NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars unless otherwise indicated, except for share and per share data)
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1. MAJOR ACCOUNTING POLICIES
Basis of Presentation and Consolidation Principles
The accompanying consolidated financial statements of Air Products and Chemicals, Inc. were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Air Products and Chemicals, Inc. and those of its controlled subsidiaries (“we,” “our,” “us,” the “Company,” “Air Products,” or “registrant”), which are generally majority owned. Intercompany transactions and balances are eliminated in consolidation.
We consolidate all entities that we control. The general condition for control is ownership of a majority of the voting interests of an entity. Control may also exist in arrangements where we are the primary beneficiary of a variable interest entity ("VIE"). An entity that has both the power to direct the activities that most significantly impact the economic performance of a VIE and the obligation to absorb losses or receive benefits significant to the VIE is considered the primary beneficiary of that entity. We have determined that we are not a primary beneficiary of any material VIE.
The results of operations and cash flows for our discontinued operations have been segregated from the results of continuing operations and segment results. The comprehensive income related to discontinued operations has not been segregated and is included in the consolidated comprehensive income statements. There were no assets and liabilities presented as discontinued operations on the consolidated balance sheets. Refer to Note 6, Discontinued Operations, for additional information.
The notes to the consolidated financial statements, unless otherwise indicated, are on a continuing operations basis. The term "total company" includes both continuing and discontinued operations.
Certain prior year information has been reclassified to conform to the fiscal year 2020 presentation.
Estimates and Assumptions
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
COVID-19 Risks and Uncertainties
In March 2020, the World Health Organization declared the novel strain of coronavirus, COVID-19, a global pandemic and recommended containment and mitigation measures worldwide. COVID-19 had a negative impact on our operating results in fiscal year 2020, primarily in the regional industrial gas segments. We continue to monitor its impact on our operations; however, we are unable to predict the future impact that COVID-19 will have on our future financial position and operating results due to numerous uncertainties, including the duration and severity of the outbreak.
Revenue Recognition
We recognize 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 4, Revenue Recognition.
Cost of Sales
Cost of sales predominantly represents the cost of tangible products sold. These costs include labor, raw materials, plant engineering, power, depreciation, production supplies and materials packaging costs, and maintenance costs. Costs incurred for shipping and handling are also included in cost of sales.
Depreciation
Depreciation is recorded using the straight-line method, which deducts equal amounts of the cost of each asset from earnings every year over its expected economic useful life. The principal lives for major classes of plant and equipment are summarized in Note 9, Plant and Equipment, net.
Selling and Administrative
The principal components of selling and administrative expenses are compensation, advertising, and promotional costs.
Postemployment Benefits
We provide termination benefits to employees as part of ongoing benefit arrangements and record a liability for termination benefits when probable and estimable. These criteria are met when management, with the appropriate level of authority, approves and commits to its plan of action for termination; the plan identifies the employees to be terminated and their related benefits; and the plan is to be completed within one year. We do not provide material one-time benefit arrangements.
Fair Value Measurements
We are required to measure certain assets and liabilities at fair value, either upon initial measurement or for subsequent accounting or reporting. For example, fair value is used in the initial measurement of assets and liabilities acquired in a business combination; on a recurring basis in the measurement of derivative financial instruments; and on a nonrecurring basis when long-lived assets are written down to fair value when held for sale or determined to be impaired. Refer to Note 14, Fair Value Measurements, and Note 16, Retirement Benefits, for information on the methods and assumptions used in our fair value measurements.
Financial Instruments
We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The types of derivative financial instruments permitted for such risk management programs are specified in policies set by management. Refer to Note 13, Financial Instruments, for further detail on the types and use of derivative instruments into which we enter.
Major financial institutions are counterparties to all of these derivative contracts. We have established counterparty credit guidelines and generally enter into transactions with financial institutions of investment grade or better. Management believes the risk of incurring losses related to credit risk is remote, and any losses would be immaterial to the consolidated financial results, financial condition, or liquidity.
We recognize derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, we generally designate the derivative as either (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), (2) a hedge of a net investment in a foreign operation (net investment hedge), or (3) a hedge of the fair value of a recognized asset or liability (fair value hedge).
The following details the accounting treatment of our cash flow, fair value, net investment, and non-designated hedges:
•Changes in the fair value of a derivative that is designated as and meets the cash flow hedge criteria are recorded in accumulated other comprehensive loss ("AOCL") to the extent effective and then recognized in earnings when the hedged items affect earnings.
•Changes in the fair value of a derivative that is designated as and meets all the required criteria for a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings.
•Changes in the fair value of a derivative and foreign currency debt that are designated as and meet all the required criteria for a hedge of a net investment are recorded as translation adjustments in AOCL.
•Changes in the fair value of a derivative that is not designated as a hedge are recorded immediately in earnings.
We formally document the relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. This process includes relating derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also formally assess, at the inception of the hedge and on an ongoing basis, whether derivatives are highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we will discontinue hedge accounting with respect to that derivative prospectively.
Foreign Currency
Since we do business in many foreign countries, fluctuations in currency exchange rates affect our financial position and results of operations.
In most of our foreign operations, the local currency is considered the functional currency. Foreign subsidiaries translate their assets and liabilities into U.S. dollars at current exchange rates in effect as of the balance sheet date. The gains or losses that result from this process are shown as translation adjustments in AOCL in the equity section of the balance sheet.
The revenue and expense accounts of foreign subsidiaries are translated into U.S. dollars at the average exchange rates that prevail during the period. Therefore, the U.S. dollar value of these items on the consolidated income statements fluctuates from period to period, depending on the value of the U.S. dollar against foreign currencies. Some transactions are made in currencies different from an entity’s functional currency. Gains and losses from these foreign currency transactions are generally reflected in "Other income (expense), net" on our consolidated income statements as they occur. Net foreign exchange losses reflected in "Other income (expense), net" were not material for the periods presented. Refer to the Other Non-Operating Income (Expense), Net section below for discussion on other foreign currency presentation.
Environmental Expenditures
Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Remediation costs are capitalized if the costs improve our property as compared with the condition of the property when originally constructed or acquired, or if the costs prevent environmental contamination from future operations. We expense environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. The amounts charged to income from continuing operations related to environmental matters totaled $18.3, $14.2, and $12.8 in fiscal years 2020, 2019, and 2018, respectively. In addition, we recorded a pre-tax expense of $19.0 in results from discontinued operations to increase our environmental accrual for the Pace facility in the second quarter of fiscal year 2020. Refer to the Pace discussion within Note 17, Commitments and Contingencies, for additional information.
The measurement of environmental liabilities is based on an evaluation of currently available information with respect to each individual site and considers factors such as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. An environmental liability related to cleanup of a contaminated site might include, for example, a provision for one or more of the following types of costs: site investigation and testing costs, remediation costs, post-remediation monitoring costs, natural resource damages, and outside legal fees. These liabilities include costs related to other potentially responsible parties to the extent that we have reason to believe such parties will not fully pay their proportionate share. They do not consider any claims for recoveries from insurance or other parties and are not discounted.
As assessments and remediation progress at individual sites, the amount of projected cost is reviewed and the liability is adjusted to reflect additional technical and legal information that becomes available. Management has an established process in place to identify and monitor our environmental exposures. An environmental accrual analysis is prepared and maintained that lists all environmental loss contingencies, even where an accrual has not been established. This analysis assists in monitoring our overall environmental exposure and serves as a tool to facilitate ongoing communication among our technical experts, environmental managers, environmental lawyers, and financial management to ensure that required accruals are recorded and potential exposures disclosed.
Given inherent uncertainties in evaluating environmental exposures, actual costs to be incurred at identified sites in future periods may vary from the estimates. Refer to Note 17, Commitments and Contingencies, for additional information on our environmental loss contingencies.
The accruals for environmental liabilities are reflected in the consolidated balance sheets, primarily as part of other noncurrent liabilities.
Litigation
In the normal course of business, we are involved in legal proceedings. We accrue a liability for such matters when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency includes estimates of potential damages and other directly related costs expected to be incurred. Refer to Note 17, Commitments and Contingencies, for additional information on our current legal proceedings.
Share-Based Compensation
We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. We expense the grant-date fair value of these awards over the vesting period during which employees perform related services. Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. Refer to Note 19, Share-Based Compensation, for additional information regarding these awards and the models and assumptions used to determine the grant-date fair value of our awards.
Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. A principal temporary difference results from the excess of tax depreciation over book depreciation because accelerated methods of depreciation and shorter useful lives are used for income tax purposes. The cumulative impact of a change in tax rates or regulations is included in income tax expense in the period that includes the enactment date. We recognize deferred tax assets net of existing valuation allowances to the extent we believe that these assets are more likely than not to be realized considering all available evidence.
A tax benefit for an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination based on its technical merits. This position is measured as the largest amount of tax benefit that is greater than 50% likely of being realized. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense. For additional information regarding our income taxes, refer to Note 22, Income Taxes.
Other Non-Operating Income (Expense), net
Other non-operating income (expense), net includes interest income associated with our cash and cash items and short-term investments, certain impacts from hedging activities, and non-service cost components of net periodic pension and postretirement benefit cost. Our non-service costs primarily include interest cost, expected return on plan assets, amortization of actuarial gains and losses, and settlements.
In fiscal year 2020, we adopted new accounting guidance on hedging activities that changed the income statement presentation of excluded components (foreign currency forward points and currency swap basis differences) of our cash flow hedges of intercompany loans. This activity is amortized on a straight-line basis within “Other non-operating income (expense), net." In addition, gains and losses from the foreign currency remeasurement of balances associated with intercompany and third-party financing transactions, related income tax assets and liabilities, and the impact of related hedges are also reflected within “Other non-operating income (expense), net.” Refer to Note 2, New Accounting Guidance, for additional information.
Cash and Cash Items
Cash and cash items include cash, time deposits, and treasury securities acquired with an original maturity of three months or less.
Short-term Investments
Short-term investments include time deposits and treasury securities with original maturities greater than three months and less than one year.
Trade Receivables, net
Trade receivables comprise amounts owed to us through our operating activities and are presented net of allowances for doubtful accounts. The allowances for doubtful accounts represent estimated uncollectible receivables associated with potential customer defaults on contractual obligations. A provision for customer defaults is made on a general formula basis when it is determined that the risk of some default is probable and estimable but cannot yet be associated with specific customers. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience, and existing economic conditions. The allowance also includes amounts for certain customers where a risk of default has been specifically identified, considering factors such as the financial condition of the customer and their inability to pay. The allowance excludes amounts associated with customer disputes over contractual terms and conditions. Changes to the carrying amount of the allowance for doubtful accounts are summarized below:
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Balance at 30 September 2017
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$22.6
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Provision for credit losses
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11.2
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Write-offs charged against the allowance
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(7.2)
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Currency translation and other
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(0.2)
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Balance at 30 September 2018
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$26.4
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Provision for credit losses
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7.7
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Write-offs charged against the allowance
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(6.8)
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Currency translation and other
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(2.5)
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Balance at 30 September 2019
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$24.8
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Provision for credit losses
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7.7
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Write-offs charged against the allowance
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(8.3)
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Currency translation and other
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(0.3)
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Balance at 30 September 2020
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$23.9
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Inventories
We carry inventory that is comprised of finished goods, work-in-process, raw materials and supplies. Refer to Note 7, Inventories, for further detail.
Inventories on our consolidated balance sheets are stated at the lower of cost or net realizable value. We write down our inventories for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions.
Effective 1 July 2018, we determine the cost of all our inventories on a first-in, first-out basis ("FIFO"). Prior to 1 July 2018, we determined the cost of our industrial gas inventories in the United States on a last-in, first-out basis ("LIFO"). We applied this accounting change as a cumulative effect adjustment to cost of sales in the fourth quarter of fiscal year 2018. This change decreased our cost of sales by $24.1 for the quarter and fiscal year ended 30 September 2018.
Equity Investments
The equity method of accounting is used when we exercise significant influence but do not have operating control, generally assumed to be 20% – 50% ownership. Under the equity method, original investments are recorded at cost and adjusted by our share of undistributed earnings or losses of these companies. We use the cumulative earnings approach for determining cash flow presentation of cash distributions received from equity method investees. Equity investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.
Plant and Equipment, net
Plant and equipment, net is stated at cost less accumulated depreciation. Construction costs, labor, and applicable overhead related to installations are capitalized. Expenditures for additions and improvements that extend the lives or increase the capacity of plant assets are capitalized. The costs of maintenance and repairs of plant and equipment are charged to expense as incurred.
Fully depreciated assets are retained in the gross plant and equipment and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income. Refer to Note 9, Plant and Equipment, net, for further detail.
Computer Software
We capitalize costs incurred to purchase or develop software for internal use. Capitalized costs include purchased computer software packages, payments to vendors/consultants for development and implementation or modification to a purchased package to meet our requirements, payroll and related costs for employees directly involved in development, and interest incurred while software is being developed. Capitalized computer software costs are reflected in "Plant and equipment, net" on the consolidated balance sheets and are depreciated over the estimated useful life of the software, generally a period of three to five years.
Capitalized Interest
As we build new plant and equipment, we include in the cost of these assets a portion of the interest payments we make during the year. The amount of capitalized interest was $15.9, $13.5, and $19.5 in fiscal years 2020, 2019, and 2018, respectively.
Leases
As lessee, we recognize a right-of-use ("ROU") asset and lease liability on the balance sheet for all leases with a term in excess of 12 months. We determine if an arrangement contains a lease at inception. The arrangement contains a lease when there is an identifiable asset, we obtain substantially all of the economic benefits from that asset, and we direct how and for what purpose the asset is used during the term of the arrangement. If the initial term of an arrangement is 12 months or less, we have made an accounting election to not assess if these arrangements contain a lease for inclusion on our balance sheet.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since our leases generally do not provide an implicit discount rate, we use our incremental borrowing rates based on the information available at the commencement date in determining the present value of lease payments. To determine the incremental borrowing rate, we consider our unsecured borrowings and published market rates, and then adjust those rates to assume full collateralization and to factor in the individual lease term, geography, and payment structure.
Our lease term includes periods covered by options to extend or terminate the lease when it is reasonably certain that we will exercise an option to extend or not exercise an option to terminate. Lease payments consider our practical expedient to combine amounts for lease and related non-lease components for all classes of underlying assets in which we are lessee. Fixed payments and payments associated with escalation clauses based on an index are included in the ROU asset and lease liability at commencement. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our variable lease payments primarily include the impact from escalation clauses that are not fixed or based on an index. Prepaid lease payments are included in the recognition of ROU assets. Our lease agreements do not contain any material lease incentives, residual value guarantees or restrictions or covenants.
Impairment of Long-Lived Assets
Long-lived assets are grouped for impairment testing at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets and liabilities and are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. We assess recoverability by comparing the carrying amount of the asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If an asset group is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset group’s carrying amount exceeds its fair value. Long-lived assets meeting the held for sale criteria are reported at the lower of carrying amount or fair value less cost to sell.
Asset Retirement Obligations
The fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred. The fair value of the liability is measured using discounted estimated cash flows and is adjusted to its present value in subsequent periods as accretion expense is recorded. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s useful life. Our asset retirement obligations are primarily associated with on-site long-term supply contracts under which we have built a facility on land owned by the customer and are obligated to remove the facility at the end of the contract term. Our asset retirement obligations totaled $241.4 and $208.2 at 30 September 2020 and 2019, respectively.
Goodwill
Business combinations are accounted for using the acquisition method. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price (plus the fair value of any noncontrolling interest and previously held equity interest in the acquiree) over the fair market value of the net assets acquired, including identified intangibles, is recorded as goodwill. Preliminary purchase price allocations are made at the date of acquisition and finalized when information about facts and circumstances that existed as of the acquisition date needed to finalize underlying estimates is obtained or when we determine that such information is not obtainable, within a maximum measurement period of one year.
Goodwill is subject to impairment testing at least annually. In addition, goodwill is tested more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. Refer to Note 10, Goodwill, for further detail.
Intangible Assets
Intangible assets with determinable lives primarily consist of customer relationships, purchased patents and technology, and land use rights. The cost of intangible assets with determinable lives is amortized on a straight-line basis over the estimated period of economic benefit. No residual value is estimated for these intangible assets. Indefinite-lived intangible assets consist of trade names and trademarks. Indefinite-lived intangibles are subject to impairment testing at least annually. In addition, intangible assets are tested more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists.
Customer relationships are generally amortized over periods of five to twenty-five years. Purchased patents and technology and other finite-lived intangibles are generally amortized over periods of five to fifteen years. Other intangibles includes land use rights, which are generally amortized over a period of fifty years. Amortizable lives are adjusted whenever there is a change in the estimated period of economic benefit. Refer to Note 11, Intangible Assets, for further detail.
Retirement Benefits
The cost of pension benefits is generally recognized over the employees’ service period. We use actuarial methods and assumptions in the valuation of defined benefit obligations and the determination of expense. Differences between actual and expected results or changes in the value of obligations and plan assets are not recognized in earnings as they occur but, rather, are recognized systematically over subsequent periods. Refer to Note 16, Retirement Benefits, for disclosures related to our pension and other postretirement benefits.
2. NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented in Fiscal Year 2020
Leases
In February 2016, the FASB issued lease guidance (the "new lease 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.
We are the lessee under various agreements for real estate, vehicles, aircraft, and other equipment that are accounted for as operating leases.
We adopted this guidance in fiscal year 2020 using a modified retrospective approach with the election to apply the guidance as of 1 October 2019, "the adoption date," instead of the earliest comparative period presented in the consolidated financial statements.
We elected the following practical expedients provided by this guidance:
•The package of practical expedients, which allows us to carry forward the lease population and classification existing as of the adoption date, among other things;
•The land easements practical expedient, which allows us to carry forward our accounting treatment for land easements on agreements existing before the adoption date;
•The hindsight practical expedient, which is used to determine the reasonably certain lease term for existing leases as of the adoption date;
•The component combination practical expedient, which allows us to account for lease and non-lease components associated with that lease as a single component, if certain criteria are met; and
•The short-term leases practical expedient, which allows us to not record the related lease liabilities and right-of-use assets for operating leases in which we are the lessee with a term of 12 months or less.
Adoption of the standard resulted in recognition of lease liabilities and right-of-use assets on our consolidated balance sheets as of the adoption date of $375.3 and $332.3, respectively. The standard did not materially affect our retained earnings, results of operations or liquidity. Refer to Note 12, Leases, for additional information.
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.
We adopted the new guidance on 1 October 2019 on a modified retrospective basis. The primary impact of adoption was the presentation in the consolidated income statement of foreign currency forward points and currency swap basis differences ("excluded components"), since these are excluded from the assessment of hedge effectiveness for our hedges of intercompany loans. Historically, the impacts from changes in value of these components were recorded in "Interest expense." In fiscal year 2020, excluded components of $33.5 were recognized in "Other non-operating income (expense), net" consistent with the remeasurement of the intercompany loans. Interest expense of $33.3 and $42.6 in fiscal years 2019 and 2018, respectively, has not been restated to conform to the 2020 presentation.
In accordance with the transition provisions of the guidance, the separate measurement of ineffectiveness for our cash flow hedging instruments existing as of the date of adoption should be eliminated through a cumulative-effect adjustment within equity. Ineffectiveness recognized for our cash flow hedging instruments existing as of the date of adoption was not material to the consolidated financial statements.
Retirement Benefit Disclosures
In August 2018, the FASB issued guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance is effective in fiscal year 2021, with early adoption permitted, and must be applied on a retrospective basis. We adopted this guidance in the fourth quarter of fiscal year 2020 and updated the disclosures contained in Note 16, Retirement Benefits, accordingly. Other than the modification of certain disclosures, this guidance had no effect on our consolidated financial statements.
New Accounting Guidance to be Implemented
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. We will adopt this guidance at the beginning of fiscal year 2021 under the modified retrospective approach with an adjustment to retained earnings as of the effective date. This guidance will not have a material impact on our consolidated financial statements upon adoption.
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 will adopt this guidance at the beginning of fiscal year 2021. This guidance will 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 will adopt this guidance at the beginning of fiscal year 2021. This guidance will not have a material impact on our consolidated financial statements upon adoption.
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
Fiscal Year 2020
Asset Acquisition
On 17 April 2020, we acquired five operating hydrogen production plants from PBF Energy Inc. ("PBF") and commenced contractual long-term supply of hydrogen from those plants to PBF's refineries. We accounted for the transaction as an asset acquisition and recorded the aggregate purchase price of approximately $580 to plant and equipment on our consolidated balance sheets.
Business Combinations
We completed three acquisitions on 1 July 2020 that were accounted for as business combinations. These acquisitions had an aggregate purchase price, net of cash acquired, of $185.4. The largest of these acquisitions was the purchase of Oxygen & Argon Works Ltd., the leading manufacturer and marketer of industrial gases in Israel, primarily offering merchant gas products. We expect this acquisition to create growth opportunities in the region and allow us to leverage synergies and operating efficiencies. The results of this business are consolidated within our Industrial Gases – EMEA segment and did not materially impact our consolidated income statement.
Our fiscal year 2020 business combinations resulted in the recognition of plant and equipment of $71.2, goodwill of $71.1, and intangible assets of $50.7, partially offset by net liabilities acquired. The goodwill recognized on the transactions, $8.1 of which is deductible for tax purposes, is attributable to expected growth and cost synergies. The intangible assets recognized primarily resulted from acquired customer relationships, having a weighted-average useful life of 19 years.
The acquired assets and liabilities resulting from our 2020 business combinations were recorded at their estimated fair values, which were calculated based primarily on a preliminary purchase price allocation prepared by independent valuation specialists. 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 2019
As further discussed below, we completed three business combinations in fiscal year 2019.
Exchange of Equity Affiliate Investments
We previously 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 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 was reflected as "Gain on exchange of equity affiliate investments" on our consolidated income statements in fiscal year 2019 and was excluded from the results of the Industrial Gases – Asia segment.
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 are consolidated within our Industrial Gases – Asia segment.
Other Fiscal Year 2019 Business Combinations
The remaining business combinations completed in fiscal year 2019 had total consideration, net of cash acquired, of $126.6. The largest of these business combinations was the acquisition of ACP Europe SA ("ACP"), the largest independent carbon dioxide business in Continental Europe, which closed in the second quarter. The results of this business are consolidated within our Industrial Gases – EMEA segment.
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 results of the JV are consolidated within the Industrial Gases – Asia segment.
Air Products contributed four large air separation units to the JV, and the JV acquired gasification and syngas clean-up assets from Lu’An. 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, and we established a liability for remaining cash payments. 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 were excluded from the consolidated statement of cash flows for the fiscal year ended 30 September 2018. Refer to Note 15, Debt, for additional information on our related party debt.
Business Combinations
We completed eight acquisitions that were accounted for as business combinations in fiscal year 2018. These acquisitions had total consideration, 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. The results of this business are consolidated within our Industrial Gases – Asia segment.
4. REVENUE RECOGNITION
Nature of Goods and Services
The principal activities from which we generate sales from our 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, 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. We also deliver smaller quantities of product through small on-site plants (cryogenic or non-cryogenic generators), typically via 10- to 15- year sale of gas contracts. 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 we typically design and install 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
We design and manufacture equipment for air separation, hydrocarbon recovery and purification, natural gas liquefaction, 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. In addition, 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 favorably impacted operating income by approximately $7, $37, and $38 in fiscal years 2020, 2019, and 2018, respectively. Our changes in estimates would not have significantly impacted amounts recorded in prior years.
Disaggregation of Revenue
The table below presents our consolidated sales for fiscal years 2020 and 2019 disaggregated by supply mode 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
|
%
|
2020
|
|
|
|
|
|
|
|
On-site
|
$2,040.2
|
|
$629.3
|
|
$1,652.8
|
|
$—
|
|
$—
|
|
$4,322.3
|
|
49
|
%
|
Merchant
|
1,590.5
|
|
1,297.0
|
|
1,063.7
|
|
—
|
|
—
|
|
3,951.2
|
|
45
|
%
|
Sale of Equipment
|
—
|
|
—
|
|
—
|
|
364.9
|
|
217.9
|
|
582.8
|
|
6
|
%
|
Total
|
$3,630.7
|
|
$1,926.3
|
|
$2,716.5
|
|
$364.9
|
|
$217.9
|
|
$8,856.3
|
|
100
|
%
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
On-site
|
$2,230.6
|
|
$728.4
|
|
$1,622.6
|
|
$—
|
|
$—
|
|
$4,581.6
|
|
52
|
%
|
Merchant
|
1,642.9
|
|
1,274.1
|
|
1,041.0
|
|
—
|
|
—
|
|
3,958.0
|
|
44
|
%
|
Sale of Equipment
|
—
|
|
—
|
|
—
|
|
261.0
|
|
118.3
|
|
379.3
|
|
4
|
%
|
Total
|
$3,873.5
|
|
$2,002.5
|
|
$2,663.6
|
|
$261.0
|
|
$118.3
|
|
$8,918.9
|
|
100
|
%
|
Remaining Performance Obligations
As of 30 September 2020, the transaction price allocated to remaining performance obligations is estimated to be approximately $22 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 of our control, including but not limited to inflationary price escalations, currency exchange rates, and terminated or renewed contracts.
Contract Balances
The table below details balances arising from contracts with customers:
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|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
Balance Sheet Location
|
2020
|
2019
|
Assets
|
|
|
|
|
Contract assets – current
|
|
Other receivables and current assets
|
$55.9
|
|
$64.3
|
|
Contract fulfillment costs – current
|
|
Other receivables and current assets
|
109.9
|
|
64.5
|
|
Liabilities
|
|
|
|
|
Contract liabilities – current
|
|
Payables and accrued liabilities
|
313.8
|
|
247.4
|
|
Contract liabilities – noncurrent
|
|
Other noncurrent liabilities
|
57.9
|
|
49.2
|
|
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.
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.
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 September 2020 and 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. The increase in our contract liabilities – current balance primarily relates to new sale of equipment projects as balances associated with our sale of gas contracts are generally related to fixed charges and are relatively consistent period over period. During the fiscal year ended 30 September 2020, we recognized approximately $145 in revenue associated with sale of equipment contracts that was included within our contract liabilities as of 30 September 2019. 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 fiscal year ended 30 September 2020 were not materially impacted by any other factors.
5. COST REDUCTION ACTIONS
In 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 were taken to drive cost synergies primarily within the Industrial Gases – EMEA and the Industrial Gases – Americas segments. The charge was not recorded in segment results.
Liabilities associated with these actions are reflected on our consolidated balance sheets within "Payables and accrued liabilities." The table below summarizes the carrying amount of the accrual as of 30 September 2020:
|
|
|
|
|
|
|
|
2019 Charge
|
$25.5
|
|
Cash expenditures
|
(6.9)
|
|
Amount reflected in pension liability
|
(0.3)
|
|
Currency translation adjustment
|
(0.5)
|
|
30 September 2019
|
$17.8
|
|
Cash expenditures
|
(13.5)
|
|
Currency translation adjustment
|
0.4
|
|
30 September 2020
|
$4.7
|
|
6. DISCONTINUED OPERATIONS
In fiscal year 2020, loss from discontinued operations, net of tax, was $14.3. This resulted from a pre-tax loss of $19.0 recorded in the second quarter to increase our existing liability for retained environmental obligations associated with the sale of our former Amines business in September 2006. Refer to the Pace discussion within Note 17, Commitments and Contingencies, for additional information. The loss did not have an impact on our cash flows for the fiscal year ended 30 September 2020.
In fiscal year 2018, income from discontinued operations, net of tax, was $42.2. This included 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 and 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 in fiscal year 2017. These benefits were partially offset by an after-tax loss of $1.0 associated with Energy-from-Waste project exit activities.
7. INVENTORIES
The components of inventories are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
2020
|
|
2019
|
Finished goods
|
|
$134.5
|
|
|
$128.8
|
|
Work in process
|
|
21.3
|
|
|
27.5
|
|
Raw materials, supplies and other
|
|
249.0
|
|
|
232.0
|
|
Inventories
|
|
$404.8
|
|
|
$388.3
|
|
|
|
|
|
|
|
|
|
|
|
8. SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATES
The summarized financial information below is on a combined 100% basis and has been compiled based on financial statements of the companies accounted for by the equity method. The amounts presented include the accounts of the following equity affiliates:
|
|
|
|
|
|
|
|
|
Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (25%);
|
|
INOX Air Products Private Limited (50%);
|
Air Products South Africa (Proprietary) Limited (50%);
|
|
Jazan Gas Projects Company (26%);
|
Bangkok Cogeneration Company Limited (49%);
|
|
Kulim Industrial Gases Sdn. Bhd. (50%);
|
Bangkok Industrial Gases Co., Ltd. (49%);
|
|
Sapio Produzione Idrogeno Ossigeno S.r.l. (49%);
|
Chengdu Air & Gas Products Ltd. (50%);
|
|
Tecnologia en Nitrogeno S. de R.L. de C.V. (50%);
|
Helios S.p.A. (49%);
|
|
Tyczka Industrie-Gases GmbH (50%);
|
INFRA Group (40%);
|
|
and principally, other industrial gas producers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
|
|
2020
|
|
2019
|
Current assets
|
|
|
|
$1,943.5
|
|
|
$1,660.6
|
|
Noncurrent assets
|
|
|
|
4,529.2
|
|
|
4,400.4
|
|
Current liabilities
|
|
|
|
765.3
|
|
|
725.1
|
|
Noncurrent liabilities
|
|
|
|
2,958.8
|
|
|
2,853.6
|
|
|
|
|
|
|
|
|
Year Ended 30 September
|
|
2020
|
|
2019
|
|
2018
|
Net sales
|
|
$2,809.1
|
|
|
$2,885.6
|
|
|
$2,663.1
|
|
Sales less cost of sales
|
|
1,212.5
|
|
|
1,193.4
|
|
|
1,050.6
|
|
Operating income
|
|
748.6
|
|
|
763.4
|
|
|
635.3
|
|
Net income
|
|
567.8
|
|
|
492.4
|
|
|
388.0
|
|
Dividends received from equity affiliates were $107.0, $144.3, and $122.5 in fiscal years 2020, 2019, and 2018, respectively.
The investment in net assets of and advances to equity affiliates as of 30 September 2020 and 2019 included investment in foreign affiliates of $1,431.3 and $1,275.4, respectively.
As of 30 September 2020 and 2019, the amount of investment in companies accounted for by the equity method included equity method goodwill of $50.0 and $42.8, respectively.
India Finance Act 2020
For the fiscal year ended 30 September 2020, equity affiliates' income includes a benefit of $33.8 due to tax legislation passed by the Indian government (the "India Finance Act"). This benefit relates to INOX Air Products Private Limited for the release of our share of accumulated dividend distribution taxes and is included in the fiscal year 2020 net income on a 100% basis in the table above. Refer to Note 22, Income Taxes, for additional information.
U.S. Tax Cuts and Jobs Act
For the fiscal year ended 30 September 2018, equity affiliates' income includes an expense of $28.5 for our proportionate share of the impact of the U.S. Tax Cuts and Jobs Act primarily recorded during the first quarter of fiscal year 2018. This expense is included in the fiscal year 2018 net income on a 100% basis in the table above. Refer to Note 22, Income Taxes, for additional information.
Jazan Gas Project Company
On 19 April 2015, a joint venture between Air Products and ACWA Holding entered into a 20-year oxygen and nitrogen supply agreement to supply Saudi Aramco’s oil refinery and power plant being built in Jazan, Saudi Arabia. Air Products owns 26% of the joint venture and guarantees the repayment of its share of an equity bridge loan. ACWA also guarantees their share of the loan. We determined that the joint venture is a variable interest entity, for which we are not the primary beneficiary. As of 30 September 2020, our consolidated balance sheets included $94.4 reflected within "Payables and accrued liabilities" for our obligation to make future equity contributions in 2021 based on our proportionate share of the advances received by the joint venture under the loan.
9. PLANT AND EQUIPMENT, NET
The major classes of plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
Useful Life
in years
|
|
2020
|
|
2019
|
Land
|
|
|
|
|
|
$296.8
|
|
|
$281.5
|
|
Buildings
|
|
|
|
30
|
|
997.8
|
|
|
946.8
|
|
Production facilities(A)
|
|
10
|
to
|
20
|
|
17,289.7
|
|
|
15,602.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution and other machinery and equipment(B)
|
|
5
|
to
|
25
|
|
4,807.7
|
|
|
4,491.9
|
|
Construction in progress
|
|
|
|
|
|
1,784.2
|
|
|
1,011.4
|
|
Plant and equipment, at cost
|
|
|
|
|
|
25,176.2
|
|
|
22,333.7
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
13,211.5
|
|
|
11,996.1
|
|
Plant and equipment, net
|
|
|
|
|
|
$11,964.7
|
|
|
$10,337.6
|
|
(A)Depreciable lives of production facilities related to long-term customer supply contracts are matched to the contract lives.
(B)The depreciable lives for various types of distribution equipment are: 10 to 25 years for cylinders, depending on the nature and properties of the product; 20 years for tanks; 7.5 years for customer stations; and 5 to 15 years for tractors and trailers.
Depreciation expense was $1,150.5, $1,049.7, and $940.7 in fiscal years 2020, 2019, and 2018, respectively.
10. GOODWILL
Changes to the carrying amount of consolidated goodwill by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases–
Americas
|
Industrial
Gases–
EMEA
|
Industrial
Gases–
Asia
|
Industrial
Gases–
Global
|
Corporate and other
|
Total
|
Goodwill, net at 30 September 2018
|
$162.1
|
|
$424.4
|
|
$171.9
|
|
$20.1
|
|
$10.4
|
|
$788.9
|
|
|
|
|
|
|
|
|
Acquisitions
|
—
|
|
38.5
|
|
10.1
|
|
—
|
|
—
|
|
48.6
|
|
Currency translation and other
|
(5.8)
|
|
(30.6)
|
|
(3.5)
|
|
(0.5)
|
|
—
|
|
(40.4)
|
|
Goodwill, net at 30 September 2019
|
$156.3
|
|
$432.3
|
|
$178.5
|
|
$19.6
|
|
$10.4
|
|
$797.1
|
|
|
|
|
|
|
|
|
Acquisitions
|
—
|
|
66.6
|
|
—
|
|
—
|
|
4.5
|
|
71.1
|
|
Currency translation and other
|
(3.7)
|
|
25.2
|
|
1.9
|
|
(0.1)
|
|
—
|
|
23.3
|
|
Goodwill, net at 30 September 2020
|
$152.6
|
|
$524.1
|
|
$180.4
|
|
$19.5
|
|
$14.9
|
|
$891.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
2020
|
2019
|
2018
|
Goodwill, gross
|
$1,230.2
|
|
$1,162.2
|
|
$1,194.7
|
|
Accumulated impairment losses(A)
|
(338.7)
|
|
(365.1)
|
|
(405.8)
|
|
Goodwill, net
|
$891.5
|
|
$797.1
|
|
$788.9
|
|
(A)Accumulated impairment losses include the impacts of currency translation. These losses are attributable to our Latin America reporting unit ("LASA") within the Industrial Gases – Americas segment.
We review goodwill for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying value of goodwill might not be recoverable. The impairment test for goodwill involves calculating the fair value of each reporting unit and comparing that value to the carrying value. If the fair value of the reporting unit is less than its carrying value, the difference is recorded as a goodwill impairment charge, not to exceed the total amount of goodwill allocated to that reporting unit. During the fourth quarter of fiscal year 2020, we conducted our annual goodwill impairment test and determined that the fair value of all our reporting units exceeded their carrying value.
11. INTANGIBLE ASSETS
The table below summarizes the major classes of our intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
30 September
|
|
Gross
|
|
Accumulated
Amortization/
Impairment
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization/
Impairment
|
|
Net
|
Customer relationships
|
|
$538.0
|
|
|
($209.9)
|
|
|
$328.1
|
|
|
$487.9
|
|
|
($179.8)
|
|
|
$308.1
|
|
Patents and technology
|
|
39.1
|
|
|
(16.3)
|
|
|
22.8
|
|
|
39.0
|
|
|
(13.3)
|
|
|
25.7
|
|
Other
|
|
77.6
|
|
|
(33.7)
|
|
|
43.9
|
|
|
75.0
|
|
|
(33.4)
|
|
|
41.6
|
|
Total finite-lived intangible assets
|
|
654.7
|
|
|
(259.9)
|
|
|
394.8
|
|
|
601.9
|
|
|
(226.5)
|
|
|
375.4
|
|
Trade names and trademarks (indefinite-lived)
|
|
52.2
|
|
|
(11.2)
|
|
|
41.0
|
|
|
56.2
|
|
|
(12.1)
|
|
|
44.1
|
|
Total Intangible Assets
|
|
$706.9
|
|
|
($271.1)
|
|
|
$435.8
|
|
|
$658.1
|
|
|
($238.6)
|
|
|
$419.5
|
|
The increase in net intangible assets in fiscal year 2020 was primarily attributable to intangible assets acquired through business combinations, partially offset by amortization.
Amortization expense for intangible assets was $34.5, $33.1, and $30.0 in fiscal years 2020, 2019, and 2018, respectively. Refer to Note 1, Major Accounting Policies, for the amortization periods for each major class of intangible assets. The table below details projected annual amortization expense for intangible assets as of 30 September 2020:
|
|
|
|
|
|
2021
|
$36.6
|
|
2022
|
34.1
|
|
2023
|
33.0
|
|
2024
|
31.8
|
|
2025
|
30.7
|
|
Thereafter
|
228.6
|
|
Total
|
$394.8
|
|
Indefinite-lived intangible assets are subject to impairment testing at least annually or more frequently if events or changes in circumstances indicate that potential impairment exists. The impairment test for indefinite-lived intangible assets involves calculating the fair value of the indefinite-lived intangible assets and comparing the fair value to their carrying value. If the fair value is less than the carrying value, the difference is recorded as an impairment loss. During the fourth quarter of fiscal year 2020, we conducted our annual impairment test of indefinite-lived intangible assets and determined that the fair value of all our intangible assets exceeded their carrying value.
12. LEASES
As discussed in Note 2, New Accounting Guidance, we adopted the new lease guidance in fiscal year 2020 using a modified retrospective approach with the election to apply the guidance as of 1 October 2019. For adoption, we elected the package of practical expedients permitted under the transition guidance to carry forward the historical lease populations as well as their classifications existing as of the adoption date (i.e. contracts having a lease commencement date prior to 1 October 2019). Refer to Note 1, Major Accounting Policies, and Note 2, New Accounting Guidance, for additional information on our adoption and related policies under the new lease standard.
Lessee Accounting
We are the lessee under various agreements for real estate, vehicles, aircraft, and other equipment that are accounted for as operating leases. Our finance leases principally relate to the right to use machinery and equipment and are not material.
The operating lease expense for fiscal year 2020 was $80.1. This amount excludes short-term and variable lease expenses, which were not material.
Amounts associated with operating leases and their presentation on our consolidated balance sheets as of our most recent balance sheet date and our adoption date are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September 2020
|
|
1 October 2019
|
Operating lease ROU asset
|
|
|
|
Other noncurrent assets
|
$376.8
|
|
|
$332.3
|
|
Operating lease liabilities
|
|
|
|
Payables and accrued liabilities
|
70.7
|
|
|
68.6
|
|
Other noncurrent liabilities
|
335.8
|
|
|
306.7
|
|
Total Operating Lease Liabilities
|
$406.5
|
|
|
$375.3
|
|
The difference between the ROU assets and lease liabilities recorded upon adoption primarily relate to the land lease associated with our former Energy-from-Waste business in which an ROU asset was not recognized.
|
|
|
|
|
|
|
|
|
30 September 2020
|
|
|
Weighted-average remaining lease term (in years)(A)
|
15.7
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate(B)
|
2.1 %
|
|
|
|
|
|
|
|
|
|
|
(A)Calculated on the basis of the remaining lease term and the lease liability balance for each lease as of the reporting date.
(B)Calculated on the basis of the discount rate used to calculate the lease liability for each lease and the remaining balance of the lease payments for each lease as of the reporting date.
At 30 September 2020, the maturity analysis of lease liabilities, showing the undiscounted cash flows, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
2021
|
|
|
|
$78.5
|
|
2022
|
|
|
|
55.7
|
|
2023
|
|
|
|
46.5
|
|
2024
|
|
|
|
37.5
|
|
2025
|
|
|
|
30.5
|
|
Thereafter
|
|
|
|
226.0
|
|
Total Undiscounted Lease Payments
|
|
|
|
474.7
|
|
Imputed interest
|
|
|
|
(68.2)
|
|
Present Value of Lease Liability Recognized on the Balance Sheet
|
|
|
|
$406.5
|
|
As previously disclosed in our 2019 Form 10-K, at 30 September 2019, prior to our adoption of the new lease guidance, our rent expense under operating leases, including month-to-month agreements was $87.0 and $82.7 in fiscal years 2019 and 2018, respectively. In addition, minimum payments due under leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
2020
|
|
|
|
$75.1
|
|
2021
|
|
|
|
62.6
|
|
2022
|
|
|
|
44.4
|
|
2023
|
|
|
|
35.9
|
|
2024
|
|
|
|
28.6
|
|
Thereafter
|
|
|
|
171.4
|
|
Total Undiscounted Lease Payments
|
|
|
|
$418.0
|
|
The impacts associated with our operating leases on the consolidated statements of cash flows are reflected within "Other adjustments" within operating activities. This includes the non-cash operating lease expense of $80.1 as well as a use of cash of $90.0 for payments on amounts included in the measurement of the lease liability for fiscal year 2020.
In addition to the ROU assets established upon adoption, we recorded $110 of non-cash additions during fiscal year 2020.
We have additional operating leases that have not yet commenced as of 30 September 2020 having lease payments totaling approximately $60.
Lessor Accounting
Historically, certain contracts associated with facilities that are built to provide product to a specific customer were accounted for as leases. As noted above, we elected the package of practical expedients permitted under the transition guidance to carry forward these lease determinations as of 30 September 2019. As we generally control the operations and maintenance of the assets that provide the supply of gas to our customers, there have been no new arrangements that qualified as a lease in fiscal year 2020.
In cases where operating lease treatment is appropriate, there is no difference in revenue recognition over the life of the contract as compared to accounting for the contract under a sale of gas agreement. Under the new lease standard, these contracts qualify for a practical expedient available to lessors to combine the lease and non-lease components and account for the combined component in accordance with the accounting treatment for the predominant component. We elected to apply this practical expedient and have accounted for the combined component as product sales under the revenue standard as we control the operations and maintenance of the assets that provide the supply of gas to our customers.
In cases where sales-type lease treatment is appropriate, revenue and expense are recognized up front for the sale of equipment component of the contract as compared to revenue recognition over the life of the arrangement under contracts not qualifying as sales-type leases. Additionally, a portion of the revenue representing interest income from the financing component of the lease receivable is reflected as sales over the life of the contract. During fiscal year 2020, we recognized interest income of $71.2 on our lease receivables.
Our contracts generally do not have the option to extend or terminate the lease or provide the customer the right to purchase the asset at the end of the contract term. Instead, renewal of such contracts requires negotiation of mutually agreed terms by both parties. Unless the customer terminates within the required notice period, the contract will go into evergreen. Given the long-term duration of our contracts, there is no assumed residual value for the assets at the end of the lease term.
Lease receivables, net, primarily relate to sales-type leases and are mostly included within "Noncurrent lease receivables" on our consolidated balance sheets, with the remaining balance in "Other receivables and current assets." As of 30 September 2020 and 2019, the credit quality of lease receivables did not require a material allowance for credit losses.
Lease payments collected in fiscal years 2020, 2019, and 2018 were $162.8, $171.6, and $182.7, respectively. These payments reduced the lease receivable balance by $91.6, $94.6, and $97.4 in fiscal years 2020, 2019, and 2018, respectively.
At 30 September 2020, minimum lease payments expected to be collected, which reconciles to lease receivables, net, were as follows:
|
|
|
|
|
|
2021
|
$153.9
|
|
2022
|
147.0
|
|
2023
|
142.5
|
|
2024
|
136.2
|
|
2025
|
130.7
|
|
Thereafter
|
608.5
|
|
Total
|
1,318.8
|
|
Unearned interest income
|
(415.8)
|
|
Lease Receivables, net
|
$903.0
|
|
As previously disclosed in our 2019 Form 10-K, at 30 September 2019, prior to our adoption of the new lease guidance, minimum lease payments expected to be collected were as follows:
|
|
|
|
|
|
2020
|
$162.5
|
|
2021
|
156.9
|
|
2022
|
145.7
|
|
2023
|
139.4
|
|
2024
|
133.2
|
|
Thereafter
|
715.5
|
|
Total
|
1,453.2
|
|
Unearned interest income
|
(472.3)
|
|
Lease Receivables, net
|
$980.9
|
|
Other than lease payments received during fiscal year 2020 and the impact of currency, there have been no significant changes to our minimum lease payments expected to be collected since those disclosed as of 30 September 2019 in our 2019 Form 10-K.
13. FINANCIAL INSTRUMENTS
Currency Price Risk Management
Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency-denominated transactions and net investments in foreign operations. It is our policy to 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 30 September 2020 is 2.8 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
30 September
|
|
US$
Notional
|
|
Years
Average
Maturity
|
|
US$
Notional
|
|
Years
Average
Maturity
|
Forward Exchange Contracts
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
$2,842.1
|
|
|
0.5
|
|
$2,418.2
|
|
|
0.5
|
Net investment hedges
|
|
636.6
|
|
|
3.8
|
|
830.8
|
|
|
0.9
|
Not designated
|
|
1,685.2
|
|
|
0.3
|
|
1,053.5
|
|
|
0.6
|
Total Forward Exchange Contracts
|
|
$5,163.9
|
|
|
0.8
|
|
$4,302.5
|
|
|
0.6
|
The increase in the notional value of cash flow hedges from 30 September 2019 to 30 September 2020 is primarily due to the addition of a forward exchange contract that hedges the repayment of our Eurobond maturing in fiscal year 2021. The increase in the notional value of our forward exchange contracts that are not designated is primarily due to the origination of forward exchange contracts that offset other forward exchange contracts previously designated as net investment hedges or cash flow hedges that were de-designated during fiscal year 2020.
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 €1,288.7 million ($1,510.8) at 30 September 2020 and €951.3 million ($1,036.9) at 30 September 2019. 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 September 2020, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
30 September
|
|
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
|
%
|
|
1.1
|
|
$200.0
|
|
|
LIBOR
|
|
2.76
|
%
|
|
2.1
|
Cross currency interest rate swaps (net investment hedge)
|
|
$201.6
|
|
|
4.27
|
%
|
|
3.12
|
%
|
|
3.2
|
|
$216.8
|
|
|
4.80
|
%
|
|
3.31
|
%
|
|
3.5
|
Cross currency interest rate swaps (cash flow hedge)
|
|
$1,057.9
|
|
|
4.83
|
%
|
|
2.98
|
%
|
|
2.5
|
|
$1,129.3
|
|
|
4.92
|
%
|
|
3.04
|
%
|
|
2.3
|
Cross currency interest rate swaps (not designated)
|
|
$12.8
|
|
|
5.39
|
%
|
|
3.54
|
%
|
|
3.2
|
|
$6.1
|
|
|
2.55
|
%
|
|
3.72
|
%
|
|
4.5
|
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
|
30 September
|
2020
|
2019
|
|
2020
|
2019
|
|
|
|
|
|
|
Long-term debt
|
$405.4
|
|
$404.7
|
|
|
$5.7
|
|
$5.2
|
|
The table below summarizes the fair value and balance sheet location of our outstanding derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
Balance Sheet Location
|
2020
|
2019
|
Balance Sheet Location
|
2020
|
2019
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
Forward exchange contracts
|
Other receivables and current assets
|
$51.1
|
|
$79.0
|
|
Payables and accrued liabilities
|
$22.5
|
|
$53.8
|
|
Interest rate management contracts
|
Other receivables and current assets
|
14.7
|
|
24.8
|
|
Payables and accrued liabilities
|
0.4
|
|
1.1
|
|
Forward exchange contracts
|
Other noncurrent assets
|
0.8
|
|
11.9
|
|
Other noncurrent
liabilities
|
33.0
|
|
0.7
|
|
Interest rate management contracts
|
Other noncurrent assets
|
44.3
|
|
60.9
|
|
Other noncurrent
liabilities
|
1.7
|
|
0.7
|
|
Total Derivatives Designated as Hedging Instruments
|
|
$110.9
|
|
$176.6
|
|
|
$57.6
|
|
$56.3
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
Forward exchange contracts
|
Other receivables and current assets
|
$31.7
|
|
$38.7
|
|
Payables and accrued liabilities
|
$28.0
|
|
$36.3
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
Other noncurrent assets
|
—
|
|
8.4
|
|
Other noncurrent liabilities
|
—
|
|
19.8
|
|
Interest rate management contracts
|
Other noncurrent assets
|
0.7
|
|
0.5
|
|
Other noncurrent
liabilities
|
—
|
|
—
|
|
Total Derivatives Not Designated as Hedging Instruments
|
|
$32.4
|
|
$47.6
|
|
|
$28.0
|
|
$56.1
|
|
Total Derivatives
|
|
$143.3
|
|
$224.2
|
|
|
$85.6
|
|
$112.4
|
|
Refer to Note 14, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.
The tables below summarize gains (losses) recognized in other comprehensive income during the period related to our net investment and cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Net Investment Hedging Relationships
|
|
|
Forward exchange contracts
|
($15.9)
|
|
$51.5
|
|
Foreign currency debt
|
(100.2)
|
|
65.3
|
|
Cross currency interest rate swaps
|
1.9
|
|
12.6
|
|
Total Amount Recognized in OCI
|
(114.2)
|
|
129.4
|
|
Tax effects
|
28.2
|
|
(30.9)
|
|
Net Amount Recognized in OCI
|
($86.0)
|
|
$98.5
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
Forward exchange contracts
|
$116.6
|
|
($30.3)
|
|
Forward exchange contracts, excluded components
|
(15.2)
|
|
(16.1)
|
|
Other(A)
|
(34.2)
|
|
0.8
|
|
Total Amount Recognized in OCI
|
67.2
|
|
(45.6)
|
|
Tax effects
|
(23.7)
|
|
1.5
|
|
Net Amount Recognized in OCI
|
$43.5
|
|
($44.1)
|
|
(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 table below summarizes the location and amounts recognized in income related to our cash flow and fair value hedging relationships by contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
Cost of Sales
|
|
Other Income (Expense), Net
|
|
Interest Expense
|
|
Other Non-Operating Income (Expense), Net
|
|
2020
|
2019
|
|
2020
|
2019
|
|
2020
|
2019
|
|
2020
|
2019
|
|
2020
|
2019
|
Total Amounts Presented in the Consolidated Income Statement in which the Effects of Cash Flow and Fair Value Hedges are Recorded
|
$8,856.3
|
|
$8,918.9
|
|
|
$5,858.1
|
|
$5,975.5
|
|
|
$65.4
|
|
$49.3
|
|
|
$109.3
|
|
$137.0
|
|
|
$30.7
|
|
$66.7
|
|
(Gain) Loss Effects of Cash Flow Hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Exchange Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from OCI into income(A)
|
($0.2)
|
|
$0.5
|
|
|
($1.0)
|
|
$0.3
|
|
|
$—
|
|
$28.5
|
|
|
$—
|
|
$16.0
|
|
|
($117.9)
|
|
$—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount excluded from effectiveness testing recognized in earnings based on amortization approach(A)
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
17.0
|
|
—
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from OCI into income(B)
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
(32.4)
|
|
|
4.2
|
|
3.9
|
|
|
22.5
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Gain) Loss Reclassified from OCI to Income
|
(0.2)
|
|
0.5
|
|
|
(1.0)
|
|
0.3
|
|
|
—
|
|
(3.9)
|
|
|
4.2
|
|
19.9
|
|
|
(78.4)
|
|
—
|
|
Tax effects
|
—
|
|
(0.1)
|
|
|
0.2
|
|
(0.1)
|
|
|
—
|
|
0.9
|
|
|
(1.4)
|
|
(5.2)
|
|
|
18.9
|
|
—
|
|
Net (Gain) Loss Reclassified from OCI to Income
|
($0.2)
|
|
$0.4
|
|
|
($0.8)
|
|
$0.2
|
|
|
$—
|
|
($3.0)
|
|
|
$2.8
|
|
$14.7
|
|
|
($59.5)
|
|
$—
|
|
(Gain) Loss Effects of Fair Value Hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
|
$0.5
|
|
$4.3
|
|
|
$—
|
|
$—
|
|
Derivatives designated as hedging instruments
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
(0.5)
|
|
(4.3)
|
|
|
—
|
|
—
|
|
Total (Gain) Loss Recognized in Income
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
|
$—
|
|
$—
|
|
(A)Net amount excluded from effectiveness testing recognized in interest expense for fiscal year 2019, see Note 2, New Accounting Guidance, for additional details.
(B)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.
The table below summarizes the location and amounts recognized in income related to our derivatives not designated as hedging instruments by contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense), Net
|
|
Other Non-Operating Income (Expense), Net
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
The Effects of Derivatives Not Designated as Hedging Instruments:
|
|
|
|
Forward Exchange Contracts
|
($1.5)
|
|
|
$1.3
|
|
|
$1.1
|
|
|
$—
|
|
Other
|
—
|
|
|
(2.0)
|
|
|
0.7
|
|
|
—
|
|
Total (Gain) Loss Recognized in Income
|
($1.5)
|
|
|
($0.7)
|
|
|
$1.8
|
|
|
$—
|
|
The amount of unrealized gains and losses related to cash flow hedges as of 30 September 2020 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 $30.0 and $30.1 as of 30 September 2020 and 2019, 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 $76.5 and $157.1 as of 30 September 2020 and 2019, respectively. No financial institution is required to post collateral at this time, as all have credit ratings at or above threshold.
14. 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 13, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
30 September
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Assets
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
$83.6
|
|
|
$83.6
|
|
|
$138.0
|
|
|
$138.0
|
|
Interest rate management contracts
|
|
59.7
|
|
|
59.7
|
|
|
86.2
|
|
|
86.2
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
$83.5
|
|
|
$83.5
|
|
|
$110.6
|
|
|
$110.6
|
|
Interest rate management contracts
|
|
2.1
|
|
|
2.1
|
|
|
1.8
|
|
|
1.8
|
|
Long-term debt, including current portion and related party
|
|
7,900.1
|
|
|
8,278.4
|
|
|
3,267.8
|
|
|
3,350.9
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
30 September
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
$83.6
|
|
|
$—
|
|
|
$83.6
|
|
|
$—
|
|
|
$138.0
|
|
|
$—
|
|
|
$138.0
|
|
|
$—
|
|
Interest rate management contracts
|
|
59.7
|
|
|
—
|
|
|
59.7
|
|
|
—
|
|
|
86.2
|
|
|
—
|
|
|
86.2
|
|
|
—
|
|
Total Assets at Fair Value
|
|
$143.3
|
|
|
$—
|
|
|
$143.3
|
|
|
$—
|
|
|
$224.2
|
|
|
$—
|
|
|
$224.2
|
|
|
$—
|
|
Liabilities at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
|
$83.5
|
|
|
$—
|
|
|
$83.5
|
|
|
$—
|
|
|
$110.6
|
|
|
$—
|
|
|
$110.6
|
|
|
$—
|
|
Interest rate management contracts
|
|
2.1
|
|
|
—
|
|
|
2.1
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
Total Liabilities at Fair Value
|
|
$85.6
|
|
|
$—
|
|
|
$85.6
|
|
|
$—
|
|
|
$112.4
|
|
|
$—
|
|
|
$112.4
|
|
|
$—
|
|
15. DEBT
In fiscal year 2020, Air Products issued U.S. Dollar- and Euro-denominated fixed-rate notes in multiple tranches with aggregate principal amounts of $3.8 billion and €1.0 billion ($1.2 billion as of 30 September 2020), respectively. The U.S. Dollar-denominated notes were issued on 30 April 2020, and the Euro-denominated notes were issued on 5 May 2020. The proceeds from these notes were reduced by deferred financing charges and discounts of approximately $45, which are being amortized over the life of the underlying bonds. We intend to use the majority of the proceeds to fund growth projects and repay debt maturities through 2021. In August 2020, we repaid a 2.0% Eurobond of €300.0 million that had been previously reflected as long-term debt due to our intent to refinance as of 30 September 2019.
Total Debt
The table below summarizes our total outstanding debt as reflected on our consolidated balance sheets as of 30 September 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
2020
|
|
2019
|
Short-term borrowings(A)
|
|
$7.7
|
|
|
$58.2
|
|
Current portion of long-term debt(B)(C)
|
|
470.0
|
|
|
40.4
|
|
Long-term debt
|
|
7,132.9
|
|
|
2,907.3
|
|
Long-term debt – related party(B)
|
|
297.2
|
|
|
320.1
|
|
Total Debt
|
|
$7,907.8
|
|
|
$3,326.0
|
|
(A)Includes bank obligations with weighted average interest rates of 1.6% and 3.7% as of 30 September 2020 and 2019, respectively.
(B)Our related party debt resulted from the 2018 acquisition of gasification and syngas clean-up assets from our joint venture partner, Lu'An, who partially funded the acquisition with a loan to the joint venture.
(C)Includes current portions of long-term debt owed to Lu'An of $41.3 and $37.8 as of 30 September 2020 and 2019, respectively.
Long-term Debt
The coupon interest rates, maturities, and carrying amounts of our long-term debt as of 30 September 2020 and 2019 are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
Fiscal Year
Maturities
|
|
2020
|
|
2019
|
Payable in U.S. Dollars
|
|
|
|
|
|
|
Debentures
|
|
|
|
|
|
|
8.75%
|
|
2021
|
|
$18.4
|
|
|
$18.4
|
|
Medium-term Notes (weighted average rate)
|
|
|
|
|
|
|
Series E 7.6%
|
|
2026
|
|
17.2
|
|
|
17.2
|
|
Senior Notes
|
|
|
|
|
|
|
Note 3.0%
|
|
2022
|
|
400.0
|
|
|
400.0
|
|
Note 2.75%
|
|
2023
|
|
400.0
|
|
|
400.0
|
|
Note 3.35%
|
|
2024
|
|
400.0
|
|
|
400.0
|
|
Note 1.50%
|
|
2026
|
|
550.0
|
|
|
—
|
|
Note 1.85%
|
|
2027
|
|
650.0
|
|
|
—
|
|
Note 2.05%
|
|
2030
|
|
900.0
|
|
|
—
|
|
Note 2.70%
|
|
2040
|
|
750.0
|
|
|
—
|
|
Note 2.80%
|
|
2050
|
|
950.0
|
|
|
—
|
|
Other (weighted average rate)
|
|
|
|
|
|
|
Variable-rate industrial revenue bonds 0.1%
|
|
2035 to 2050
|
|
631.9
|
|
|
631.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
Fiscal Year
Maturities
|
|
2020
|
|
2019
|
Payable in Other Currencies
|
|
|
|
|
|
|
Eurobonds 2.0%
|
|
2020
|
|
—
|
|
|
327.0
|
|
Eurobonds 0.375%
|
|
2021
|
|
410.3
|
|
|
381.5
|
|
Eurobonds 1.0%
|
|
2025
|
|
351.7
|
|
|
327.0
|
|
Eurobonds 0.50%
|
|
2028
|
|
586.2
|
|
|
—
|
|
Eurobonds 0.80%
|
|
2032
|
|
586.2
|
|
|
—
|
|
Other
|
|
2023
|
|
0.6
|
|
|
3.8
|
|
Related Party
|
|
|
|
|
|
|
Chinese Renminbi 5.5%
|
|
2021 to 2027
|
|
338.5
|
|
|
357.9
|
|
Capital Lease Obligations (weighted average rate)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign 10.9%
|
|
2021 to 2036
|
|
9.2
|
|
|
10.1
|
|
Total Principal Amount
|
|
|
|
7,950.2
|
|
|
3,274.8
|
|
Less: Unamortized discount and debt issuance costs
|
|
|
|
(55.8)
|
|
|
(12.2)
|
|
Less: Fair value hedge accounting adjustments(A)
|
|
|
|
5.7
|
|
|
5.2
|
|
Total Long-term Debt
|
|
|
|
7,900.1
|
|
|
3,267.8
|
|
Less: Current portion of long-term debt
|
|
|
|
(470.0)
|
|
|
(40.4)
|
|
Less: Long-term debt – related party
|
|
|
|
(297.2)
|
|
|
(320.1)
|
|
Long-term Debt
|
|
|
|
$7,132.9
|
|
|
$2,907.3
|
|
(A)We have entered into LIBOR-based interest rate swap arrangements with various counterparty financial institutions on the 3.0% Senior Note maturing in fiscal year 2022. These interest rate swaps have been designated as fair value hedges of the Note. Refer to Note 13, Financial Instruments, for additional information.
Maturities of long-term debt, including principal amounts owed to related parties, in each of the next five years and thereafter are as follows:
|
|
|
|
|
|
2021
|
$470.4
|
|
2022
|
441.7
|
|
2023
|
456.3
|
|
2024
|
456.4
|
|
2025
|
415.8
|
|
Thereafter
|
5,709.6
|
|
Total
|
$7,950.2
|
|
Various debt agreements to which we are a party include financial covenants and other restrictions, including restrictions pertaining to the ability to create property liens and enter into certain sale and leaseback transactions. As of 30 September 2020, we are in compliance with all the financial and other covenants under our debt agreements.
There were no additional commitments maintained by our foreign subsidiaries as of 30 September 2020.
Cash paid for interest, net of amounts capitalized, was $67.2, $155.9, and $123.1 in fiscal years 2020, 2019, and 2018, respectively.
Credit Agreement
We have a $2,300 five-year revolving credit agreement maturing 31 March 2022 with a syndicate of banks (the “Credit Agreement”). Under the Credit Agreement, senior unsecured debt is available to us and certain of our subsidiaries. The Credit Agreement provides us a source of liquidity and supports our commercial paper program. Our only financial covenant under the Credit Agreement is a maximum ratio of total debt to total capitalization, or total debt plus total equity, no greater than 70%. No borrowings were outstanding under the Credit Agreement as of 30 September 2020.
16. RETIREMENT BENEFITS
We and certain of our subsidiaries sponsor defined benefit pension plans and defined contribution plans that cover a substantial portion of our worldwide employees. The principal defined benefit pension plans are the U.S. salaried pension plan and the U.K. pension plan. These plans were closed to new participants in 2005, after which defined contribution plans were offered to new employees. The principal defined contribution plan is the Retirement Savings Plan, in which a substantial portion of the U.S. employees participate. A similar plan is offered to U.K. employees. We also provide other postretirement benefits consisting primarily of healthcare benefits to U.S. retirees who meet age and service requirements.
Defined Benefit Pension Plans
Pension benefits earned are generally based on years of service and compensation during active employment. The components of net periodic benefit cost for our defined benefit pension plans for fiscal years 2020, 2019, and 2018 were as follows:
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|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Year Ended 30 September
|
U.S.
|
International
|
|
U.S.
|
International
|
|
U.S.
|
International
|
Service cost
|
$23.4
|
|
$23.3
|
|
|
$21.4
|
|
$19.3
|
|
|
$25.5
|
|
$25.5
|
|
Interest cost
|
91.2
|
|
24.8
|
|
|
113.4
|
|
35.8
|
|
|
107.2
|
|
37.3
|
|
Expected return on plan assets
|
(188.7)
|
|
(77.4)
|
|
|
(172.5)
|
|
(75.1)
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|
|
(201.6)
|
|
(81.7)
|
|
Prior service cost amortization
|
1.2
|
|
—
|
|
|
1.1
|
|
—
|
|
|
1.6
|
|
—
|
|
Actuarial loss amortization
|
83.7
|
|
19.5
|
|
|
65.3
|
|
10.9
|
|
|
87.4
|
|
40.2
|
|
Settlements
|
5.0
|
|
0.2
|
|
|
6.2
|
|
0.2
|
|
|
45.0
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
Special termination benefits
|
—
|
|
—
|
|
|
0.7
|
|
0.1
|
|
|
0.4
|
|
—
|
|
Other
|
—
|
|
0.8
|
|
|
—
|
|
0.8
|
|
|
—
|
|
1.5
|
|
Net Periodic (Benefit) Cost
|
$15.8
|
|
($8.8)
|
|
|
$35.6
|
|
($8.0)
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|
|
$65.5
|
|
$26.3
|
|
|
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|
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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 fiscal years 2020, 2019 and 2018 were not material. The non-service related costs, including pension settlement losses, are presented outside operating income within "Other non-operating income (expense), net."
During the fourth quarter of fiscal year 2018, we recognized a pension settlement loss of $43.7 primarily in connection with the transfer of certain pension assets and payment obligations for our U.S. salaried and hourly plans to an insurer through the purchase of an irrevocable, nonparticipating group annuity contract. The transaction does not change the amount of the monthly pension benefits received by affected retirees.
Certain of our pension plans provide for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after their retirement date. A participant’s vested benefit is considered settled upon cash payment of the lump sum. We recognize pension settlement losses when cash payments exceed the sum of the service and interest cost components of net periodic benefit cost of the plan for the fiscal year. We recognized pension settlement losses of $5.0, $6.2 and $5.2 in fiscal years 2020, 2019 and 2018, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss, primarily associated with the U.S. supplementary pension plan.
We calculate net periodic benefit cost for a given fiscal year based on assumptions developed at the end of the previous fiscal year. The following table sets forth the weighted average assumptions used in the calculation of net periodic benefit cost:
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|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
U.S.
|
International
|
|
U.S.
|
International
|
|
U.S.
|
International
|
|
|
|
|
|
|
|
|
|
Discount rate – Service cost
|
3.3
|
%
|
1.5
|
%
|
|
4.3
|
%
|
2.5
|
%
|
|
3.9
|
%
|
2.6
|
%
|
Discount rate – Interest cost
|
2.9
|
%
|
1.3
|
%
|
|
4.0
|
%
|
2.2
|
%
|
|
3.3
|
%
|
2.2
|
%
|
Expected return on plan assets
|
7.0
|
%
|
5.0
|
%
|
|
7.0
|
%
|
5.3
|
%
|
|
7.5
|
%
|
5.8
|
%
|
Rate of compensation increase
|
3.5
|
%
|
3.3
|
%
|
|
3.5
|
%
|
3.5
|
%
|
|
3.5
|
%
|
3.6
|
%
|
The projected benefit obligation ("PBO") is the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future salary increases. The following table sets forth the weighted average assumptions used in the calculation of the PBO:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
Discount rate
|
|
2.7
|
%
|
|
1.5
|
%
|
|
3.2
|
%
|
|
1.5
|
%
|
Rate of compensation increase
|
|
3.5
|
%
|
|
3.3
|
%
|
|
3.5
|
%
|
|
3.3
|
%
|
The following tables reflect the change in the PBO and the change in the fair value of plan assets based on the plan year measurement date, as well as the amounts recognized in the consolidated balance sheets:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
Obligation at beginning of year
|
|
$3,281.6
|
|
|
$1,864.0
|
|
|
$2,922.8
|
|
|
$1,660.5
|
|
Service cost
|
|
23.4
|
|
|
23.3
|
|
|
21.4
|
|
|
19.3
|
|
Interest cost
|
|
91.2
|
|
|
24.8
|
|
|
113.4
|
|
|
35.8
|
|
Amendments
|
|
1.6
|
|
|
—
|
|
|
1.1
|
|
|
4.7
|
|
Actuarial loss (gain)
|
|
190.5
|
|
|
(11.6)
|
|
|
380.3
|
|
|
300.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
(11.7)
|
|
|
(0.9)
|
|
|
(12.2)
|
|
|
(1.6)
|
|
Special termination benefits
|
|
—
|
|
|
—
|
|
|
0.7
|
|
|
0.1
|
|
Participant contributions
|
|
—
|
|
|
1.2
|
|
|
—
|
|
|
1.3
|
|
Benefits paid
|
|
(152.5)
|
|
|
(49.8)
|
|
|
(146.2)
|
|
|
(47.7)
|
|
Currency translation and other
|
|
(0.3)
|
|
|
98.7
|
|
|
0.3
|
|
|
(108.6)
|
|
Obligation at End of Year
|
|
$3,423.8
|
|
|
$1,949.7
|
|
|
$3,281.6
|
|
|
$1,864.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Fair value at beginning of year
|
|
$2,832.4
|
|
|
$1,672.4
|
|
|
$2,684.9
|
|
|
$1,588.2
|
|
Actual return on plan assets
|
|
364.6
|
|
|
(3.1)
|
|
|
289.9
|
|
|
208.0
|
|
Company contributions
|
|
15.5
|
|
|
22.0
|
|
|
16.0
|
|
|
24.2
|
|
Participant contributions
|
|
—
|
|
|
1.2
|
|
|
—
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
(152.5)
|
|
|
(49.8)
|
|
|
(146.2)
|
|
|
(47.7)
|
|
Settlements
|
|
(11.7)
|
|
|
(0.9)
|
|
|
(12.2)
|
|
|
(1.6)
|
|
Currency translation and other
|
|
—
|
|
|
85.0
|
|
|
—
|
|
|
(100.0)
|
|
Fair Value at End of Year
|
|
$3,048.3
|
|
|
$1,726.8
|
|
|
$2,832.4
|
|
|
$1,672.4
|
|
Funded Status at End of Year
|
|
($375.5)
|
|
|
($222.9)
|
|
|
($449.2)
|
|
|
($191.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
Amounts Recognized
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$26.5
|
|
|
$—
|
|
|
$17.3
|
|
|
$11.4
|
|
Accrued liabilities
|
|
10.5
|
|
|
0.2
|
|
|
18.3
|
|
|
—
|
|
Noncurrent liabilities
|
|
391.5
|
|
|
222.7
|
|
|
448.2
|
|
|
203.0
|
|
Net Liability Recognized
|
|
$375.5
|
|
|
$222.9
|
|
|
$449.2
|
|
|
$191.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in plan assets and benefit obligation that have been recognized in other comprehensive income on a pretax basis during fiscal years 2020 and 2019 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
Net actuarial loss arising during the period
|
|
$14.6
|
|
|
$68.9
|
|
|
$262.9
|
|
|
$161.5
|
|
Amortization of net actuarial loss
|
|
(88.7)
|
|
|
(19.7)
|
|
|
(71.5)
|
|
|
(11.1)
|
|
Prior service cost arising during the period
|
|
1.6
|
|
|
—
|
|
|
1.1
|
|
|
4.7
|
|
Amortization of prior service cost
|
|
(1.2)
|
|
|
—
|
|
|
(1.1)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
($73.7)
|
|
|
$49.2
|
|
|
$191.4
|
|
|
$155.1
|
|
The net actuarial loss represents the actual changes in the estimated obligation and plan assets that have not yet been recognized in the consolidated income statements and are included in accumulated other comprehensive loss. Actuarial losses arising during fiscal year 2020 are primarily attributable to lower discount rates, partially offset by higher than expected return on plan assets. Accumulated actuarial gains and losses that exceed a corridor are amortized over the average remaining service period of U.S. participants, which was approximately seven years as of 30 September 2020. For U.K. participants, accumulated actuarial gains and losses that exceed a corridor are amortized over the average remaining life expectancy, which was approximately twenty-five years as of 30 September 2020.
The components recognized in accumulated other comprehensive loss on a pretax basis at 30 September consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
Net actuarial loss
|
|
$797.7
|
|
|
$643.2
|
|
|
$871.8
|
|
|
$594.0
|
|
Prior service cost (credit)
|
|
7.0
|
|
|
3.6
|
|
|
6.6
|
|
|
3.6
|
|
Net transition liability
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$804.7
|
|
|
$647.2
|
|
|
$878.4
|
|
|
$598.0
|
|
The accumulated benefit obligation ("ABO") is the actuarial present value of benefits attributed to employee service rendered to a particular date, based on current salaries. The ABO for all defined benefit pension plans was $5,166.5 and $4,931.6 as of 30 September 2020 and 2019, respectively.
The following table provides information on pension plans where the benefit liability exceeds the value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
30 September
|
U.S.
|
International
|
|
U.S.
|
International
|
Pension Plans with PBO in Excess of Plan Assets:
|
|
|
|
|
|
PBO
|
$3,202.2
|
|
$1,949.7
|
|
|
$3,069.2
|
|
$521.1
|
|
Fair value of plan assets
|
2,800.3
|
|
1,726.7
|
|
|
2,602.8
|
|
318.0
|
|
PBO in excess of plan assets
|
$401.9
|
|
$223.0
|
|
|
$466.4
|
|
$203.1
|
|
Pension Plans with ABO in Excess of Plan Assets:
|
|
|
|
|
|
ABO
|
$3,081.4
|
|
$475.8
|
|
|
$2,941.2
|
|
$413.3
|
|
Fair value of plan assets
|
2,800.3
|
|
324.4
|
|
|
2,602.8
|
|
266.5
|
|
ABO in excess of plan assets
|
$281.1
|
|
$151.4
|
|
|
$338.4
|
|
$146.8
|
|
The tables above include several pension arrangements that are not funded because of jurisdictional practice. The ABO and PBO related to these plans as of 30 September 2020 were $86.6 and $91.7, respectively. As of 30 September 2019, the U.K. pension plan had plan assets in excess of both PBO and ABO and was therefore not included in the table above. As of 30 September 2020, the PBO of this plan exceeded the fair value of plan assets, resulting in an increase to the International balances.
Pension Plan Assets
Our pension plan investment strategy is to invest in diversified portfolios to earn a long-term return consistent with acceptable risk in order to pay retirement benefits and meet regulatory funding requirements while minimizing company cash contributions over time. De-risking strategies are also employed for closed plans as funding improves, generally resulting in higher allocations to long duration bonds. The plans invest primarily in passive and actively managed equity and debt securities. Equity investments are diversified geographically and by investment style and market capitalization. Fixed income investments include sovereign, corporate and asset-backed securities generally denominated in the currency of the plan.
Asset allocation targets are established based on the long-term return, volatility and correlation characteristics of the asset classes, the profiles of the plans’ liabilities, and acceptable levels of risk. Assets are routinely rebalanced through contributions, benefit payments, and otherwise as deemed appropriate. The actual and target allocations at the measurement date are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Target Allocation
|
|
2020 Actual Allocation
|
|
2019 Actual Allocation
|
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
42 - 57%
|
|
40 - 49%
|
|
51
|
%
|
|
43
|
%
|
|
38
|
%
|
|
42
|
%
|
Debt securities
|
|
35 - 50%
|
|
51 - 60%
|
|
43
|
%
|
|
56
|
%
|
|
56
|
%
|
|
57
|
%
|
Real estate and other
|
|
— - 10%
|
|
—
|
%
|
|
5
|
%
|
|
—
|
%
|
|
6
|
%
|
|
—
|
%
|
Cash
|
|
—
|
%
|
|
—
|
%
|
|
1
|
%
|
|
1
|
%
|
|
—
|
%
|
|
1
|
%
|
Total
|
|
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
In fiscal year 2020, the 7.0% expected return for U.S. plan assets was based on a weighted average of estimated long-term returns of major asset classes and the historical performance of plan assets. The estimated long-term return for equity, debt securities, and real estate is 7.6%, 5.1%, and 6.5%, respectively. In determining asset class returns, we take into account historical long-term returns and the value of active management, as well as other economic and market factors.
In fiscal year 2020, the 5.0% expected rate of return for international plan assets was based on a weighted average return for plans outside the U.S., which vary significantly in size, asset structure and expected returns. The expected asset return for the U.K. plan, which represents over 80% of the assets of our International plans, is 5.7% and was derived from expected equity and debt security returns of 7.3% and 1.8%, respectively.
The following table summarizes pension plan assets measured at fair value by asset class (see Note 14, Fair Value Measurements, for definition of the levels):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
30 September
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
U.S. Qualified Pension Plans
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$16.9
|
|
$16.9
|
|
$—
|
|
$—
|
|
|
$13.7
|
|
$13.7
|
|
$—
|
|
$—
|
|
Equity securities
|
573.9
|
|
573.9
|
|
—
|
|
—
|
|
|
401.1
|
|
401.1
|
|
—
|
|
—
|
|
Equity mutual funds
|
213.1
|
|
213.1
|
|
—
|
|
—
|
|
|
152.9
|
|
152.9
|
|
—
|
|
—
|
|
Equity pooled funds
|
762.0
|
|
—
|
|
762.0
|
|
—
|
|
|
524.8
|
|
—
|
|
524.8
|
|
—
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
Bonds (government
and corporate)
|
1,312.7
|
|
—
|
|
1,312.7
|
|
—
|
|
|
1,572.1
|
|
—
|
|
1,572.1
|
|
—
|
|
Total U.S. Qualified Pension Plans at Fair Value
|
$2,878.6
|
|
$803.9
|
|
$2,074.7
|
|
$—
|
|
|
$2,664.6
|
|
$567.7
|
|
$2,096.9
|
|
$—
|
|
Real estate pooled funds(A)
|
169.7
|
|
|
|
|
|
167.8
|
|
|
|
|
Total U.S. Qualified Pension Plans
|
$3,048.3
|
|
|
|
|
|
$2,832.4
|
|
|
|
|
International Pension Plans
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$13.9
|
|
$13.9
|
|
$—
|
|
$—
|
|
|
$13.4
|
|
$13.4
|
|
$—
|
|
$—
|
|
Equity pooled funds
|
746.8
|
|
—
|
|
746.8
|
|
—
|
|
|
711.3
|
|
—
|
|
711.3
|
|
—
|
|
Fixed income pooled funds
|
694.1
|
|
—
|
|
694.1
|
|
—
|
|
|
679.9
|
|
—
|
|
679.9
|
|
—
|
|
Other pooled funds
|
15.5
|
|
—
|
|
15.5
|
|
—
|
|
|
13.7
|
|
—
|
|
13.7
|
|
—
|
|
Insurance contracts
|
256.5
|
|
—
|
|
—
|
|
256.5
|
|
|
254.1
|
|
—
|
|
—
|
|
254.1
|
|
Total International Pension Plans
|
$1,726.8
|
|
$13.9
|
|
$1,456.4
|
|
$256.5
|
|
|
$1,672.4
|
|
$13.4
|
|
$1,404.9
|
|
$254.1
|
|
(A)Real estate pooled funds consist of funds that invest in properties. These funds generally allow for quarterly redemption with 30 days' notice. Timing for redemption could be delayed based on the priority of our request and the availability of funds. Interests in these funds are valued using the net asset value ("NAV") per share practical expedient and are not classified in the fair value hierarchy.
The following table summarizes changes in fair value of the pension plan assets classified as Level 3, which comprised of investments in insurance contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 30 September 2018
|
|
|
|
|
|
|
|
$217.7
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
Assets held at end of year
|
|
|
|
|
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
Purchases, sales, and settlements, net
|
|
|
|
|
|
|
|
(1.7)
|
|
Balance at 30 September 2019
|
|
|
|
|
|
|
|
$254.1
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
Assets held at end of year
|
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 30 September 2020
|
|
|
|
|
|
|
|
$256.5
|
|
The descriptions and fair value methodologies for the U.S. and International pension plan assets are as follows:
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents approximate fair value due to the short-term maturity.
Equity Securities
Equity securities are valued at the closing market price reported on a U.S. or international exchange where the security is actively traded and are therefore classified as Level 1 assets.
Equity Mutual and Pooled Funds
Shares of mutual funds are valued at the NAV of the fund and are classified as Level 1 assets. Units of pooled funds are valued at the per unit NAV determined by the fund manager based on the value of the underlying traded holdings and are classified as Level 2 assets.
Corporate and Government Bonds
Corporate and government bonds are classified as Level 2 assets, as they are either valued at quoted market prices from observable pricing sources at the reporting date or valued based upon comparable securities with similar yields and credit ratings.
Other Pooled Funds
Other pooled funds classified as Level 2 assets are valued at the NAV of the shares held at year end, which is based on the fair value of the underlying investments.
Insurance Contracts
Insurance contracts are classified as Level 3 assets, as they are carried at contract value, which approximates the estimated fair value. The estimated fair value is based on the fair value of the underlying investment of the insurance company and discount rates that require inputs with limited observability.
Contributions and Projected Benefit Payments
Pension contributions to funded plans and benefit payments for unfunded plans for fiscal year 2020 were $37.5. Contributions for funded plans resulted primarily from contractual and regulatory requirements. Benefit payments to unfunded plans were due primarily to the timing of retirements. We anticipate contributing $45 to $55 to the defined benefit pension plans in fiscal year 2021. These contributions are anticipated to be driven primarily by contractual and regulatory requirements for funded plans and benefit payments for unfunded plans, which are dependent upon timing of retirements.
Projected benefit payments, which reflect expected future service, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
International
|
2021
|
|
$163.7
|
|
|
$52.0
|
|
2022
|
|
165.2
|
|
|
52.8
|
|
2023
|
|
169.8
|
|
|
56.9
|
|
2024
|
|
174.0
|
|
|
60.2
|
|
2025
|
|
177.9
|
|
|
59.9
|
|
2026-2030
|
|
932.6
|
|
|
334.4
|
|
These estimated benefit payments are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.
U.K. Lloyds 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 are amortizing this cost over the average remaining life expectancy of the U.K. participants.
Defined Contribution Plans
We maintain a non-leveraged employee stock ownership plan ("ESOP") which forms part of the Air Products and Chemicals, Inc. Retirement Savings Plan ("RSP"). The ESOP was established in May of 2002. The balance of the RSP is a qualified defined contribution plan including a 401(k) elective deferral component. A substantial portion of U.S. employees are eligible and participate.
We treat dividends paid on ESOP shares as ordinary dividends. Under existing tax law, we may deduct dividends which are paid with respect to shares held by the plan. Shares of our common stock in the ESOP totaled 2,001,152 as of 30 September 2020.
Our contributions to the RSP include a Company core contribution for certain eligible employees who do not receive their primary retirement benefit from the defined benefit pension plans, with the core contribution based on a percentage of pay that is dependent on years of service. For the RSP, we also make matching contributions on overall employee contributions as a percentage of the employee contribution and include an enhanced contribution for certain eligible employees that do not participate in the defined benefit pension plans. Worldwide contributions expensed to income in fiscal years 2020, 2019, and 2018 were $45.6, $40.6, and $34.2, respectively.
Other Postretirement Benefits
We provide other postretirement benefits consisting primarily of healthcare benefits to certain U.S. retirees who meet age and service requirements. The healthcare benefit is a continued medical benefit until the retiree reaches age 65. Healthcare benefits are contributory, with contributions adjusted periodically. The retiree medical costs are capped at a specified dollar amount, with the retiree contributing the remainder. The cost of these benefits were not material in fiscal years 2020, 2019, and 2018. Accumulated postretirement benefit obligations as of the end of fiscal years 2020 and 2019 were $38.6 and $43.7, respectively, of which $7.2 and $7.7 were current obligations, respectively.
We recognize changes in other postretirement benefit plan obligations in other comprehensive income on a pretax basis. In fiscal years 2020 and 2019, we recognized gains that arose during the period of $1.3 and $6.1, respectively. There was no net actuarial loss amortization in fiscal years 2020 and 2019 as the corridor for the plan was not exceeded.
The net actuarial gain/loss recognized in accumulated other comprehensive loss on a pretax basis was a net gain of $3.0 and $1.7 as of 30 September 2020 and 2019, respectively.
17. COMMITMENTS AND CONTINGENCIES
Litigation
We are involved in various legal proceedings, including commercial, competition, environmental, intellectual property, regulatory, 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 $32 at 30 September 2020) 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 30 September 2020) plus interest accrued thereon until final disposition of the proceedings.
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 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 30 September 2020 and 2019 included an accrual of $84.7 and $68.9, 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 $84 to a reasonably possible upper exposure of $98 as of 30 September 2020.
Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Using reasonably possible alternative assumptions of the exposure level could result in an increase to the environmental accrual. Due to the inherent uncertainties related to environmental exposures, a significant increase to the reasonably possible upper exposure level could occur if a new site is designated, the scope of remediation is increased, a different remediation alternative is identified, or a significant increase in our proportionate share occurs. We do not expect that any sum we may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse impact on our financial position or results of operations in any one year.
Pace
At 30 September 2020, $42.2 of the environmental accrual was related to the Pace facility.
In 2006, we sold our Amines business, which included operations at Pace, Florida, and recognized a liability for retained environmental obligations associated with remediation activities at Pace. We are required by the Florida Department of Environmental Protection ("FDEP") and the United States Environmental Protection Agency ("USEPA") to continue our remediation efforts. We 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 and the USEPA 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 pre-tax expense of $19 in results from discontinued operations in the second quarter of fiscal year 2020.
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. The costs we are incurring based on the fiscal year 2020 review are higher than our previous estimates.
Piedmont
At 30 September 2020, $13.3 of the environmental accrual was related to the Piedmont site.
On 30 June 2008, we sold our Elkton, Maryland, and Piedmont, South Carolina, production facilities and the related North American atmospheric emulsions and global pressure sensitive adhesives businesses. In connection with the sale, we recognized a liability for retained environmental obligations associated with remediation activities at the Piedmont site. This site is under active remediation for contamination caused by an insolvent prior owner.
We are required by the South Carolina Department of Health and Environmental Control ("SCDHEC") to address both contaminated soil and groundwater. Numerous areas of soil contamination have been addressed, and contaminated groundwater is being recovered and treated. The SCDHEC issued its final approval to the site-wide feasibility study on 13 June 2017 and the Record of Decision for the site on 27 June 2018. Field work has started to support the remedial design, and in the fourth quarter of fiscal year 2018, we signed a Consent Agreement Amendment memorializing our obligations to complete the cleanup of the site. We estimate that source area remediation and groundwater recovery and treatment will continue through 2029. Thereafter, we expect this site to go into a state of monitored natural attenuation through 2047.
We recognized a before-tax expense of $24 in 2008 as a component of income from discontinued operations and recorded an environmental liability of $24 in continuing operations on the consolidated balance sheets. There have been no significant changes to the estimated exposure.
Pasadena
At 30 September 2020, $11.5 of the environmental accrual was related to the Pasadena site.
During the fourth quarter of 2012, management committed to permanently shutting down our polyurethane intermediates ("PUI") production facility in Pasadena, Texas. In shutting down and dismantling the facility, we have undertaken certain obligations related to soil and groundwater contaminants. We have been pumping and treating groundwater to control off-site contaminant migration in compliance with regulatory requirements and under the approval of the Texas Commission on Environmental Quality ("TCEQ"). We estimate that the pump and treat system will continue to operate until 2042.
We plan to perform additional work to address other environmental obligations at the site. This additional work includes remediating, as required, impacted soils, investigating groundwater west of the former PUI facility, performing post closure care for two closed RCRA surface impoundment units, and establishing engineering controls. In 2012, we estimated the total exposure at this site to be $13. There have been no significant changes to the estimated exposure.
Asset Retirement Obligations
Our asset retirement obligations are primarily associated with long-term on-site supply contracts under which we have built a facility on land owned by the customer and are obligated to remove the facility at the end of the contract term. The retirement of assets includes the contractually required removal of a long-lived asset from service and encompasses the sale, removal, abandonment, recycling, or disposal of the assets as required at the end of the contract term. These obligations are primarily reflected within "Other noncurrent liabilities" on the consolidated balance sheets. The timing and/or method of settlement of these obligations are conditional on a future event that may or may not be within our control.
Changes to the carrying amount of our asset retirement obligations were as follows:
|
|
|
|
|
|
Balance at 30 September 2018
|
$190.4
|
|
Additional accruals
|
14.7
|
|
Liabilities settled
|
(2.1)
|
|
Accretion expense
|
8.7
|
|
Currency translation adjustment
|
(3.5)
|
|
Balance at 30 September 2019
|
$208.2
|
|
Additional accruals
|
22.0
|
|
Liabilities settled
|
(2.8)
|
|
Accretion expense
|
9.5
|
|
Currency translation adjustment
|
4.5
|
|
Balance at 30 September 2020
|
$241.4
|
|
Guarantees and Warranties
We guaranteed the repayment of our 25% share of an equity bridge loan that has been provided to fund equity commitments to a joint venture arrangement with ACWA Holding in Saudi Arabia. ACWA also guarantees their share of the loan. Our maximum exposure under the guarantee, which expires in 2021, is approximately $100. As of 30 September 2020, our consolidated balance sheets included $94.4 reflected within "Payables and accrued liabilities" for our obligation to make future equity contributions in 2021 based on our proportionate share of the advances received by the joint venture under the loan.
Air Products has also entered into a long-term sale of equipment contract with the joint venture to engineer, procure, and construct the industrial gas facilities that will supply gases to Saudi Aramco. We provided bank guarantees to the joint venture to support our performance under the contract. As of 30 September 2020, our maximum potential payments were $247. Exposures under the guarantees will be extinguished after completion of the project.
We are party to an equity support agreement and operations guarantee related to an air separation facility constructed in Trinidad for a venture in which we own 50%. At 30 September 2020, maximum potential payments under joint and several guarantees were $25.0. Exposures under the guarantees decline over time and will be completely extinguished by 2024.
To date, no equity contributions or payments have been made since the inception of these guarantees. The fair value of the above guarantees is not material.
We, in the normal course of business operations, have issued product warranties related to equipment sales. Also, contracts often contain standard terms and conditions which typically include a warranty and indemnification to the buyer that the goods and services purchased do not infringe on third-party intellectual property rights. The provision for estimated future costs relating to warranties is not material to the consolidated financial statements.
We do not expect that any sum we may have to pay in connection with guarantees and warranties will have a material adverse effect on our consolidated financial condition, liquidity, or results of operations.
Unconditional Purchase Obligations
We are obligated to make future payments under unconditional purchase obligations as summarized below:
|
|
|
|
|
|
2021
|
$1,460
|
|
2022
|
460
|
|
2023
|
450
|
|
2024
|
455
|
|
2025
|
454
|
|
Thereafter
|
6,277
|
|
Total
|
$9,556
|
|
Approximately $7.9 billion of our unconditional purchase obligations relate to helium and rare gases. The majority of these obligations occur after fiscal year 2025. Helium purchases include crude feedstock supply to helium refining plants in North America as well as refined helium purchases from sources around the world. As a rare byproduct of natural gas production in the energy sector, these helium sourcing agreements are medium- to long-term and contain take-if-tendered provisions. The refined helium is distributed globally and sold as a merchant gas, primarily under medium-term requirements contracts. While contract terms in our helium sourcing contracts are generally longer than our customer sales contracts, helium is a rare gas used in applications with few or no substitutions because of its unique physical and chemical properties.
We estimate our maximum obligation for future purchases of plant and equipment to be approximately $1.0 billion based on open purchase orders as of 30 September 2020. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to reschedule, cancel, or otherwise modify based on our business needs. We have disclosed this obligation in fiscal year 2021; however, timing of actual satisfaction of the obligation may vary.
Our unconditional purchase obligations also include commitments for power and natural gas supply as well as feedstock supply or numerous HyCO (hydrogen, carbon monoxide, and syngas) facilities. Our long-term sales contracts to customers are generally matched to the term of these obligations and provide recovery of price increases. As a result, we do not believe these purchase obligations would have a material effect on our financial condition or results of operations.
18. CAPITAL STOCK
Common Stock
Authorized common stock consists of 300 million shares with a par value of $1 per share. As of 30 September 2020, 249 million shares were issued, with 221 million outstanding.
On 15 September 2011, the Board of Directors authorized the repurchase of up to $1.0 billion of our outstanding common stock. We repurchase shares pursuant to Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, through repurchase agreements established with several brokers. We did not purchase any of our outstanding shares during fiscal year 2020. At 30 September 2020, $485.3 in share repurchase authorization remains.
A summary of the changes in common shares in fiscal year 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 30 September
|
|
2020
|
|
2019
|
|
2018
|
Number of common shares outstanding, beginning of year
|
|
220,415,262
|
|
|
219,515,245
|
|
|
218,346,074
|
|
Issuance of treasury shares for stock option and award plans
|
|
602,197
|
|
|
900,017
|
|
|
1,169,171
|
|
Number of common shares outstanding, end of year
|
|
221,017,459
|
|
|
220,415,262
|
|
|
219,515,245
|
|
Preferred Stock
Authorized preferred stock consisted of 25 million shares with a par value of $1 per share, of which 2.5 million were designated as Series A Junior Participating Preferred Stock. There were no preferred shares issued or outstanding as of 30 September 2020 and 2019.
19. SHARE-BASED COMPENSATION
We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. During the fiscal year ended 30 September 2020, 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 September 2020, there were 4,341,614 shares available for future grant under our Long-Term Incentive Plan ("LTIP"), which is shareholder approved.
Share-based compensation cost recognized in the consolidated income statements is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Before-tax share-based compensation cost
|
$55.8
|
|
$41.2
|
|
$38.8
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
(13.0)
|
|
(9.7)
|
|
(9.1)
|
|
After-tax share-based compensation cost
|
$42.8
|
|
$31.5
|
|
$29.7
|
|
Before-tax share-based compensation cost is primarily included in "Selling and administrative expense" on our consolidated income statements. The amount of share-based compensation cost capitalized in fiscal years 2020, 2019, and 2018 was not material.
Before-tax share-based compensation cost by type of program was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Deferred stock units
|
$55.8
|
|
$41.1
|
|
$38.3
|
|
Stock options
|
—
|
|
—
|
|
0.2
|
|
Restricted stock
|
—
|
|
0.1
|
|
0.3
|
|
Before-tax share-based compensation cost
|
$55.8
|
|
$41.2
|
|
$38.8
|
|
Deferred Stock Units
We have granted deferred stock units to executives, selected employees, and outside directors. These deferred stock units entitle the recipient to one share of common stock upon vesting, which is conditioned, for employee recipients, on continued employment during the deferral period and may be conditioned on achieving certain performance targets. We grant deferred stock unit awards with a two- to five-year deferral period that is subject to payout upon death, disability, or retirement. Deferred stock units issued to outside directors are paid after service on the Board of Directors ends at the time elected by the director (not to exceed 10 years after service ends). We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period; however, expense recognition is accelerated for retirement eligible individuals who meet the requirements for vesting upon retirement. We have elected to account for forfeitures as they occur, rather than to estimate them. Forfeitures have not been significant historically.
Market-based deferred stock units vest as long as the employee continues to be employed by the Company and upon the achievement of the performance target. The performance target, which is approved by the Compensation Committee, is our share price appreciation and dividends paid, or "total shareholder return," in relation to a defined peer group over a three-year performance period beginning 1 October of the fiscal year of grant. We granted 80,215, 114,929, and 105,268 market-based deferred stock units in fiscal years 2020, 2019, and 2018, respectively.
The fair value of market-based deferred stock units was estimated using a Monte Carlo simulation model as these equity awards are tied to a market condition. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards. We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period. The estimated grant-date fair value of market-based deferred stock units was $275.19, $229.61, and $202.50 per unit in fiscal years 2020, 2019, and 2018, respectively. The calculation of the fair value of these market-based deferred stock units used the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
Expected volatility
|
|
17.8
|
%
|
17.5
|
%
|
18.7
|
%
|
Risk-free interest rate
|
|
1.6
|
%
|
2.8
|
%
|
1.9
|
%
|
Expected dividend yield
|
|
2.4
|
%
|
2.6
|
%
|
2.6
|
%
|
In addition, we granted 123,448 time-based deferred stock units at a weighted average grant-date fair value of $230.92. In fiscal years 2019 and 2018, we granted 169,666 and 143,379 time-based deferred stock units at a weighted average grant-date fair value of and $168.68 and $162.11, respectively.
A summary of deferred stock unit activity in fiscal year 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (000)
|
|
Weighted Average
Grant-Date Fair Value
|
Deferred stock units outstanding at 30 September 2019
|
|
976
|
|
|
$156.31
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
203
|
|
|
252.53
|
|
Paid out
|
|
(300)
|
|
|
141.08
|
|
Forfeited/adjustments
|
|
47
|
|
|
131.35
|
|
Deferred stock units outstanding at 30 September 2020
|
|
926
|
|
|
$181.14
|
|
Cash payments made for deferred stock units totaled $4.8, $1.9, and $2.2 in fiscal years 2020, 2019, and 2018, respectively. As of 30 September 2020, there was $52.7 of unrecognized compensation cost related to deferred stock units. This cost is expected to be recognized over a weighted average period of 2.0 years. The total fair value of deferred stock units paid out during fiscal years 2020, 2019, and 2018, including shares vested in prior periods, was $65.4, $19.2, and $38.5, respectively.
Stock Options
We have granted awards of options to purchase common stock to executives and selected employees. The exercise price of stock options equals the market price of our stock on the date of the grant. Options generally vest incrementally over three years and remain exercisable for ten years from the date of grant. We have not issued stock option awards since fiscal year 2015. As of 30 September 2020, there was no unrecognized compensation cost as all stock option awards were fully vested.
A summary of stock option activity in fiscal year 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (000)
|
|
Weighted Average
Exercise Price
|
Stock options outstanding and exercisable at 30 September 2019
|
|
1,344
|
|
|
$93.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(403)
|
|
|
86.28
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Stock options outstanding and exercisable at 30 September 2020
|
|
941
|
|
|
$96.95
|
|
|
|
|
|
|
The weighted average remaining contractual term of stock options outstanding and exercisable at 30 September 2020 was 2.7 years. The aggregate intrinsic value of these stock options was $189, which represents the amount by which our closing stock price of $297.86 as of 30 September 2020 exceeds the exercise price multiplied by the number of in-the-money options outstanding or exercisable. The intrinsic value of stock options exercised during fiscal years 2020, 2019, and 2018 was $65.7, $87.2, and $90.4, respectively.
Compensation cost is generally recognized over the stated vesting period consistent with the terms of the arrangement, which is either on a straight-line or graded-vesting basis. Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement.
Cash received from option exercises during fiscal year 2020 was $34.1. The total tax benefit realized from stock option exercises in fiscal year 2020 was $15.4, of which $14.2 was the excess tax benefit.
Restricted Stock
The grant-date fair value of restricted stock is estimated on the date of grant based on the closing price of the stock, and compensation cost is generally amortized to expense on a straight-line basis over the vesting period during which employees perform related services. Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. We have elected to account for forfeitures as they occur rather than to estimate them. Historically, forfeitures have not been significant.
We have issued shares of restricted stock to certain officers. Participants are entitled to cash dividends and to vote their respective shares. Restrictions on shares lift in one to four years or upon the earlier of retirement, death, or disability. The shares are nontransferable while subject to forfeiture.
A summary of restricted stock activity in fiscal year 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (000)
|
|
Weighted Average
Grant-Date Fair Value
|
Restricted stock outstanding at 30 September 2019
|
|
26
|
|
|
$138.00
|
|
|
|
|
|
|
Vested
|
|
(26)
|
|
|
138.00
|
|
Restricted stock outstanding at 30 September 2020
|
|
—
|
|
|
$—
|
|
As of 30 September 2020, there was no unrecognized compensation cost as all restricted stock awards were fully vested. The total fair value of restricted stock vested during fiscal years 2020, 2019, and 2018 was $6.1, $2.6, and $2.2, respectively.
20. ACCUMULATED OTHER COMPREHENSIVE LOSS
The table below summarizes changes in accumulated other comprehensive loss ("AOCL"), net of tax, attributable to Air Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
qualifying
as hedges
|
|
Foreign
currency
translation
adjustments
|
|
Pension and
postretirement
benefits
|
|
Total
|
Balance at 30 September 2017
|
|
($53.1)
|
|
|
($787.1)
|
|
|
($1,007.2)
|
|
|
($1,847.4)
|
|
Other comprehensive income (loss) before reclassifications
|
|
45.9
|
|
|
(244.6)
|
|
|
179.4
|
|
|
(19.3)
|
|
Amounts reclassified from AOCL
|
|
(30.4)
|
|
|
3.1
|
|
|
133.1
|
|
|
105.8
|
|
Net current period other comprehensive income (loss)
|
|
$15.5
|
|
|
($241.5)
|
|
|
$312.5
|
|
|
$86.5
|
|
Amount attributable to noncontrolling interests
|
|
—
|
|
|
(18.8)
|
|
|
(0.2)
|
|
|
(19.0)
|
|
Balance at 30 September 2018
|
|
($37.6)
|
|
|
($1,009.8)
|
|
|
($694.5)
|
|
|
($1,741.9)
|
|
Other comprehensive loss before reclassifications
|
|
(44.1)
|
|
|
(356.2)
|
|
|
(326.2)
|
|
|
(726.5)
|
|
Amounts reclassified from AOCL
|
|
12.3
|
|
|
(2.6)
|
|
|
63.2
|
|
|
72.9
|
|
Net current period other comprehensive loss
|
|
($31.8)
|
|
|
($358.8)
|
|
|
($263.0)
|
|
|
($653.6)
|
|
Amount attributable to noncontrolling interest
|
|
(8.0)
|
|
|
(11.7)
|
|
|
(0.2)
|
|
|
(19.9)
|
|
Balance at 30 September 2019
|
|
($61.4)
|
|
|
($1,356.9)
|
|
|
($957.3)
|
|
|
($2,375.6)
|
|
Other comprehensive income (loss) before reclassifications
|
|
43.5
|
|
|
233.4
|
|
|
(68.2)
|
|
|
208.7
|
|
Amounts reclassified from AOCL
|
|
(57.7)
|
|
|
—
|
|
|
82.5
|
|
|
24.8
|
|
Net current period other comprehensive income (loss)
|
|
($14.2)
|
|
|
$233.4
|
|
|
$14.3
|
|
|
$233.5
|
|
|
|
|
|
|
|
|
|
|
Amount attributable to noncontrolling interest
|
|
(21.1)
|
|
|
19.3
|
|
|
(0.2)
|
|
|
(2.0)
|
|
Balance at 30 September 2020
|
|
($54.5)
|
|
|
($1,142.8)
|
|
|
($942.8)
|
|
|
($2,140.1)
|
|
The table below summarizes the reclassifications out of AOCL and the affected line item on the consolidated income statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 30 September
|
|
2020
|
|
2019
|
|
2018
|
(Gain) Loss on Cash Flow Hedges, net of tax
|
|
|
|
|
|
|
Sales/Cost of sales
|
|
($1.0)
|
|
|
$0.6
|
|
|
$7.1
|
|
Other income (expense), net
|
|
—
|
|
|
(3.0)
|
|
|
(42.6)
|
|
Interest expense
|
|
2.8
|
|
|
14.7
|
|
|
5.1
|
|
Other non-operating income (expense), net(A)
|
|
(59.5)
|
|
|
—
|
|
|
—
|
|
Total (Gain) Loss on Cash Flow Hedges, net of tax
|
|
($57.7)
|
|
|
$12.3
|
|
|
($30.4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Translation Adjustment(B)
|
|
$—
|
|
|
($2.6)
|
|
|
$3.1
|
|
|
|
|
|
|
|
|
Pension and Postretirement Benefits, net of tax(C)
|
|
$82.5
|
|
|
$63.2
|
|
|
$133.1
|
|
(A)The fiscal year 2020 impact includes amortization of the excluded component and the effective portion of the related hedges.
(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 3, Acquisitions, for additional information. 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.
(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 16, Retirement Benefits, for additional information.
21. EARNINGS PER SHARE
The table below details the computation of basic and diluted earnings per share ("EPS"):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 30 September
|
2020
|
|
2019
|
|
2018
|
Numerator
|
|
|
|
|
|
Net income from continuing operations
|
$1,901.0
|
|
|
$1,760.0
|
|
|
$1,455.6
|
|
Net (loss) income from discontinued operations
|
(14.3)
|
|
|
—
|
|
|
42.2
|
|
Net Income Attributable to Air Products
|
$1,886.7
|
|
|
$1,760.0
|
|
|
$1,497.8
|
|
|
|
|
|
|
|
Denominator (in millions)
|
|
|
|
|
|
Weighted average common shares — Basic
|
221.2
|
|
|
220.3
|
|
|
219.3
|
|
Effect of dilutive securities
|
|
|
|
|
|
Employee stock option and other award plans
|
1.1
|
|
|
1.3
|
|
|
1.5
|
|
Weighted average common shares — Diluted
|
222.3
|
|
|
221.6
|
|
|
220.8
|
|
|
|
|
|
|
|
Per Share Data*
|
|
|
|
|
|
Basic EPS from continuing operations
|
$8.59
|
|
|
$7.99
|
|
|
$6.64
|
|
Basic EPS from discontinued operations
|
(0.06)
|
|
|
—
|
|
|
0.19
|
|
Basic EPS Attributable to Air Products
|
$8.53
|
|
|
$7.99
|
|
|
$6.83
|
|
Diluted EPS from continuing operations
|
$8.55
|
|
|
$7.94
|
|
|
$6.59
|
|
Diluted EPS from discontinued operations
|
(0.06)
|
|
|
—
|
|
|
0.19
|
|
Diluted EPS Attributable to Air Products
|
$8.49
|
|
|
$7.94
|
|
|
$6.78
|
|
*EPS is calculated independently for each component and may not sum to total EPS due to rounding.
Diluted EPS attributable to Air Products reflects the potential dilution that could occur if stock options or other share-based awards were exercised or converted into common stock. The dilutive effect is computed using the treasury stock method, which assumes all share-based awards are exercised, and the hypothetical proceeds from exercise are used by the Company to purchase common stock at the average market price during the period. To the extent they would have been dilutive, the incremental shares, or the difference between shares assumed to be issued versus purchased, are included in the denominator of the diluted EPS calculation. There were no antidilutive outstanding share-based awards in fiscal years 2020 and 2019. Outstanding share-based awards of 0.1 million shares were antidilutive and therefore excluded from the computation of diluted EPS for fiscal year 2018.
22. INCOME TAXES
The following table summarizes the income of U.S. and foreign operations before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
United States income
|
|
$943.7
|
|
|
$723.3
|
|
|
$688.5
|
|
Foreign income
|
|
1,215.3
|
|
|
1,350.8
|
|
|
1,151.7
|
|
Equity affiliates' income
|
|
264.8
|
|
|
215.4
|
|
|
174.8
|
|
Income from Continuing Operations Before Taxes
|
|
$2,423.8
|
|
|
$2,289.5
|
|
|
$2,015.0
|
|
On 22 December 2017, the United States enacted the U.S. Tax Cuts and Jobs Act (the “Tax Act” or "Tax Reform"), which significantly changed existing U.S. tax laws, including a reduction in the federal corporate income tax rate from 35% to 21%, a deemed repatriation tax on unremitted foreign earnings, as well as other changes. Our consolidated income statements reflect a discrete net income tax expense of $43.8 and $180.6 in fiscal years 2019 and 2018, respectively, related to impacts of the Tax Act.
In fiscal year 2019, our income tax expense reflects the reversal of a non-recurring $56.2 benefit recorded in fiscal year 2018 related to the U.S. taxation of deemed foreign dividends. This was partially offset by a benefit of $12.4 to reduce the total expected costs of the deemed repatriation tax. The non-recurring benefit recorded in fiscal year 2018 was eliminated by regulations issued in fiscal year 2019.
In fiscal year 2018, our consolidated income statements reflect a discrete net income tax expense of $180.6 and a $28.5 reduction to equity affiliates' income for the impacts of the Tax Act. The income tax expense of $180.6 included a cost of $392.4, which included $322.1 for the deemed repatriation tax and $70.3 primarily for additional foreign taxes on the repatriation of foreign earnings. This cost was partially offset by a $211.8 benefit primarily from the re-measurement of our net U.S. deferred tax liabilities at the lower corporate tax rate. The deemed repatriation tax of $322.1 included the $56.2 non-recurring benefit related to the U.S. taxation of deemed foreign dividends that was eliminated in 2019. We have historically asserted our intention to indefinitely reinvest foreign earnings in certain foreign subsidiaries. We reevaluated our historic assertions as a result of enactment of the Tax Act and adjusted our position relative to the indefinitely reinvested earnings of various foreign subsidiaries. The impact of these changes is included in the $70.3 for additional foreign taxes on the repatriation of foreign earnings recorded in fiscal year 2018.
As of 30 September 2020, the remaining balance of the deemed repatriation tax obligation is $211.4, $190.9 of which is presented on our consolidated balance sheets in noncurrent liabilities. We are paying the obligation in installments over six remaining years.
While our accounting for the provisions of the Tax Act is not provisional, further adjustments to the deemed repatriation tax could result from future U.S. or foreign tax examinations of the years impacted by the calculation or from the issuance of additional federal or state guidance.
As a fiscal year-end taxpayer, certain provisions of the Tax Act became effective in our fiscal year 2018 while other provisions did not become effective until fiscal year 2019. The corporate tax rate reduction was effective as of 1 January 2018 and, accordingly, reduced our 2018 fiscal year U.S. federal statutory rate to a blended rate of approximately 24.5%. The 21.0% federal tax rate applied to our fiscal year ended 30 September 2019 and each year thereafter.
The following table details the components of the provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current Tax Provision
|
|
|
|
|
|
|
Federal
|
|
$26.9
|
|
|
$163.7
|
|
|
$305.1
|
|
State
|
|
23.8
|
|
|
23.3
|
|
|
17.7
|
|
Foreign
|
|
262.7
|
|
|
235.5
|
|
|
256.9
|
|
Total Current Tax Provision
|
|
313.4
|
|
|
422.5
|
|
|
579.7
|
|
Deferred Tax Provision
|
|
|
|
|
|
|
Federal
|
|
108.8
|
|
|
9.7
|
|
|
(121.7)
|
|
State
|
|
(3.6)
|
|
|
2.4
|
|
|
12.5
|
|
Foreign
|
|
59.8
|
|
|
45.5
|
|
|
53.8
|
|
Total Deferred Tax Provision
|
|
165.0
|
|
|
57.6
|
|
|
(55.4)
|
|
Total Income Tax Provision
|
|
$478.4
|
|
|
$480.1
|
|
|
$524.3
|
|
Total company income tax payments, net of refunds, were $379.9, $324.3, and $372.0 in fiscal years 2020, 2019, and 2018, respectively.
The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. A reconciliation of the differences between the United States federal statutory tax rate and the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Percent of income before taxes)
|
|
2020
|
|
2019
|
|
2018
|
U.S. federal statutory tax rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
24.5
|
%
|
State taxes, net of federal benefit
|
|
0.6
|
|
|
1.0
|
|
|
1.0
|
|
Income from equity affiliates
|
|
(2.3)
|
|
|
(2.0)
|
|
|
(2.1)
|
|
Foreign tax differentials
|
|
0.1
|
|
|
1.0
|
|
|
(1.0)
|
|
Tax on foreign repatriated earnings
|
|
0.9
|
|
|
0.1
|
|
|
(0.4)
|
|
Share-based compensation
|
|
(0.8)
|
|
|
(0.6)
|
|
|
(1.0)
|
|
Tax reform repatriation
|
|
—
|
|
|
1.9
|
|
|
19.5
|
|
Tax reform rate change and other
|
|
—
|
|
|
—
|
|
|
(11.1)
|
|
Tax restructuring benefit
|
|
—
|
|
|
—
|
|
|
(1.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic production activities
|
|
—
|
|
|
—
|
|
|
(0.4)
|
|
Other
|
|
0.2
|
|
|
(1.4)
|
|
|
(1.2)
|
|
Effective Tax Rate
|
|
19.7
|
%
|
|
21.0
|
%
|
|
26.0
|
%
|
Foreign tax differentials represent the differences between foreign earnings subject to foreign tax rates that are different than the U.S. federal statutory rate and include tax holidays and incentives. As a result of the Tax Act, our effective non-U.S. tax rates in fiscal years 2020 and 2019 are higher than our statutory rate of 21.0% in those years. Our income tax holidays relate to operations in jurisdictions that provide reduced income tax rates for certain qualifying activities and are conditional upon us meeting certain operating thresholds. The impact of these tax holidays decreased income tax expense by $26.9 ($0.12 per share) in fiscal year 2020, primarily related to a preferential tax rate in China that is effective until 31 December 2030. This includes the impact of remeasurement of the deferred tax assets and liabilities due to an extension of the holiday period in China. The impact of tax holidays in fiscal years 2019 and 2018 were not material.
Tax on foreign repatriated earnings includes benefits and costs related to U.S. and additional foreign taxation on the current and future repatriation of foreign earnings and a U.S. benefit for related foreign tax credits. The enactment of the India Finance Act 2020, increased income tax expense by $20.3 and increased equity affiliate income by $33.8 for changes in the future tax costs of repatriated earnings. In addition, the Tax Act included new provisions related to the taxation of foreign operations, known as Global Intangible Low Tax Income (“GILTI”). We have elected as an accounting policy to account for GILTI as a period cost when incurred. This and various other provisions of the Tax Act did not become effective until fiscal year 2019 and did not impact our tax provision in fiscal year 2018.
The Tax Act repealed the domestic production activities deduction, effective for our fiscal 2019 tax year.
Share-based compensation reflects the impact from recognition of $20.0, $14.6, and $21.5 of excess tax benefits in our provision for income taxes during fiscal years 2020, 2019, and 2018, respectively.
In fiscal year 2018, we recognized a tax benefit of $35.7, net of reserves for uncertain tax positions, and a corresponding decrease to net deferred tax liabilities resulting from the restructuring of several foreign subsidiaries.
The significant components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 September
|
|
2020
|
|
2019
|
Gross Deferred Tax Assets
|
|
|
|
|
Retirement benefits and compensation accruals
|
|
$209.0
|
|
|
$227.1
|
|
Tax loss carryforwards
|
|
112.6
|
|
|
140.6
|
|
Tax credits and other tax carryforwards
|
|
40.3
|
|
|
31.1
|
|
Reserves and accruals
|
|
67.0
|
|
|
69.6
|
|
|
|
|
|
|
Currency losses
|
|
30.4
|
|
|
—
|
|
Other
|
|
64.6
|
|
|
57.7
|
|
Valuation allowance
|
|
(95.0)
|
|
|
(92.1)
|
|
Deferred Tax Assets
|
|
428.9
|
|
|
434.0
|
|
Gross Deferred Tax Liabilities
|
|
|
|
|
Plant and equipment
|
|
1,110.9
|
|
|
954.6
|
|
|
|
|
|
|
Currency gains
|
|
—
|
|
|
23.9
|
|
Unremitted earnings of foreign entities
|
|
58.7
|
|
|
31.0
|
|
Partnership and other investments
|
|
19.3
|
|
|
14.8
|
|
Intangible assets
|
|
83.6
|
|
|
80.0
|
|
Other
|
|
3.9
|
|
|
8.3
|
|
Deferred Tax Liabilities
|
|
1,276.4
|
|
|
1,112.6
|
|
Net Deferred Income Tax Liability
|
|
$847.5
|
|
|
$678.6
|
|
Deferred tax assets and liabilities are included within the consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Deferred Tax Assets
|
|
|
|
|
Other noncurrent assets
|
|
$115.1
|
|
|
$115.2
|
|
Deferred Tax Liabilities
|
|
|
|
|
Deferred income taxes
|
|
962.6
|
|
|
793.8
|
|
Net Deferred Income Tax Liability
|
|
$847.5
|
|
|
$678.6
|
|
Deferred tax liabilities related to plant and equipment increased due to the impact of accelerated tax depreciation deductions in excess of book depreciation primarily in the United States. The deferred tax component for currency transactions moved into an overall deferred tax asset position due primarily to currency movements on hedging transactions as several foreign based currencies strengthened against the U.S. dollar in fiscal year 2020. We also realized a deferred tax liability related to the unrealized foreign exchange gain for a euro denominated financial instrument. Unremitted earnings of foreign entities increased primarily as a result of the enactment of the India Finance Act 2020 which increased the future tax costs of repatriated earnings.
As of 30 September 2020, we had the following deferred tax assets for certain tax credits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jurisdiction
|
|
Gross Tax Asset
|
|
Expiration Period
|
U.S. State
|
|
$2.0
|
|
|
2021 - 2034
|
U.S. Federal
|
|
14.1
|
|
|
2027 - 2030
|
Foreign
|
|
28.6
|
|
|
2021 - 2025; Indefinite
|
Of the $28.6 foreign tax credits, $13.3 have indefinite carryforward periods.
As of 30 September 2020, we had the following loss carryforwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jurisdiction
|
|
Gross Loss Carryforward
|
|
Expiration Period
|
U.S. State Net Operating Loss
|
|
$323.2
|
|
|
2021 - 2040
|
U.S. Federal Capital Loss
|
|
24.4
|
|
|
2025
|
Foreign Net Operating Loss
|
|
236.6
|
|
|
2021 - 2030; Indefinite
|
Foreign Capital Loss
|
|
274.8
|
|
|
Indefinite
|
In fiscal year 2020, the U.S. Federal capital losses increased by $22.6 primarily due to the recognition of a capital loss for the liquidation of a foreign subsidiary. Of the $236.6 of foreign net operating loss carryforwards, $83.1 have indefinite carryforward periods. Foreign net operating losses decreased by $116.0 in fiscal year 2020 primarily due to utilization in China and a tax election in India that reduced tax loss carryforwards and decreased plant and equipment net deferred tax liabilities.
The valuation allowance was $95.0 and $92.1 as of 30 September 2020 and 2019, respectively. As of 30 September 2020, the balance primarily related to $40.3 of foreign credits and loss carryforwards as well as $52.2 related to foreign capital losses that were generated from the loss recorded on the exit from the Energy-from-Waste project in 2016. If events warrant the reversal of the valuation allowance, it would result in a reduction of tax expense. We believe it is more likely than not that future earnings and reversal of deferred tax liabilities will be sufficient to utilize our deferred tax assets, net of existing valuation allowance, as of 30 September 2020.
As a result of the Tax Act, we recorded $373.2 of federal income tax from the deemed repatriation tax on approximately $5.8 billion of previously undistributed earnings from our foreign subsidiaries and corporate joint ventures. These earnings are now eligible to be repatriated to the U.S. with reduced U.S. tax impacts. However, such earnings may be subject to foreign withholding and other taxes. We record foreign and U.S. income taxes on the undistributed earnings of our foreign subsidiaries and corporate joint ventures unless those earnings are indefinitely reinvested. The cumulative undistributed earnings that are considered to be indefinitely reinvested in foreign subsidiaries and corporate joint ventures are included in retained earnings on the consolidated balance sheets and amounted to $4.7 billion as of 30 September 2020. An estimated $454.4 in additional foreign withholding and other income taxes would be due if these earnings were remitted as dividends.
A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Unrecognized tax benefits balance at beginning of year
|
|
$231.7
|
|
|
$233.6
|
|
|
$146.4
|
|
Additions for tax positions of the current year
|
|
7.6
|
|
|
7.8
|
|
|
26.4
|
|
Additions for tax positions of prior years
|
|
17.7
|
|
|
14.2
|
|
|
119.2
|
|
Reductions for tax positions of prior years
|
|
(4.1)
|
|
|
(14.7)
|
|
|
(41.3)
|
|
Settlements
|
|
(1.2)
|
|
|
(1.5)
|
|
|
(14.2)
|
|
Statute of limitations expiration
|
|
(14.0)
|
|
|
(3.9)
|
|
|
(2.6)
|
|
Foreign currency translation
|
|
(0.7)
|
|
|
(3.8)
|
|
|
(0.3)
|
|
Unrecognized tax benefits balance at end of year
|
|
$237.0
|
|
|
$231.7
|
|
|
$233.6
|
|
As of 30 September 2020 and 2019, we had $237.0 and $231.7 of unrecognized tax benefits, excluding interest and penalties, respectively. Of these benefits, $86.1 and $75.0 as of 30 September 2020 and 2019, respectively, would impact the effective tax rate from continuing operations if recognized.
Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense and totaled $6.1, $12.0, and ($2.4) in fiscal years 2020, 2019, and 2018, respectively. Our accrued balance for interest and penalties was $25.2 and $19.5 as of 30 September 2020 and 2019, respectively.
In fiscal year 2018, $119.2 in additions for tax positions of prior years related primarily to uncertain state tax filing positions taken related to the sale of our former Performance Materials Division in fiscal year 2017. Additions for tax positions of the current year in fiscal year 2018 of $26.4 included uncertain tax positions related to the restructuring of foreign subsidiaries and reserves for ongoing transfer pricing uncertainties.
In fiscal year 2018, we received a final audit settlement agreement that resolved uncertainties related to unrecognized tax benefits of $43.1, including interest. This settlement primarily related to tax positions taken in conjunction with the disposition of our Homecare business in 2012. As a result, we recorded an income tax benefit of $25.6, including interest, in income from discontinued operations during 2018. The settlement also resulted in an income tax benefit of approximately $9.1, including interest, in continuing operations for the release of tax reserves on other matters.
We are currently under examination in a number of tax jurisdictions, some of which may be resolved in the next twelve months. As a result, it is reasonably possible that a change in the unrecognized tax benefits may occur during the next twelve months. However, quantification of an estimated range cannot be made as of the date of this report.
We generally remain subject to examination in the following major tax jurisdictions for the years indicated below:
|
|
|
|
|
|
Major Tax Jurisdiction
|
Open Tax Years
|
North America
|
|
United States – Federal
|
2017 - 2020
|
United States – State
|
2012 - 2020
|
Canada
|
2015 - 2020
|
Europe
|
|
France
|
2017 - 2020
|
Germany
|
2017 - 2020
|
Netherlands
|
2016 - 2020
|
Spain
|
2015 - 2020
|
United Kingdom
|
2016 - 2020
|
Asia
|
|
China
|
2015 - 2020
|
South Korea
|
2010 - 2020
|
Taiwan
|
2015 - 2020
|
Latin America
|
|
Chile
|
2017 - 2020
|
23. SUPPLEMENTAL INFORMATION
|
|
|
|
|
|
|
|
|
Other Receivables and Current Assets
|
|
|
|
|
|
30 September
|
2020
|
2019
|
Contract assets
|
$55.9
|
|
$64.3
|
|
Contract fulfillment costs
|
109.9
|
|
64.5
|
|
Derivative instruments
|
97.5
|
|
142.5
|
|
|
|
|
Current lease receivables
|
86.7
|
|
90.9
|
|
Other
|
132.9
|
|
115.5
|
|
Other receivables and current assets
|
$482.9
|
|
$477.7
|
|
|
|
|
|
|
|
|
|
|
Other Noncurrent Assets
|
|
|
|
|
|
30 September
|
2020
|
2019
|
Operating lease right-of-use assets
|
$376.8
|
|
$—
|
|
Deferred tax assets
|
115.1
|
|
115.2
|
|
Derivative instruments
|
45.8
|
|
81.7
|
|
Noncurrent customer receivable
|
—
|
|
118.0
|
|
|
|
|
Prepaid tax
|
19.3
|
|
17.0
|
|
Pension benefits
|
26.5
|
|
28.7
|
|
Long-term deposits on plant and equipment
|
100.0
|
|
—
|
|
Other
|
259.6
|
|
243.5
|
|
Other noncurrent assets
|
$943.1
|
|
$604.1
|
|
|
|
|
|
|
|
|
|
|
Payables and Accrued Liabilities
|
|
|
|
|
|
30 September
|
2020
|
2019
|
Trade creditors
|
$546.2
|
|
$528.2
|
|
|
|
|
Contract liabilities
|
313.8
|
|
247.4
|
|
Dividends payable
|
296.2
|
|
255.7
|
|
Accrued payroll and employee benefits
|
196.8
|
|
186.1
|
|
Obligation for future contribution to an equity affiliate
|
94.4
|
|
94.4
|
|
Current lease obligations
|
70.7
|
|
—
|
|
Derivative instruments
|
50.9
|
|
91.2
|
|
Pension and postretirement benefits
|
17.9
|
|
26.0
|
|
|
|
|
|
|
|
|
|
|
Other
|
246.3
|
|
206.7
|
|
Payables and accrued liabilities
|
$1,833.2
|
|
$1,635.7
|
|
|
|
|
|
|
|
|
|
|
Other Noncurrent Liabilities
|
|
|
|
|
|
30 September
|
2020
|
2019
|
Pension benefits
|
$614.2
|
|
$651.2
|
|
Postretirement benefits
|
31.4
|
|
36.0
|
|
|
|
|
Operating lease liabilities(A)
|
335.8
|
|
—
|
|
Asset retirement obligations
|
236.2
|
|
201.9
|
|
Long-term accrued income taxes related to U.S. tax reform
|
190.9
|
|
215.4
|
|
Contingencies related to uncertain tax positions
|
138.6
|
|
123.3
|
|
Environmental liabilities
|
73.6
|
|
59.1
|
|
Contract liabilities
|
57.9
|
|
49.2
|
|
Derivative instruments
|
34.7
|
|
21.2
|
|
Noncurrent customer liability
|
—
|
|
118.0
|
|
|
|
|
Obligations associated with Energy-from-Waste(A)
|
—
|
|
57.8
|
|
Other
|
202.7
|
|
179.3
|
|
Other noncurrent liabilities
|
$1,916.0
|
|
$1,712.4
|
|
(A)In connection with our adoption of the new lease guidance, the presentation of our lease liability associated with our former Energy-from-Waste project has been recorded in aggregate with our other operating lease liabilities effective 1 October 2019.
Company Headquarters Relocation Income (Expense)
During 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 fiscal year ended 30 September 2020 and has been excluded from the results of the Corporate and other segment.
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 was reflected as “Facility closure” on our consolidated income statements for the fiscal year ended 30 September 2019 and was not recorded in segment results.
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 $335, $410, and $360 for the fiscal years ended 30 September 2020, 2019, and 2018, 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 30 September 2020 and 2019, our consolidated balance sheets include related party trade receivables of approximately $95 and $130, respectively.
24. SUMMARY BY QUARTER (UNAUDITED)
The tables below provide unaudited selected financial data and weighted average share information for each quarter of fiscal years 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Total
|
|
Sales
|
$2,254.7
|
|
|
$2,216.3
|
|
|
$2,065.2
|
|
|
$2,320.1
|
|
|
$8,856.3
|
|
|
Gross profit
|
768.1
|
|
|
756.2
|
|
|
720.3
|
|
|
753.6
|
|
|
2,998.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company headquarters relocation income (expense) (See Note 23)
|
—
|
|
|
33.8
|
|
|
—
|
|
|
—
|
|
|
33.8
|
|
|
Operating income
|
561.0
|
|
|
577.2
|
|
|
539.2
|
|
|
560.2
|
|
|
2,237.6
|
|
|
Equity affiliates' income
|
58.2
|
|
|
88.2
|
|
(A)
|
51.2
|
|
|
67.2
|
|
|
264.8
|
|
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
120.7
|
|
|
148.5
|
|
(A)
|
109.3
|
|
|
99.9
|
|
|
478.4
|
|
(A)
|
Income from continuing operations
|
488.9
|
|
|
504.7
|
|
|
457.1
|
|
|
494.7
|
|
|
1,945.4
|
|
|
Loss from discontinued operations, net of tax (See Note 6)
|
—
|
|
|
(14.3)
|
|
|
—
|
|
|
—
|
|
|
(14.3)
|
|
|
Net income
|
488.9
|
|
|
490.4
|
|
|
457.1
|
|
|
494.7
|
|
|
1,931.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$475.6
|
|
|
$492.1
|
|
|
$446.5
|
|
|
$486.8
|
|
|
$1,901.0
|
|
|
Net loss from discontinued operations
|
—
|
|
|
(14.3)
|
|
|
—
|
|
|
—
|
|
|
(14.3)
|
|
|
Net Income Attributable to Air Products
|
$475.6
|
|
|
$477.8
|
|
|
$446.5
|
|
|
$486.8
|
|
|
$1,886.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data*
|
|
|
|
|
|
|
|
|
|
|
Basic EPS from continuing operations
|
$2.15
|
|
|
$2.22
|
|
|
$2.02
|
|
|
$2.20
|
|
|
$8.59
|
|
|
Basic EPS from discontinued operations
|
—
|
|
|
(0.06)
|
|
|
—
|
|
|
—
|
|
|
(0.06)
|
|
|
Basic EPS Attributable to Air Products
|
$2.15
|
|
|
$2.16
|
|
|
$2.02
|
|
|
$2.20
|
|
|
$8.53
|
|
|
Diluted EPS from continuing operations
|
$2.14
|
|
|
$2.21
|
|
|
$2.01
|
|
|
$2.19
|
|
|
$8.55
|
|
|
Diluted EPS from discontinued operations
|
—
|
|
|
(0.06)
|
|
|
—
|
|
|
—
|
|
|
(0.06)
|
|
|
Diluted EPS Attributable to Air Products
|
$2.14
|
|
|
$2.15
|
|
|
$2.01
|
|
|
$2.19
|
|
|
$8.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares (in millions)
|
|
|
|
|
|
|
|
|
|
|
Basic
|
220.9
|
|
|
221.2
|
|
|
221.2
|
|
|
221.3
|
|
|
221.2
|
|
|
Diluted
|
222.2
|
|
|
222.3
|
|
|
222.4
|
|
|
222.6
|
|
|
222.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Information
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
$1.16
|
|
|
$1.34
|
|
|
$1.34
|
|
|
$1.34
|
|
|
$5.18
|
|
|
* EPS is calculated independently for each component and may not sum to total EPS due to rounding.
|
(A)Includes the impact of the enactment of India Finance Act 2020, which increased equity affiliates' income by $33.8 and our income tax provision by $20.3. Refer to Note 22, Income Taxes, for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Total
|
|
Sales
|
$2,224.0
|
|
|
$2,187.7
|
|
|
$2,224.0
|
|
|
$2,283.2
|
|
|
$8,918.9
|
|
|
Gross profit
|
651.0
|
|
(A)
|
713.0
|
|
|
758.0
|
|
|
792.4
|
|
|
2,914.4
|
|
(A)
|
Cost reduction actions (See Note 5)
|
—
|
|
|
—
|
|
|
25.5
|
|
|
—
|
|
|
25.5
|
|
|
Gain on exchange of equity affiliate investments (See Note 3)
|
—
|
|
|
—
|
|
|
29.1
|
|
|
—
|
|
|
29.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
455.0
|
|
|
516.5
|
|
|
569.7
|
|
|
603.2
|
|
|
2,144.4
|
|
|
Equity affiliates' income
|
52.9
|
|
|
46.2
|
|
|
56.4
|
|
|
59.9
|
|
|
215.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension settlement loss (See Note 16)
|
—
|
|
|
5.0
|
|
|
—
|
|
|
—
|
|
|
5.0
|
|
|
Income tax provision
|
132.1
|
|
(B)
|
107.5
|
|
|
109.3
|
|
(B)
|
131.2
|
|
|
480.1
|
|
(B)
|
Income from continuing operations
|
357.0
|
|
|
433.5
|
|
|
500.2
|
|
|
518.7
|
|
|
1,809.4
|
|
|
Income from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income
|
357.0
|
|
|
433.5
|
|
|
500.2
|
|
|
518.7
|
|
|
1,809.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$347.5
|
|
|
$421.3
|
|
|
$488.0
|
|
|
$503.2
|
|
|
$1,760.0
|
|
|
Net income from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net Income Attributable to Air Products
|
$347.5
|
|
|
$421.3
|
|
|
$488.0
|
|
|
$503.2
|
|
|
$1,760.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data*
|
|
|
|
|
|
|
|
|
|
|
Basic EPS from continuing operations
|
$1.58
|
|
|
$1.91
|
|
|
$2.21
|
|
|
$2.28
|
|
|
$7.99
|
|
|
Basic EPS from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Basic EPS Attributable to Air Products
|
$1.58
|
|
|
$1.91
|
|
|
$2.21
|
|
|
$2.28
|
|
|
$7.99
|
|
|
Diluted EPS from continuing operations
|
$1.57
|
|
|
$1.90
|
|
|
$2.20
|
|
|
$2.27
|
|
|
$7.94
|
|
|
Diluted EPS from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Diluted EPS Attributable to Air Products
|
$1.57
|
|
|
$1.90
|
|
|
$2.20
|
|
|
$2.27
|
|
|
$7.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares (in millions)
|
|
|
|
|
|
|
|
|
|
|
Basic
|
219.9
|
|
|
220.2
|
|
|
220.6
|
|
|
220.7
|
|
|
220.3
|
|
|
Diluted
|
221.0
|
|
|
221.4
|
|
|
221.9
|
|
|
222.1
|
|
|
221.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Information
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
$1.10
|
|
|
$1.16
|
|
|
$1.16
|
|
|
$1.16
|
|
|
$4.58
|
|
|
* EPS is calculated independently for each component and may not sum to total EPS due to rounding.
|
(A)Includes the impact of a facility closure charge of $29.0 resulting from the government enforced shutdown of a customer in December 2018. Refer to Note 23, Supplemental Information, for additional information.
(B)Includes a discrete net income tax expense of $43.8, primarily recorded in the first quarter of fiscal year 2019 to finalize our estimates of the impacts of the U.S. Tax Cuts and Jobs Act. Refer to Note 22, Income Taxes, for additional information.
25. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Our reporting segments reflect the manner in which our chief operating decision maker reviews results and allocates resources. Except in the Industrial Gases – EMEA and Corporate and other segments, each reporting segment meets the definition of an operating segment and does not include the aggregation of multiple operating segments. Our Industrial Gases – EMEA and Corporate and other segment each include the aggregation of two operating segments that meet the aggregation criteria under GAAP.
Our reporting segments are:
•Industrial Gases – Americas;
•Industrial Gases – EMEA (Europe, Middle East, and Africa);
•Industrial Gases – Asia;
•Industrial Gases – Global; and
•Corporate and other
Industrial Gases – Regional
The regional Industrial Gases segments (Americas, EMEA, and Asia) include the results of our regional industrial gas businesses, which produce and sell atmospheric gases, such as oxygen, nitrogen, and argon; process gases, such as hydrogen, helium, carbon dioxide (CO2), carbon monoxide, and syngas (a mixture of hydrogen and carbon monoxide); and specialty gases. The industrial gases business also develops, builds, and operates equipment for the production or processing of gases, such as air separation units and non-cryogenic generators.
We supply gases to diversified customers in many industries, including those in refining, chemical, gasification, metals, electronics, manufacturing, and food and beverage. We distribute gases to our customers through a variety of supply modes including liquid or gaseous bulk supply delivered by tanker or tube trailer and, for smaller customers, packaged gases delivered in cylinders and dewars or small on-sites (cryogenic or non-cryogenic generators). For large-volume customers, we construct an on-site plant adjacent to or near the customer’s facility or deliver product from one of our pipelines.
Electricity is the largest cost component in the production of atmospheric gases. Steam methane reformers utilize natural gas as the primary raw material and gasifiers use liquid and solid hydrocarbons as the principal raw material for the production of hydrogen, carbon monoxide, and syngas. We mitigate energy, natural gas, and hydrocarbon price fluctuations contractually through pricing formulas, surcharges, and cost pass-through and tolling arrangements.
The regional Industrial Gases segments also include our share of the results of several joint ventures accounted for by the equity method. The largest of these joint ventures operate in China, India, Italy, Mexico, Saudi Arabia, South Africa, and Thailand.
Each of the regional Industrial Gases segments competes against global industrial gas companies as well as regional competitors. Competition is based primarily on price, reliability of supply, and the development of industrial gas applications. We derive a competitive advantage in locations where we have pipeline networks, which enable us to provide reliable and economic supply of products to larger customers.
Industrial Gases – Global
The Industrial Gases – Global segment includes activity related to the sale of cryogenic and gas processing equipment for air separation. The equipment is sold worldwide to customers in a variety of industries, including chemical and petrochemical manufacturing, oil and gas recovery and processing, and steel and primary metals processing. The Industrial Gases – Global segment also includes centralized global costs associated with management of all the Industrial Gases segments. These costs include Industrial Gases global administrative costs, product development costs, and research and development costs. We compete with a large number of firms for all the offerings included in the Industrial Gases – Global segment. Competition in the equipment business is based primarily on technological performance, service, technical know-how, price, and performance guarantees.
Corporate and other
The Corporate and other segment includes our liquefied natural gas, turbo machinery equipment and services, and distribution sale of equipment businesses as well as our corporate support functions that benefit all segments. Competition for the sale of equipment businesses is based primarily on technological performance, service, technical know-how, price, and performance guarantees.
The results of the Corporate and other segment also include income and expense that is not directly associated with the other segments, such as foreign exchange gains and losses.
In addition to assets of the global businesses included in this segment, other assets include cash, deferred tax assets, and financial instruments.
Customers
We do not have a homogeneous customer base or end market, and no single customer accounts for more than 10% of our consolidated revenues.
Accounting Policies
The accounting policies of the segments are the same as those described in Note 1, Major Accounting Policies. We evaluate the performance of segments based upon reported segment operating income.
Business Segment Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases–
Americas
|
Industrial
Gases–
EMEA
|
Industrial
Gases–
Asia
|
Industrial
Gases–
Global
|
Corporate
and other
|
Total
|
|
2020
|
|
|
|
|
|
|
|
Sales
|
$3,630.7
|
|
$1,926.3
|
|
$2,716.5
|
|
$364.9
|
|
$217.9
|
|
$8,856.3
|
|
(A)
|
Operating income (loss)
|
1,012.4
|
|
473.3
|
|
870.3
|
|
(40.0)
|
|
(112.2)
|
|
2,203.8
|
|
(B)
|
Depreciation and amortization
|
559.5
|
|
195.9
|
|
399.4
|
|
9.6
|
|
20.6
|
|
1,185.0
|
|
|
Equity affiliates' income
|
84.3
|
|
74.8
|
|
61.0
|
|
10.9
|
|
—
|
|
231.0
|
|
(B)
|
Expenditures for long-lived assets
|
1,264.7
|
|
327.6
|
|
690.3
|
|
35.3
|
|
191.1
|
|
2,509.0
|
|
|
Investments in net assets of and advances to equity affiliates
|
310.9
|
|
535.2
|
|
539.7
|
|
46.4
|
|
—
|
|
1,432.2
|
|
|
Total assets
|
6,610.1
|
|
3,917.0
|
|
6,842.9
|
|
397.8
|
|
7,400.7
|
|
25,168.5
|
|
|
2019
|
|
|
|
|
|
|
|
Sales
|
$3,873.5
|
|
$2,002.5
|
|
$2,663.6
|
|
$261.0
|
|
$118.3
|
|
$8,918.9
|
|
(A)
|
Operating income (loss)
|
997.7
|
|
472.4
|
|
864.2
|
|
(11.7)
|
|
(152.8)
|
|
2,169.8
|
|
(B)
|
Depreciation and amortization
|
505.2
|
|
189.5
|
|
361.5
|
|
8.6
|
|
18.0
|
|
1,082.8
|
|
|
Equity affiliates' income
|
84.8
|
|
69.0
|
|
58.4
|
|
3.2
|
|
—
|
|
215.4
|
|
(B)
|
Expenditures for long-lived assets
|
545.8
|
|
216.3
|
|
1,105.5
|
|
33.8
|
|
88.3
|
|
1,989.7
|
|
|
Investments in net assets of and advances to equity affiliates
|
301.6
|
|
493.4
|
|
445.5
|
|
35.7
|
|
—
|
|
1,276.2
|
|
|
Total assets
|
5,832.2
|
|
3,250.8
|
|
6,240.6
|
|
325.7
|
|
3,293.5
|
|
18,942.8
|
|
|
2018
|
|
|
|
|
|
|
|
Sales
|
$3,758.8
|
|
$2,193.3
|
|
$2,458.0
|
|
$436.1
|
|
$84.0
|
|
$8,930.2
|
|
(A)
|
Operating income (loss)
|
927.9
|
|
445.8
|
|
689.9
|
|
53.9
|
|
(176.0)
|
|
1,941.5
|
|
(B)
|
Depreciation and amortization
|
485.3
|
|
198.6
|
|
265.8
|
|
8.1
|
|
12.9
|
|
970.7
|
|
|
Equity affiliates' income
|
82.0
|
|
61.1
|
|
58.3
|
|
1.9
|
|
—
|
|
203.3
|
|
(B)
|
Expenditures for long-lived assets
|
546.5
|
|
163.1
|
|
791.9
|
|
17.3
|
|
49.6
|
|
1,568.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)The sales information noted above relates 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
Operating Income
The table below reconciles total operating income disclosed in the table above to consolidated operating income as reflected on our consolidated income statements:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 30 September
|
2020
|
2019
|
2018
|
Total
|
$2,203.8
|
|
$2,169.8
|
|
$1,941.5
|
|
Change in inventory valuation method
|
—
|
|
—
|
|
24.1
|
|
Facility closure
|
—
|
|
(29.0)
|
|
—
|
|
|
|
|
|
Cost reduction actions
|
—
|
|
(25.5)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on exchange of equity affiliate investments
|
—
|
|
29.1
|
|
—
|
|
Company headquarters relocation income (expense)
|
33.8
|
|
—
|
|
—
|
|
|
|
|
|
Consolidated Operating Income
|
$2,237.6
|
|
$2,144.4
|
|
$1,965.6
|
|
Equity Affiliates' Income
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:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 30 September
|
2020
|
2019
|
2018
|
Total
|
$231.0
|
|
$215.4
|
|
$203.3
|
|
|
|
|
|
India Finance Act 2020
|
33.8
|
|
—
|
|
—
|
|
Tax reform repatriation - equity method investment
|
—
|
|
—
|
|
(28.5)
|
|
Consolidated Equity Affiliates' Income
|
$264.8
|
|
$215.4
|
|
$174.8
|
|
Geographic Information
Sales to External Customers
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 30 September
|
2020
|
2019
|
2018
|
United States
|
$3,359.6
|
|
$3,351.8
|
|
$3,149.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
1,719.7
|
|
1,730.2
|
|
1,585.7
|
|
|
|
|
|
|
|
|
|
Other foreign operations
|
3,777.0
|
|
3,836.9
|
|
4,194.9
|
|
Total
|
$8,856.3
|
|
$8,918.9
|
|
$8,930.2
|
|
|
|
|
|
Long-Lived Assets(A)
|
|
|
|
|
|
|
|
30 September
|
2020
|
2019
|
2018
|
United States
|
$4,633.9
|
|
$3,721.3
|
|
$3,512.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
3,719.4
|
|
3,302.6
|
|
3,066.6
|
|
|
|
|
|
|
|
|
|
Other foreign operations
|
3,611.4
|
|
3,313.7
|
|
3,344.4
|
|
Total
|
$11,964.7
|
|
$10,337.6
|
|
$9,923.7
|
|
(A)Long-lived assets represents plant and equipment, net.
Geographic information is based on country of origin.