees.
Certain of our pension plans provide for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after their retirement date. A participant’s vested benefit is considered settled upon cash payment of the lump sum. We recognize pension settlement losses when cash payments exceed the sum of the service and interest cost components of net periodic benefit cost of the plan for the fiscal year. We recognized pension settlement losses of
$10.5
and
$5.1
in fiscal years
2017
and
2016
, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss, primarily associated with the U.S. Supplementary Pension Plan.
We calculate net periodic benefit cost for a given fiscal year based on assumptions developed at the end of the previous fiscal year. The following table sets forth the weighted average assumptions used in the calculation of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
U.S.
|
|
International
|
|
|
U.S.
|
|
International
|
|
|
U.S.
|
|
International
|
|
Discount rate – Service cost
|
3.9
|
%
|
2.6
|
%
|
|
3.6
|
%
|
2.1
|
%
|
|
4.5
|
%
|
3.4
|
%
|
Discount rate – Interest cost
|
3.3
|
%
|
2.2
|
%
|
|
3.0
|
%
|
1.8
|
%
|
|
3.6
|
%
|
2.9
|
%
|
Expected return on plan assets
|
7.5
|
%
|
5.8
|
%
|
|
8.0
|
%
|
6.1
|
%
|
|
8.0
|
%
|
6.3
|
%
|
Rate of compensation increase
|
3.5
|
%
|
3.6
|
%
|
|
3.5
|
%
|
3.5
|
%
|
|
3.5
|
%
|
3.5
|
%
|
The projected benefit obligation (PBO) is the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future salary increases. The following table sets forth the weighted average assumptions used in the calculation of the PBO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
International
|
|
Discount rate
|
|
4.3
|
%
|
|
2.5
|
%
|
|
3.8
|
%
|
|
2.4
|
%
|
Rate of compensation increase
|
|
3.5
|
%
|
|
3.5
|
%
|
|
3.5
|
%
|
|
3.6
|
%
|
The following tables reflect the change in the PBO and the change in the fair value of plan assets based on the plan year measurement date, as well as the amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
International
|
|
Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
Obligation at beginning of year
|
|
|
$3,357.7
|
|
|
|
$1,749.5
|
|
|
|
$3,477.7
|
|
|
|
$1,849.6
|
|
Service cost
|
|
25.5
|
|
|
25.5
|
|
|
29.0
|
|
|
25.9
|
|
Interest cost
|
|
107.2
|
|
|
37.3
|
|
|
107.5
|
|
|
32.2
|
|
Amendments
|
|
.1
|
|
|
.7
|
|
|
1.9
|
|
|
—
|
|
Actuarial gain
|
|
(217.8
|
)
|
|
(33.9
|
)
|
|
(68.0
|
)
|
|
(132.4
|
)
|
Divestitures
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(34.1
|
)
|
Curtailments
|
|
—
|
|
|
—
|
|
|
(17.3
|
)
|
|
(4.2
|
)
|
Settlements
|
|
(193.0
|
)
|
|
(24.6
|
)
|
|
7.0
|
|
|
—
|
|
Special termination benefits
|
|
.4
|
|
|
—
|
|
|
2.8
|
|
|
—
|
|
Participant contributions
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
1.4
|
|
Benefits paid
|
|
(157.3
|
)
|
|
(51.3
|
)
|
|
(182.9
|
)
|
|
(46.5
|
)
|
Currency translation/other
|
|
—
|
|
|
(44.1
|
)
|
|
—
|
|
|
57.6
|
|
Obligation at End of Year
|
|
|
$2,922.8
|
|
|
|
$1,660.5
|
|
|
|
$3,357.7
|
|
|
|
$1,749.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
International
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Fair value at beginning of year
|
|
|
$2,869.2
|
|
|
|
$1,540.0
|
|
|
|
$2,705.3
|
|
|
|
$1,411.1
|
|
Actual return on plan assets
|
|
150.2
|
|
|
115.5
|
|
|
319.6
|
|
|
87.9
|
|
Company contributions
|
|
14.6
|
|
|
53.7
|
|
|
27.2
|
|
|
42.2
|
|
Participant contributions
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
1.4
|
|
Divestitures
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.0
|
)
|
Benefits paid
|
|
(157.3
|
)
|
|
(51.3
|
)
|
|
(182.9
|
)
|
|
(46.5
|
)
|
Settlements
|
|
(191.8
|
)
|
|
(24.6
|
)
|
|
—
|
|
|
(5.3
|
)
|
Currency translation/other
|
|
—
|
|
|
(46.5
|
)
|
|
—
|
|
|
52.2
|
|
Fair Value at End of Year
|
|
|
$2,684.9
|
|
|
|
$1,588.2
|
|
|
|
$2,869.2
|
|
|
|
$1,540.0
|
|
Funded Status at End of Year
|
|
|
($237.9
|
)
|
|
|
($72.3
|
)
|
|
|
($488.5
|
)
|
|
|
($209.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
$28.2
|
|
|
|
$103.5
|
|
|
|
$5.3
|
|
|
|
$13.1
|
|
Accrued liabilities
|
|
23.5
|
|
|
1.2
|
|
|
12.6
|
|
|
—
|
|
Noncurrent liabilities
|
|
242.6
|
|
|
174.6
|
|
|
481.2
|
|
|
222.6
|
|
Net Liability Recognized
|
|
|
$237.9
|
|
|
|
$72.3
|
|
|
|
$488.5
|
|
|
|
$209.5
|
|
Settlements in the table above primarily reflect the impact of the transfer of certain pension obligations and plan assets of our U.S. salaried and hourly plans to an insurer through the purchase of an irrevocable, nonparticipating group annuity contract in the fourth quarter of fiscal year 2018.
The changes in plan assets and benefit obligation that have been recognized in other comprehensive income on a pretax basis during fiscal years
2018
and
2017
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
International
|
|
Net actuarial gain arising during the period
|
|
|
($167.7
|
)
|
|
|
($64.6
|
)
|
|
|
($189.8
|
)
|
|
|
($162.0
|
)
|
Amortization of net actuarial loss
|
|
(132.4
|
)
|
|
(43.7
|
)
|
|
(103.3
|
)
|
|
(55.7
|
)
|
Prior service cost arising during the period
|
|
.1
|
|
|
.7
|
|
|
1.9
|
|
|
—
|
|
Amortization of prior service cost
|
|
(1.6
|
)
|
|
—
|
|
|
(2.3
|
)
|
|
.1
|
|
Total
|
|
|
($301.6
|
)
|
|
|
($107.6
|
)
|
|
|
($293.5
|
)
|
|
|
($217.6
|
)
|
The net actuarial gain represents the actual changes in the estimated obligation and plan assets that have not yet been recognized in the consolidated income statements and are included in accumulated other comprehensive loss. Actuarial gains arising during fiscal year 2018 are primarily attributable to higher discount rates and higher than expected return on plan assets. Accumulated actuarial gains and losses that exceed a corridor are amortized over the average remaining service period of U.S. participants, which was approximately
eight
years as of
30 September 2018
. For U.K. participants, accumulated actuarial gains and losses that exceed a corridor are amortized over the average remaining life expectancy, which was approximately
26
years as of 30 September 2018.
The components recognized in accumulated other comprehensive loss on a pretax basis at 30 September consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
International
|
|
Net actuarial loss
|
|
|
$680.4
|
|
|
|
$443.6
|
|
|
|
$980.5
|
|
|
|
$551.9
|
|
Prior service cost (credit)
|
|
6.6
|
|
|
(1.1
|
)
|
|
8.1
|
|
|
(1.8
|
)
|
Net transition liability
|
|
—
|
|
|
.4
|
|
|
—
|
|
|
.4
|
|
Total
|
|
|
$687.0
|
|
|
|
$442.9
|
|
|
|
$988.6
|
|
|
|
$550.5
|
|
The amount of accumulated other comprehensive loss at
30 September 2018
that is expected to be recognized as a component of net periodic pension cost during fiscal year
2019
, excluding discontinued operations and amounts that may be recognized through settlement losses, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
Net actuarial loss
|
|
|
$65.1
|
|
|
|
$11.2
|
|
Prior service cost (credit)
|
|
1.0
|
|
|
(.2
|
)
|
The accumulated benefit obligation (ABO) is the actuarial present value of benefits attributed to employee service rendered to a particular date, based on current salaries. The ABO for all defined benefit pension plans was
$4,376.4
and
$4,842.8
as of
30 September 2018
and
2017
, respectively.
The following table provides information on pension plans where the benefit liability exceeds the value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September 2018
|
|
30 September 2017
|
|
U.S.
|
|
International
|
|
|
U.S.
|
|
International
|
|
Pension Plans with PBO in Excess of Plan Assets:
|
|
|
|
|
|
PBO
|
|
$2,733.6
|
|
|
$452.6
|
|
|
|
$3,116.7
|
|
|
$465.7
|
|
Fair value of plan assets
|
2,467.5
|
|
276.8
|
|
|
2,623.0
|
|
243.1
|
|
Pension Plans with ABO in Excess of Plan Assets:
|
|
|
|
|
|
ABO
|
|
$2,608.6
|
|
|
$357.9
|
|
|
|
$2,951.0
|
|
|
$365.6
|
|
Fair value of plan assets
|
2,467.5
|
|
228.2
|
|
|
2,623.0
|
|
197.1
|
|
The tables above include several pension arrangements that are not funded because of jurisdictional practice. The ABO and PBO related to these plans as of 30 September
2018
were
$92.8
and
$100.9
, respectively.
Pension Plan Assets
Our pension plan investment strategy is to invest in diversified portfolios to earn a long-term return consistent with acceptable risk in order to pay retirement benefits and meet regulatory funding requirements while minimizing company cash contributions over time. De-risking strategies are also employed for closed plans as funding improves, generally resulting in higher allocations to long duration bonds. The plans invest primarily in passive and actively managed equity and debt securities. Equity investments are diversified geographically and by investment style and market capitalization. Fixed income investments include sovereign, corporate and asset-backed securities generally denominated in the currency of the plan.
Asset allocation targets are established based on the long-term return, volatility and correlation characteristics of the asset classes, the profiles of the plans’ liabilities, and acceptable levels of risk. Actual allocations vary from target due to market changes and are reviewed regularly. Assets are routinely rebalanced through contributions, benefit payments, and otherwise as deemed appropriate. The actual and target allocations at the measurement date are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Target Allocation
|
|
2018 Actual Allocation
|
|
2017 Actual Allocation
|
|
|
U.S.
|
|
International
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
International
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
38
|
-
|
48%
|
|
40
|
-
|
49%
|
|
41
|
%
|
|
46
|
%
|
|
58
|
%
|
|
53
|
%
|
Debt securities
|
|
44
|
-
|
54%
|
|
50
|
-
|
60%
|
|
50
|
%
|
|
53
|
%
|
|
34
|
%
|
|
46
|
%
|
Real estate/other
|
|
—
|
-
|
10%
|
|
—
|
-
|
—%
|
|
8
|
%
|
|
—
|
%
|
|
7
|
%
|
|
1
|
%
|
Cash
|
|
|
|
—%
|
|
|
|
—%
|
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
|
—
|
%
|
Total
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
In fiscal year 2018, the
7.5%
expected return for U.S. plan assets was based on a weighted average of estimated long-term returns of major asset classes and the historical performance of plan assets. The estimated long-term return for equity, debt securities, and real estate is
8.0%
,
5.4%
, and
6.9%
, respectively. In determining asset class returns, we take into account historical long-term returns and the value of active management, as well as other economic and market factors.
In fiscal year 2018, the
5.8%
expected rate of return for international plan assets was based on a weighted average return for plans outside the U.S., which vary significantly in size, asset structure and expected returns. The expected asset return for the U.K. plan, which represents over
80%
of the assets of our International plans, is
6.2%
and was derived from expected equity and debt security returns of
7.4%
and
2.7%
, respectively.
The following table summarizes pension plan assets measured at fair value by asset class (see Note
14
,
Fair Value Measurements
, for definition of the levels):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September 2018
|
|
30 September 2017
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
U.S. Qualified Pension Plans
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$13.8
|
|
|
$13.8
|
|
|
$—
|
|
|
$—
|
|
|
|
$13.6
|
|
|
$13.6
|
|
|
$—
|
|
|
$—
|
|
Equity securities
|
397.9
|
|
397.9
|
|
—
|
|
—
|
|
|
598.6
|
|
598.6
|
|
—
|
|
—
|
|
Equity mutual funds
|
173.8
|
|
173.8
|
|
—
|
|
—
|
|
|
276.5
|
|
276.5
|
|
—
|
|
—
|
|
Equity pooled funds
|
545.2
|
|
—
|
|
545.2
|
|
—
|
|
|
787.0
|
|
—
|
|
787.0
|
|
—
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
Bonds (government
and corporate)
|
1,344.6
|
|
—
|
|
1,344.6
|
|
—
|
|
|
985.7
|
|
—
|
|
985.7
|
|
—
|
|
Total U.S. Qualified Pension Plans at Fair Value
|
|
$2,475.3
|
|
|
$585.5
|
|
|
$1,889.8
|
|
|
$—
|
|
|
|
$2,661.4
|
|
|
$888.7
|
|
|
$1,772.7
|
|
|
$—
|
|
Real estate pooled funds
(A)
|
|
$209.6
|
|
|
|
|
|
|
$207.8
|
|
|
|
|
Total U.S. Qualified Pension Plans
|
|
$2,684.9
|
|
|
|
|
|
|
|
|
$2,869.2
|
|
|
|
|
|
|
International Pension Plans
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$15.8
|
|
|
$15.8
|
|
|
$—
|
|
|
$—
|
|
|
|
$7.3
|
|
|
$7.3
|
|
|
$—
|
|
|
$—
|
|
Equity pooled funds
|
727.9
|
|
—
|
|
727.9
|
|
—
|
|
|
821.4
|
|
—
|
|
821.4
|
|
—
|
|
Fixed income pooled funds
|
615.2
|
|
—
|
|
615.2
|
|
—
|
|
|
651.3
|
|
—
|
|
651.3
|
|
—
|
|
Other pooled funds
|
11.6
|
|
—
|
|
11.6
|
|
—
|
|
|
18.6
|
|
—
|
|
10.8
|
|
7.8
|
|
Insurance contracts
|
217.7
|
|
—
|
|
—
|
|
217.7
|
|
|
41.4
|
|
—
|
|
—
|
|
41.4
|
|
Total International Pension Plans
|
|
$1,588.2
|
|
|
$15.8
|
|
|
$1,354.7
|
|
|
$217.7
|
|
|
|
$1,540.0
|
|
|
$7.3
|
|
|
$1,483.5
|
|
|
$49.2
|
|
|
|
(A)
|
Real estate pooled funds consist of funds that invest in properties. Interests in these funds are valued using the net asset value ("NAV") per share practical expedient and are not classified in the fair value hierarchy. During fiscal year 2018, we identified that these investments were improperly included in the fair value hierarchy table of our 2017 Form 10-K. Accordingly, we have updated the prior period to conform with the appropriate current year presentation.
|
The following table summarizes changes in fair value of the pension plan assets classified as Level 3, by asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Pooled Funds
|
|
|
Insurance
Contracts
|
|
|
Total
|
|
30 September 2016
|
|
|
$7.3
|
|
|
|
$45.8
|
|
|
|
$53.1
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
Assets held at end of year
|
|
1.2
|
|
|
(1.0
|
)
|
|
.2
|
|
Assets sold during the period
|
|
.3
|
|
|
—
|
|
|
.3
|
|
Purchases, sales, and settlements, net
|
|
(1.0
|
)
|
|
(3.4
|
)
|
|
(4.4
|
)
|
30 September 2017
|
|
|
$7.8
|
|
|
|
$41.4
|
|
|
|
$49.2
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
Assets held at end of year
|
|
—
|
|
|
.9
|
|
|
.9
|
|
Assets sold during the period
|
|
.5
|
|
|
—
|
|
|
.5
|
|
Purchases, sales, and settlements, net
|
|
(8.3
|
)
|
|
175.4
|
|
|
167.1
|
|
30 September 2018
|
|
|
$—
|
|
|
|
$217.7
|
|
|
|
$217.7
|
|
The descriptions and fair value methodologies for the U.S. and International pension plan assets are as follows:
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents approximate fair value due to the short-term maturity.
Equity Securities
Equity securities are valued at the closing market price reported on a U.S. or international exchange where the security is actively traded and are therefore classified as Level 1 assets.
Equity Mutual and Pooled Funds
Shares of mutual funds are valued at the net asset value (NAV) of the fund and are classified as Level 1 assets. Units of pooled funds are valued at the per unit NAV determined by the fund manager based on the value of the underlying traded holdings and are classified as Level 2 assets.
Corporate and Government Bonds
Corporate and government bonds are classified as Level 2 assets, as they are either valued at quoted market prices from observable pricing sources at the reporting date or valued based upon comparable securities with similar yields and credit ratings.
Other Pooled Funds
Other pooled funds classified as Level 2 assets are valued at the NAV of the shares held at year end, which is based on the fair value of the underlying investments. Securities and interests classified as Level 3 are carried at the estimated fair value. The estimated fair value is based on the fair value of the underlying investment values, which includes estimated bids from brokers or other third-party vendor sources that utilize expected cash flow streams and other uncorroborated data including counterparty credit quality, default risk, discount rates, and the overall capital market liquidity.
Insurance Contracts
Insurance contracts are classified as Level 3 assets, as they are carried at contract value, which approximates the estimated fair value. The estimated fair value is based on the fair value of the underlying investment of the insurance company and discount rates that require inputs with limited observability.
Contributions and Projected Benefit Payments
Pension contributions to funded plans and benefit payments for unfunded plans for fiscal year
2018
were
$68.3
. Contributions for funded plans resulted primarily from contractual and regulatory requirements. Benefit payments to unfunded plans were due primarily to the timing of retirements. We anticipate contributing
$45
to
$65
to the defined benefit pension plans in fiscal year
2019
. These contributions are anticipated to be driven primarily by contractual and regulatory requirements for funded plans and benefit payments for unfunded plans, which are dependent upon timing of retirements.
Projected benefit payments, which reflect expected future service, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
2019
|
|
|
$165.5
|
|
|
|
$52.8
|
|
2020
|
|
152.4
|
|
|
53.9
|
|
2021
|
|
157.0
|
|
|
55.6
|
|
2022
|
|
163.7
|
|
|
56.0
|
|
2023
|
|
167.9
|
|
|
60.6
|
|
2024-2028
|
|
900.2
|
|
|
336.8
|
|
These estimated benefit payments are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.
Subsequent Event – GMP Equalization
On 26 October 2018, the United Kingdom High Court issued a ruling in a case relating to equalization of pension plan participants’ benefits for the gender effects of Guaranteed Minimum Pensions ("GMP equalization"). The ruling relates to the Lloyds Banking Group pension plans but impacts other U.K. defined benefit pension plans. We are still assessing the impact of this ruling. If we determine that the ruling impacts our U.K. pension plan, the approach to achieve GMP equalization may retroactively increase our benefit obligation for some participants in the plan and may impact funding requirements.
Defined Contribution Plans
We maintain a nonleveraged employee stock ownership plan (ESOP) which forms part of the Air Products and Chemicals, Inc. Retirement Savings Plan (RSP). The ESOP was established in May of 2002. The balance of the RSP is a qualified defined contribution plan including a 401(k) elective deferral component. A substantial portion of U.S. employees are eligible and participate.
We treat dividends paid on ESOP shares as ordinary dividends. Under existing tax law, we may deduct dividends which are paid with respect to shares held by the plan. Shares of the Company’s common stock in the ESOP totaled
2,378,336
as of
30 September 2018
.
Our contributions to the RSP include a Company core contribution for certain eligible employees who do not receive their primary retirement benefit from the defined benefit pension plans, with the core contribution based on a percentage of pay that is dependent on years of service. For the RSP, we also make matching contributions on overall employee contributions as a percentage of the employee contribution and include an enhanced contribution for certain eligible employees that do not participate in the defined benefit pension plans. Worldwide contributions, excluding discontinued operations, expensed to income in fiscal years
2018
,
2017
, and
2016
were
$34.2
,
$33.7
, and
$34.6
, respectively.
Other Postretirement Benefits
We provide other postretirement benefits consisting primarily of healthcare benefits to certain U.S. retirees who meet age and service requirements. The healthcare benefit is a continued medical benefit until the retiree reaches age 65. Healthcare benefits are contributory, with contributions adjusted periodically. The retiree medical costs are capped at a specified dollar amount, with the retiree contributing the remainder. The cost of these benefits were not material in fiscal years
2018
,
2017
, and
2016
. Accumulated postretirement benefit obligations as of the end of fiscal years
2018
and
2017
were
$56.4
and
$67.0
, respectively, of which
$9.4
and
$10.0
were current obligations, respectively.
The changes in other postretirement benefit plan obligations that have been recognized in other comprehensive income on a pretax basis during fiscal years
2018
and
2017
were gains of
$3.1
and
$10.7
that arose during the periods, respectively, and
$.3
and
$.2
of net actuarial loss amortization, respectively. The net actuarial loss recognized in accumulated other comprehensive loss on a pretax basis was
$4.4
at
30 September 2018
and
$7.8
at
30 September 2017
.
Expected per capita claims costs are currently assumed to be greater than the annual cap; therefore, the assumed healthcare cost trend rate, ultimate trend rate, and the year the ultimate trend rate is reached have
no
impact on plan obligations.
17
.
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
$44
at
30 September 2018
) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, whose investigation began in 2003, alleging violation of competition laws with respect to the sale of industrial and medical gases. The fines are based on a percentage of 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
$44
at
30 September 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
32
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
30 September 2018
and
2017
included an accrual of
$76.8
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
$76
to a reasonably possible upper exposure of
$90
as of
30 September 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
30 September 2018
,
$26.0
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 before-tax expense of
$42
in fiscal 2006 as a component of income from discontinued operations and recorded an environmental accrual of
$42
in continuing operations on the consolidated balance sheets. There has been
no
change to the estimated exposure range related to the Pace facility.
We have implemented many of the remedial corrective measures at the Pace facility required under 1995 Consent Orders issued by the FDEP and the USEPA. Contaminated soils have been bioremediated, and the treated soils have been secured in a lined on-site disposal cell. Several groundwater recovery systems have been installed to contain and remove contamination from groundwater. We completed an extensive assessment of the site to determine how well existing measures are working, what additional corrective measures may be needed, and whether newer remediation technologies that were not available in the 1990s might be suitable to more quickly and effectively remove groundwater contaminants. Based on assessment results, we completed a focused feasibility study that has identified alternative approaches that may more effectively remove contaminants. We continue to review alternative remedial approaches with the FDEP 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
30 September 2018
,
$15.7
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. The SCDHEC issued its final approval to the site-wide feasibility study on 13 June 2017 and the Record of Decision for the site on 27 June 2018. Field work has started to support the remedial design, and in the fourth quarter of fiscal year 2018, we signed a Consent Agreement Amendment memorializing our obligations to complete the cleanup of the site. We estimate that source area remediation and groundwater recovery and treatment will continue through 2029. Thereafter, we expect this site to go into a state of monitored natural attenuation through 2047.
We recognized a before-tax expense of
$24
in 2008 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
30 September 2018
,
$11.7
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.
ASSET RETIREMENT OBLIGATIONS
Our asset retirement obligations are primarily associated with on-site long-term supply contracts under which we have built a facility on land owned by the customer and are obligated to remove the facility at the end of the contract term. The retirement of assets includes the contractually required removal of a long-lived asset from service and encompasses the sale, removal, abandonment, recycling, or disposal of the assets as required at the end of the contract terms. These obligations are primarily reflected in "Other noncurrent liabilities" on the consolidated balance sheets. The timing and/or method of settlement of these obligations are conditional on a future event that may or may not be within our control.
Changes to the carrying amount of our asset retirement obligations are as follows:
|
|
|
|
|
Balance at 30 September 2016
|
|
$119.9
|
|
Additional accruals
|
22.7
|
|
Liabilities settled
|
(4.1
|
)
|
Accretion expense
|
5.8
|
|
Currency translation adjustment
|
.4
|
|
Balance at 30 September 2017
|
|
$144.7
|
|
Additional accruals
|
43.8
|
|
Liabilities settled
|
(2.6
|
)
|
Accretion expense
|
7.2
|
|
Currency translation adjustment
|
(2.7
|
)
|
Balance at 30 September 2018
|
|
$190.4
|
|
The increase in the liability during fiscal year 2018 primarily relates to new obligations associated with the Lu'An asset acquisition completed in April 2018.
GUARANTEES AND WARRANTIES
In April 2015, we entered into joint venture arrangements in Saudi Arabia. An equity bridge loan has been provided to the joint venture
until 2020
to fund equity commitments. We guaranteed the repayment of our
25%
share of this loan, and our venture partner guaranteed repayment of its share. Our maximum exposure under the guarantee is approximately
$100
. As of
30 September 2018
and
2017
, we recorded a noncurrent liability of
$94.4
for our obligation to make future equity contributions based on our proportionate share of the advances received by the joint venture under the loan.
Air Products has also entered into a long-term sale of equipment contract with the joint venture to engineer, procure, and construct the industrial gas facilities that will supply gases to Saudi Aramco. We provided bank guarantees to the joint venture to support our performance under the contract. As of
30 September 2018
, our maximum potential payments were
$249
. Exposures under the guarantees decline over time and will be completely extinguished after completion of the project.
We are party to an equity support agreement and operations guarantee related to an air separation facility constructed in Trinidad for a venture in which we own
50%
. At
30 September 2018
, maximum potential payments under joint and several guarantees were
$27.0
. Exposures under the guarantees decline over time and will be completely extinguished
by 2024
.
During the first quarter of 2014, we sold the remaining portion of our Homecare business and entered into an operations guarantee related to obligations under certain homecare contracts assigned in connection with the transaction. Our maximum potential payment under the guarantee is
£20 million
(approximately
$25
at
30 September 2018
), and our exposure will be extinguished
by 2020
.
To date,
no
equity contributions or payments have been made since the inception of these guarantees. The fair value of the above guarantees is not material.
We, in the normal course of business operations, have issued product warranties related to equipment sales. Also, contracts often contain standard terms and conditions which typically include a warranty and indemnification to the buyer that the goods and services purchased do not infringe on third-party intellectual property rights. The provision for estimated future costs relating to warranties is not material to the consolidated financial statements.
We do not expect that any sum we may have to pay in connection with guarantees and warranties will have a material adverse effect on our consolidated financial condition, liquidity, or results of operations.
UNCONDITIONAL PURCHASE OBLIGATIONS
We are obligated to make future payments under unconditional purchase obligations as summarized below:
|
|
|
|
|
2019
|
|
$851
|
|
2020
|
362
|
|
2021
|
342
|
|
2022
|
318
|
|
2023
|
326
|
|
Thereafter
|
5,461
|
|
Total
|
|
$7,660
|
|
Approximately
$6,800
of our unconditional purchase obligations relate to helium purchases. The majority of these obligations occur after fiscal year 2023. 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.
Approximately
$210
of our long-term unconditional purchase obligations relate to feedstock supply for numerous HyCO (hydrogen, carbon monoxide, and syngas) facilities. The price of feedstock supply is principally related to the price of natural gas. However, long-term take-or-pay sales contracts to HyCO customers are generally matched to the term of the feedstock supply obligations and provide recovery of price increases in the feedstock supply. Due to the matching of most long-term feedstock supply obligations to customer sales contracts, we do not believe these purchase obligations would have a material effect on our financial condition or results of operations.
The unconditional purchase obligations also include other product supply and purchase commitments and electric power and natural gas supply purchase obligations, which are primarily pass-through contracts with our customers.
Purchase commitments to spend approximately
$455
for additional plant and equipment are included in the unconditional purchase obligations in
2019
.
18
.
CAPITAL STOCK
Common Stock
Authorized common stock consists of
300 million
shares with a par value of
$1
per share. As of
30 September 2018
,
249 million
shares were issued, with
220 million
outstanding.
On 15 September 2011, the Board of Directors authorized the repurchase of up to
$1.0 billion
of our outstanding common stock. We repurchase shares pursuant to Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, through repurchase agreements established with several brokers. We did not purchase any of our outstanding shares during fiscal year
2018
. At
30 September 2018
,
$485.3
in share repurchase authorization remains.
The following table reflects the changes in common shares:
|
|
|
|
|
|
|
|
|
|
|
Year ended 30 September
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Number of Common Shares Outstanding
|
|
|
|
|
|
|
Balance, beginning of year
|
|
218,346,074
|
|
|
217,350,825
|
|
|
215,359,113
|
|
Issuance of treasury shares for stock option and award plans
|
|
1,169,171
|
|
|
995,249
|
|
|
1,991,712
|
|
Balance, end of year
|
|
219,515,245
|
|
|
218,346,074
|
|
|
217,350,825
|
|
Preferred Stock
Authorized preferred stock consists of
25 million
shares with a par value of
$1
per share, of which
2.5 million
were designated as Series A Junior Participating Preferred Stock. There were no shares issued or outstanding as of
30 September 2018
and
2017
.
19
.
SHARE-BASED COMPENSATION
We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. 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. Share information presented is on a total company basis. As of
30 September 2018
, there were
4,869,212
shares available for future grant under our Long-Term Incentive Plan (LTIP), which is shareholder approved.
Share-based compensation cost recognized in the consolidated income statements is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Before-Tax Share-Based Compensation Cost – Total
|
|
$38.8
|
|
|
$40.7
|
|
|
$37.6
|
|
Before-Tax Share-Based Compensation Cost – Discontinued Operations
|
—
|
|
.8
|
|
6.6
|
|
Before-Tax Share-Based Compensation Cost – Continuing Operations
|
|
$38.8
|
|
|
$39.9
|
|
|
$31.0
|
|
Income tax benefit – Continuing Operations
|
(9.1
|
)
|
(14.0
|
)
|
(10.8
|
)
|
After-Tax Share-Based Compensation Cost – Continuing Operations
|
|
$29.7
|
|
|
$25.9
|
|
|
$20.2
|
|
Before-tax share-based compensation cost is primarily included in selling and administrative expense on our consolidated income statements. The amount of share-based compensation cost capitalized in fiscal years
2018
,
2017
, and
2016
was not material.
On a total company basis, before-tax share-based compensation cost by type of program was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Deferred stock units
|
|
$38.3
|
|
|
$34.5
|
|
|
$29.9
|
|
Stock options
|
.2
|
|
1.4
|
|
4.2
|
|
Restricted stock
|
.3
|
|
4.8
|
|
3.5
|
|
Before-Tax Share-Based Compensation Cost – Total
|
|
$38.8
|
|
|
$40.7
|
|
|
$37.6
|
|
Deferred Stock Units
We have granted deferred stock units to executives, selected employees, and outside directors. These deferred stock units entitle the recipient to one share of common stock upon vesting, which is conditioned, for employee recipients, on continued employment during the deferral period and may be conditioned on achieving certain performance targets. We grant deferred stock unit awards with a
two
- to
five
-year deferral period that is subject to payout upon death, disability, or retirement. Deferred stock units issued to outside directors are paid after service on the Board of Directors ends at the time elected by the director (not to exceed
10 years
after service ends). We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period; however, expense recognition is accelerated for retirement eligible individuals who meet the requirements for vesting upon retirement. We have elected to account for forfeitures as they occur, rather than to estimate them. Forfeitures have not been significant historically.
Market-based deferred stock units vest as long as the employee continues to be employed by the Company and upon the achievement of the performance target. The performance target, which is approved by the Compensation Committee, is the Company’s total shareholder return (share price appreciation and dividends paid) in relation to a defined peer group over a
three
‑year performance period beginning 1 October of the fiscal year of grant. We granted
105,268
,
117,692
, and
130,167
market-based deferred stock units in fiscal years
2018
,
2017
, and
2016
, respectively.
The fair value of market-based deferred stock units was estimated using a Monte Carlo simulation model as these equity awards are tied to a market condition. 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 estimated grant-date fair value of market-based deferred stock units was
$202.50
,
$156.87
, and
$135.49
per unit in fiscal years
2018
,
2017
, and 2016, respectively. The calculation of the fair value used the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
2016
|
Expected volatility
|
|
18.7
|
%
|
|
20.6
|
%
|
20.5
|
%
|
Risk-free interest rate
|
|
1.9
|
%
|
|
1.4
|
%
|
1.2
|
%
|
Expected dividend yield
|
|
2.6
|
%
|
|
2.5
|
%
|
2.2
|
%
|
In addition, during fiscal year
2018
, we granted
143,379
time-based deferred stock units at a weighted average grant-date fair value of
$162.11
. In fiscal years 2017 and 2016, we granted
165,121
and
164,711
time-based deferred stock units at a weighted average grant-date fair value of and
$143.75
and
$128.03
, respectively.
|
|
|
|
|
|
|
|
|
Deferred Stock Units
|
|
Shares (000)
|
|
|
Weighted Average
Grant-Date Fair Value
|
|
Outstanding at 30 September 2017
|
|
975
|
|
|
|
$127.29
|
|
Granted
|
|
249
|
|
|
179.21
|
|
Paid out
|
|
(237
|
)
|
|
134.99
|
|
Forfeited/adjustments
|
|
(47
|
)
|
|
153.57
|
|
Outstanding at 30 September 2018
|
|
940
|
|
|
|
$137.78
|
|
Cash payments made for deferred stock units were
$2.2
,
$2.1
, and
$2.9
in fiscal years
2018
,
2017
, and
2016
, respectively. As of
30 September 2018
, there was
$40.5
of unrecognized compensation cost related to deferred stock units. The cost is expected to be recognized over a weighted average period of
1.6 years
. The total fair value of deferred stock units paid out during fiscal years
2018
,
2017
, and
2016
, including shares vested in prior periods, was
$38.5
,
$36.6
, and
$41.6
, respectively.
Stock Options
We have granted awards of options to purchase common stock to executives and selected employees. The exercise price of stock options equals the market price of our stock on the date of the grant. Options generally vest incrementally over
three years
, and remain exercisable for
ten years
from the date of grant. In fiscal years
2018
,
2017
, and
2016
,
no
stock options were awarded.
A summary of stock option activity is presented below:
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Shares (000)
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at 30 September 2017
|
|
3,202
|
|
|
|
$84.85
|
|
Exercised
|
|
(1,015
|
)
|
|
75.15
|
|
Forfeited
|
|
(1
|
)
|
|
124.76
|
|
Outstanding and Exercisable at 30 September 2018
|
|
2,186
|
|
|
|
$89.33
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value
|
|
Outstanding and Exercisable at 30 September 2018
|
|
3.9
|
|
|
$170
|
|
The aggregate intrinsic value represents the amount by which our closing stock price of
$167.05
as of
30 September 2018
exceeds the exercise price multiplied by the number of in-the-money options outstanding or exercisable.
On a total company basis, the intrinsic value of stock options exercised during fiscal years
2018
,
2017
, and
2016
was
$90.4
,
$57.3
, and
$115.3
, respectively.
Compensation cost is generally recognized over the stated vesting period consistent with the terms of the arrangement (i.e., either on a straight-line or graded-vesting basis). Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. As of
30 September 2018
, there was
no
unrecognized compensation cost as all stock option awards were fully vested.
Cash received from option exercises during fiscal year
2018
was
$76.2
. The total tax benefit realized from stock option exercises in fiscal year
2018
was
$25.8
, of which
$19.0
was the excess tax benefit.
Restricted Stock
The grant-date fair value of restricted stock is estimated on the date of grant based on the closing price of the stock, and compensation cost is generally amortized to expense on a straight-line basis over the vesting period during which employees perform related services. Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. We have elected to account for forfeitures as they occur, rather than to estimate them. Forfeitures have not been significant historically.
We have issued shares of restricted stock to certain officers. Participants are entitled to cash dividends and to vote their respective shares. Restrictions on shares lift in
one
to
four
years or upon the earlier of retirement, death, or disability. The shares are nontransferable while subject to forfeiture.
A summary of restricted stock activity is presented below:
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Shares (000)
|
|
|
Weighted Average
Grant-Date Fair Value
|
|
Outstanding at 30 September 2017
|
|
56
|
|
|
|
$135.74
|
|
Vested
|
|
(14
|
)
|
|
121.90
|
|
Outstanding at 30 September 2018
|
|
42
|
|
|
|
$140.28
|
|
As of
30 September 2018
, there was
$.1
of unrecognized compensation cost related to restricted stock awards. The cost is expected to be recognized over a weighted average period of
0.5 years
. The total fair value of restricted stock vested during fiscal years
2018
,
2017
, and
2016
was
$2.2
,
$4.1
, and
$4.3
, respectively.
As discussed in Note
3
,
Discontinued Operations
, Air Products completed the spin-off of Versum on 1 October 2016. In connection with the spin-off, the Company adjusted the number of deferred stock units and stock options pursuant to existing anti-dilution provisions in the LTIP to preserve the intrinsic value of the awards immediately before and after the separation. The outstanding awards will continue to vest over the original vesting period defined at the grant date. Outstanding awards at the time of spin-off were primarily converted into awards of the holders' employer following the separation.
Stock awards held upon separation were adjusted based upon the conversion ratio of Air Products' New York Stock Exchange (“NYSE”) volume weighted-average closing stock price on 30 September 2016 (
$150.35
) to the NYSE volume weighted-average opening stock price on 3 October 2016 (
$140.38
), or
1.071
. The adjustment to the awards did not result in incremental fair value, and no incremental compensation expense was recorded related to the conversion of these awards.
20
.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The table below summarizes changes in AOCL, net of tax, attributable to Air Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
qualifying
as hedges
|
|
Foreign
currency
translation
adjustments
|
|
Pension and
postretirement
benefits
|
|
Total
|
Balance at 30 September 2015
|
|
|
($42.9
|
)
|
|
|
($956.5
|
)
|
|
|
($1,126.5
|
)
|
|
|
($2,125.9
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
13.7
|
|
|
9.9
|
|
|
(335.1
|
)
|
|
(311.5
|
)
|
Amounts reclassified from AOCL
|
|
(36.0
|
)
|
|
2.7
|
|
|
87.2
|
|
|
53.9
|
|
Net current period other comprehensive income (loss)
|
|
|
($22.3
|
)
|
|
|
$12.6
|
|
|
|
($247.9
|
)
|
|
|
($257.6
|
)
|
Amount attributable to noncontrolling interest
|
|
(.2
|
)
|
|
5.4
|
|
|
(.4
|
)
|
|
4.8
|
|
Balance at 30 September 2016
|
|
|
($65.0
|
)
|
|
|
($949.3
|
)
|
|
|
($1,374.0
|
)
|
|
|
($2,388.3
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(12.6
|
)
|
|
101.9
|
|
|
251.6
|
|
|
340.9
|
|
Amounts reclassified from AOCL
|
|
24.2
|
|
|
57.3
|
|
|
110.7
|
|
|
192.2
|
|
Net current period other comprehensive income
|
|
|
$11.6
|
|
|
|
$159.2
|
|
|
|
$362.3
|
|
|
|
$533.1
|
|
Spin-off of Versum
|
|
.2
|
|
|
6.0
|
|
|
5.3
|
|
|
11.5
|
|
Amount attributable to noncontrolling interest
|
|
(.1
|
)
|
|
3.0
|
|
|
.8
|
|
|
3.7
|
|
Balance at 30 September 2017
|
|
|
($53.1
|
)
|
|
|
($787.1
|
)
|
|
|
($1,007.2
|
)
|
|
|
($1,847.4
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
45.9
|
|
|
(244.6
|
)
|
|
179.4
|
|
|
(19.3
|
)
|
Amounts reclassified from AOCL
|
|
(30.4
|
)
|
|
3.1
|
|
|
133.1
|
|
|
105.8
|
|
Net current period other comprehensive income (loss)
|
|
|
$15.5
|
|
|
|
($241.5
|
)
|
|
|
$312.5
|
|
|
|
$86.5
|
|
Amount attributable to noncontrolling interest
|
|
—
|
|
|
(18.8
|
)
|
|
(.2
|
)
|
|
(19.0
|
)
|
Balance at 30 September 2018
|
|
|
($37.6
|
)
|
|
|
($1,009.8
|
)
|
|
|
($694.5
|
)
|
|
|
($1,741.9
|
)
|
The table below summarizes the reclassifications out of accumulated other comprehensive loss and the affected line item on the consolidated income statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
(Gain) Loss on Cash Flow Hedges, net of tax
|
|
|
|
|
|
|
Sales/Cost of sales
|
|
|
$7.1
|
|
|
|
$18.3
|
|
|
|
$.2
|
|
Other income (expense), net
|
|
(42.6
|
)
|
|
5.1
|
|
|
(46.2
|
)
|
Interest expense
|
|
5.1
|
|
|
.8
|
|
|
10.0
|
|
Total (Gain) Loss on Cash Flow Hedges, net of tax
|
|
|
($30.4
|
)
|
|
|
$24.2
|
|
|
|
($36.0
|
)
|
|
|
|
|
|
|
|
Currency Translation Adjustment
|
|
|
|
|
|
|
Cost of sales
(A)
|
|
|
$3.1
|
|
|
|
$—
|
|
|
|
$—
|
|
Cost reduction and assets actions
(B)
|
|
—
|
|
|
8.2
|
|
|
—
|
|
Loss from discontinued operations, net of tax
(C)
|
|
—
|
|
|
49.1
|
|
|
2.7
|
|
Total Currency Translation Adjustment
|
|
|
$3.1
|
|
|
|
$57.3
|
|
|
|
$2.7
|
|
|
|
|
|
|
|
|
Pension and Postretirement Benefits, net of tax
(D)
|
|
|
$133.1
|
|
|
|
$110.7
|
|
|
|
$87.2
|
|
|
|
(A)
|
The fiscal year 2018 impact relates to an equipment sale resulting from the termination of a contract in the Industrial Gases – Asia segment during the first quarter.
|
|
|
(B)
|
The fiscal year 2017 impact relates to the planned sale of a non-industrial gas hardgoods business in the Industrial Gases – Americas segment recorded in the third quarter.
|
|
|
(C)
|
The fiscal year 2017 impact relates to the sale of PMD during the second quarter. The fiscal year 2016 impact primarily relates to the sale of an equity affiliate in the first quarter.
|
|
|
(D)
|
The components of net periodic benefit cost reclassified out of AOCL include items such as prior service cost amortization, actuarial loss amortization, and settlements and are included in “Other non-operating income (expense), net” on the consolidated income statements. Refer to Note
16
,
Retirement Benefits
, for additional information.
|
21
.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
$1,455.6
|
|
|
|
$1,134.4
|
|
|
|
$1,099.5
|
|
Income (Loss) from discontinued operations
|
|
42.2
|
|
|
1,866.0
|
|
|
(468.4
|
)
|
Net Income Attributable to Air Products
|
|
|
$1,497.8
|
|
|
|
$3,000.4
|
|
|
|
$631.1
|
|
Denominator
(in millions)
|
|
|
|
|
|
|
Weighted average common shares — Basic
|
|
219.3
|
|
|
218.0
|
|
|
216.4
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
Employee stock option and other award plans
|
|
1.5
|
|
|
1.8
|
|
|
1.9
|
|
Weighted average common shares — Diluted
|
|
220.8
|
|
|
219.8
|
|
|
218.3
|
|
Basic EPS Attributable to Air Products
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
$6.64
|
|
|
|
$5.20
|
|
|
|
$5.08
|
|
Income (Loss) from discontinued operations
|
|
.19
|
|
|
8.56
|
|
|
(2.16
|
)
|
Net Income Attributable to Air Products
|
|
|
$6.83
|
|
|
|
$13.76
|
|
|
|
$2.92
|
|
Diluted EPS Attributable to Air Products
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
$6.59
|
|
|
|
$5.16
|
|
|
|
$5.04
|
|
Income (Loss) from discontinued operations
|
|
.19
|
|
|
8.49
|
|
|
(2.15
|
)
|
Net Income Attributable to Air Products
|
|
|
$6.78
|
|
|
|
$13.65
|
|
|
|
$2.89
|
|
Diluted EPS attributable to Air Products reflects the potential dilution that could occur if stock options or other share-based awards were exercised or converted into common stock. The dilutive effect is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used by the Company to purchase common stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. Outstanding share-based awards of
.1 million
and
.2 million
shares were antidilutive and therefore excluded from the computation of diluted EPS for 2018 and 2016, respectively. There were
no
antidilutive outstanding share-based awards in fiscal year 2017.
22
.
INCOME TAXES
The following table summarizes the income of U.S. and foreign operations before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income from Continuing Operations before Taxes
|
|
|
|
|
|
|
United States
|
|
|
$688.5
|
|
|
|
$669.8
|
|
|
|
$631.7
|
|
Foreign
|
|
1,151.7
|
|
|
666.2
|
|
|
775.9
|
|
Income from equity affiliates
|
|
174.8
|
|
|
80.1
|
|
|
147.0
|
|
Total
|
|
|
$2,015.0
|
|
|
|
$1,416.1
|
|
|
|
$1,554.6
|
|
On 22 December 2017, the United States enacted the U.S. Tax Cuts and Jobs Act (“Tax Act” or "Tax reform") which significantly changed existing U.S. tax laws, including a reduction in the federal corporate income tax rate from
35%
to
21%
, a deemed repatriation tax on unremitted foreign earnings, as well as other changes. Our consolidated income statements for the twelve months ended
30 September 2018
reflect a discrete net tax expense of
$180.6
and a
$28.5
reduction in equity affiliate income for the impacts of the Tax Act. The
$180.6
includes a
$392.4
cost comprised of
$322.1
for the deemed repatriation tax and
$70.3
primarily for additional foreign taxes on the repatriation of foreign earnings. This cost is partially offset by a
$211.8
benefit primarily from the re-measurement of our net U.S. deferred tax liabilities at the lower corporate tax rate.
The deemed repatriation tax includes a
$56.2
non-recurring benefit related to the U.S. taxation of deemed foreign dividends in fiscal year 2018, the year of enactment of the Tax Act. This benefit may be eliminated by future legislation.
After applying tax credits, the balance of the deemed repatriation tax obligation is
$203.2
, which we intend to pay in installments over eight years. We have recorded
$184.4
of this obligation on our consolidated balance sheets in noncurrent liabilities.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional estimates when a company does not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. We are reporting the
$392.4
cost of deemed repatriation tax and foreign repatriation taxes and the
$211.8
re-measurement of our net U.S. deferred tax liabilities provisionally based upon reasonable estimates as of
30 September 2018
. The impacts are not yet finalized as they are dependent on factors and analysis not yet known or fully completed, including but not limited to, changes in our estimates of book to U.S. tax adjustments for the earnings and foreign taxes of foreign and domestic entities, as well as our ongoing analysis of the Tax Act. Estimates used in the provisional amounts include earnings, cash positions, foreign taxes and withholding taxes attributable to foreign subsidiaries as well as the anticipated reversal pattern of gross deferred balances. We are continuing to gather additional information and expect to complete our accounting by the first quarter of fiscal year 2019, within the prescribed one-year measurement period.
Due to the Company’s fiscal year, certain amounts cannot be finalized until the completion and filing of the Company’s U.S. federal 2018 tax return, which is due in the fourth quarter of fiscal year 2019, and any changes to the tax positions reflected in those returns could result in an adjustment to the impact of the Tax Act. In addition to final calculations of the earnings and taxes of foreign entities that would impact the deemed repatriation tax, estimates that are timing-related may result in adjustments due to the reduction of the U.S. tax rate. Foreign audit settlements, as well as future regulatory guidance, could also significantly impact the deemed repatriation tax.
We have historically asserted our intention to indefinitely reinvest foreign earnings in certain foreign subsidiaries. We have reevaluated our historic assertion as a result of enactment of the Tax Act and adjusted our position relative to the indefinitely reinvested earnings of various foreign subsidiaries. The impact of these changes is included in the
$70.3
for additional foreign taxes on the repatriation of foreign earnings.
The Tax Act also enacted new provisions related to the taxation of foreign operations, known as Global Intangible Low Tax Income or (“GILTI”). We have elected as an accounting policy to account for GILTI as a period cost when incurred. This and various other provisions of the Tax Act do not become effective until fiscal year 2019 and did not impact our tax provision in fiscal year 2018. We have also elected as an accounting policy to record within income tax expense transaction gains and losses on foreign currency denominated withholding tax liabilities.
As a fiscal year-end taxpayer, certain provisions of the Tax Act become effective in our fiscal year 2018 while other provisions do not become effective until fiscal year 2019. The corporate tax rate reduction is effective as of 1 January 2018 and, accordingly, reduces our 2018 fiscal year U.S. federal statutory rate to a blended rate of approximately
24.5%
. The
21%
federal tax rate will apply to our fiscal year ended 30 September 2019 and each year thereafter.
The following table shows the components of the provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current Tax Provision
|
|
|
|
|
|
|
Federal
|
|
|
$305.1
|
|
|
|
$62.8
|
|
|
|
$171.0
|
|
State
|
|
17.7
|
|
|
7.0
|
|
|
21.2
|
|
Foreign
|
|
256.9
|
|
|
229.1
|
|
|
178.6
|
|
|
|
579.7
|
|
|
298.9
|
|
|
370.8
|
|
Deferred Tax Provision
|
|
|
|
|
|
|
Federal
|
|
(121.7
|
)
|
|
1.4
|
|
|
45.0
|
|
State
|
|
12.5
|
|
|
6.0
|
|
|
2.8
|
|
Foreign
|
|
53.8
|
|
|
(45.4
|
)
|
|
14.0
|
|
|
|
(55.4
|
)
|
|
(38.0
|
)
|
|
61.8
|
|
Income Tax Provision
|
|
|
$524.3
|
|
|
|
$260.9
|
|
|
|
$432.6
|
|
Total company income tax payments, net of refunds, were
$372.0
,
$1,348.8
, and
$440.8
in fiscal years
2018
,
2017
, and
2016
, respectively. Tax payments were higher in 2017 due to taxes related to the
$2,870
gain on the sale of PMD.
The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. A reconciliation of the differences between the United States federal statutory tax rate and the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
(Percent of income before taxes)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
U.S. federal statutory tax rate
|
|
24.5
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
1.0
|
|
|
1.0
|
|
|
1.2
|
|
Income from equity affiliates
|
|
(2.1
|
)
|
|
(2.0
|
)
|
|
(3.3
|
)
|
Foreign tax differentials
|
|
(1.0
|
)
|
|
(7.9
|
)
|
|
(6.6
|
)
|
Tax on foreign repatriated earnings
|
|
(.4
|
)
|
|
(2.2
|
)
|
|
(3.1
|
)
|
Domestic production activities
|
|
(.4
|
)
|
|
(.8
|
)
|
|
(.8
|
)
|
Share-based compensation
|
|
(1.0
|
)
|
|
(1.2
|
)
|
|
—
|
|
Tax reform repatriation
|
|
19.5
|
|
|
—
|
|
|
—
|
|
Tax reform rate change and other
|
|
(11.1
|
)
|
|
—
|
|
|
—
|
|
Tax restructuring benefit
|
|
(1.8
|
)
|
|
—
|
|
|
—
|
|
Non-deductible goodwill impairment charge
|
|
—
|
|
|
3.6
|
|
|
—
|
|
Non-U.S. subsidiary tax election
|
|
—
|
|
|
(7.7
|
)
|
|
—
|
|
Business separation costs
|
|
—
|
|
|
.2
|
|
|
4.2
|
|
Other
|
|
(1.2
|
)
|
|
.4
|
|
|
1.2
|
|
Effective Tax Rate
|
|
26.0
|
%
|
|
18.4
|
%
|
|
27.8
|
%
|
Foreign tax differentials represent the differences between foreign earnings subject to foreign tax rates lower than the U.S. federal statutory tax rate. Some of our foreign earnings are subject to local country tax rates that are below the U.S. federal statutory rate and include tax holidays and incentives. As a result of the reduction in the federal corporate income tax rates under the Tax Act our effective non-U.S. tax rate is now closer to our blended current year U.S. statutory rate of
24.5%
.
Tax on foreign repatriated earnings includes benefits and costs related to U.S. and additional foreign taxation on the current and future repatriation of foreign earnings and a U.S. benefit for related foreign tax credits. As a result of the Tax Act, the impact on our effective rate from repatriations and credits has been significantly reduced. Due to the effective date of provisions under the Tax Act, certain benefits reported in fiscal year 2018 will not recur in fiscal year 2019.
The Tax Act repeals the domestic production activities deduction, effective for our fiscal 2019 tax year, and lowers the benefit taken in fiscal year 2018.
In fiscal year 2018, we recognized a tax benefit of
$35.7
, net of reserves for uncertain tax positions, and a corresponding decrease in net deferred tax liabilities resulting from the restructuring of several foreign subsidiaries.
During the first quarter of fiscal year 2017, we adopted new accounting guidance that requires excess tax benefits and deficiencies from share-based compensation to be recognized in the consolidated income statements rather than in additional paid-in capital on the consolidated balance sheets. As a result of applying this change prospectively, we recognized
$21.5
and
$17.6
of excess tax benefits in our provision for income taxes during fiscal year 2018 and 2017, respectively.
Primarily due to the impact of the Tax Act and the restructuring benefit, our effective tax rate was
26%
for the twelve months ended
30 September 2018
.
In
2017
, the effective tax rate was impacted by a tax election made with respect to a Chilean holding company resulting in an income tax benefit of
$111.4
on tax losses related to investments in Chile. The effective tax rate was also impacted by a goodwill impairment charge of
$145.3
for which
no
tax benefits were available. See Note
10
,
Goodwill
, for additional information regarding the impairment charge.
In
2016
, the effective tax rate was impacted by tax costs of
$51.8
incurred in anticipation of the tax-free spin-off of Versum, primarily for a dividend declared during the third quarter of 2016 to repatriate
$443.8
from a subsidiary in South Korea to the U.S. Previously, most of these foreign earnings were considered to be indefinitely reinvested. In addition, a tax benefit was not available on a significant portion of the business separation costs. See Note
4
,
Materials Technologies Separation
, for additional information.
The significant components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
30 September
|
|
2018
|
|
|
2017
|
|
Gross Deferred Tax Assets
|
|
|
|
|
Retirement benefits and compensation accruals
|
|
|
$153.1
|
|
|
|
$370.1
|
|
Tax loss carryforwards
|
|
143.5
|
|
|
64.5
|
|
Tax credits and other tax carryforwards
|
|
17.1
|
|
|
76.1
|
|
Reserves and accruals
|
|
42.5
|
|
|
88.2
|
|
Currency losses
|
|
3.8
|
|
|
20.7
|
|
Other
|
|
45.4
|
|
|
37.2
|
|
Valuation allowance
|
|
(105.0
|
)
|
|
(107.7
|
)
|
Deferred Tax Assets
|
|
300.4
|
|
|
549.1
|
|
Gross Deferred Tax Liabilities
|
|
|
|
|
Plant and equipment
|
|
811.8
|
|
|
1,035.6
|
|
Unremitted earnings of foreign entities
|
|
36.1
|
|
|
20.9
|
|
Partnership and other investments
|
|
16.3
|
|
|
5.4
|
|
Intangible assets
|
|
84.3
|
|
|
81.9
|
|
Other
|
|
5.6
|
|
|
9.2
|
|
Deferred Tax Liabilities
|
|
954.1
|
|
|
1,153.0
|
|
Net Deferred Income Tax Liability
|
|
|
$653.7
|
|
|
|
$603.9
|
|
Deferred tax assets and liabilities are included within the consolidated financial statements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets
|
|
|
|
|
Other noncurrent assets
|
|
|
$121.4
|
|
|
|
$174.5
|
|
Deferred Tax Liabilities
|
|
|
|
|
Deferred income taxes
|
|
775.1
|
|
|
778.4
|
|
Net Deferred Income Tax Liability
|
|
|
$653.7
|
|
|
|
$603.9
|
|
The various components of deferred tax assets and liabilities, including plant and equipment, retirement benefits and compensation accruals, and reserves and accruals were reduced by the re-measurement of our U.S. deferred tax accounts to the lower U.S. corporate tax rate. Tax loss carryforwards increased primarily due to the sale of plant and equipment related to our EfW business. The sale converted these assets into capital losses which are subject to a full valuation allowance. In addition, deferred tax liabilities related to plant and equipment also includes an increase due to the impact of the immediate expensing provision allowed for under the Tax Act. The balance of unremitted earnings of foreign entities and partnership and other investments were increased by additional foreign withholding tax liability recorded as a result of the Tax Act, net of tax payments. Retirement benefits and compensation accruals are also impacted significantly by the changes in plan assets and benefit obligations that have been recognized in other comprehensive income. See Note 16, Retirement Benefits, for additional information.
As of 30 September 2018, the Company had the following deferred tax assets for certain tax credits:
|
|
|
|
|
|
|
|
Jurisdiction
|
|
Gross Tax Asset
|
|
|
Expiration Period
|
U.S. State
|
|
|
$1.9
|
|
|
2019 - 2034
|
Foreign
|
|
21.6
|
|
|
2019 - 2030; Indefinite
|
At
30 September 2018
, the Company had the following loss carryforwards:
|
|
|
|
|
|
|
|
Jurisdiction
|
|
Gross Loss Carryforward
|
|
|
Expiration Period
|
U.S. State Net Operating Loss
|
|
|
$324.9
|
|
|
2019 - 2034
|
Foreign Net Operating Loss
|
|
340.6
|
|
|
2019 - 2028; Indefinite
|
Foreign Capital Loss
|
|
281.9
|
|
|
Indefinite
|
In fiscal year
2018
we utilized the balance of our federal tax credit carryforward against the deemed repatriation tax. Of the
$340.6
of foreign net operating loss carryforwards,
$121.8
have indefinite carryforward periods. Of the
$21.6
foreign tax credits,
$16.4
have indefinite carryforward periods.
The valuation allowance as of
30 September 2018
of
$105.0
, primarily related to the tax benefit of foreign loss carryforwards of
$56.0
as well as foreign capital losses of
$47.9
that were generated from the loss recorded on the exit from the Energy-from-Waste business in 2016. If events warrant the reversal of the valuation allowance, it would result in a reduction of tax expense. We believe it is more likely than not that future earnings and reversal of deferred tax liabilities will be sufficient to utilize our deferred tax assets, net of existing valuation allowance, at
30 September 2018
.
As a result of the Tax Act we recorded
$322.1
of federal income tax from the deemed repatriation tax on approximately
$5.8 billion
of previously undistributed earnings from our foreign subsidiaries and corporate joint ventures. These earnings are now eligible to be repatriated to the U.S. with reduced U.S. tax impacts. However, such earnings may be subject to foreign withholding and other taxes. We record foreign and U.S. income taxes on the undistributed earnings of our foreign subsidiaries and corporate joint ventures unless those earnings are indefinitely reinvested. The cumulative undistributed earnings that are considered to be indefinitely reinvested in foreign subsidiaries and corporate joint ventures are included in retained earnings on the consolidated balance sheets and amounted to
$3.2 billion
as of
30 September 2018
. An estimated
$420.4
in additional foreign withholding and other income taxes would be due if these earnings were remitted as dividends.
A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized Tax Benefits
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of year
|
|
|
$146.4
|
|
|
|
$90.2
|
|
|
|
$83.8
|
|
Additions for tax positions of the current year
|
|
26.4
|
|
|
47.5
|
|
|
12.5
|
|
Additions for tax positions of prior years
|
|
119.2
|
|
|
16.1
|
|
|
2.9
|
|
Reductions for tax positions of prior years
|
|
(41.3
|
)
|
|
(4.0
|
)
|
|
—
|
|
Settlements
|
|
(14.2
|
)
|
|
(2.0
|
)
|
|
(5.6
|
)
|
Statute of limitations expiration
|
|
(2.6
|
)
|
|
(3.2
|
)
|
|
(2.9
|
)
|
Foreign currency translation
|
|
(.3
|
)
|
|
1.8
|
|
|
(.5
|
)
|
Balance at End of Year
|
|
|
$233.6
|
|
|
|
$146.4
|
|
|
|
$90.2
|
|
At
30 September 2018
and
2017
, we had
$233.6
and
$146.4
of unrecognized tax benefits, excluding interest and penalties, of which
$88.6
and
$73.8
, respectively, would impact the effective tax rate from continuing operations if recognized.
Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense and totaled
($2.4)
,
$3.7
, and
$1.8
in fiscal years
2018
,
2017
,
and
2016
, respectively. Our accrued balance for interest and penalties was
$8.4
and
$12.1
as of
30 September 2018
and
2017
, respectively.
The additions for tax positions of prior years of
$119.2
relates primarily to uncertain state tax filing positions taken related to the sale of PMD. Additions for tax positions of the current year of
$26.4
included uncertain tax positions related to the restructuring of foreign subsidiaries and reserves for ongoing transfer pricing uncertainties.
On 17 April 2018, we received a final audit settlement agreement that resolved uncertainties related to unrecognized tax benefits of
$43.1
, including interest. This settlement primarily related to tax positions taken in conjunction with the disposition of our Homecare business in 2012. As a result, we recorded an income tax benefit of
$25.6
, including interest, in income from discontinued operations during 2018. The settlement also resulted in an income tax benefit of approximately
$9.1
, including interest, in continuing operations for the release of tax reserves on other matters. The reduction in prior year positions and settlement payments also reflect the settlement of U.S. federal tax audits for 2012 through 2014 reported in the first quarter of the year.
We are currently under examination in a number of tax jurisdictions, some of which may be resolved in the next twelve months. As a result, it is reasonably possible that a change in the unrecognized tax benefits may occur during the next twelve months. However, quantification of an estimated range cannot be made at this time.
We generally remain subject to examination in the following major tax jurisdictions for the years indicated below:
|
|
|
|
|
Major Tax Jurisdiction
|
Open Tax Years
|
North America
|
|
|
|
United States – Federal
|
2015
|
-
|
2018
|
United States – All States
|
2011
|
-
|
2018
|
Canada
|
2014
|
-
|
2018
|
Europe
|
|
|
|
France
|
2015
|
-
|
2018
|
Germany
|
2013
|
-
|
2018
|
Netherlands
|
2012
|
-
|
2018
|
Spain
|
2015
|
-
|
2018
|
United Kingdom
|
2014
|
-
|
2018
|
Asia
|
|
|
|
China
|
2013
|
-
|
2018
|
South Korea
|
2010
|
-
|
2018
|
Taiwan
|
2013
|
-
|
2018
|
Latin America
|
|
|
|
Chile
|
2015
|
-
|
2018
|
23
.
SUPPLEMENTAL INFORMATION
|
|
|
|
|
|
|
|
Other Receivables and Current Assets
30 September
|
2018
|
|
2017
|
|
Derivative instruments
|
|
$61.1
|
|
|
$93.9
|
|
Other receivables
|
139.0
|
|
188.0
|
|
Current capital lease receivables
|
92.1
|
|
93.3
|
|
Other
|
3.6
|
|
28.1
|
|
Other receivables and current assets
|
|
$295.8
|
|
|
$403.3
|
|
|
|
|
|
|
|
|
|
Other Noncurrent Assets
30 September
|
2018
|
|
2017
|
|
Derivative instruments
|
|
$85.0
|
|
|
$133.9
|
|
Noncurrent customer receivable
|
92.4
|
|
62.6
|
|
Prepaid tax
|
13.2
|
|
5.1
|
|
Deferred tax assets
|
121.4
|
|
174.5
|
|
Pension benefits
|
131.7
|
|
18.4
|
|
Deposits
|
—
|
|
34.8
|
|
Other
|
210.8
|
|
212.5
|
|
Other noncurrent assets
|
|
$654.5
|
|
|
$641.8
|
|
|
|
|
|
|
|
|
|
Payables and Accrued Liabilities
30 September
|
2018
|
|
2017
|
|
Trade creditors
|
|
$594.6
|
|
|
$659.5
|
|
Payables associated with Lu'An
|
330.0
|
|
—
|
|
Customer advances
|
156.6
|
|
438.9
|
|
Accrued payroll and employee benefits
|
201.4
|
|
187.1
|
|
Pension and postretirement benefits
|
34.1
|
|
22.6
|
|
Dividends payable
|
241.5
|
|
207.5
|
|
Outstanding payments in excess of certain cash balances
|
9.1
|
|
4.5
|
|
Accrued interest expense
|
49.5
|
|
42.2
|
|
Derivative instruments
|
54.2
|
|
95.9
|
|
Severance and other costs associated with cost reduction actions
|
9.9
|
|
41.5
|
|
Other
|
136.9
|
|
114.6
|
|
Payables and accrued liabilities
|
|
$1,817.8
|
|
|
$1,814.3
|
|
|
|
|
|
|
|
|
|
Other Noncurrent Liabilities
30 September
|
2018
|
|
2017
|
|
Pension benefits
|
|
$417.2
|
|
|
$703.8
|
|
Postretirement benefits
|
47.0
|
|
57.0
|
|
Other employee benefits
|
94.4
|
|
99.3
|
|
Noncurrent customer liability
|
92.4
|
|
62.6
|
|
Long-term accrued income taxes related to U.S. tax reform
|
184.4
|
|
—
|
|
Contingencies related to uncertain tax positions
|
113.2
|
|
130.6
|
|
Advance payments
|
58.2
|
|
39.0
|
|
Environmental liabilities
|
64.6
|
|
72.3
|
|
Derivative instruments
|
39.9
|
|
36.0
|
|
Asset retirement obligations
|
189.5
|
|
144.0
|
|
Obligation for future contribution to an equity affiliate
|
94.4
|
|
94.4
|
|
Obligations associated with EfW
|
63.3
|
|
65.3
|
|
Other
|
78.4
|
|
107.6
|
|
Other noncurrent liabilities
|
|
$1,536.9
|
|
|
$1,611.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense), Net
30 September
|
2018
|
|
2017
|
|
2016
|
|
Technology and royalty income
(A)
|
|
$22.8
|
|
|
$20.8
|
|
|
$19.0
|
|
Interest income
(B)
|
—
|
|
1.5
|
|
6.1
|
|
Foreign exchange
|
(3.9
|
)
|
4.3
|
|
(7.2
|
)
|
Sale of assets and investments
(C)
|
6.9
|
|
24.3
|
|
8.8
|
|
Contract settlements
|
2.9
|
|
14.3
|
|
12.6
|
|
Transition service agreements reimbursement
(D)
|
12.7
|
|
38.4
|
|
—
|
|
Other
|
8.8
|
|
17.4
|
|
10.1
|
|
Other income (expense), net
|
|
$50.2
|
|
|
$121.0
|
|
|
$49.4
|
|
|
|
(A)
|
Primarily includes related party activity with our equity affiliates.
|
|
|
(B)
|
Beginning in the second quarter of fiscal year 2017, interest income associated with our cash and cash items and short-term investments is reflected on the consolidated income statements in "Other non-operating income (expense), net."
|
|
|
(C)
|
Includes a gain of
$12.2
resulting from the sale of a parcel of land during the fourth quarter of fiscal year 2017.
|
|
|
(D)
|
Reflects reimbursement for costs in support of transition services agreements with Versum for EMD and with Evonik for PMD. Refer to Note
4
,
Materials Technologies Separation
, for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Operating Income (Expense), Net
30 September
|
2018
|
|
2017
|
|
2016
|
|
Interest income
(A)
|
|
$46.3
|
|
|
$29.8
|
|
|
$—
|
|
Pension settlement loss
(B)
|
(48.5
|
)
|
(10.5
|
)
|
(5.1
|
)
|
Other non-service pension benefit (costs)
|
7.7
|
|
(1.9
|
)
|
(.3
|
)
|
Other
|
(.4
|
)
|
(.8
|
)
|
—
|
|
Other non-operating income (expense), net
|
|
$5.1
|
|
|
$16.6
|
|
|
($5.4
|
)
|
|
|
(A)
|
Prior to the second quarter of fiscal year 2017, interest income associated with our cash and cash items and short-term investments was reflected on the consolidated income statements in "Other income (expense), net."
|
|
|
(B)
|
Fiscal year 2018 includes a loss of
$43.7
that primarily resulted from the transfer of certain pension payment obligations to an insurer through the purchase of an irrevocable, nonparticipating group annuity contract during the fourth quarter.
|
Related Party Sales
We have related party sales to some of our equity affiliates and joint venture partners. Sales to related parties totaled approximately
$340
,
$580
, and
$320
during fiscal years
2018
,
2017
, and
2016
, respectively, and primarily related to Jazan sale of equipment activity. Agreements with related parties include terms that are consistent with those that we believe would have been negotiated at an arm’s length with an independent party.
24
.
SUMMARY BY QUARTER
(UNAUDITED)
These tables summarize the unaudited results of operations for each quarter of fiscal years
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Total
|
|
Sales
|
|
$2,216.6
|
|
|
|
$2,155.7
|
|
|
|
$2,259.0
|
|
|
|
$2,298.9
|
|
|
|
$8,930.2
|
|
|
Gross profit
|
644.8
|
|
|
649.2
|
|
|
713.6
|
|
|
733.1
|
|
|
2,740.7
|
|
|
Operating income
|
460.7
|
|
|
455.4
|
|
|
515.8
|
|
|
533.7
|
|
|
1,965.6
|
|
|
Equity affiliates income
|
13.8
|
|
(A)
|
43.7
|
|
|
58.1
|
|
|
59.2
|
|
(A)
|
174.8
|
|
(A)
|
Income tax provision
|
291.8
|
|
(A)
|
56.2
|
|
(B)
|
107.1
|
|
|
69.2
|
|
(A)(B)
|
524.3
|
|
(A)(B)
|
Net income
|
161.7
|
|
|
423.6
|
|
|
487.9
|
|
|
459.7
|
|
|
1,532.9
|
|
|
Net income attributable to Air Products
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
155.6
|
|
|
416.4
|
|
|
430.7
|
|
|
452.9
|
|
|
1,455.6
|
|
|
Income (Loss) from discontinued operations
|
(1.0
|
)
|
|
—
|
|
|
43.2
|
|
(C)
|
—
|
|
|
42.2
|
|
(C)
|
Net income attributable to Air Products
|
154.6
|
|
|
416.4
|
|
|
473.9
|
|
|
452.9
|
|
|
1,497.8
|
|
|
Basic Earnings Per Common Share Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
.71
|
|
|
1.90
|
|
|
1.96
|
|
|
2.06
|
|
|
6.64
|
|
|
Income from discontinued operations
|
—
|
|
|
—
|
|
|
.20
|
|
|
—
|
|
|
.19
|
|
|
Net income attributable to Air Products
|
.71
|
|
|
1.90
|
|
|
2.16
|
|
|
2.06
|
|
|
6.83
|
|
|
Diluted Earnings Per Common Share Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
.70
|
|
|
1.89
|
|
|
1.95
|
|
|
2.05
|
|
|
6.59
|
|
|
Income from discontinued operations
|
—
|
|
|
—
|
|
|
.20
|
|
|
—
|
|
|
.19
|
|
|
Net income attributable to Air Products
|
.70
|
|
|
1.89
|
|
|
2.15
|
|
|
2.05
|
|
|
6.78
|
|
|
Weighted Average Common Shares — Diluted (in millions)
|
220.4
|
|
|
220.8
|
|
|
220.9
|
|
|
220.9
|
|
|
220.8
|
|
|
Dividends declared per common share
|
.95
|
|
|
1.10
|
|
|
1.10
|
|
|
1.10
|
|
|
4.25
|
|
|
Market price per common share – High
|
164.78
|
|
|
175.17
|
|
|
170.29
|
|
|
171.66
|
|
|
|
|
Market price per common share – Low
|
150.55
|
|
|
152.71
|
|
|
154.67
|
|
|
153.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Total
|
|
Sales
|
|
$1,882.5
|
|
|
|
$1,980.1
|
|
|
|
$2,121.9
|
|
|
|
$2,203.1
|
|
|
|
$8,187.6
|
|
|
Gross profit
|
565.8
|
|
|
576.3
|
|
|
635.9
|
|
|
658.1
|
|
|
2,436.1
|
|
|
Business separation costs
(D)
|
32.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32.5
|
|
|
Cost reduction and assets actions
(E)
|
50.0
|
|
|
10.3
|
|
|
42.7
|
|
|
48.4
|
|
|
151.4
|
|
|
Goodwill and intangible asset impairment charge
(F)
|
—
|
|
|
—
|
|
|
162.1
|
|
|
—
|
|
|
162.1
|
|
|
Gain on land sale
|
—
|
|
|
—
|
|
|
—
|
|
|
12.2
|
|
|
12.2
|
|
|
Operating income
|
328.3
|
|
|
395.6
|
|
|
258.7
|
|
|
457.4
|
|
|
1,440.0
|
|
|
Equity affiliates income (loss)
|
38.0
|
|
|
34.2
|
|
|
(36.9
|
)
|
(G)
|
44.8
|
|
|
80.1
|
|
(G)
|
Income tax provision (benefit)
|
78.4
|
|
|
94.5
|
|
|
89.3
|
|
|
(1.3
|
)
|
(H)
|
260.9
|
|
(H)
|
Net income
|
306.4
|
|
|
2,135.7
|
|
(I)
|
104.1
|
|
|
475.0
|
|
|
3,021.2
|
|
(I)
|
Net income attributable to Air Products
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
251.6
|
|
|
304.4
|
|
|
104.2
|
|
|
474.2
|
|
|
1,134.4
|
|
|
Income (Loss) from discontinued operations
|
48.2
|
|
|
1,825.6
|
|
(I)
|
(2.3
|
)
|
|
(5.5
|
)
|
|
1,866.0
|
|
(I)
|
Net income attributable to Air Products
|
299.8
|
|
|
2,130.0
|
|
|
101.9
|
|
|
468.7
|
|
|
3,000.4
|
|
|
Basic Earnings Per Common Share Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
1.16
|
|
|
1.40
|
|
|
.48
|
|
|
2.17
|
|
|
5.20
|
|
|
Income (Loss) from discontinued operations
|
.22
|
|
|
8.38
|
|
|
(.01
|
)
|
|
(.02
|
)
|
|
8.56
|
|
|
Net income attributable to Air Products
|
1.38
|
|
|
9.78
|
|
|
.47
|
|
|
2.15
|
|
|
13.76
|
|
|
Diluted Earnings Per Common Share Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
1.15
|
|
|
1.39
|
|
|
.47
|
|
|
2.15
|
|
|
5.16
|
|
|
Income (Loss) from discontinued operations
|
.22
|
|
|
8.31
|
|
|
(.01
|
)
|
|
(.02
|
)
|
|
8.49
|
|
|
Net income attributable to Air Products
|
1.37
|
|
|
9.70
|
|
|
.46
|
|
|
2.13
|
|
|
13.65
|
|
|
Weighted Average Common Shares — Diluted (in millions)
|
219.7
|
|
|
219.7
|
|
|
219.8
|
|
|
220.1
|
|
|
219.8
|
|
|
Dividends declared per common share
|
.86
|
|
|
.95
|
|
|
.95
|
|
|
.95
|
|
|
3.71
|
|
|
Market price per common share – High
|
150.45
|
|
|
149.46
|
|
|
147.66
|
|
|
152.26
|
|
|
|
|
Market price per common share – Low
|
129.00
|
|
|
133.63
|
|
|
134.09
|
|
|
141.88
|
|
|
|
|
|
|
(A)
|
Includes the impacts of the Tax Act. For additional information, refer to Note
22
,
Income Taxes
.
|
|
|
(B)
|
Includes the impacts of the restructuring of several foreign subsidiaries. For additional information, refer to Note
22
,
Income Taxes
.
|
|
|
(C)
|
Primarily includes benefits resulting from the resolution of uncertain tax positions related to the disposition of our former European Homecare business and post-closing adjustments associated with the sale of PMD. For additional information, refer to Note
3
,
Discontinued Operations
.
|
|
|
(D)
|
For additional information, refer to Note
4
,
Materials Technologies Separation
.
|
|
|
(E)
|
For additional information, refer to Note
5
,
Cost Reduction and Asset Actions
.
|
|
|
(F)
|
For additional information, refer to Note
10
,
Goodwill
, and Note
11
,
Intangible Assets
.
|
|
|
(G)
|
Includes the impact of an other-than-temporary impairment of an investment in an equity affiliate. For additional information, refer to Note
8
,
Summarized Financial Information of Equity Affiliates
.
|
|
|
(H)
|
Includes the impact of a tax election benefit related to a non-U.S. subsidiary. For additional information, see Note
22
,
Income Taxes
.
|
|
|
(I)
|
Includes the after-tax gain on the sale of PMD. For additional information, see Note
3
,
Discontinued Operations
.
|
25
.
BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Our reporting segments reflect the manner in which our chief operating decision maker reviews results and allocates resources. Except in the Industrial Gases – EMEA and Corporate and other segments, each reporting segment meets the definition of an operating segment and does not include the aggregation of multiple operating segments. Our Industrial Gases – EMEA and Corporate and other segment each include the aggregation of two operating segments that meet the aggregation criteria under GAAP.
Our reporting segments are:
|
|
•
|
Industrial Gases – Americas
|
|
|
•
|
Industrial Gases – EMEA (Europe, Middle East, and Africa)
|
|
|
•
|
Industrial Gases – Asia
|
|
|
•
|
Industrial Gases – Global
|
Industrial Gases – Regional
The regional Industrial Gases segments (Americas, EMEA, and Asia) include the results of our regional industrial gas businesses, which produce and sell atmospheric gases such as oxygen, nitrogen, argon, and rare gases (primarily recovered by the cryogenic distillation of air), process gases such as hydrogen, helium, carbon dioxide, carbon monoxide, syngas (a mixture of hydrogen and carbon monoxide), and specialty gases, and equipment for the production or processing of gases, such as air separation units and non-cryogenic generators.
We supply gases to customers in many industries, including those in refining, chemical, gasification, metals, electronics, manufacturing, and food and beverage. We distribute gases to our customers through a variety of supply modes including liquid or gaseous bulk supply delivered by tanker or tube trailer and, for smaller customers, packaged gases delivered in cylinders and dewars or small on-sites (cryogenic or non-cryogenic generators). For large-volume customers, we construct an on-site plant adjacent to or near the customer’s facility or deliver product from one of our pipelines. We are the world’s largest provider of hydrogen, which is used by refiners to facilitate the conversion of heavy crude feedstock and lower the sulfur content of gasoline and diesel fuels.
Electricity is the largest cost component in the production of atmospheric gases, and natural gas is the principal raw material for hydrogen, carbon monoxide, and syngas production. We mitigate energy and natural gas price fluctuations contractually through pricing formulas, surcharges, cost pass-through, and tolling arrangements. The regional Industrial Gases segments also include our share of the results of several joint ventures accounted for by the equity method. The largest of these joint ventures operate in Mexico, Italy, South Africa, India, Saudi Arabia, and Thailand.
Each of the regional Industrial Gases segments competes against global industrial gas companies as well as regional competitors. Competition is based primarily on price, reliability of supply, and the development of industrial gas applications. We derive a competitive advantage in locations where we have pipeline networks, which enable us to provide reliable and economic supply of products to larger customers.
Industrial Gases – Global
The Industrial Gases – Global segment includes cryogenic and gas processing equipment for air separation. The equipment is sold worldwide to customers in a variety of industries, including chemical and petrochemical manufacturing, oil and gas recovery and processing, and steel and primary metals processing. The Industrial Gases – Global segment also includes centralized global costs associated with management of all the Industrial Gases segments. These costs include Industrial Gases global administrative costs, product development costs, and research and development costs. We compete with a large number of firms for all the offerings included in the Industrial Gases – Global segment. Competition in the equipment businesses is based primarily on technological performance, service, technical know-how, price, and performance guarantees.
Corporate and other
The Corporate and other segment includes our LNG equipment and helium storage and distribution sale of equipment businesses and corporate support functions that benefit all segments. Competition for the sale of equipment businesses is based primarily on technological performance, service, technical know-how, price, and performance guarantees.
Corporate and other also includes income and expense that is not directly associated with the other segments, including foreign exchange gains and losses and stranded costs. Stranded costs result from functional support previously provided to the two divisions comprising the former Materials Technologies segment. The majority of these costs are reimbursed to Air Products pursuant to short-term transition services agreements under which Air Products provides transition services to Versum for EMD and to Evonik for PMD. The reimbursement for costs in support of the transition services has been reflected on the consolidated income statements within “Other income (expense), net.” All transition services were completed during fiscal year 2018. Refer to Note
4
,
Materials Technologies Separation
, for additional information.
In addition to assets of the global businesses included in this segment, other assets include cash, deferred tax assets, and financial instruments.
Customers
We do not have a homogeneous customer base or end market, and no single customer accounts for more than
10%
of our consolidated revenues.
Accounting Policies
The accounting policies of the segments are the same as those described in Note
1
,
Major Accounting Policies
. We evaluate the performance of segments based upon reported segment operating income.
Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases–
Americas
|
Industrial
Gases–
EMEA
|
Industrial
Gases–
Asia
|
Industrial
Gases–
Global
|
Corporate
and other
|
Segment
Total
|
2018
|
|
|
|
|
|
|
Sales
|
|
$3,758.8
|
|
|
$2,193.3
|
|
|
$2,458.0
|
|
|
$436.1
|
|
|
$84.0
|
|
|
$8,930.2
|
|
Operating income (loss)
|
927.9
|
|
445.8
|
|
689.9
|
|
53.9
|
|
(176.0
|
)
|
1,941.5
|
|
Depreciation and amortization
|
485.3
|
|
198.6
|
|
265.8
|
|
8.1
|
|
12.9
|
|
970.7
|
|
Equity affiliates' income
|
82.0
|
|
61.1
|
|
58.3
|
|
1.9
|
|
—
|
|
203.3
|
|
Expenditures for long-lived assets
|
546.5
|
|
163.1
|
|
791.9
|
|
17.3
|
|
49.6
|
|
1,568.4
|
|
Investments in net assets of and advances to equity affiliates
|
312.1
|
|
503.3
|
|
445.6
|
|
16.2
|
|
—
|
|
1,277.2
|
|
Total assets
|
5,904.0
|
|
3,280.4
|
|
5,899.5
|
|
240.1
|
|
3,854.3
|
|
19,178.3
|
|
2017
|
|
|
|
|
|
|
Sales
|
|
$3,637.0
|
|
|
$1,780.4
|
|
|
$1,964.7
|
|
|
$722.9
|
|
|
$82.6
|
|
|
$8,187.6
|
|
Operating income (loss)
|
946.1
|
|
395.5
|
|
532.6
|
|
71.1
|
|
(171.5
|
)
|
1,773.8
|
|
Depreciation and amortization
|
464.4
|
|
177.1
|
|
203.2
|
|
8.9
|
|
12.2
|
|
865.8
|
|
Equity affiliates' income
|
58.1
|
|
47.1
|
|
53.5
|
|
.9
|
|
—
|
|
159.6
|
|
Expenditures for long-lived assets
|
427.2
|
|
143.2
|
|
337.8
|
|
25.6
|
|
105.9
|
|
1,039.7
|
|
Investments in net assets of and advances to equity affiliates
|
287.5
|
|
508.6
|
|
471.8
|
|
19.0
|
|
—
|
|
1,286.9
|
|
Total assets
|
5,840.8
|
|
3,276.1
|
|
4,412.1
|
|
279.6
|
|
4,648.4
|
|
18,457.0
|
|
2016
|
|
|
|
|
|
|
Sales
|
|
$3,344.1
|
|
|
$1,704.4
|
|
|
$1,720.4
|
|
|
$498.8
|
|
|
$236.0
|
|
|
$7,503.7
|
|
Operating income (loss)
|
891.3
|
|
387.0
|
|
452.8
|
|
(21.5
|
)
|
(89.4
|
)
|
1,620.2
|
|
Depreciation and amortization
|
443.6
|
|
185.7
|
|
197.9
|
|
7.9
|
|
19.5
|
|
854.6
|
|
Equity affiliates' income
|
52.7
|
|
36.5
|
|
57.8
|
|
—
|
|
—
|
|
147.0
|
|
Expenditures for long-lived assets
|
406.6
|
|
159.5
|
|
313.3
|
|
6.0
|
|
22.3
|
|
907.7
|
|
Investments in net assets of and advances to equity affiliates
|
250.6
|
|
580.5
|
|
442.5
|
|
10.0
|
|
—
|
|
1,283.6
|
|
Total assets
|
5,896.7
|
|
3,178.6
|
|
4,232.7
|
|
367.6
|
|
2,384.5
|
|
16,060.1
|
|
Below is a reconciliation of segment total operating income to consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
2018
|
|
2017
|
|
2016
|
|
Segment total
|
|
$1,941.5
|
|
|
$1,773.8
|
|
|
$1,620.2
|
|
Change in inventory valuation method
|
24.1
|
|
—
|
|
—
|
|
Business separation costs
|
—
|
|
(32.5
|
)
|
(50.6
|
)
|
Cost reduction and asset actions
|
—
|
|
(151.4
|
)
|
(34.5
|
)
|
Goodwill and intangible asset impairment charge
|
—
|
|
(162.1
|
)
|
—
|
|
Gain on land sale
|
—
|
|
12.2
|
|
—
|
|
Consolidated Total
|
|
$1,965.6
|
|
|
$1,440.0
|
|
|
$1,535.1
|
|
Below is a reconciliation of segment total
equity affiliates' income
to consolidated
equity affiliates' income
:
|
|
|
|
|
|
|
|
|
|
|
Equity Affiliates' Income
|
2018
|
2017
|
2016
|
Segment total
|
|
$203.3
|
|
|
$159.6
|
|
|
$147.0
|
|
Equity method investment impairment charge
|
—
|
|
(79.5
|
)
|
—
|
|
Tax reform repatriation - equity method investment
|
(28.5
|
)
|
—
|
|
—
|
|
Consolidated Total
|
|
$174.8
|
|
|
$80.1
|
|
|
$147.0
|
|
Below is a reconciliation of segment total assets to consolidated total assets:
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
2018
|
|
2017
|
|
2016
|
|
Segment total
|
|
$19,178.3
|
|
|
$18,457.0
|
|
|
$16,060.1
|
|
Discontinued operations
|
—
|
|
10.2
|
|
1,968.5
|
|
Consolidated Total
|
|
$19,178.3
|
|
|
$18,467.2
|
|
|
$18,028.6
|
|
The sales information noted above relates to external customers only. All intersegment sales are eliminated in consolidation. The Industrial Gases – Global segment had intersegment sales of
$254.3
,
$239.0
, and
$232.4
in fiscal years
2018
,
2017
, and
2016
, respectively. These sales are generally transacted at market pricing.
We generally do not have intersegment sales from our regional industrial gases businesses. Equipment manufactured for our regional industrial gases segments are generally transferred at cost and are not reflected as an intersegment sale.
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
Sales to External Customers
|
2018
|
|
2017
|
|
2016
|
|
United States
|
|
$3,149.6
|
|
|
$2,886.8
|
|
|
$2,911.7
|
|
Europe, including Middle East
|
2,292.5
|
|
2,478.5
|
|
2,186.5
|
|
Asia, excluding China and India
|
904.0
|
|
849.6
|
|
721.4
|
|
China
|
1,585.7
|
|
1,143.4
|
|
1,020.4
|
|
Other
(A)
|
998.4
|
|
829.3
|
|
663.7
|
|
Total
|
|
$8,930.2
|
|
|
$8,187.6
|
|
|
$7,503.7
|
|
Long-Lived Assets
(B)
|
2018
|
|
2017
|
|
2016
|
|
United States
|
|
$3,512.7
|
|
|
$3,407.4
|
|
|
$3,411.4
|
|
Europe, including Middle East
|
1,283.3
|
|
1,279.0
|
|
1,292.5
|
|
Asia, excluding China and India
|
899.8
|
|
778.5
|
|
707.0
|
|
China
|
3,066.6
|
|
1,737.9
|
|
1,675.8
|
|
Other
(A)
|
1,161.3
|
|
1,237.4
|
|
1,173.0
|
|
Total
|
|
$9,923.7
|
|
|
$8,440.2
|
|
|
$8,259.7
|
|
|
|
(A)
|
Includes Canada, Latin America, and India.
|
|
|
(B)
|
Long-lived assets include plant and equipment, net.
|
Geographic information is based on country of origin. Included in United States revenues are export sales to third‑party customers of
$33.1
in fiscal year
2018
,
$64.2
in fiscal year
2017
, and
$134.9
in fiscal year
2016
.