NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars unless otherwise indicated, except for share and per share data)
|
|
|
|
|
|
|
|
1
|
.
|
|
|
|
2
|
.
|
|
|
|
3
|
.
|
|
|
|
4
|
.
|
|
|
|
5
|
.
|
|
|
|
6
|
.
|
|
|
|
7
|
.
|
|
|
|
8
|
.
|
|
|
|
9
|
.
|
|
|
|
10
|
.
|
|
|
|
11
|
.
|
|
|
|
12
|
.
|
|
|
|
13
|
.
|
|
|
|
14
|
.
|
|
|
|
15
|
.
|
|
|
|
16
|
.
|
|
|
|
17
|
.
|
|
|
|
18
|
.
|
|
|
1
.
BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES
The interim consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries (“we,” “our,” “us,” the “Company,” “Air Products,” or “registrant”) included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In our opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the notes. The notes to the interim consolidated financial statements, unless otherwise indicated, are on a continuing operations basis.
To fully understand the basis of presentation, the consolidated financial statements and related notes included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our
2018
Form 10-K. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.
Refer to our
2018
Form 10-K for a description of major accounting policies. In fiscal year 2019, these policies were impacted by the implementation of certain new accounting guidance, including the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and all related amendments (“the new revenue standard”). We adopted the new revenue standard as of 1 October 2018 under the modified retrospective approach. Comparative prior year information has not been restated and continues to be reported under the accounting standards in effect for those periods. Our updated revenue recognition policy, which reflects the principles under the new revenue standard, is discussed below.
Other than the adoption of new accounting guidance as discussed in Note
2
,
New Accounting Guidance
, there have been no notable changes to our accounting policies during the first
nine
months of fiscal year
2019
.
Certain prior year information has been reclassified to conform to the fiscal year 2019 presentation.
Revenue Recognition
The Company recognizes revenue when or as performance obligations are satisfied, which occurs when control is transferred to the customer.
We determine the transaction price of our contracts based on the amount of consideration to which we expect to be entitled to receive in exchange for the goods or services provided. Our contracts within the scope of revenue guidance do not contain payment terms that include a significant financing component.
Sales returns and allowances are not a business practice in the industry.
Our sale of gas contracts are either accounted for over time during the period in which we deliver or make available the agreed upon quantity of goods or at a point in time when the customer receives and obtains control of the product, which generally occurs upon delivery. We generally recognize revenue from our sale of gas contracts based on the right to invoice practical expedient.
Our sale of equipment contracts are generally comprised of a single performance obligation as the individual promised goods or services contained within the contracts are integrated with or dependent upon other goods or services in the contract for a single output to the customer. Revenue from our sale of equipment contracts is generally recognized over time as we have an enforceable right to payment for performance completed to date and our performance under the contract terms does not create an asset with alternative use. We recognize these contracts using a cost incurred input method by which costs incurred to date relative to total estimated costs at completion are used to measure progress toward satisfying performance obligations.
Amounts billed for shipping and handling fees are classified as sales in the consolidated income statements. Shipping and handling activities for our sale of equipment contracts may be performed after the customer obtains control of the promised goods. In these cases, we have elected to apply the practical expedient to account for shipping and handling as activities to fulfill the promise to transfer the goods. For our sale of gas contracts, control generally transfers to the customer upon delivery.
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.
For additional information, refer to Note
3
,
Revenue Recognition
.
2
.
NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented in Fiscal Year 2019
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued the new revenue standard, which is 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 adopted this guidance under the modified retrospective approach as of 1 October 2018. Upon adoption, we no longer present "Contracts in progress, less progress billings" on our consolidated balance sheets and have expanded disclosure requirements. Otherwise, adoption of this guidance did not impact our consolidated financial statements, and no adjustment was necessary to opening retained earnings. Accordingly, sales presented during the first nine months of fiscal year 2019 would not change if presented under accounting standards in effect prior to 1 October 2018.
For additional information, including the balance sheet impacts of no longer presenting "Contracts in progress, less progress billings" and expanded disclosures under the new revenue standard, refer to Note
3
,
Revenue Recognition
.
Cash Flow Statement Classification
In August 2016, the FASB issued guidance to reduce diversity in practice related to the classification of certain cash receipts and cash payments in the statement of cash flows. We adopted this guidance retrospectively in the first quarter of fiscal year 2019 and elected to use the cumulative earnings approach to determine the classification of distributions received from equity affiliates. As a result, we reclassified
$7.1
of net activity from operating activities to investing activities for the
nine
months ended
30 June 2018
.
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. Previous guidance prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had 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. We adopted this guidance in the first quarter of fiscal year 2019 on a modified retrospective basis through a cumulative-effect adjustment of
$17.1
that decreased retained earnings as of 1 October 2018.
New Accounting Guidance to be Implemented
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 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 using a modified retrospective approach with the election to apply the guidance as of the adoption date instead of the earliest comparative period presented in the consolidated financial statements.
We expect to elect the package of practical expedients permitted under the transition guidance, which among other things, allows us to carry forward the historical lease classification. We intend to also elect the practical expedient related to land easements, allowing us to carry forward our current accounting treatment for land easements on existing agreements. In addition, we expect to elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases as of the date of adoption
.
We are evaluating the impact the guidance will have on our consolidated financial statements. In addition, we are implementing a new software 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 evaluating the impact this guidance will have on our consolidated financial statements.
Hedging Activities
In August 2017, the FASB issued guidance on hedging activities to expand the related presentation and disclosure requirements, change how companies assess effectiveness, and eliminate the separate measurement and reporting of hedge ineffectiveness. The guidance also enables more 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 evaluating the impact this guidance will have on our consolidated financial statements and expect to adopt this guidance at the beginning of fiscal year 2020.
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 U.S. Tax Cuts and Jobs Act. The guidance is effective in fiscal year 2020, with early adoption permitted, including adoption in an interim period. If elected, the reclassification can be applied in either the period of adoption or retrospectively to the period of the enactment of the U.S. Tax Cuts and Jobs Act (i.e., our first quarter of fiscal year 2018). We are 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 that 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 while other amendments must be applied retrospectively. We are 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 that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance is effective in fiscal year 2021, with early adoption permitted, and must be applied on a retrospective basis. We are 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 that 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 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 that 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 required under current accounting standards. 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 evaluating the impact this guidance will have on our consolidated financial statements.
3
.
REVENUE RECOGNITION
Nature of Goods and Services
The principal activities from which the Company generates its sales from its contracts with customers, separated between our regional industrial gases businesses and industrial gases equipment businesses, are described below with their respective revenue recognition policies. For an overall summary of these policies and discussion on payment terms and presentation, refer to Note
1
,
Basis of Presentation and Major Accounting Policies
.
Industrial Gases – Regional
Our regional industrial gases businesses produce and sell atmospheric gases such as oxygen, nitrogen, and argon (primarily recovered by the cryogenic distillation of air) and process gases such as hydrogen, helium, carbon dioxide, carbon monoxide, syngas, and specialty gases. We distribute gases to our sale of gas customers through different supply modes depending on various factors including the customer's volume requirements and location. Our supply modes are as follows:
On-Site Gases—Supply mode associated with customers who require large volumes of gases and have relatively constant demand. Gases are produced and supplied by large facilities we construct on or near the customers’ facilities or by pipeline systems from centrally located production facilities. These sale of gas contracts generally have 15- to 20- year terms. The Company also delivers smaller quantities of product through small on-site plants (cryogenic or non-cryogenic generators), typically via a 10- to 15- year sale of gas contract. The contracts within this supply mode generally contain fixed monthly charges and/or minimum purchase requirements with price escalation provisions that are generally based on external indices. Revenue associated with this supply mode is generally recognized over time during the period in which we deliver or make available the agreed upon quantity of goods.
Merchant Gases—Supply mode associated with liquid bulk and packaged gases customers. Liquid bulk customers receive delivery of product in liquid or gaseous form by tanker or tube trailer. The product is stored, usually in its liquid state, in equipment typically designed and installed by the Company at the customer’s site for vaporizing into a gaseous state as needed. Packaged gases customers receive small quantities of product delivered in either cylinders or dewars. Both liquid bulk and packaged gases sales do not contain minimum purchase requirements as they are governed by contracts and/or purchase orders based on the customer's requirements. These contracts contain stated terms that are generally 5 years or less. Performance obligations associated with this supply mode are satisfied at a point in time when the customer receives and obtains control of the product, which generally occurs upon delivery.
The timing of revenue recognition for our regional industrial gases businesses is generally consistent with our right to invoice the customer. Variable components of consideration that may not be resolved within the month, such as the ability to earn an annual bonus or incur a penalty, are more relevant to on-site contracts and are considered constrained as they can be impacted by a single significant event such as a plant outage, which could occur at the end of a contract period. We consider contract modifications on an individual basis to determine appropriate accounting treatment. However, contract modifications are generally accounted for prospectively as they relate to distinct goods or services associated with future periods of performance.
We mitigate energy and natural gas price risk contractually through pricing formulas, surcharges, and cost pass-through arrangements.
Industrial Gases – Equipment
The Company designs and manufactures equipment for air separation, hydrocarbon recovery and purification, natural gas liquefaction (LNG), and liquid helium and liquid hydrogen transport and storage. The Industrial Gases – Global and the Corporate and other segments serve our sale of equipment customers.
Our sale of equipment contracts are generally comprised of a single performance obligation as the individual promised goods or services contained within the contracts are integrated with or dependent upon other goods or services in the contract for a single output to the customer.
Revenue from our sale of equipment contracts is generally recognized over time as we have an enforceable right to payment for performance completed to date and our performance under the contract terms does not create an asset with alternative use. Otherwise, sale of equipment contracts are satisfied at the point in time the customer obtains control of the equipment, which is generally determined based on the shipping terms of the contract. For contracts recognized over time, we primarily recognize revenue using a cost incurred input method by which costs incurred to date relative to total estimated costs at completion are used to measure progress toward satisfying performance obligations. Costs incurred include material, labor, and overhead costs and represent work contributing and proportionate to the transfer of control to the customer.
Since our contracts are generally comprised of a single performance obligation, contract modifications are typically accounted for as part of the existing contract and are recognized as a cumulative adjustment for the inception-to-date effect of such change.
Disaggregation of Revenue
The table below presents our consolidated sales disaggregated by each of the supply modes described above for each of our reporting segments. We believe this presentation best depicts the nature, timing, type of customer, and contract terms for our sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases–
Americas
|
Industrial
Gases–
EMEA
|
Industrial
Gases–
Asia
|
Industrial
Gases–
Global
|
Corporate
and other
|
Total
|
%
|
|
Three Months Ended 30 June 2019
|
|
|
|
|
|
|
|
|
On-site
|
|
$537.1
|
|
|
$165.0
|
|
|
$402.9
|
|
|
$—
|
|
|
$—
|
|
|
$1,105.0
|
|
50
|
%
|
|
Merchant
|
418.2
|
|
329.6
|
|
276.5
|
|
—
|
|
—
|
|
1,024.3
|
|
46
|
%
|
|
Sale of Equipment
|
—
|
|
—
|
|
—
|
|
57.9
|
|
36.8
|
|
94.7
|
|
4
|
%
|
|
Total
|
|
$955.3
|
|
|
$494.6
|
|
|
$679.4
|
|
|
$57.9
|
|
|
$36.8
|
|
|
$2,224.0
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases–
Americas
|
Industrial
Gases–
EMEA
|
Industrial
Gases–
Asia
|
Industrial
Gases–
Global
|
Corporate
and other
|
Total
|
%
|
|
Nine Months Ended 30 June 2019
|
|
|
|
|
|
|
|
|
On-site
|
|
$1,714.0
|
|
|
$565.8
|
|
|
$1,169.9
|
|
|
$—
|
|
|
$—
|
|
|
$3,449.7
|
|
52
|
%
|
|
Merchant
|
1,222.2
|
|
947.4
|
|
761.7
|
|
—
|
|
—
|
|
2,931.3
|
|
44
|
%
|
|
Sale of Equipment
|
—
|
|
—
|
|
—
|
|
179.9
|
|
74.8
|
|
254.7
|
|
4
|
%
|
|
Total
|
|
$2,936.2
|
|
|
$1,513.2
|
|
|
$1,931.6
|
|
|
$179.9
|
|
|
$74.8
|
|
|
$6,635.7
|
|
100
|
%
|
Approximately
5%
and
4%
of total consolidated sales for the
three and nine
months ended
30 June 2019
, respectively, was associated with lease revenue relating to our on-site supply mode and therefore not within the scope of the new revenue standard.
Remaining Performance Obligations
As of
30 June 2019
, the transaction price allocated to remaining performance obligations is estimated to be approximately
$14 billion
. This amount includes fixed-charge contract provisions associated with our on-site and sale of equipment supply modes. We estimate that approximately half of this revenue will be recognized over approximately the next five years and the balance thereafter.
Expected revenue associated with new on-site plants that are not yet onstream is excluded from this amount. In addition, this amount excludes consideration associated with contracts determined to be leases, those with an expected duration of less than one year, and variable consideration for which we recognize revenue at the amount to which we have the right to invoice, including pass-through costs related to energy and natural gas.
In the future, actual amounts will differ due to events outside of our control, including but not limited to inflationary price escalations, currency exchange rates, and terminated or renewed contracts.
Contract Balances
Upon adoption of the new revenue standard, we no longer present "Contracts in progress, less progress billings" on our consolidated balance sheets. The balance as of
30 September 2018
has been reclassified to "
Other receivables and current assets
" within this quarterly report.
Our sale of equipment contracts generally contain a single performance obligation which, as discussed below, results in presentation of either a contract asset or contract liability.
The table below summarizes the balance sheet impacts of no longer presenting "Contracts in progress, less progress billings" upon adoption of the new revenue standard on 1 October 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The table below details balances arising from contracts with customers as of our most recent balance sheet date and our date of adoption:
|
|
|
|
|
|
|
|
|
|
|
|
30 June 2019
|
1 October 2018
|
|
Assets
|
|
|
|
Contract assets – current
|
|
$43.0
|
|
|
$53.0
|
|
|
Contract fulfillment costs – current
|
66.4
|
|
50.7
|
|
|
Liabilities
|
|
|
|
Contract liabilities – current
|
181.1
|
|
174.5
|
|
|
Contract liabilities – noncurrent
|
52.8
|
|
53.5
|
|
Contract assets and liabilities result from differences in timing of revenue recognition and customer invoicing. These balances are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.
Contract assets primarily relate to our sale of equipment contracts for which revenue is recognized over time. These balances represent unbilled revenue, which occurs when revenue recognized under the measure of progress exceeds the amount invoiced to our customers. Our ability to invoice the customer for contract asset balances is not only based on the passage of time, but also the achievement of certain contractual milestones. Our contract assets are included within "Other receivables and current assets" on the consolidated balance sheets.
Contract fulfillment costs primarily include deferred costs related to sale of equipment projects that cannot be inventoried and for which we expect to recognize revenue upon transfer of control at project completion or costs related to fulfilling a specific anticipated contract. Contract fulfillment costs are generally classified as current and are included within "Other receivables and current assets" on the consolidated balance sheets.
Costs to obtain a contract, or contract acquisition costs, are capitalized only after we have established a contract with the customer. We elected to apply the practical expedient to expense these costs as they are incurred if the amortization period of the asset that would have otherwise been recognized is one year or less. Our contract acquisition costs capitalized as of
30 June 2019
were not material.
Contract liabilities include advance payments or right to consideration prior to performance under the contract. Contract liabilities are recognized as revenue when or as we perform under the contract. Changes in our contract liability balances primarily relate to sale of equipment projects. During the
nine
months ended
30 June 2019
, we recognized approximately
$100
in revenue associated with sale of equipment contracts that was included within our contract liabilities as of 30 September 2018. The current and noncurrent portions of our contract liabilities are included within "Payables and accrued liabilities" and "Other noncurrent liabilities" on our consolidated balance sheets, respectively. Advanced payments from our customers do not represent a significant financing component as these payments are intended for purposes other than financing, such as to meet working capital demands or to protect us from our customer failing to meet its obligations under the terms of the contract.
Changes in contract asset and liability balances during the
nine
months ended
30 June 2019
were not materially impacted by any other factors.
4
.
DISCONTINUED OPERATIONS
For the three and nine months ended 30 June 2018, income from discontinued operations, net of tax, on the consolidated income statements was
$43.2
and
$42.2
, respectively. During the third quarter of fiscal year 2018, we recorded 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. The nine months ended 30 June 2018 also includes an after-tax loss of
$1.0
related to Energy-from-Waste project exit activities and administrative costs incurred during the first quarter of fiscal year 2018.
5
.
COST REDUCTION ACTIONS
During the third quarter of fiscal year 2019, we recognized an expense of
$25.5
for severance and other benefits associated with the elimination or planned elimination of approximately
300
positions. These actions are expected to drive cost synergies primarily within the Industrial Gases – EMEA and the Industrial Gases – Americas segments. The expense has been reflected as “Cost reduction actions” on the consolidated income statements and was excluded from segment operating income for the three and nine months ended 30 June 2019.
The following table summarizes the carrying amount of the accrual as of
30 June 2019
. This amount is reflected on our consolidated balance sheets within "Payables and accrued liabilities."
|
|
|
|
|
|
|
|
|
|
|
2019 Charge
|
|
$25.5
|
|
|
Cash expenditures
|
(4.7
|
)
|
|
Amount reflected in pension liability
|
(.3
|
)
|
|
Currency translation adjustment
|
.1
|
|
|
30 June 2019
|
|
$20.6
|
|
6
.
ACQUISITIONS
Fiscal Year 2019 Business Combinations
Exchange of Equity Affiliate Investments
As of 30 September 2018, we held
50%
ownership interests in High-Tech Gases (Beijing) Co., Ltd. ("High-Tech Gases") and WuXi Hi-Tech Gas Co., Ltd. ("WuXi"), both of which were joint ventures with another industrial gas company in China. We accounted for these arrangements as equity method investments in our Industrial Gases – Asia segment through 30 April 2019.
On 1 May 2019, we acquired our partner's
50%
interest in WuXi in exchange for our
50%
interest in High-Tech Gases. The purpose of the exchange was to simplify the current structure of the two entities and to allow each party to serve its customers more efficiently in their respective geographies. Subsequent to the acquisition date, we own
100%
of WuXi and
no
longer have an equity interest in High-Tech Gases.
The exchange resulted in a net gain of
$29.1
, of which
$15.0
resulted from the revaluation of our previously held equity interest in WuXi to its acquisition date fair value and
$14.1
resulted from the disposition of our interest in High-Tech Gases. The net gain has been reflected as "
Gain on exchange of equity affiliate investments
" on our consolidated income statements and was excluded from segment operating income for the three and nine months ended 30 June 2019. There were
no
tax impacts on the exchange.
We revalued our previously held
50%
equity interest in WuXi based on an estimated acquisition date fair value of
$27.0
. We calculated this fair value using a discounted cash flow analysis under the income approach, which required estimates and assumptions regarding projected revenue growth, customer attrition rates, profit margin, and discount rate.
The acquisition of the remaining interest in WuXi was accounted for as a business combination. The results of this business have been consolidated within our Industrial Gases – Asia segment as of the acquisition date. Upon acquisition, we recognized plant and equipment of
$28.0
, intangible assets of
$27.6
, and goodwill of
$4.2
. The intangible assets were primarily customer relationships, having a weighted-average useful life of approximately
10 years
. The goodwill recognized on the transaction,
none
of which is deductible for tax purposes, was recorded in the Industrial Gases – Asia segment and is attributable to expected growth synergies. The acquisition did not materially impact our consolidated income statements for the periods presented.
ACP Europe SA Acquisition
On 1 March 2019, we completed the acquisition of ACP Europe SA ("ACP"), the largest independent carbon dioxide business in Continental Europe, for an aggregate purchase price, net of cash acquired, of
$106.3
. We expect this acquisition to enable us to better serve existing merchant customers and pursue new industrial gas growth opportunities across additional European geographies. The results of this business are consolidated within our Industrial Gases – EMEA segment and did not materially impact our consolidated income statements for the periods presented.
The acquisition of ACP was accounted for as a business combination and resulted in the recognition of plant and equipment of
$74.6
and goodwill of
$38.0
, partially offset by net liabilities acquired. The goodwill recognized on the transaction,
none
of which is deductible for tax purposes, was recorded in the Industrial Gases – EMEA segment and is attributable to expected growth and cost synergies.
The acquired assets and liabilities resulting from our 2019 business combinations were recorded at their estimated fair values, which were calculated based on a preliminary purchase price allocation prepared by management. We may record adjustments to these assets and liabilities during the preliminary purchase price allocation period, which could be up to one year from the acquisition date.
Fiscal Year 2018 Asset Acquisition
On 26 April 2018 ("the acquisition date"), we completed the formation of Air Products Lu An (Changzhi) Co., Ltd. ("the JV"), a
60%
-owned joint venture with Lu'An Clean Energy Company ("Lu'An"). The JV receives coal, steam, and power from Lu’An and supplies syngas to Lu’An under a long-term onsite contract. The results of the JV are consolidated within 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 2019. Long-term debt payable to Lu'An of
$321.6
and
$384.3
as of
30 June 2019
and
30 September 2018
, respectively, is presented on the consolidated balance sheets as "
Long-term debt – related party
." As of
30 June 2019
,
$62.9
of the loan is reflected within "Current portion of long-term debt." The expected remaining cash payments are presented within "Payables and accrued liabilities" and were
$80.8
and
$330.0
as of
30 June 2019
and
30 September 2018
, respectively.
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 that have been excluded from the consolidated statement of cash flows for the nine months ended 30 June 2018.
Fiscal Year 2018 Business Combinations
During the first nine months of 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 primarily consisted of three air separation units serving onsite and merchant customers in China, which strengthened our position in the region. The results of this business are consolidated within our Industrial Gases – Asia segment.
7
.
INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 June
|
|
30 September
|
|
|
|
2019
|
|
2018
|
|
Finished goods
|
|
|
$135.1
|
|
|
|
$125.4
|
|
|
Work in process
|
|
29.9
|
|
|
21.2
|
|
|
Raw materials, supplies and other
|
|
243.3
|
|
|
249.5
|
|
|
Inventories
|
|
|
$408.3
|
|
|
|
$396.1
|
|
8
.
GOODWILL
Changes to the carrying amount of consolidated goodwill by segment for the
nine
months ended
30 June 2019
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases–
Americas
|
|
Industrial
Gases–
EMEA
|
|
Industrial
Gases–
Asia
|
|
Industrial
Gases–
Global
|
|
Corporate and other
|
|
Total
|
|
Goodwill, net at 30 September 2018
|
|
|
$162.1
|
|
|
|
$424.4
|
|
|
|
$171.9
|
|
|
|
$20.1
|
|
|
|
$10.4
|
|
|
|
$788.9
|
|
|
Acquisitions
|
|
—
|
|
|
38.0
|
|
|
4.2
|
|
|
—
|
|
|
—
|
|
|
42.2
|
|
|
Currency translation and other
|
|
(1.9
|
)
|
|
(7.5
|
)
|
|
(1.1
|
)
|
|
(.2
|
)
|
|
—
|
|
|
(10.7
|
)
|
|
Goodwill, net at 30 June 2019
|
|
|
$160.2
|
|
|
|
$454.9
|
|
|
|
$175.0
|
|
|
|
$19.9
|
|
|
|
$10.4
|
|
|
|
$820.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 June
|
|
30 September
|
|
|
|
2019
|
|
2018
|
|
Goodwill, gross
|
|
|
$1,212.9
|
|
|
|
$1,194.7
|
|
|
Accumulated impairment losses
(A)
|
|
(392.5
|
)
|
|
(405.8
|
)
|
|
Goodwill, net
|
|
|
$820.4
|
|
|
|
$788.9
|
|
|
|
|
|
(A)
|
Accumulated impairment losses are attributable to our Latin America reporting unit (LASA) within the Industrial Gases – Americas segment and include the impacts of currency translation.
|
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.
9
.
FINANCIAL INSTRUMENTS
Currency Price Risk Management
Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency-denominated transactions and net investments in foreign operations. It is our policy to seek to minimize our cash flow volatility from changes in currency exchange rates. This is accomplished by identifying and evaluating the risk that our cash flows will change in value due to changes in exchange rates and by executing 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 June 2019
is
2.3 years
.
Forward exchange contracts are also used to hedge the value of investments in certain foreign subsidiaries and affiliates by creating a liability in a currency in which we have a net equity position. The primary currency pair in this portfolio of forward exchange contracts is Euros and U.S. Dollars.
We also 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 June 2019
|
|
30 September 2018
|
|
|
|
US$
Notional
|
|
Years
Average
Maturity
|
|
US$
Notional
|
|
Years
Average
Maturity
|
|
Forward Exchange Contracts:
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
$2,656.2
|
|
|
0.4
|
|
|
$2,489.1
|
|
|
0.4
|
|
Net investment hedges
|
|
553.0
|
|
|
1.0
|
|
457.5
|
|
|
1.7
|
|
Not designated
|
|
921.7
|
|
|
0.9
|
|
1,736.1
|
|
|
0.8
|
|
Total Forward Exchange Contracts
|
|
|
$4,130.9
|
|
|
0.6
|
|
|
$4,682.7
|
|
|
0.7
|
The notional value of forward exchange contracts not designated decreased from the prior year as a result of maturities.
We also 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 was
€940.4 million
(
$1,069.6
) at
30 June 2019
and
€908.8 million
(
$1,054.6
) at
30 September 2018
. The designated foreign currency-denominated debt is presented within "Long-term debt" on the consolidated balance sheets.
Debt Portfolio Management
It is our policy to identify, on a continuing basis, the need for debt capital and to evaluate the financial risks inherent in funding the Company with debt capital. Reflecting the result of this ongoing review, our debt portfolio and hedging program are managed with the 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). As of
30 June 2019
, the outstanding interest rate swaps were denominated in U.S. Dollars. The notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. When interest rate swaps are used to hedge variable-rate debt, the indices of the swaps and the debt to which they are designated are the same. It is our policy not to enter into any interest rate management contracts which lever a move in interest rates on a greater than one-to-one basis.
Cross Currency Interest Rate Swap Contracts
We enter into cross currency interest rate swap contracts when our risk management function deems necessary. These contracts may entail both the exchange of fixed- and floating-rate interest payments periodically over the life of the agreement and the exchange of one currency for another currency at inception and at a specified future date. The contracts are used to hedge either certain net investments in foreign operations or non-functional currency cash flows related to intercompany loans. The current cross currency interest rate swap portfolio consists of fixed-to-fixed swaps primarily between U.S. Dollars and Chinese Renminbi, U.S. Dollars and Indian Rupee, and U.S. Dollars and Chilean Pesos.
The following table summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 June 2019
|
|
30 September 2018
|
|
|
|
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
|
%
|
|
0.9
|
|
|
$600.0
|
|
|
LIBOR
|
|
|
2.60
|
%
|
|
1.6
|
|
Cross currency interest rate swaps
(net investment hedge)
|
|
|
$246.6
|
|
|
4.55
|
%
|
|
3.09
|
%
|
|
2.9
|
|
|
$201.7
|
|
|
4.42
|
%
|
|
2.97
|
%
|
|
3.1
|
|
Cross currency interest rate swaps
(cash flow hedge)
|
|
|
$1,063.5
|
|
|
4.85
|
%
|
|
2.94
|
%
|
|
2.2
|
|
|
$1,052.7
|
|
|
4.99
|
%
|
|
2.89
|
%
|
|
2.3
|
|
Cross currency interest rate swaps
(not designated)
|
|
|
$29.6
|
|
|
4.17
|
%
|
|
3.61
|
%
|
|
4.6
|
|
|
$80.2
|
|
|
4.88
|
%
|
|
3.43
|
%
|
|
3.9
|
The table below summarizes the fair value and balance sheet location of our outstanding derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Location
|
30 June 2019
|
30 September 2018
|
Balance Sheet
Location
|
30 June 2019
|
30 September 2018
|
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
Forward exchange contracts
|
Other receivables
|
|
$28.3
|
|
|
$24.9
|
|
Accrued liabilities
|
|
$32.3
|
|
|
$37.0
|
|
|
Interest rate management contracts
|
Other receivables
|
14.0
|
|
24.3
|
|
Accrued liabilities
|
.6
|
|
2.3
|
|
|
Forward exchange contracts
|
Other noncurrent
assets
|
27.9
|
|
19.8
|
|
Other noncurrent
liabilities
|
.8
|
|
4.6
|
|
|
Interest rate management contracts
|
Other noncurrent
assets
|
36.1
|
|
48.7
|
|
Other noncurrent
liabilities
|
7.3
|
|
11.6
|
|
|
Total Derivatives Designated as Hedging Instruments
|
|
|
$106.3
|
|
|
$117.7
|
|
|
|
$41.0
|
|
|
$55.5
|
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
Forward exchange contracts
|
Other receivables
|
|
$7.9
|
|
|
$7.9
|
|
Accrued liabilities
|
|
$13.4
|
|
|
$14.9
|
|
|
Interest rate management contracts
|
Other receivables
|
—
|
|
4.0
|
|
Accrued liabilities
|
—
|
|
—
|
|
|
Forward exchange contracts
|
Other noncurrent
assets
|
22.8
|
|
16.2
|
|
Other noncurrent
liabilities
|
26.1
|
|
23.7
|
|
|
Interest rate management contracts
|
Other noncurrent
assets
|
.7
|
|
.3
|
|
Other noncurrent
liabilities
|
—
|
|
—
|
|
|
Total Derivatives Not Designated as Hedging Instruments
|
|
|
$31.4
|
|
|
$28.4
|
|
|
|
$39.5
|
|
|
$38.6
|
|
|
Total Derivatives
|
|
|
$137.7
|
|
|
$146.1
|
|
|
|
$80.5
|
|
|
$94.1
|
|
Refer to Note
10
,
Fair Value Measurements
, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.
The table below summarizes the gain or loss related to our cash flow hedges, fair value hedges, net investment hedges, and derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 30 June
|
|
|
Forward
Exchange Contracts
|
Foreign Currency
Debt
|
Other
(A)
|
Total
|
|
|
2019
|
2018
|
2019
|
2018
|
2019
|
2018
|
2019
|
2018
|
|
Cash Flow Hedges, net of tax:
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in OCI (effective portion)
|
|
$1.7
|
|
|
($34.4
|
)
|
|
$—
|
|
|
$—
|
|
|
$5.8
|
|
|
$61.5
|
|
|
$7.5
|
|
|
$27.1
|
|
|
Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)
|
—
|
|
1.9
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1.9
|
|
|
Net (gain) loss reclassified from OCI to other income (expense), net (effective portion)
|
(6.9
|
)
|
33.7
|
|
—
|
|
—
|
|
(9.7
|
)
|
(55.6
|
)
|
(16.6
|
)
|
(21.9
|
)
|
|
Net (gain) loss reclassified from OCI to interest expense (effective portion)
|
3.1
|
|
.8
|
|
—
|
|
—
|
|
.7
|
|
2.0
|
|
3.8
|
|
2.8
|
|
|
Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion)
|
(.2
|
)
|
—
|
|
—
|
|
—
|
|
(.1
|
)
|
(.5
|
)
|
(.3
|
)
|
(.5
|
)
|
|
Fair Value Hedges:
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in interest expense
(B)
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
|
$2.0
|
|
|
($2.1
|
)
|
|
$2.0
|
|
|
($2.1
|
)
|
|
Net Investment Hedges, net of tax:
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in OCI
|
|
($2.1
|
)
|
|
$16.2
|
|
|
($11.3
|
)
|
|
$44.2
|
|
|
$3.4
|
|
|
$36.9
|
|
|
($10.0
|
)
|
|
$97.3
|
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in other income (expense), net
(C)
|
|
($.8
|
)
|
|
($.3
|
)
|
|
$—
|
|
|
$—
|
|
|
$.7
|
|
|
$2.2
|
|
|
($.1
|
)
|
|
$1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended 30 June
|
|
|
Forward
Exchange Contracts
|
Foreign Currency
Debt
|
Other
(A)
|
Total
|
|
|
2019
|
2018
|
2019
|
2018
|
2019
|
2018
|
2019
|
2018
|
|
Cash Flow Hedges, net of tax:
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in OCI (effective portion)
|
|
($14.1
|
)
|
|
$5.0
|
|
|
$—
|
|
|
$—
|
|
|
($24.1
|
)
|
|
$30.4
|
|
|
($38.2
|
)
|
|
$35.4
|
|
|
Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)
|
.4
|
|
6.9
|
|
—
|
|
—
|
|
—
|
|
—
|
|
.4
|
|
6.9
|
|
|
Net (gain) loss reclassified from OCI to other income (expense), net (effective portion)
|
2.6
|
|
(13.2
|
)
|
—
|
|
—
|
|
6.5
|
|
(23.4
|
)
|
9.1
|
|
(36.6
|
)
|
|
Net (gain) loss reclassified from OCI to interest expense (effective portion)
|
9.4
|
|
3.0
|
|
—
|
|
—
|
|
2.0
|
|
3.3
|
|
11.4
|
|
6.3
|
|
|
Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion)
|
(.1
|
)
|
(.5
|
)
|
—
|
|
—
|
|
(.1
|
)
|
(.5
|
)
|
(.2
|
)
|
(1.0
|
)
|
|
Fair Value Hedges:
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in interest expense
(B)
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
|
$4.6
|
|
|
($8.9
|
)
|
|
$4.6
|
|
|
($8.9
|
)
|
|
Net Investment Hedges, net of tax:
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in OCI
|
|
$15.9
|
|
|
($6.5
|
)
|
|
$15.5
|
|
|
$4.7
|
|
|
$1.3
|
|
|
$2.4
|
|
|
$32.7
|
|
|
$.6
|
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in other income (expense), net
(C)
|
|
($3.1
|
)
|
|
($.2
|
)
|
|
$—
|
|
|
$—
|
|
|
$.2
|
|
|
($1.3
|
)
|
|
($2.9
|
)
|
|
($1.5
|
)
|
|
|
|
|
(A)
|
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 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 was largely offset by recognized gains and losses resulting from the impact of changes in exchange rates on assets and liabilities denominated in non-functional currencies.
|
The amount of unrealized gains and losses related to cash flow hedges as of
30 June 2019
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
$25.0
and
$33.4
as of
30 June 2019
and
30 September 2018
, respectively. 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
$90.9
and
$97.6
as of
30 June 2019
and
30 September 2018
, respectively. No financial institution is required to post collateral at this time as all have credit ratings at or above threshold.
10
.
FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, or the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
|
|
|
|
Level 1
|
— Quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
|
|
Level 2
|
— Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
|
|
|
|
|
Level 3
|
— Inputs that are unobservable for the asset or liability based on our own assumptions about the assumptions market participants would use in pricing the asset or liability.
|
The methods and assumptions used to measure the fair value of financial instruments are as follows:
Short-term Investments
Short-term investments primarily include time deposits and treasury securities with original maturities greater than three months and less than one year. We estimated the fair value of our short-term investments, which approximates carrying value as of the balance sheet date, 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 consider 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 that are derived from or corroborated by observable market data such as interest rate yield curves as well as currency spot and forward rates; therefore, the fair value of our derivatives is classified as a level 2 measurement. On an ongoing basis, we randomly test a subset of our valuations against valuations received from the transaction’s counterparty to validate the accuracy of our standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions.
Refer to Note
9
,
Financial Instruments
, for a description of derivative instruments, including details related to 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 consider 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 June 2019
|
|
30 September 2018
|
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
|
$86.9
|
|
|
|
$86.9
|
|
|
|
$68.8
|
|
|
|
$68.8
|
|
|
Interest rate management contracts
|
|
50.8
|
|
|
50.8
|
|
|
77.3
|
|
|
77.3
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
|
$72.6
|
|
|
|
$72.6
|
|
|
|
$80.2
|
|
|
|
$80.2
|
|
|
Interest rate management contracts
|
|
7.9
|
|
|
7.9
|
|
|
13.9
|
|
|
13.9
|
|
|
Long-term debt, including current portion and related party
|
|
3,739.8
|
|
|
3,816.9
|
|
|
3,758.3
|
|
|
3,788.2
|
|
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 on the consolidated balance sheets that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 June 2019
|
|
30 September 2018
|
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Assets at Fair Value
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
$86.9
|
|
|
$—
|
|
|
$86.9
|
|
|
$—
|
|
|
|
$68.8
|
|
|
$—
|
|
|
$68.8
|
|
|
$—
|
|
|
Interest rate management contracts
|
50.8
|
|
—
|
|
50.8
|
|
—
|
|
|
77.3
|
|
—
|
|
77.3
|
|
—
|
|
|
Total Assets at Fair Value
|
|
$137.7
|
|
|
$—
|
|
|
$137.7
|
|
|
$—
|
|
|
|
$146.1
|
|
|
$—
|
|
|
$146.1
|
|
|
$—
|
|
|
Liabilities at Fair Value
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
$72.6
|
|
|
$—
|
|
|
$72.6
|
|
|
$—
|
|
|
|
$80.2
|
|
|
$—
|
|
|
$80.2
|
|
|
$—
|
|
|
Interest rate management contracts
|
7.9
|
|
—
|
|
7.9
|
|
—
|
|
|
13.9
|
|
—
|
|
13.9
|
|
—
|
|
|
Total Liabilities at Fair Value
|
|
$80.5
|
|
|
$—
|
|
|
$80.5
|
|
|
$—
|
|
|
|
$94.1
|
|
|
$—
|
|
|
$94.1
|
|
|
$—
|
|
11
.
RETIREMENT BENEFITS
The components of net periodic benefit cost for our defined benefit pension plans for the
three and nine
months ended
30 June 2019
and
2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
2019
|
|
2018
|
|
Three Months Ended 30 June
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
|
Service cost
|
|
$5.4
|
|
|
|
$4.8
|
|
|
|
$6.4
|
|
|
|
$6.5
|
|
|
Interest cost
|
28.2
|
|
|
9.0
|
|
|
26.8
|
|
|
9.4
|
|
|
Expected return on plan assets
|
(43.2
|
)
|
|
(18.9
|
)
|
|
(50.4
|
)
|
|
(20.6
|
)
|
|
Prior service cost amortization
|
.3
|
|
|
—
|
|
|
.4
|
|
|
—
|
|
|
Actuarial loss amortization
|
16.3
|
|
|
2.7
|
|
|
21.8
|
|
|
10.2
|
|
|
Settlements
|
.3
|
|
|
—
|
|
|
1.5
|
|
|
—
|
|
|
Special termination benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other
|
—
|
|
|
.2
|
|
|
—
|
|
|
.3
|
|
|
Net Periodic Benefit Cost
|
|
$7.3
|
|
|
|
($2.2
|
)
|
|
|
$6.5
|
|
|
|
$5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
2019
|
|
2018
|
|
Nine Months Ended 30 June
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
|
Service cost
|
|
$16.1
|
|
|
|
$14.6
|
|
|
|
$19.2
|
|
|
|
$19.4
|
|
|
Interest cost
|
85.0
|
|
|
27.0
|
|
|
80.3
|
|
|
28.2
|
|
|
Expected return on plan assets
|
(129.4
|
)
|
|
(57.0
|
)
|
|
(151.2
|
)
|
|
(61.9
|
)
|
|
Prior service cost amortization
|
.9
|
|
|
.1
|
|
|
1.2
|
|
|
—
|
|
|
Actuarial loss amortization
|
48.9
|
|
|
8.3
|
|
|
65.7
|
|
|
30.5
|
|
|
Settlements
|
6.1
|
|
|
.2
|
|
|
4.8
|
|
|
—
|
|
|
Special termination benefits
|
.7
|
|
|
—
|
|
|
.4
|
|
|
—
|
|
|
Other
|
—
|
|
|
.6
|
|
|
—
|
|
|
.9
|
|
|
Net Periodic Benefit Cost
|
|
$28.3
|
|
|
|
($6.2
|
)
|
|
|
$20.4
|
|
|
|
$17.1
|
|
Our service costs are primarily included within "Cost of sales" and "Selling and administrative" on our consolidated income statements.
The amount of service costs capitalized in fiscal year
s
2019
and
2018
was not material.
The non-service related costs, including pension settlement losses, are presented outside operating income within "Other non-operating income (expense), net."
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 settlements to accelerate recognition of actuarial gains or losses deferred in accumulated other comprehensive loss 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. Pension settlements are reflected on our consolidated income statements within “Other non-operating income (expense), net.” For the nine months ended 30 June 2019, we recognized pension settlement losses of
$6.3
, of which
$5.0
associated with the U.S. Supplementary Pension Plan was recognized during the second quarter.
For the
nine
months ended
30 June 2019
and
2018
, our cash contributions to funded pension plans and benefit payments under unfunded pension plans were
$31.0
and
$43.0
, respectively. Total contributions for fiscal year
2019
are expected to be approximately
$45
to
$65
. During fiscal year
2018
, total contributions were
$68.3
.
U.K. Lloyds Pensions Equalization Ruling
On 26 October 2018, the United Kingdom High Court issued a ruling related to the equalization of pension plan participants’ benefits for the gender effects of Guaranteed Minimum Pensions. As a result of this ruling, we estimated the impact of retroactively increasing benefits in our U.K. plan in accordance with the High Court ruling. We treated the additional benefits as a prior service cost, which resulted in an increase to our projected benefit obligation and accumulated other comprehensive loss of
$4.7
during the first quarter of fiscal year 2019. We will amortize this cost over the average remaining life expectancy of the U.K. participants. Given the immaterial effect on the U.K. plan's projected benefit, an interim remeasurement was not performed.
12
.
COMMITMENTS AND CONTINGENCIES
Litigation
We are involved in various legal proceedings, including commercial, competition, environmental, health, safety, product liability, and insurance matters. In September 2010, the Brazilian Administrative Council for Economic Defense (CADE) issued a decision against our Brazilian subsidiary, Air Products Brasil Ltda., and several other Brazilian industrial gas companies for alleged anticompetitive activities. CADE imposed a civil fine of
R$179.2 million
(approximately
$47
at
30 June 2019
) 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
$47
at
30 June 2019
) 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 June 2019
and
30 September 2018
included an accrual of
$71.1
and
$76.8
, 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
$71
to a reasonably possible upper exposure of
$84
as of
30 June 2019
.
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 June 2019
,
$24.7
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 June 2019
,
$14.9
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 June 2019
,
$11.8
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.
13
.
SHARE-BASED COMPENSATION
We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. During the
nine
months ended
30 June 2019
, we granted market-based and time-based deferred stock units. Under all programs, the terms of the awards are fixed at the grant date. We issue shares from treasury stock upon the payout of deferred stock units, the exercise of stock options, and the issuance of restricted stock awards. As of
30 June 2019
, there were
4,473,615
shares available for future grant under our Long-Term Incentive Plan (LTIP), which is shareholder approved.
Share-based compensation cost recognized on the consolidated income statements is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
30 June
|
|
30 June
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Before-tax share-based compensation cost
|
|
|
$9.8
|
|
|
|
$7.9
|
|
|
|
$31.0
|
|
|
|
$30.4
|
|
|
Income tax benefit
|
|
(2.3
|
)
|
|
(1.9
|
)
|
|
(7.3
|
)
|
|
(7.2
|
)
|
|
After-tax share-based compensation cost
|
|
|
$7.5
|
|
|
|
$6.0
|
|
|
|
$23.7
|
|
|
|
$23.2
|
|
Before-tax share-based compensation cost is primarily included in "Selling and administrative" on our consolidated income statements. The amount of share-based compensation cost capitalized in the first
nine
months of fiscal years
2019
and
2018
was not material.
Deferred Stock Units
During the
nine
months ended
30 June 2019
, we granted
114,929
market-based deferred stock units. The market-based deferred stock units are earned at the end of the performance period beginning 1 October 2018 and ending 30 September 2021, conditioned on the level of the Company’s total shareholder return in relation to a defined peer group over the
three
-year performance period.
The market-based deferred stock units had an estimated grant-date fair value of
$229.61
per unit, which was estimated using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards. We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period. The calculation of the fair value of market-based deferred stock units used the following assumptions:
|
|
|
|
|
|
|
|
Expected volatility
|
|
17.5
|
%
|
|
Risk-free interest rate
|
|
2.8
|
%
|
|
Expected dividend yield
|
|
2.6
|
%
|
In addition, during the
nine
months ended
30 June 2019
, we granted
166,119
time-based deferred stock units at a weighted average grant-date fair value of
$167.82
.
14
.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The tables below summarize changes in accumulated other comprehensive loss (AOCL), net of tax, attributable to Air Products for the
three and nine
months ended
30 June 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
qualifying as
hedges
|
|
Foreign
currency
translation
adjustments
|
|
Pension and
postretirement
benefits
|
|
Total
|
|
|
Balance at 31 March 2019
|
|
($49.5
|
)
|
|
($1,030.8
|
)
|
|
($664.5
|
)
|
|
($1,744.8
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
7.5
|
|
(48.8
|
)
|
—
|
|
(41.3
|
)
|
|
Amounts reclassified from AOCL
|
(13.1
|
)
|
(2.6
|
)
|
14.8
|
|
(.9
|
)
|
|
Net current period other comprehensive income (loss)
|
(5.6
|
)
|
(51.4
|
)
|
14.8
|
|
(42.2
|
)
|
|
Amount attributable to noncontrolling interests
|
.1
|
|
(5.7
|
)
|
—
|
|
(5.6
|
)
|
|
Balance at 30 June 2019
|
|
($55.2
|
)
|
|
($1,076.5
|
)
|
|
($649.7
|
)
|
|
($1,781.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
qualifying
as hedges
|
|
Foreign
currency
translation
adjustments
|
|
Pension and
postretirement
benefits
|
|
Total
|
|
|
Balance at 30 September 2018
|
|
($37.6
|
)
|
|
($1,009.8
|
)
|
|
($694.5
|
)
|
|
($1,741.9
|
)
|
|
Other comprehensive loss before reclassifications
|
(38.2
|
)
|
(65.6
|
)
|
(3.9
|
)
|
(107.7
|
)
|
|
Amounts reclassified from AOCL
|
20.7
|
|
(2.6
|
)
|
48.7
|
|
66.8
|
|
|
Net current period other comprehensive income (loss)
|
(17.5
|
)
|
(68.2
|
)
|
44.8
|
|
(40.9
|
)
|
|
Amount attributable to noncontrolling interests
|
.1
|
|
(1.5
|
)
|
—
|
|
(1.4
|
)
|
|
Balance at 30 June 2019
|
|
($55.2
|
)
|
|
($1,076.5
|
)
|
|
($649.7
|
)
|
|
($1,781.4
|
)
|
The table below summarizes the reclassifications out of AOCL and the affected line item on the consolidated income statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
|
30 June
|
30 June
|
|
|
2019
|
2018
|
2019
|
2018
|
|
(Gain) Loss on Cash Flow Hedges, net of tax
|
|
|
|
|
|
Sales/Cost of sales
|
|
$—
|
|
|
$1.9
|
|
|
$.4
|
|
|
$6.9
|
|
|
Other income/expense, net
|
(16.9
|
)
|
(22.4
|
)
|
8.9
|
|
(37.6
|
)
|
|
Interest expense
|
3.8
|
|
2.8
|
|
11.4
|
|
6.3
|
|
|
Total (Gain) Loss on Cash Flow Hedges, net of tax
|
|
($13.1
|
)
|
|
($17.7
|
)
|
|
$20.7
|
|
|
($24.4
|
)
|
|
|
|
|
|
|
|
Currency Translation Adjustment
|
|
|
|
|
|
Cost of sales
(A)
|
|
$—
|
|
|
$—
|
|
|
$—
|
|
|
$3.1
|
|
|
Gain on exchange of equity affiliate investments
(B)
|
(2.6
|
)
|
—
|
|
(2.6
|
)
|
—
|
|
|
Total Currency Translation Adjustment
|
|
($2.6
|
)
|
|
$—
|
|
|
($2.6
|
)
|
|
$3.1
|
|
|
|
|
|
|
|
|
Pension and Postretirement Benefits, net of tax
(C)
|
|
$14.8
|
|
|
$26.0
|
|
|
$48.7
|
|
|
$75.5
|
|
|
|
|
|
(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 2019 impact relates to a net gain on the exchange of two equity affiliates with a joint venture partner. Refer to Note
6
,
Acquisitions
, for additional information.
|
|
|
|
|
(C)
|
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
11
,
Retirement Benefits
, for additional information.
|
15
.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
30 June
|
|
30 June
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
$488.0
|
|
|
|
$430.7
|
|
|
|
$1,256.8
|
|
|
|
$1,002.7
|
|
|
Income from discontinued operations
|
|
—
|
|
|
43.2
|
|
|
—
|
|
|
42.2
|
|
|
Net Income Attributable to Air Products
|
|
|
$488.0
|
|
|
|
$473.9
|
|
|
|
$1,256.8
|
|
|
|
$1,044.9
|
|
|
Denominator
(in millions)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares — Basic
|
|
220.6
|
|
|
219.5
|
|
|
220.2
|
|
|
219.3
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
Employee stock option and other award plans
|
|
1.3
|
|
|
1.4
|
|
|
1.2
|
|
|
1.4
|
|
|
Weighted average common shares — Diluted
|
|
221.9
|
|
|
220.9
|
|
|
221.4
|
|
|
220.7
|
|
|
Basic EPS Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
$2.21
|
|
|
|
$1.96
|
|
|
|
$5.71
|
|
|
|
$4.57
|
|
|
Income from discontinued operations
|
|
—
|
|
|
.20
|
|
|
—
|
|
|
.19
|
|
|
Net Income Attributable to Air Products
|
|
|
$2.21
|
|
|
|
$2.16
|
|
|
|
$5.71
|
|
|
|
$4.76
|
|
|
Diluted EPS Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
$2.20
|
|
|
|
$1.95
|
|
|
|
$5.68
|
|
|
|
$4.54
|
|
|
Income from discontinued operations
|
|
—
|
|
|
.20
|
|
|
—
|
|
|
.19
|
|
|
Net Income Attributable to Air Products
|
|
|
$2.20
|
|
|
|
$2.15
|
|
|
|
$5.68
|
|
|
|
$4.73
|
|
For the
three and nine
months ended
30 June 2019
, there were
no
antidilutive outstanding share-based awards. For the three months ended
30 June 2018
, there were
no
antidilutive outstanding share-based awards. Outstanding share-based awards of
.1 million
were antidilutive and therefore excluded from the computation of diluted EPS for the nine months ended
30 June 2018
.
16
.
INCOME TAXES
U.S. Tax Cuts and Jobs Act
The United States enacted the U.S. Tax Cuts and Jobs Act (the "Tax Act") on 22 December 2017. This legislation 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.
We filed our 2018 federal income tax return in June 2019, which required an adjustment to our initial calculation of the deemed repatriation tax. Our income tax provision for the three months ended 30 June 2019 includes a discrete net income tax expense of
$3.2
resulting from this adjustment. Our income tax provision for the nine months ended 30 June 2019 includes a net expense of
$43.8
, which reflects the net expense recorded to refine our estimates in the first quarter of 2019, within the one-year measurement period. This net expense included the reversal of a
$56.2
benefit recorded in the fourth quarter of fiscal year 2018 related to the U.S. taxation of deemed foreign dividends and a benefit of
$12.4
to reduce the total expected costs of the deemed repatriation tax.
For the
nine
months ended
30 June 2018
, our consolidated income statements reflect the impacts recorded during the first quarter of fiscal year 2018, which include a discrete net income tax expense of
$206.5
for our initial provisional estimates of the impacts of the Tax Act and a reduction to equity affiliates' income of
$32.5
for future costs of repatriation related to the Tax Act that will be borne by an equity affiliate.
While our accounting for the provisions of the Tax Act is not provisional, further adjustments to the deemed repatriation tax could result from future adjustments to state tax return filing positions, U.S. or foreign tax examinations of the years impacted by the calculation, or from the issuance of additional federal or state guidance.
2018 Tax Restructuring and Audit Settlement
In the second quarter of fiscal year 2018, we recognized a
$38.8
tax benefit, net of reserves for uncertain tax positions, and a decrease in net deferred tax liabilities resulting from the restructuring of foreign subsidiaries.
In the third quarter of fiscal year 2018 we received a final audit settlement agreement that resulted in an income tax benefit of approximately
$9.1
, including interest, in continuing operations during the three months ended
30 June 2018
for the release of tax reserves.
Effective Tax Rate
Our effective tax rate was
17.9%
and
21.3%
for the
three and nine
months ended
30 June 2019
, respectively. Our effective tax rate was
19.4%
and
30.6%
for the
three and nine
months ended
30 June 2018
, respectively. The current and prior year effective tax rates were primarily impacted by the Tax Act, restructuring benefit, and audit settlement items discussed above.
Cash Paid for Taxes (Net of Cash Refunds)
On a total company basis, income tax payments, net of refunds, were
$250.8
and
$319.1
for the
nine
months ended
30 June 2019
and
2018
, respectively.
17
.
SUPPLEMENTAL INFORMATION
Facility Closure
In December 2018, one of our customers was subject to a government enforced shutdown due to environmental reasons. As a result, we recognized a charge of
$29.0
during the first quarter of fiscal year 2019 primarily related to the write-off of onsite assets. This charge is reflected as “Facility closure” on our consolidated income statements for the nine months ended 30 June 2019 and has been excluded from segment results. Annual sales and operating income associated with this customer prior to the facility closure were not material to the Industrial Gases – Asia segment. We do not expect to recognize additional charges related to this shutdown.
Related Party Sales
We have related party sales to some of our equity affiliates and joint venture partners. Sales to related parties totaled approximately
$80
and
$245
for the
three and nine
months ended
30 June 2019
, respectively, and
$70
and
$245
for the
three and nine
months ended
30 June 2018
, respectively. 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.
18
.
BUSINESS SEGMENT 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 segments 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 –
Americas
|
Industrial
Gases –
EMEA
|
Industrial
Gases –
Asia
|
Industrial
Gases –
Global
|
Corporate
and other
|
Segment
Total
|
|
Three Months Ended 30 June 2019
|
|
Sales
|
|
$955.3
|
|
|
$494.6
|
|
|
$679.4
|
|
|
$57.9
|
|
|
$36.8
|
|
|
$2,224.0
|
|
|
Operating income (loss)
|
262.2
|
|
123.4
|
|
231.4
|
|
(9.6
|
)
|
(41.3
|
)
|
566.1
|
|
|
Depreciation and amortization
|
126.3
|
|
47.8
|
|
87.9
|
|
2.2
|
|
4.9
|
|
269.1
|
|
|
Equity affiliates' income
|
21.7
|
|
18.8
|
|
14.9
|
|
1.0
|
|
—
|
|
56.4
|
|
|
Three Months Ended 30 June 2018
|
|
Sales
|
|
$948.7
|
|
|
$561.1
|
|
|
$623.8
|
|
|
$101.1
|
|
|
$24.3
|
|
|
$2,259.0
|
|
|
Operating income (loss)
|
237.1
|
|
118.8
|
|
185.5
|
|
19.8
|
|
(45.4
|
)
|
515.8
|
|
|
Depreciation and amortization
|
120.5
|
|
49.8
|
|
69.5
|
|
2.3
|
|
3.5
|
|
245.6
|
|
|
Equity affiliates' income
|
24.1
|
|
17.5
|
|
15.1
|
|
1.4
|
|
—
|
|
58.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases –
Americas
|
Industrial
Gases –
EMEA
|
Industrial
Gases –
Asia
|
Industrial
Gases –
Global
|
Corporate
and other
|
Segment
Total
|
|
Nine Months Ended 30 June 2019
|
|
Sales
|
|
$2,936.2
|
|
|
$1,513.2
|
|
|
$1,931.6
|
|
|
$179.9
|
|
|
$74.8
|
|
|
$6,635.7
|
|
|
Operating income (loss)
|
737.0
|
|
351.5
|
|
632.9
|
|
(17.9
|
)
|
(136.9
|
)
|
1,566.6
|
|
|
Depreciation and amortization
|
376.8
|
|
140.4
|
|
252.7
|
|
6.3
|
|
13.0
|
|
789.2
|
|
|
Equity affiliates' income
|
62.1
|
|
45.8
|
|
44.9
|
|
2.7
|
|
—
|
|
155.5
|
|
|
Nine Months Ended 30 June 2018
|
|
Sales
|
|
$2,771.7
|
|
|
$1,638.6
|
|
|
$1,825.0
|
|
|
$335.8
|
|
|
$60.2
|
|
|
$6,631.3
|
|
|
Operating income (loss)
|
676.6
|
|
340.0
|
|
509.7
|
|
41.4
|
|
(135.8
|
)
|
1,431.9
|
|
|
Depreciation and amortization
|
360.6
|
|
149.6
|
|
188.9
|
|
5.8
|
|
8.6
|
|
713.5
|
|
|
Equity affiliates' income
|
59.6
|
|
41.7
|
|
44.7
|
|
2.1
|
|
—
|
|
148.1
|
|
|
Total Assets
|
|
30 June 2019
|
|
$5,896.6
|
|
|
$3,399.7
|
|
|
$6,357.6
|
|
|
$284.3
|
|
|
$3,593.7
|
|
|
$19,531.9
|
|
|
30 September 2018
|
5,904.0
|
|
3,280.4
|
|
5,899.5
|
|
240.1
|
|
3,854.3
|
|
19,178.3
|
|
The sales information noted above relates to external customers only. All intersegment sales are eliminated in consolidation. 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 industrial gases segments is generally transferred at cost and not reflected as an intersegment sale.
Changes in estimates on projects accounted for under the cost incurred input method are recognized as a cumulative adjustment for the inception-to-date effect of such change. For the
nine
months ended
30 June 2019
and
2018
, changes in estimates
favorably impacted
operating income by approximately
$15
and
$25
, respectively.
Below is a reconciliation of segment total operating income to consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
|
30 June
|
30 June
|
|
Operating Income
|
2019
|
2018
|
2019
|
2018
|
|
Segment total
|
|
$566.1
|
|
|
$515.8
|
|
|
$1,566.6
|
|
|
$1,431.9
|
|
|
Facility closure
|
—
|
|
—
|
|
(29.0
|
)
|
—
|
|
|
Cost reduction actions
|
(25.5
|
)
|
—
|
|
(25.5
|
)
|
—
|
|
|
Gain on exchange of equity affiliate investments
|
29.1
|
|
—
|
|
29.1
|
|
—
|
|
|
Consolidated Total
|
|
$569.7
|
|
|
$515.8
|
|
|
$1,541.2
|
|
|
$1,431.9
|
|
Below is a reconciliation of segment total
equity affiliates' income
to consolidated
equity affiliates' income
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
|
30 June
|
30 June
|
|
Equity Affiliates' Income
|
2019
|
2018
|
2019
|
2018
|
|
Segment total
|
|
$56.4
|
|
|
$58.1
|
|
|
$155.5
|
|
|
$148.1
|
|
|
Tax reform repatriation - equity method investment
|
—
|
|
—
|
|
—
|
|
(32.5
|
)
|
|
Consolidated Total
|
|
$56.4
|
|
|
$58.1
|
|
|
$155.5
|
|
|
$115.6
|
|