NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars unless otherwise indicated, except for share and per share data)
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17.
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1. BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES
Basis of Presentation
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 (the "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 disclosures to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the notes to the interim consolidated financial statements. These notes, unless otherwise indicated, are presented on a continuing operations basis.
To fully understand the basis of presentation, the interim consolidated financial statements and related notes included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended 30 September 2020 (the "2020 Form 10-K"). Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.
COVID-19 Risks and Uncertainties
The novel strain of coronavirus ("COVID-19"), which was declared a global pandemic by the World Health Organization in March 2020, continues to impact our business operations and results. We are encouraged by signs of improvement in our business. However, there are many unknowns regarding the pandemic, including the ongoing spread and severity of the virus and the pace of vaccine rollouts globally. Given the dynamic nature of these circumstances, uncertainty remains related to how the pandemic may affect our business, results of operations, and overall financial performance.
Major Accounting Policies
Refer to our 2020 Form 10-K for a description of major accounting policies. In fiscal year 2021, accounting policies related to customer credit losses were impacted by the implementation of certain new accounting guidance, as further discussed below and in Note 2, New Accounting Guidance. There were no other notable changes to our accounting policies during the first six months of fiscal year 2021.
Credit Losses
We are exposed to credit losses through sales of products and services. When extending credit, we evaluate customer creditworthiness based on a combination of qualitative and quantitative factors that include, but are not limited to, the customer’s credit score from external providers, financial condition, and past payment experience.
We assess allowances for credit losses on our trade receivables and lease receivable portfolios. Allowances are evaluated by portfolio on a collective basis where similar characteristics exist. A provision for customer defaults is made on a general formula basis as the risk of some default is expected but cannot yet be associated with specific customers. The assessment of the likelihood of default is based on various factors, including the length of time the receivables are past due, historical experience, existing economic conditions, and forward-looking information. When we identify specific customers with known collectability issues, the assessment for credit losses is performed on an individual basis, considering current and forward-looking information of the customer.
The use of forward-looking information considers economic conditions that may affect the customers’ ability to pay. Although we historically have not experienced significant credit losses, our exposure to credit losses may increase if our customers are adversely affected by economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the ongoing COVID-19 pandemic, or other customer-specific factors. We review our reserves for credit losses on a quarterly basis.
Trade receivables comprise amounts owed to us through our operating activities and are presented net of allowances for credit losses.
Changes to the carrying amount of the allowance for credit losses on trade receivables for the six months ended 31 March 2021 are as follows:
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Balance at 30 September 2020
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$23.9
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Adoption of new credit losses standard
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0.5
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Provision for credit losses
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1.2
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Write-offs charged against the allowance
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(1.6)
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Currency translation and other
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2.6
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Balance at 31 March 2021
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$26.6
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Lease receivables, net, primarily relate to sales-type leases on certain on-site assets which are collected over the contract term. As of 31 March 2021 and 30 September 2020, our lease receivables, net were $875.7 and $903.0, respectively. Lease receivables, net, are primarily included within "Noncurrent lease receivables" on our consolidated balance sheets, with the remaining balance in "Other receivables and current assets." The majority of our leases are of high credit quality and were originated prior to fiscal year 2017. Allowances for credit losses on lease receivables were not material as of 31 March 2021 and 30 September 2020, respectively.
2. NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented in Fiscal Year 2021
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 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 previous guidance, which delayed recognition of a credit loss until it was probable that a loss had been incurred. We adopted this guidance on 1 October 2020 using a modified retrospective approach with an after-tax cumulative-effect adjustment of $1.3 to retained earnings. Refer to the “Major Accounting Polices – Credit Losses" section of Note 1, Basis of Presentation and Major Accounting Policies, for a description of our accounting policy on credit losses.
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. We adopted this guidance prospectively at the beginning of fiscal year 2021. Eligible implementation costs previously capitalized in "Plant and equipment, net" were reclassified to "Other noncurrent assets" on our consolidated balance sheets beginning in fiscal year 2021. This guidance did not have a material impact on our consolidated financial statements upon adoption.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued an update to simplify the accounting for income taxes and improve consistent application by clarifying or amending existing guidance. We adopted this guidance at the beginning of fiscal year 2021. This guidance did not have a material impact on our consolidated financial statements upon adoption.
New Accounting Guidance to be Implemented
Reference Rate Reform
In March 2020, the FASB issued an update to provide practical expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This update is primarily applicable to our contracts and hedging relationships that reference LIBOR. The amendments may be applied to impacted contracts and hedges prospectively through 31 December 2022. To date, we have had no impacts on our hedging relationships related to reference rate reform. We will continue to evaluate the impact this guidance could have on our consolidated financial statements.
3. ACQUISITIONS
Gain on Exchange With Joint Venture Partner
As of 30 September 2020, we held a 50% ownership interest in Tyczka Industrie-Gases GmbH ("TIG"), a joint venture in Germany with the Tyczka Group that is primarily a merchant gases business. We accounted for this arrangement as an equity method investment in our Industrial Gases – EMEA segment.
Effective 23 February 2021 (the "acquisition date"), we agreed with our joint venture partner to separate TIG into two separate businesses. On the acquisition date, we acquired a portion of the business on a 100% basis, and our partner paid us $10.8 to acquire the rest of the business. The exchange resulted in a gain of $36.8 ($27.3 after-tax), which is reflected as “Gain on exchange with joint venture partner” on our consolidated income statements for the three and six months ended 31 March 2021. The gain included $12.7 from the revaluation of our previously held equity interest in the portion of the business that we retained and $24.1 from the sale of our equity interest in the remaining business. The gain was not recorded in segment results.
We estimated an acquisition date fair value of $15.4 for our previously held equity interest in the acquired portion of the business using a market approach, which considered historical earnings and the application of a market-based multiple derived from comparable transactions.
We accounted for the acquisition as a business combination within our Industrial Gases – EMEA segment. As a result of the acquisition, we recognized intangible assets of $16.7 for customer relationships, goodwill of $14.5, and plant and equipment of $10.3. The customer relationships have a weighted-average useful life of approximately 15 years.
The acquired assets were recorded at their estimated fair values based primarily on a preliminary purchase price allocation. We may record adjustments to these assets during the preliminary purchase price allocation period, which could be up to one year from the acquisition date.
We expect the acquisition to allow us to have more control over the business we retained and to serve customers more effectively. The results of this business did not materially impact our consolidated income statements for the periods presented.
4. REVENUE RECOGNITION
The majority of our revenue is generated from our sale of gas customers within the Industrial Gases regional segments. We distribute gases through either our on-site or merchant supply mode depending on various factors, including the customer's volume requirements and location. The Industrial Gases – Global and the Corporate and other segments serve our sale of equipment customers.
Disaggregation of Revenue
The tables below present our consolidated sales disaggregated by supply mode for each of our reporting segments for the three and six months ended 31 March 2021 and 2020. We believe this presentation best depicts the nature, timing, type of customer, and contract terms for our sales.
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Industrial
Gases–
Americas
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Industrial
Gases–
EMEA
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Industrial
Gases–
Asia
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Industrial
Gases–
Global
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Corporate
and other
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Total
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%
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Three Months Ended 31 March 2021
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On-site
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$636.7
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$202.3
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$416.0
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$—
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$—
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$1,255.0
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50
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%
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Merchant
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419.4
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382.3
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281.5
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—
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—
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1,083.2
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43
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%
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Sale of Equipment
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—
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—
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—
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97.9
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65.9
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163.8
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7
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%
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Total
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$1,056.1
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$584.6
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$697.5
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$97.9
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$65.9
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$2,502.0
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100
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%
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Three Months Ended 31 March 2020
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On-site
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$516.2
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$160.3
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$425.6
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$—
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$—
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$1,102.1
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50
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%
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Merchant
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416.2
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332.4
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232.5
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—
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—
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981.1
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44
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%
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Sale of Equipment
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—
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—
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—
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79.3
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53.8
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133.1
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6
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%
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Total
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$932.4
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$492.7
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$658.1
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$79.3
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$53.8
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$2,216.3
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100
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%
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Industrial
Gases–
Americas
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Industrial
Gases–
EMEA
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Industrial
Gases–
Asia
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Industrial
Gases–
Global
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Corporate
and other
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Total
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%
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Six Months Ended 31 March 2021
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On-site
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$1,178.0
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$391.0
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$830.9
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$—
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$—
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$2,399.9
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49
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%
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Merchant
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811.1
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756.6
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584.1
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—
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—
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2,151.8
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44
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%
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Sale of Equipment
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—
|
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—
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—
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202.4
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123.1
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325.5
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7
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%
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Total
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$1,989.1
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$1,147.6
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$1,415.0
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$202.4
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$123.1
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$4,877.2
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100
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%
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Six Months Ended 31 March 2020
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On-site
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$1,050.7
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|
$331.7
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$843.9
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$—
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$—
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$2,226.3
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50
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%
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Merchant
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817.9
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659.7
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507.0
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—
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—
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1,984.6
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44
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%
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Sale of Equipment
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—
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|
—
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—
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171.9
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88.2
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260.1
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6
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%
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Total
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$1,868.6
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$991.4
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$1,350.9
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$171.9
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$88.2
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$4,471.0
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100
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%
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Remaining Performance Obligations
As of 31 March 2021, the transaction price allocated to remaining performance obligations is estimated to be approximately $24 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 having 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 our control, including, but not limited to, inflationary price escalations; currency exchange rates; and amended, terminated, or renewed contracts.
Contract Balances
The table below details balances arising from contracts with customers:
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Balance Sheet Location
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31 March 2021
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30 September 2020
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Assets
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Contract assets – current
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Other receivables and current assets
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$68.8
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$55.9
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Contract fulfillment costs – current
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Other receivables and current assets
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154.5
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109.9
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Liabilities
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Contract liabilities – current
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Payables and accrued liabilities
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413.0
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313.8
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Contract liabilities – noncurrent
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Other noncurrent liabilities
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59.4
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57.9
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|
Changes to our contract balances primarily relate to our sale of equipment contracts. During the six months ended 31 March 2021, we recognized approximately $145 in revenue associated with sale of equipment contracts that was included within our contract liabilities as of 30 September 2020.
5. DISCONTINUED OPERATIONS
In the first quarter of fiscal year 2021, we recorded a tax benefit of $10.3 as a component of discontinued operations. This benefit primarily resulted from the settlement of a state tax appeal related to the gain on the sale of our former Performance Materials Division in fiscal year 2017. The benefit is reflected within "Income from discontinued operations, net of tax" on our consolidated income statement for the six months ended 31 March 2021. Our consolidated statement of cash flows for the six months ended 31 March 2021 includes $6.7 received as part of the settlement.
In the second quarter of fiscal year 2020, we recorded a pre-tax loss from discontinued operations of $19.0 ($14.3 after-tax) to increase our existing environmental liability associated with the sale of our former Amines business in September 2006. Refer to the Pace discussion within Note 12, Commitments and Contingencies, for additional information. The loss did not have an impact on our consolidated statement of cash flows for the six months ended 31 March 2020.
6. INVENTORIES
The components of inventories are as follows:
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31 March
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30 September
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2021
|
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2020
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Finished goods
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$143.7
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$134.5
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Work in process
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25.0
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21.3
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Raw materials, supplies and other
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261.6
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249.0
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Inventories
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$430.3
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$404.8
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7. GOODWILL
Changes to the carrying amount of consolidated goodwill by segment for the six months ended 31 March 2021 are as follows:
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Industrial
Gases–
Americas
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Industrial
Gases–
EMEA
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Industrial
Gases–
Asia
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Industrial
Gases–
Global
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Corporate
and other
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Total
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Goodwill, net at 30 September 2020
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$152.6
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$524.1
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|
$180.4
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$19.5
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$14.9
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$891.5
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Acquisitions(A)
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—
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14.5
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—
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—
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—
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|
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14.5
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Currency translation and other
|
4.4
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|
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0.9
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|
|
3.0
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|
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0.4
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|
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—
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|
|
8.7
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|
Goodwill, net at 31 March 2021
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$157.0
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$539.5
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$183.4
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$19.9
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$14.9
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$914.7
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(A)We recognized goodwill for expected cost synergies and growth opportunities resulting from a business combination in the second quarter of fiscal year 2021. Refer to Note 3, Acquisitions, for additional information. The goodwill recognized is not deductible for tax purposes.
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31 March
|
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30 September
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2021
|
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2020
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Goodwill, gross
|
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$1,284.8
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|
$1,230.2
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Accumulated impairment losses(B)
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|
(370.1)
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(338.7)
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Goodwill, net
|
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$914.7
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|
$891.5
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(B)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.
8. 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 and third-party debt. This portfolio of forward exchange contracts consists primarily of Euros and U.S. Dollars. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 31 March 2021 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 our business activity and sourcing decisions.
The table below summarizes our outstanding currency price risk management instruments:
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31 March 2021
|
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30 September 2020
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US$
Notional
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Years
Average
Maturity
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US$
Notional
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Years
Average
Maturity
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Forward Exchange Contracts:
|
|
|
|
|
|
|
|
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Cash flow hedges
|
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$2,985.0
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|
0.4
|
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$2,842.1
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0.5
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Net investment hedges
|
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656.4
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3.3
|
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636.6
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|
3.8
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Not designated
|
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775.7
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0.2
|
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1,685.2
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|
0.3
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Total Forward Exchange Contracts
|
|
$4,417.1
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|
0.8
|
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$5,163.9
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0.8
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The decrease in the notional value of forward exchange contracts that are not designated is primarily due to 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 €1,303.8 million ($1,529.1) at 31 March 2021 and €1,288.7 million ($1,510.8) at 30 September 2020. 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 31 March 2021, 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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 March 2021
|
|
30 September 2020
|
|
|
US$
Notional
|
|
Average
Pay %
|
|
Average
Receive
%
|
|
Years
Average
Maturity
|
|
US$
Notional
|
|
Average
Pay %
|
|
Average
Receive
%
|
|
Years
Average
Maturity
|
Interest rate swaps
(fair value hedge)
|
|
$200.0
|
|
|
LIBOR
|
|
2.76
|
%
|
|
0.6
|
|
$200.0
|
|
|
LIBOR
|
|
2.76
|
%
|
|
1.1
|
Cross currency interest rate swaps
(net investment hedge)
|
|
$199.3
|
|
|
4.26
|
%
|
|
3.12
|
%
|
|
2.7
|
|
$201.6
|
|
|
4.27
|
%
|
|
3.12
|
%
|
|
3.2
|
Cross currency interest rate swaps
(cash flow hedge)
|
|
$1,145.9
|
|
|
4.79
|
%
|
|
2.93
|
%
|
|
2.4
|
|
$1,057.9
|
|
|
4.83
|
%
|
|
2.98
|
%
|
|
2.5
|
Cross currency interest rate swaps
(not designated)
|
|
$15.1
|
|
|
5.39
|
%
|
|
3.54
|
%
|
|
2.7
|
|
$12.8
|
|
|
5.39
|
%
|
|
3.54
|
%
|
|
3.2
|
The table below provides the amounts recorded on the consolidated balance sheet related to cumulative basis adjustments for fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of hedged item
|
|
Cumulative hedging adjustment, included in carrying amount
|
Balance Sheet Location
|
31 March 2021
|
30 September 2020
|
|
31 March 2021
|
30 September 2020
|
Current portion of long-term debt
|
$402.8
|
|
$—
|
|
|
$3.0
|
|
$—
|
|
Long-term debt
|
—
|
|
405.4
|
|
|
—
|
|
5.7
|
|
The table below summarizes the fair value and balance sheet location of our outstanding derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Location
|
31 March 2021
|
30 September 2020
|
Balance Sheet
Location
|
31 March 2021
|
30 September 2020
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
Forward exchange contracts
|
Other receivables and current assets
|
$45.4
|
|
$51.1
|
|
Payables and accrued liabilities
|
$55.5
|
|
$22.5
|
|
Interest rate management contracts
|
Other receivables and current assets
|
10.3
|
|
14.7
|
|
Payables and accrued liabilities
|
6.5
|
|
0.4
|
|
Forward exchange contracts
|
Other noncurrent assets
|
2.0
|
|
0.8
|
|
Other noncurrent liabilities
|
37.2
|
|
33.0
|
|
Interest rate management contracts
|
Other noncurrent
assets
|
18.5
|
|
44.3
|
|
Other noncurrent liabilities
|
26.4
|
|
1.7
|
|
Total Derivatives Designated as Hedging Instruments
|
|
$76.2
|
|
$110.9
|
|
|
$125.6
|
|
$57.6
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
Forward exchange contracts
|
Other receivables and current assets
|
$19.6
|
|
$31.7
|
|
Payables and accrued liabilities
|
$17.1
|
|
$28.0
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
Other noncurrent assets
|
0.1
|
|
—
|
|
Other noncurrent liabilities
|
—
|
|
—
|
|
Interest rate management contracts
|
Other noncurrent assets
|
0.1
|
|
0.7
|
|
Other noncurrent liabilities
|
—
|
|
—
|
|
Total Derivatives Not Designated as Hedging Instruments
|
|
$19.8
|
|
$32.4
|
|
|
$17.1
|
|
$28.0
|
|
Total Derivatives
|
|
$96.0
|
|
$143.3
|
|
|
$142.7
|
|
$85.6
|
|
Refer to Note 9, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.
The tables below summarize gains (losses) recognized in other comprehensive income during the period related to our net investment and cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
31 March
|
|
31 March
|
|
2021
|
2020
|
|
2021
|
2020
|
Net Investment Hedging Relationships
|
|
|
|
|
|
Forward exchange contracts
|
$18.6
|
|
$40.5
|
|
|
($17.3)
|
|
$31.4
|
|
Foreign currency debt
|
63.5
|
|
16.7
|
|
|
(0.7)
|
|
(13.2)
|
|
Cross currency interest rate swaps
|
1.9
|
|
12.4
|
|
|
(12.3)
|
|
8.9
|
|
Total Amount Recognized in OCI
|
84.0
|
|
69.6
|
|
|
(30.3)
|
|
27.1
|
|
Tax effects
|
(21.2)
|
|
(16.8)
|
|
|
7.4
|
|
(6.6)
|
|
Net Amount Recognized in OCI
|
$62.8
|
|
$52.8
|
|
|
($22.9)
|
|
$20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
31 March
|
|
31 March
|
|
2021
|
2020
|
|
2021
|
2020
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
Forward exchange contracts
|
($57.3)
|
|
($10.1)
|
|
|
$7.4
|
|
$16.2
|
|
Forward exchange contracts, excluded components
|
(4.3)
|
|
(2.8)
|
|
|
(7.0)
|
|
(7.3)
|
|
Other(A)
|
43.2
|
|
(8.5)
|
|
|
(2.3)
|
|
(5.6)
|
|
Total Amount Recognized in OCI
|
(18.4)
|
|
(21.4)
|
|
|
(1.9)
|
|
3.3
|
|
Tax effects
|
13.2
|
|
(6.0)
|
|
|
10.5
|
|
(8.6)
|
|
Net Amount Recognized in OCI
|
($5.2)
|
|
($27.4)
|
|
|
$8.6
|
|
($5.3)
|
|
(A)Other primarily includes interest rate and cross currency interest rate swaps for which excluded components are recognized in “Payables and accrued liabilities” and “Other receivables and current assets” as a component of accrued interest payable and accrued interest receivable, respectively. These excluded components are recorded in “Other non-operating income (expense), net” over the life of the cross currency interest rate swap. Other also includes the recognition of our share of gains and losses, net of tax, related to interest rate swaps held by our equity affiliates.
The tables below summarize the location and amounts recognized in income related to our cash flow and fair value hedging relationships by contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 31 March
|
|
Sales
|
|
Cost of Sales
|
|
|
|
Interest Expense
|
|
Other Non-Operating Income (Expense), Net
|
|
2021
|
2020
|
|
2021
|
2020
|
|
|
|
|
2021
|
2020
|
|
2021
|
2020
|
Total presented in consolidated income statements that includes effects of hedging below
|
$2,502.0
|
|
$2,216.3
|
|
|
$1,745.5
|
|
$1,460.1
|
|
|
|
|
|
$36.1
|
|
$19.3
|
|
|
$16.8
|
|
$7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) Loss Effects of Cash Flow Hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Exchange Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from OCI into income
|
$0.1
|
|
($0.2)
|
|
|
($1.8)
|
|
($0.6)
|
|
|
|
|
|
$—
|
|
$—
|
|
|
$54.0
|
|
$5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount excluded from effectiveness testing recognized in earnings based on amortization approach
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
—
|
|
—
|
|
|
2.6
|
|
4.1
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from OCI into income
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
1.4
|
|
1.0
|
|
|
(8.3)
|
|
(32.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Gain) Loss Reclassified from OCI to Income
|
0.1
|
|
(0.2)
|
|
|
(1.8)
|
|
(0.6)
|
|
|
|
|
|
1.4
|
|
1.0
|
|
|
48.3
|
|
(22.2)
|
|
Tax effects
|
—
|
|
—
|
|
|
0.4
|
|
0.1
|
|
|
|
|
|
(0.5)
|
|
(0.3)
|
|
|
(11.9)
|
|
5.2
|
|
Net (Gain) Loss Reclassified from OCI to Income
|
$0.1
|
|
($0.2)
|
|
|
($1.4)
|
|
($0.5)
|
|
|
|
|
|
$0.9
|
|
$0.7
|
|
|
$36.4
|
|
($17.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) Loss Effects of Fair Value Hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
|
|
|
|
($1.4)
|
|
$3.5
|
|
|
$—
|
|
$—
|
|
Derivatives designated as hedging instruments
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
1.4
|
|
(3.5)
|
|
|
—
|
|
—
|
|
Total (Gain) Loss Recognized in Income
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
|
|
|
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended 31 March
|
|
Sales
|
|
Cost of Sales
|
|
|
|
Interest Expense
|
|
Other Non-Operating Income (Expense), Net
|
|
2021
|
2020
|
|
2021
|
2020
|
|
|
|
|
2021
|
2020
|
|
2021
|
2020
|
Total presented in consolidated income statements that includes effects of hedging below
|
$4,877.2
|
|
$4,471.0
|
|
|
$3,377.9
|
|
$2,946.7
|
|
|
|
|
|
$72.8
|
|
$38.0
|
|
|
$35.4
|
|
$16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) Loss Effects of Cash Flow Hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Exchange Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from OCI into income
|
$0.2
|
|
($0.1)
|
|
|
($1.9)
|
|
($0.8)
|
|
|
|
|
|
$—
|
|
$—
|
|
|
$2.4
|
|
($17.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount excluded from effectiveness testing recognized in earnings based on amortization approach
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
—
|
|
—
|
|
|
5.4
|
|
8.6
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from OCI into income
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
2.8
|
|
2.0
|
|
|
37.0
|
|
(18.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Gain) Loss Reclassified from OCI to Income
|
0.2
|
|
(0.1)
|
|
|
(1.9)
|
|
(0.8)
|
|
|
|
|
|
2.8
|
|
2.0
|
|
|
44.8
|
|
(27.5)
|
|
Tax effects
|
—
|
|
—
|
|
|
0.6
|
|
0.2
|
|
|
|
|
|
(1.0)
|
|
(0.6)
|
|
|
(10.8)
|
|
6.2
|
|
Net (Gain) Loss Reclassified from OCI to Income
|
$0.2
|
|
($0.1)
|
|
|
($1.3)
|
|
($0.6)
|
|
|
|
|
|
$1.8
|
|
$1.4
|
|
|
$34.0
|
|
($21.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) Loss Effects of Fair Value Hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
|
|
|
|
($2.7)
|
|
$2.6
|
|
|
$—
|
|
$—
|
|
Derivatives designated as hedging instruments
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
2.7
|
|
(2.6)
|
|
|
—
|
|
—
|
|
Total (Gain) Loss Recognized in Income
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
|
|
|
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
The tables below summarize the location and amounts recognized in income related to our derivatives not designated as hedging instruments by contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 31 March
|
|
Other Income (Expense), Net
|
|
Other Non-Operating Income (Expense), Net
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
The Effects of Derivatives Not Designated as Hedging Instruments:
|
|
|
|
Forward Exchange Contracts
|
($0.3)
|
|
|
($2.4)
|
|
|
($0.3)
|
|
|
$1.2
|
|
Other
|
—
|
|
|
—
|
|
|
(0.1)
|
|
|
—
|
|
Total (Gain) Loss Recognized in Income
|
($0.3)
|
|
|
($2.4)
|
|
|
($0.4)
|
|
|
$1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended 31 March
|
|
Other Income (Expense), Net
|
|
Other Non-Operating Income (Expense), Net
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
The Effects of Derivatives Not Designated as Hedging Instruments:
|
|
|
|
Forward Exchange Contracts
|
$2.5
|
|
|
($2.2)
|
|
|
($1.6)
|
|
|
$0.6
|
|
Other
|
—
|
|
|
—
|
|
|
0.4
|
|
|
0.4
|
|
Total (Gain) Loss Recognized in Income
|
$2.5
|
|
|
($2.2)
|
|
|
($1.2)
|
|
|
$1.0
|
|
The amount of unrealized gains and losses related to cash flow hedges as of 31 March 2021 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 $76.5 and $30.0 as of 31 March 2021 and 30 September 2020, 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 $46.8 and $76.5 as of 31 March 2021 and 30 September 2020, respectively. No financial institution is required to post collateral at this time as all have credit ratings at or above threshold.
9. 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 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. 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 8, 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:
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|
31 March 2021
|
|
30 September 2020
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|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Assets
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
$67.1
|
|
|
$67.1
|
|
|
$83.6
|
|
|
$83.6
|
|
Interest rate management contracts
|
|
28.9
|
|
|
28.9
|
|
|
59.7
|
|
|
59.7
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
$109.8
|
|
|
$109.8
|
|
|
$83.5
|
|
|
$83.5
|
|
Interest rate management contracts
|
|
32.9
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|
|
32.9
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2.1
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|
|
2.1
|
|
Long-term debt, including current portion and related party
|
|
7,989.0
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|
|
7,966.0
|
|
|
7,900.1
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|
|
8,278.4
|
|
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:
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31 March 2021
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30 September 2020
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Total
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Level 1
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Level 2
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Level 3
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Total
|
Level 1
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Level 2
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Level 3
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Assets at Fair Value
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Derivatives
|
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|
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|
Forward exchange contracts
|
$67.1
|
|
$—
|
|
$67.1
|
|
$—
|
|
|
$83.6
|
|
$—
|
|
$83.6
|
|
$—
|
|
Interest rate management contracts
|
28.9
|
|
—
|
|
28.9
|
|
—
|
|
|
59.7
|
|
—
|
|
59.7
|
|
—
|
|
Total Assets at Fair Value
|
$96.0
|
|
$—
|
|
$96.0
|
|
$—
|
|
|
$143.3
|
|
$—
|
|
$143.3
|
|
$—
|
|
Liabilities at Fair Value
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
$109.8
|
|
$—
|
|
$109.8
|
|
$—
|
|
|
$83.5
|
|
$—
|
|
$83.5
|
|
$—
|
|
Interest rate management contracts
|
32.9
|
|
—
|
|
32.9
|
|
—
|
|
|
2.1
|
|
—
|
|
2.1
|
|
—
|
|
Total Liabilities at Fair Value
|
$142.7
|
|
$—
|
|
$142.7
|
|
$—
|
|
|
$85.6
|
|
$—
|
|
$85.6
|
|
$—
|
|
10. DEBT
On 31 March 2021, we entered into a five-year $2,500 revolving credit agreement with a syndicate of banks (the “2021 Credit Agreement”), under which senior unsecured debt is available to us and certain of our subsidiaries. The 2021 Credit Agreement will provide a source of liquidity and support our commercial paper program. The only financial covenant in the 2021 Credit Agreement is a maximum ratio of total debt to capitalization (equal to total debt plus total equity) not to exceed 70%. No borrowings were outstanding under the 2021 Credit Agreement as of 31 March 2021.
The 2021 Credit Agreement replaced our previous five-year $2,300 revolving credit agreement, which was to have matured on 31 March 2022. No borrowings were outstanding under the previous agreement as of 30 September 2020 or at the time of its termination. No early termination penalties were incurred.
In addition, we have credit facilities available to certain of our foreign subsidiaries totaling $291.5, of which $92.1 was borrowed and outstanding as of 31 March 2021.
11. RETIREMENT BENEFITS
The components of net periodic (benefit) cost for our defined benefit pension plans for the three and six months ended 31 March 2021 and 2020 were as follows:
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Pension Benefits
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|
2021
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2020
|
|
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Three Months Ended 31 March
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U.S.
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International
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U.S.
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International
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Service cost
|
$5.3
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|
|
$5.9
|
|
|
$5.8
|
|
|
$5.8
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|
|
|
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|
Interest cost
|
17.3
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|
|
6.3
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|
|
22.8
|
|
|
6.2
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|
|
|
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|
Expected return on plan assets
|
(48.7)
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|
|
(21.0)
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|
|
(47.2)
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|
|
(19.4)
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Prior service cost amortization
|
0.3
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|
|
—
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|
|
0.3
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|
|
—
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|
|
|
|
|
Actuarial loss amortization
|
19.6
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|
|
4.8
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|
|
21.0
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|
4.9
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Settlements
|
—
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|
|
—
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|
|
1.5
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|
—
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Other
|
—
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|
|
0.2
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|
|
—
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|
|
0.2
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|
|
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|
|
Net Periodic (Benefit) Cost
|
($6.2)
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|
($3.8)
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|
|
$4.2
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|
($2.3)
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Pension Benefits
|
|
|
|
2021
|
|
2020
|
|
|
|
|
Six Months Ended 31 March
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U.S.
|
|
International
|
|
U.S.
|
|
International
|
|
|
|
|
Service cost
|
$10.7
|
|
|
$11.6
|
|
|
$11.6
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|
|
$11.7
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|
|
|
|
|
Interest cost
|
34.5
|
|
|
12.4
|
|
|
45.6
|
|
|
12.4
|
|
|
|
|
|
Expected return on plan assets
|
(97.3)
|
|
|
(41.2)
|
|
|
(94.4)
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|
|
(38.9)
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|
|
|
|
|
Prior service cost amortization
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
|
|
|
Actuarial loss amortization
|
39.3
|
|
|
9.4
|
|
|
42.0
|
|
|
9.8
|
|
|
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|
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|
|
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|
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|
|
Settlements
|
—
|
|
|
—
|
|
|
1.5
|
|
|
—
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Other
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.4
|
|
|
|
|
|
Net Periodic (Benefit) Cost
|
($12.2)
|
|
|
($7.3)
|
|
|
$6.9
|
|
|
($4.6)
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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 the first six months of fiscal years 2021 and 2020 were not material. The non-service related impacts are presented outside operating income within "Other non-operating income (expense), net."
For the six months ended 31 March 2021 and 2020, our cash contributions to funded pension plans and benefit payments under unfunded pension plans were $27.7 and $14.9, respectively. Total contributions for fiscal year 2021 are expected to be approximately $45 to $55. During fiscal year 2020, total contributions were $37.5.
During the three and six months ended 31 March 2021, we recognized actuarial gain amortization of $0.5 and $0.9, respectively, for our other postretirement benefits plan. There was no amortization in fiscal year 2020 as the corridor for the plan was not exceeded.
12. COMMITMENTS AND CONTINGENCIES
Litigation
We are involved in various legal proceedings, including commercial, competition, environmental, intellectual property, regulatory, product liability, and insurance matters. 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.
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 $32 at 31 March 2021) 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 $32 at 31 March 2021) plus interest accrued thereon until final disposition of the proceedings.
Additionally, Winter Storm Uri, a severe winter weather storm in the U.S. Gulf Coast in February 2021, disrupted our operations and caused power and natural gas prices to spike significantly in Texas. We are currently in the early stages of litigation of a dispute regarding energy management services related to the impact of this unusual event, and other disputes may arise from such power price increases. In addition, there is the potential for legislative or regulatory action that may affect power supply and energy management charges. While it is reasonably possible that we could incur additional costs or realize gains related to power supply and energy management services in Texas during this time period, it is too early to estimate potential losses or gains given significant unknowns resulting from the unusual nature of this event.
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 31 sites on which a final settlement has not been reached where we, along with others, have been designated a potentially responsible party by the Environmental Protection Agency or are otherwise engaged in investigation or remediation, including cleanup activity at certain of our current and former manufacturing sites. We continually monitor these sites for which we have environmental exposure.
Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The consolidated balance sheets at 31 March 2021 and 30 September 2020 included an accrual of $80.8 and $84.7, respectively, primarily as part of other noncurrent liabilities. The environmental liabilities will be paid over a period of up to 30 years. We estimate the exposure for environmental loss contingencies to range from $80 to a reasonably possible upper exposure of $94 as of 31 March 2021.
Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Using reasonably possible alternative assumptions of the exposure level could result in an increase to the environmental accrual. Due to the inherent uncertainties related to environmental exposures, a significant increase to the reasonably possible upper exposure level could occur if a new site is designated, the scope of remediation is increased, a different remediation alternative is identified, or a significant increase in our proportionate share occurs. We do not expect that any sum we may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse impact on our financial position or results of operations in any one year.
Pace
At 31 March 2021, $41.6 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 recognized a before-tax expense of $42 in fiscal year 2006 in results from discontinued operations and recorded an environmental accrual of $42 in continuing operations on the consolidated balance sheets.
During the second quarter of fiscal year 2020, we completed an updated cost review of the environmental remediation status at the Pace facility. The review was completed in conjunction with requirements to maintain financial assurance per the Consent Order issued by the FDEP discussed below. Based on our review, we expect ongoing activities to continue for 30 years. Additionally, we will require near-term spending to install new groundwater recovery wells and piping, in addition to future capital to consider the extended time horizon for remediation at the site. As a result of these changes, we increased our environmental accrual for this site by $19 in continuing operations on the consolidated balance sheets and recognized a before-tax expense of $19 in results from discontinued operations in the second quarter of fiscal year 2020. There has been no change to the estimated exposure range related to the Pace facility in fiscal year 2021.
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 corrective action management unit. Several groundwater recovery systems have been installed to contain and remove contamination from groundwater. We completed an extensive assessment of the site to determine the efficacy of existing measures, 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 remediate groundwater. 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, along with the completion of a cost review every 5 years. In the second quarter of fiscal year 2020, we completed an updated cost review which resulted in a change in assumptions regarding future operating costs as discussed above.
Piedmont
At 31 March 2021, $11.4 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 31 March 2021, $11.4 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.
Future Lease Obligations
As of 31 March 2021, operating leases that have not yet commenced are estimated to have lease payments totaling approximately $250.
13. SHARE-BASED COMPENSATION
We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. During the six months ended 31 March 2021, 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. At the annual shareholders meeting held on 28 January 2021, the shareholders approved a new Long-Term Incentive Plan ("LTIP"), which has an authorized pool of 1,500,000 shares available for future grant, plus additional shares underlying awards outstanding on the date the LTIP was adopted but that are not issued. As of 31 March 2021, there were 1,500,434 shares available for future grant under our Long-Term Incentive Plan ("LTIP").
Share-based compensation cost recognized on the consolidated income statements is summarized below:
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|
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|
|
|
|
|
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|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
31 March
|
|
31 March
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Before-tax share-based compensation cost
|
|
$12.9
|
|
|
$13.5
|
|
|
$22.4
|
|
|
$28.9
|
|
Income tax benefit
|
|
(3.1)
|
|
|
(3.1)
|
|
|
(5.4)
|
|
|
(6.8)
|
|
After-tax share-based compensation cost
|
|
$9.8
|
|
|
$10.4
|
|
|
$17.0
|
|
|
$22.1
|
|
Before-tax share-based compensation cost is primarily included in "Selling and administrative" on our consolidated income statements. The amount of share-based compensation cost capitalized in the first six months of fiscal years 2021 and 2020 was not material.
Deferred Stock Units
During the six months ended 31 March 2021, we granted 77,251 market-based deferred stock units. The market-based deferred stock units are earned over the performance period beginning 1 October 2020 and ending 30 September 2023, conditioned on the level of our 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 $235.48 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
|
|
29.9
|
%
|
Risk-free interest rate
|
|
0.2
|
%
|
Expected dividend yield
|
|
2.1
|
%
|
In addition, during the six months ended 31 March 2021, we granted 106,564 time-based deferred stock units at a weighted average grant-date fair value of $282.32.
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 six months ended 31 March 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
qualifying as
hedges
|
Foreign
currency
translation
adjustments
|
Pension and
postretirement
benefits
|
Total
|
Balance at 31 December 2020
|
($46.7)
|
|
($742.1)
|
|
($924.5)
|
|
($1,713.3)
|
|
Other comprehensive loss before reclassifications
|
(5.2)
|
|
(144.6)
|
|
—
|
|
(149.8)
|
|
Amounts reclassified from AOCL
|
36.0
|
|
—
|
|
18.3
|
|
54.3
|
|
Net current period other comprehensive income (loss)
|
30.8
|
|
(144.6)
|
|
18.3
|
|
(95.5)
|
|
|
|
|
|
|
Amount attributable to noncontrolling interests
|
18.8
|
|
(3.2)
|
|
—
|
|
15.6
|
|
Balance at 31 March 2021
|
($34.7)
|
|
($883.5)
|
|
($906.2)
|
|
($1,824.4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
qualifying
as hedges
|
Foreign
currency
translation
adjustments
|
Pension and
postretirement
benefits
|
Total
|
Balance at 30 September 2020
|
($54.5)
|
|
($1,142.8)
|
|
($942.8)
|
|
($2,140.1)
|
|
Other comprehensive income before reclassifications
|
8.6
|
|
271.1
|
|
—
|
|
279.7
|
|
Amounts reclassified from AOCL
|
34.7
|
|
—
|
|
36.6
|
|
71.3
|
|
Net current period other comprehensive income
|
43.3
|
|
271.1
|
|
36.6
|
|
351.0
|
|
|
|
|
|
|
Amount attributable to noncontrolling interests
|
23.5
|
|
11.8
|
|
—
|
|
35.3
|
|
Balance at 31 March 2021
|
($34.7)
|
|
($883.5)
|
|
($906.2)
|
|
($1,824.4)
|
|
The table below summarizes the reclassifications out of AOCL and the affected line item on the consolidated income statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
31 March
|
31 March
|
|
2021
|
2020
|
2021
|
2020
|
(Gain) Loss on Cash Flow Hedges, net of tax
|
|
|
|
|
Sales
|
$0.1
|
|
($0.2)
|
|
$0.2
|
|
($0.1)
|
|
Cost of sales
|
(1.4)
|
|
(0.5)
|
|
(1.3)
|
|
(0.6)
|
|
|
|
|
|
|
Interest expense
|
0.9
|
|
0.7
|
|
1.8
|
|
1.4
|
|
Other non-operating income (expense), net
|
36.4
|
|
(17.0)
|
|
34.0
|
|
(21.3)
|
|
Total (Gain) Loss on Cash Flow Hedges, net of tax
|
$36.0
|
|
($17.0)
|
|
$34.7
|
|
($20.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Postretirement Benefits, net of tax(A)
|
$18.3
|
|
$21.2
|
|
$36.6
|
|
$40.9
|
|
(A)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
|
|
Six Months Ended
|
|
31 March
|
|
31 March
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Numerator
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$473.1
|
|
|
$492.1
|
|
|
$944.8
|
|
|
$967.7
|
|
Net income (loss) from discontinued operations
|
—
|
|
|
(14.3)
|
|
|
10.3
|
|
|
(14.3)
|
|
Net Income Attributable to Air Products
|
$473.1
|
|
|
$477.8
|
|
|
$955.1
|
|
|
$953.4
|
|
|
|
|
|
|
|
|
|
Denominator (in millions)
|
|
|
|
|
|
|
|
Weighted average common shares — Basic
|
221.6
|
|
|
221.2
|
|
|
221.6
|
|
|
221.0
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
Employee stock option and other award plans
|
0.9
|
|
|
1.1
|
|
|
0.9
|
|
|
1.2
|
|
Weighted average common shares — Diluted
|
222.5
|
|
|
222.3
|
|
|
222.5
|
|
|
222.2
|
|
|
|
|
|
|
|
|
|
Per Share Data*
|
|
|
|
|
|
|
|
Basic EPS from continuing operations
|
$2.13
|
|
|
$2.22
|
|
|
$4.26
|
|
|
$4.38
|
|
Basic EPS from discontinued operations
|
—
|
|
|
(0.06)
|
|
|
0.05
|
|
|
(0.06)
|
|
Basic EPS Attributable to Air Products
|
$2.13
|
|
|
$2.16
|
|
|
$4.31
|
|
|
$4.31
|
|
Diluted EPS from continuing operations
|
$2.13
|
|
|
$2.21
|
|
|
$4.25
|
|
|
$4.36
|
|
Diluted EPS from discontinued operations
|
—
|
|
|
(0.06)
|
|
|
0.05
|
|
|
(0.06)
|
|
Diluted EPS Attributable to Air Products
|
$2.13
|
|
|
$2.15
|
|
|
$4.29
|
|
|
$4.29
|
|
*EPS is calculated independently for each component and may not sum to total EPS due to rounding.
For the three and six months ended 31 March 2021 and 2020, there were no antidilutive outstanding share-based awards.
16. INCOME TAXES
India Finance Act 2020
On 27 March 2020, the Indian government passed Finance Act 2020 (the "India Finance Act"), which amended rules regarding the taxation of dividends declared and distributed by Indian companies. Under the India Finance Act, future dividends declared or distributed by an Indian company are no longer subject to dividend distribution tax. Instead, any non-resident recipient is subject to a withholding tax.
Our consolidated income statements for the three and six months ended 31 March 2020 included a net benefit of $13.5 as a result of the India Finance Act. The net benefit included $33.8 for our share of accumulated dividend distribution taxes released with respect to INOX Air Products Private Limited ("INOX"), an equity affiliate investment in our Industrial Gases – Asia segment. This benefit was reflected within "Equity affiliates' income" and was not recorded in segment results. In addition, our income tax provision reflected an expense of $20.3 for estimated withholding taxes that we may incur on future dividends related to INOX.
Effective Tax Rate
Our effective tax rate was 20.4% and 19.8% for the three and six months ended 31 March 2021, respectively. The effective tax rate was 22.7% and 21.3% for the three and six months ended 31 March 2020, respectively.
Cash Paid for Taxes (Net of Cash Refunds)
Income tax payments, net of refunds, were $223.8 and $253.5 for the six months ended 31 March 2021 and 2020, respectively. Fiscal year 2021 reflects an income tax refund of $6.7 that is related to cash provided by discontinued operations.
17. SUPPLEMENTAL INFORMATION
Facility Closure
During the second quarter of fiscal year 2021, we recorded a charge of $23.2 primarily for a noncash write-down of assets associated with a contract termination in the Industrial Gases – Americas segment. This charge is reflected as "Facility closure" on our consolidated income statements for the three and six months ended 31 March 2021 and was not recorded in segment results.
Company Headquarters Relocation Income (Expense)
In the second quarter of fiscal year 2020, we sold property at our current corporate headquarters located in Trexlertown, Pennsylvania, for net proceeds of $44.1. The sale was completed in anticipation of relocating our U.S. headquarters and resulted in a gain of $33.8. This gain is reflected on our consolidated income statements as "Company headquarters relocation income (expense)" for the three and six months ended 31 March 2020. The gain was not recorded in the results of the Corporate and other segment.
Related Party Transactions
We have related party sales to some of our equity affiliates and joint venture partners as well as other income primarily from fees charged for use of Air Products' patents and technology. Sales to and other income from related parties totaled approximately $40 and $90 for the three and six months ended 31 March 2021, respectively, and $90 and $180 for the three and six months ended 31 March 2020, respectively. Sales 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. As of 31 March 2021 and 30 September 2020, our consolidated balance sheets included related party trade receivables of approximately $110 and $95, respectively.
We also have related party debt primarily resulting from the 2018 acquisition of gasification and syngas clean-up assets from our joint venture partner, Lu'An Clean Energy Company, which partially funded the acquisition with a loan to the joint venture. Total related party debt, including the current portion, was $352.5 and $338.5 as of 31 March 2021 and 30 September 2020, respectively.
Changes in Estimates
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. Changes in estimates unfavorably impacted operating income in the Industrial Gases – Global segment by approximately $7 in the second quarter of fiscal year 2021. Our changes in estimates would not have significantly impacted amounts recorded in prior years.
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; and
•Corporate and other
Summary by Business Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases –
Americas
|
Industrial
Gases –
EMEA
|
Industrial
Gases –
Asia
|
Industrial
Gases –
Global
|
Corporate
and other
|
Total
|
|
Three Months Ended 31 March 2021
|
|
Sales
|
$1,056.1
|
|
$584.6
|
|
$697.5
|
|
$97.9
|
|
$65.9
|
|
$2,502.0
|
|
(A)
|
Operating income (loss)
|
263.4
|
|
139.6
|
|
198.5
|
|
(26.1)
|
|
(40.5)
|
|
534.9
|
|
(B)
|
Depreciation and amortization
|
153.3
|
|
57.6
|
|
109.7
|
|
2.6
|
|
6.1
|
|
329.3
|
|
|
Equity affiliates' income
|
32.3
|
|
20.3
|
|
15.5
|
|
1.7
|
|
—
|
|
69.8
|
|
(B)
|
Three Months Ended 31 March 2020
|
|
Sales
|
$932.4
|
|
$492.7
|
|
$658.1
|
|
$79.3
|
|
$53.8
|
|
$2,216.3
|
|
(A)
|
Operating income (loss)
|
268.0
|
|
124.6
|
|
209.1
|
|
(19.8)
|
|
(38.5)
|
|
543.4
|
|
(B)
|
Depreciation and amortization
|
135.5
|
|
47.6
|
|
104.1
|
|
2.4
|
|
5.1
|
|
294.7
|
|
|
Equity affiliates' income
|
21.6
|
|
13.5
|
|
13.8
|
|
5.5
|
|
—
|
|
54.4
|
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)Sales relate to external customers only. All intersegment sales are eliminated in consolidation. Intersegment 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.
(B)Refer to the Reconciliations to Consolidated Results section below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases –
Americas
|
Industrial
Gases –
EMEA
|
Industrial
Gases –
Asia
|
Industrial
Gases –
Global
|
Corporate
and other
|
Total
|
|
Six Months Ended 31 March 2021
|
|
Sales
|
$1,989.1
|
|
$1,147.6
|
|
$1,415.0
|
|
$202.4
|
|
$123.1
|
|
$4,877.2
|
|
(A)
|
Operating income (loss)
|
489.2
|
|
281.1
|
|
413.3
|
|
(30.7)
|
|
(78.9)
|
|
1,074.0
|
|
(B)
|
Depreciation and amortization
|
305.1
|
|
113.0
|
|
217.6
|
|
5.2
|
|
12.1
|
|
653.0
|
|
|
Equity affiliates' income
|
54.6
|
|
45.3
|
|
35.4
|
|
3.8
|
|
—
|
|
139.1
|
|
(B)
|
Six Months Ended 31 March 2020
|
|
Sales
|
$1,868.6
|
|
$991.4
|
|
$1,350.9
|
|
$171.9
|
|
$88.2
|
|
$4,471.0
|
|
(A)
|
Operating income (loss)
|
525.2
|
|
245.1
|
|
437.6
|
|
(16.2)
|
|
(87.3)
|
|
1,104.4
|
|
(B)
|
Depreciation and amortization
|
267.3
|
|
96.0
|
|
205.7
|
|
4.8
|
|
10.1
|
|
583.9
|
|
|
Equity affiliates' income
|
42.2
|
|
32.8
|
|
30.7
|
|
6.9
|
|
—
|
|
112.6
|
|
(B)
|
|
|
|
|
|
|
|
|
Total Assets
|
|
31 March 2021
|
$6,916.3
|
|
$4,176.4
|
|
$7,279.9
|
|
$451.8
|
|
$7,334.5
|
|
$26,158.9
|
|
|
30 September 2020
|
6,610.1
|
|
3,917.0
|
|
6,842.9
|
|
397.8
|
|
7,400.7
|
|
25,168.5
|
|
|
(A)Sales relate to external customers only. All intersegment sales are eliminated in consolidation. Intersegment 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.
(B)Refer to the Reconciliations to Consolidated Results section below.
Reconciliations to Consolidated Results
The table below reconciles total operating income disclosed in the table above to consolidated operating income as reflected on our consolidated income statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
31 March
|
31 March
|
Operating Income
|
2021
|
2020
|
2021
|
2020
|
Total
|
$534.9
|
|
$543.4
|
|
$1,074.0
|
|
$1,104.4
|
|
|
|
|
|
|
Facility closure
|
(23.2)
|
|
—
|
|
(23.2)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on exchange with joint venture partner
|
36.8
|
|
—
|
|
36.8
|
|
—
|
|
Company headquarters relocation income (expense)
|
—
|
|
33.8
|
|
—
|
|
33.8
|
|
Consolidated Operating Income
|
$548.5
|
|
$577.2
|
|
$1,087.6
|
|
$1,138.2
|
|
The table below reconciles total equity affiliates' income disclosed in the table above to consolidated equity affiliates' income as reflected on our consolidated income statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
31 March
|
31 March
|
Equity Affiliates' Income
|
2021
|
2020
|
2021
|
2020
|
Total
|
$69.8
|
|
$54.4
|
|
$139.1
|
|
$112.6
|
|
India Finance Act 2020
|
—
|
|
33.8
|
|
—
|
|
33.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Equity Affiliates' Income
|
$69.8
|
|
$88.2
|
|
$139.1
|
|
$146.4
|
|