NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars unless otherwise indicated, except for share and per share data)
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1. BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES
About Air Products
Air Products, a Delaware corporation originally founded in 1940, is a world-leading industrial gases company. Focused on energy, environmental, and emerging markets, Air Products' core business provides a unique portfolio of products, services, and solutions that include atmospheric gases, process and specialty gases, equipment, and related services to customers in dozens of industries. Air Products also develops, engineers, builds, owns, and operates some of the world's largest industrial gas and carbon-capture projects, supplying world-scale clean hydrogen for global transportation, industrial markets, and the broader energy transition. Air Products trades on the New York Stock Exchange under the symbol "APD."
Air Products manages and reports its operating results through five reportable segments: Americas, Asia, Europe, Middle East and India, and Corporate and other. Refer to Note 23, Business Segment and Geographic Information, for additional information.
As used in this report, unless the context indicates otherwise, the terms “we,” “our,” “us,” the “Company,” "Air Products," or “registrant” include our controlled subsidiaries and affiliates.
Basis of Presentation
The accompanying consolidated financial statements 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. The notes that follow are an integral part of our consolidated financial statements. These notes, unless otherwise indicated, are presented on a continuing operations basis. Intercompany transactions and balances are eliminated in consolidation.
Discontinued Operations
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 5, Discontinued Operations, for additional information.
Estimates and Assumptions
Preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Risks and Uncertainties
We are subject to various risks and uncertainties, including, but not limited to, those resulting from the COVID-19 pandemic as well as from increased inflationary pressures and Russia's invasion of Ukraine. Due to the dynamic nature of these circumstances, uncertainty remains regarding how these events may affect our business, results of operations, and overall financial performance in future periods. For example, future events could impact our ability to complete a suspended project in Ukraine and recover the carrying value of related assets, which totaled approximately $45 within "Plant and equipment, net" on our consolidated balance sheet as of 30 September 2022.
Reclassifications
Prior year segment information has been reclassified to conform to the fiscal year 2022 presentation, which reflects the reorganization of our reporting segments effective 1 October 2021.
Consolidation Principles
We consolidate all entities we control under either the voting interest model, which generally applies when we hold a majority of the voting interest of an entity, or the variable interest model, which applies to arrangements for which we are the primary beneficiary of a variable interest entity ("VIE"). For consolidated subsidiaries in which our ownership is less than 100%, the outside shareholders’ interests are reflected as non-controlling interests on our consolidated financial statements.
We are considered the primary beneficiary of a VIE when we have both the power to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. During the third quarter of fiscal year 2022, we determined that we are the primary beneficiary of the NEOM Green Hydrogen Company and consolidated the joint venture within our Middle East and India segment. For additional information, refer to Note 22, Supplemental Information. We are not the primary beneficiary of any other material VIEs.
We account for a VIE for which we exercise significant influence but are not the primary beneficiary, such as the Jazan Integrated Gasification and Power Company joint venture, as an equity method investment. For additional information on this joint venture, refer to Note 7, Equity Affiliates.
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.
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 8, 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 13, Fair Value Measurements, and Note 15, 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 12, 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, and the impact of related hedges, are generally reflected in "Other income (expense), net" on our consolidated income statements as they occur and were not material for the periods presented.
Foreign exchange 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 reflected within “Other non-operating income (expense), net" and were not material for the periods presented.
In addition, foreign currency forward points and currency swap basis differences that are excluded from the assessment of hedge effectiveness of our cash flow hedges of intercompany loans (“excluded components”) are recorded within “Other non-operating income (expense), net" on a straight-line basis. Excluded components were expenses of $23.2, $31.0, and $33.5 in fiscal years 2022, 2021, and 2020, respectively.
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 $22.3, $18.6, and $18.3 in fiscal years 2022, 2021, and 2020, 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 16, 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 16, 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 16, Commitments and Contingencies, for additional information on our current legal proceedings.
Share-Based Compensation
We expense the grant-date fair value of our share-based 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 18, Share-Based Compensation, for additional information regarding our awards, including the models and assumptions used to determine their grant-date fair value.
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 21, 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 foreign currency remeasurements and impacts from the related hedging activities discussed in the Foreign Currency section above, 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.
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.
Credit Losses
We are exposed to credit losses through sales of products and services. When extending credit, we evaluate customer creditworthiness based on a combination of qualitative and quantitative factors that include, but are not limited to, the customer’s credit score from external providers, financial condition, and past payment experience.
We assess allowances for credit losses on our trade receivables, lease receivable, and notes receivable portfolios. Allowances are evaluated by portfolio on a collective basis where similar characteristics exist. A provision for customer defaults is made on a general formula basis as the risk of some default is expected but cannot yet be associated with specific customers. The assessment of the likelihood of default is based on various factors, including the length of time the receivables are past due, historical experience, existing economic conditions, and forward-looking information. When we identify specific customers with known collectability issues, the assessment for credit losses is performed on an individual basis, considering current and forward-looking information of the customer.
The use of forward-looking information considers economic conditions that may affect the customers’ ability to pay. Although we historically have not experienced significant credit losses, our exposure to credit losses may increase if our customers are adversely affected by economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the ongoing COVID-19 pandemic, or other customer-specific factors. We review our reserves for credit losses on a quarterly basis.
Trade receivables comprise amounts owed to us through our operating activities and are presented net of allowances for credit losses. Changes to the carrying amount of the allowance for credit losses on trade receivables are summarized below:
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Balance at 30 September 2019 | $24.8 | |
Provision for credit losses | 7.7 | |
Write-offs charged against the allowance | (8.3) | |
Currency translation and other | (0.3) | |
Balance at 30 September 2020 | $23.9 | |
Adoption of new credit losses standard | 0.5 | |
Provision for credit losses | 2.7 | |
Write-offs charged against the allowance | (3.8) | |
Currency translation and other | 1.8 | |
Balance at 30 September 2021 | $25.1 | |
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Provision for credit losses | 7.5 | |
Write-offs charged against the allowance | (7.9) | |
Currency translation and other | (0.6) | |
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Balance at 30 September 2022 | $24.1 | |
In addition, our lease receivables and notes receivable are presented net of allowances for credit losses. As of 30 September 2022 and 2021, the credit quality of lease receivables and notes receivable did not require a material allowance for credit losses. For additional information on our lease arrangements, refer to Note 11, Leases.
Inventories
We carry inventory that is comprised of finished goods, work-in-process, raw materials and supplies. Refer to Note 6, Inventories, for further detail.
Inventories on our consolidated balance sheets are stated at the lower of cost or net realizable value. We determine the cost of all our inventories on a first-in, first-out basis ("FIFO"). We write down our inventories for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions.
Equity Method Investments
We apply the equity method of accounting when we have the ability to exercise significant influence but do not control the operating and financial decisions of an investee, which generally applies when our ownership interest in common stock or in-substance common stock of the investee is between 20% and 50%. Under the equity method, we initially record our investment at cost and subsequently adjust the investment to recognize our share of net earnings or losses, distributions received, and other-than-temporary impairments. The carrying value of our equity method investments is reflected as "Investment in net assets of and advances to equity affiliates" on our consolidated balance sheets. 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.
Our share of the investee's net earnings is primarily presented net of income taxes within “Equity affiliates’ income" on our consolidated income statements. Profits or losses related to intra-entity sales with our equity method investees are eliminated consistent with our ownership percentage in the entity until realized by the investee through a transaction with a third party. In addition, “Equity affiliates’ income” includes interest income from shareholder loans viewed as in-substance common stock.
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 expensed 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 accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income. Refer to Note 8, 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 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.
We capitalize costs incurred with the implementation of a cloud computing arrangement that is a service contract, consistent with our policy for software developed or obtained for internal use. However, the capitalized costs are reflected in "Other noncurrent assets" on our consolidated balance sheets and expensed over the term of the related hosting arrangement.
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 $41.0, $28.3, and $15.9 in fiscal years 2022, 2021, and 2020, 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 $274.7 and $269.6 at 30 September 2022 and 2021, respectively. Refer to Note 16, Commitments and Contingencies, for further detail.
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 9, Goodwill, for further detail.
Intangible Assets
Intangible assets with determinable lives primarily consist of customer relationships, purchased patents and technology, and certain 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 25 years. Purchased patents and technology and other finite-lived intangibles are generally amortized over periods of five to 15 years. Other intangibles includes certain land use rights, which are generally amortized over a period of 50 years. Amortizable lives are adjusted whenever there is a change in the estimated period of economic benefit. Refer to Note 10, Intangible Assets, for further detail.
Retirement Benefits
Our retirement benefit plans are discussed in Note 15, Retirement Benefits. The cost of benefits we contribute to defined contribution plans is recognized in the year earned. The cost of benefits under our defined benefit and other post-retirement plans 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 recognized systematically over subsequent periods.
2. NEW ACCOUNTING GUIDANCE
New Accounting Guidance to be Implemented
Government Assistance
In November 2021, the Financial Accounting Standards Board ("FASB") issued disclosure guidance to increase the transparency of transactions an entity has with a government that are accounted for by applying a grant or contribution accounting model. We are evaluating the impact this guidance will have on our annual disclosures within the consolidated financial statements. We will adopt this guidance prospectively in fiscal year 2023.
Acquired Revenue Contracts in a Business Combination
In October 2021, the FASB issued an update for the recognition of contract assets and liabilities acquired in a business combination. Rather than recognizing such items at fair value on the acquisition date, the acquirer would measure and recognize contract assets and liabilities in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contract. This guidance is effective beginning in fiscal year 2024, with early adoption permitted. The impact of the new standard on our consolidated financial statements and related disclosures will depend on future acquisitions.
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 the London Inter-Bank Offered Rate ("LIBOR"). The amendments may be applied to impacted contracts and hedges through 31 December 2022. We have had no reference rate reform modifications to date. This update will be adopted on a prospective basis in the event of any such modifications.
3. ACQUISITIONS
Fiscal Year 2021
Gain on Exchange With Joint Venture Partner
We previously held a 50% ownership interest in Tyczka Industrie-Gases GmbH ("TIG"), a joint venture in Germany with the Tyczka Group that was primarily a merchant gases business. We accounted for this arrangement as an equity method investment in our former Industrial Gases – EMEA segment.
Effective 23 February 2021 (the "acquisition date"), TIG was separated into two businesses, one of which we acquired on a 100% basis. Our partner paid us $10.8 to acquire the other business. The exchange resulted in a gain of $36.8 ($27.3 after-tax), which is reflected as “Gain on exchange with joint venture partner” on our consolidated income statements for the fiscal year ended 30 September 2021. The gain included $12.7 from the revaluation of our previously held equity interest in the portion of the business that we retained and $24.1 from the sale of our equity interest in the remaining business. The gain was not recorded in segment results.
We estimated an acquisition date fair value of $15.4 for our previously held equity interest in the acquired portion of the business using a market approach, which considered historical earnings and the application of a market-based multiple derived from comparable transactions.
We accounted for the acquisition as a business combination. The results of this business are consolidated within our Europe segment.
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 in the Americas segment. The aggregate purchase price of $580 is reflected in "Additions to plant and equipment, including long-term deposits" on our consolidated statement of cash flows for the fiscal year ended 30 September 2020.
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. The results of this business are consolidated within our Europe segment.
4. REVENUE RECOGNITION
Nature of Goods and Services
The principal activities from which we generate sales from our contracts with customers are described below with their respective revenue recognition policies. For an overall summary of these policies and discussion on payment terms and presentation, refer to Note 1, Basis of Presentation and Major Accounting Policies.
Regional Industrial Gases
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 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 that are based on the customer's requirements. These contracts contain stated terms that are generally five 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.
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 Corporate and other segment serves 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 those for materials, labor, and overhead 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. We recorded changes to project estimates that unfavorably impacted operating income by approximately $30 and $19 in fiscal years 2022 and 2021, respectively. Changes in estimates favorably impacted operating income by approximately $7 in fiscal year 2020. Our changes in estimates would not have significantly impacted amounts recorded in prior years.
Disaggregation of Revenue
The table below presents our consolidated sales 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Americas | Asia | Europe | Middle East and India | Corporate and other | Total | % |
2022 | | | | | | | |
On-site | $3,423.1 | | $1,833.9 | | $1,298.2 | | $77.9 | | $— | | $6,633.1 | | 52 | % |
Merchant | 1,945.8 | | 1,309.4 | | 1,787.9 | | 51.6 | | — | | 5,094.7 | | 40 | % |
Sale of equipment | — | | — | | — | | — | | 970.8 | | 970.8 | | 8 | % |
Total | $5,368.9 | | $3,143.3 | | $3,086.1 | | $129.5 | | $970.8 | | $12,698.6 | | 100 | % |
| | | | | | | |
2021 | | | | | | | |
On-site | $2,469.5 | | $1,718.8 | | $802.4 | | $70.7 | | $— | | $5,061.4 | | 49 | % |
Merchant | 1,698.1 | | 1,202.0 | | 1,543.2 | | 28.6 | | — | | 4,471.9 | | 43 | % |
Sale of equipment | — | | — | | — | | — | | 789.7 | | 789.7 | | 8 | % |
Total | $4,167.6 | | $2,920.8 | | $2,345.6 | | $99.3 | | $789.7 | | $10,323.0 | | 100 | % |
| | | | | | | |
2020 | | | | | | | |
On-site | $2,040.2 | | $1,652.8 | | $574.6 | | $54.7 | | $— | | $4,322.3 | | 49 | % |
Merchant | 1,590.5 | | 1,063.7 | | 1,272.4 | | 24.6 | | — | | 3,951.2 | | 45 | % |
Sale of equipment | — | | — | | — | | — | | 582.8 | | 582.8 | | 6 | % |
Total | $3,630.7 | | $2,716.5 | | $1,847.0 | | $79.3 | | $582.8 | | $8,856.3 | | 100 | % |
Remaining Performance Obligations
As of 30 September 2022, the transaction price allocated to remaining performance obligations is estimated to be approximately $23 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.
Our remaining performance obligations do not include (1) expected revenue associated with new on-site plants that are not yet on-stream; (2) consideration associated with contracts that have an expected duration of less than one year; and (3) variable consideration for which we recognize revenue at the amount to which we have the right to invoice, including energy cost pass-through to customers.
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 amended, terminated, or renewed contracts.
Contract Balances
The table below details balances arising from contracts with customers:
| | | | | | | | | | | | |
30 September | | Balance Sheet Location | 2022 | 2021 |
Assets | | | | |
Contract assets – current | | Other receivables and current assets | $69.0 | | $119.4 | |
Contract fulfillment costs – current | | Other receivables and current assets | 84.1 | | 125.5 | |
Liabilities | | | | |
Contract liabilities – current | | Payables and accrued liabilities | $439.1 | | $366.8 | |
Contract liabilities – noncurrent | | Other noncurrent liabilities | 67.2 | | 58.4 | |
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 2022 and 2021 were not material.
Contract liabilities include advanced payments or right to consideration prior to performance under the contract and are recognized as revenue when or as we perform. Increases to our current contract liabilities primarily relate 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 2022, we recognized sales of approximately $242 associated with sale of equipment contracts that were included within our contract liabilities balance as of 30 September 2021. 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.
5. DISCONTINUED OPERATIONS
In fiscal year 2022, income from discontinued operations, net of tax, was $12.6. This primarily resulted from a net tax benefit recorded in the fourth quarter upon release of tax liabilities for uncertain tax positions associated with our former Performance Materials Division ("PMD") for which the statute of limitations expired. Our consolidated statement of cash flows for the fiscal year ended 30 September 2022 reflects cash provided by operating activities of discontinued operations of $59.6 primarily from income tax refunds associated with the sale of PMD in 2017.
In fiscal year 2021, income from discontinued operations, net of tax, was $70.3. This included net tax benefits of $60.0 recorded upon release of tax liabilities related to uncertain tax positions for which the statute of limitations expired. Of this benefit, we recorded $51.8 in the fourth quarter for liabilities associated with PMD and $8.2 in the third quarter for liabilities associated with our former Energy-from-Waste ("EfW") business. Additionally, we recorded a tax benefit of $10.3 in the first quarter of fiscal year 2021 primarily from the settlement of a state tax appeal related to the gain on the sale of PMD in fiscal year 2017. Our consolidated statement of cash flows for the fiscal year ended 30 September 2021 reflects cash provided by operating activities of discontinued operations of $6.7 from cash received as part of the settlement.
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 16, Commitments and Contingencies, for additional information. The loss did not have an impact on our consolidated statement of cash flows for the fiscal year ended 30 September 2020.
6. INVENTORIES
The components of inventories are as follows:
| | | | | | | | | | | | | | |
30 September | | 2022 | | 2021 |
Finished goods | | $162.0 | | | $150.7 | |
Work in process | | 22.0 | | | 24.0 | |
Raw materials, supplies, and other | | 330.2 | | | 279.2 | |
Inventories | | $514.2 | | | $453.9 | |
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| | | | |
7. EQUITY AFFILIATES
"Investment in net assets of and advances to equity affiliates" on our consolidated balance sheets were $3,353.8 and $1,649.3 as of 30 September 2022 and 2021, respectively. Substantially all our equity method investments are in foreign affiliates. In fiscal year 2022, we made an initial investment in the Jazan Integrated Gasification and Power Company ("JIGPC") joint venture as further discussed below.
As of 30 September 2022, our equity affiliates were as follows:
| | | | | | | | |
| | |
Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (25%); | | INFRA Group (40%); |
Air Products South Africa (Proprietary) Limited (50%); | | INOX Air Products Private Limited (50%); |
Bangkok Cogeneration Company Limited (49%); | | Jazan Integrated Gasification and Power Company (51%); |
Bangkok Industrial Gases Co., Ltd. (49%); | | Kulim Industrial Gases Sdn. Bhd. (50%); |
Chengdu Air & Gas Products Ltd. (50%); | | Sapio Produzione Idrogeno Ossigeno S.r.l. (49%); |
Helios S.p.A. (49%); | | and principally, other industrial gas producers. |
Dividends and other distributions received from equity affiliates were $285.1, $157.3, and $107.0 in fiscal years 2022, 2021, and 2020, respectively.
As of 30 September 2022 and 2021, the amount of investment in companies accounted for by the equity method included equity method goodwill of $44.6 and $55.3, respectively.
Summarized Financial Information
The summarized financial information presented below is on a combined 100% basis and has been compiled based on financial statements of our equity affiliates.
| | | | | | | | | | | | | | | | | | | | |
30 September | | | | 2022 | | 2021 |
Current assets | | | | $2,454.6 | | | $2,244.6 | |
Noncurrent assets | | | | 9,805.6 | | | 4,630.7 | |
Current liabilities | | | | 939.0 | | | 774.0 | |
Noncurrent liabilities | | | | 7,713.5 | | | 2,852.5 | |
| | | | | | |
| | | | | | |
Fiscal Year Ended 30 September | | 2022 | | 2021 | | 2020 |
Net sales(A) | | $4,124.4 | | | $3,338.1 | | | $2,809.1 | |
| | | | | | |
Gross profit | | 1,894.0 | | | 1,492.9 | | | 1,212.5 | |
Operating income | | 1,320.1 | | | 962.2 | | | 748.6 | |
Net income | | 895.1 | | | 646.0 | | | 567.8 | |
| | | | | | |
| | | | | | |
| | | | | | |
(A)Includes financing revenue of $674.6, $134.9, and $137.7 in fiscal years 2022, 2021, and 2020, respectively. Financing revenue in fiscal year 2022 primarily relates to the JIGPC joint venture discussed below.
Investment in Jazan Integrated Gasification and Power Company (“JIGPC”)
On 27 October 2021, we made an initial investment of $1.6 billion in JIGPC, a joint venture with Saudi Aramco Power Company (a subsidiary of Aramco), ACWA Power, and Air Products Qudra in the Jazan Economic City, Saudi Arabia. Our investment represents a 55% interest in the joint venture, of which 4% is attributable to the non-controlling partner of Air Products Qudra. The $1.6 billion investment, which includes approximately $130 from the non-controlling partner, is primarily in the form of shareholder loans that qualify as in-substance common stock in the joint venture.
We expect to make an additional investment in JIGPC of approximately $1 billion in 2023.
We determined JIGPC is a variable interest entity for which we are not the primary beneficiary as we do not have the power to direct the activities that are most significant to the economic performance of the joint venture. Instead, these activities, including plant dispatch, operating and maintenance decisions, budgeting, capital expenditures, and financing, require unanimous approval of the owners or are controlled by the customer. Since we have the ability to exercise significant influence in the joint venture, we accounted for our investment in JIGPC under the equity method within the Middle East and India segment.
Certain shareholders receive a preferred cash distribution pursuant to the joint venture agreement, which specifies each shareholder’s share of income after considering the amount of cash available for distribution. As such, the earnings attributable to Air Products may not be proportionate to our ownership interest in the venture.
As of 30 September 2022, the carrying value of our investment totaled $1,780.0 and is presented as “Investments in and advances to equity affiliates” on our consolidated balance sheet. Our loss exposure is limited to our investment in the joint venture.
JIGPC Joint Venture
On 27 September 2021, JIGPC signed definitive agreements for the acquisition of project assets from Aramco for $12 billion and entered into related project financing for the purchase. JIGPC will complete the acquisition of the project assets, which include power blocks, gasifiers, air separation units, syngas cleanup assets, and utilities, in two phases. The first phase was completed on 27 October 2021 for $7 billion. The second phase is expected to be completed in 2023. JIGPC will commission, operate, and maintain the project assets to supply electricity, steam, hydrogen, and utilities to Aramco’s refinery and terminal complex under a 25-year agreement, which commenced in the first quarter of fiscal year 2022.
JIGPC accounted for the asset transfer as a financing. Accordingly, the joint venture recorded a financing receivable upon acquisition and will recognize financing income over the supply term.
Jazan Gas Project Company
Jazan Gas Project Company (“JGPC”), a joint venture between Air Products and ACWA Holding, entered into a 20-year oxygen and nitrogen supply agreement in 2015 to supply Aramco’s oil refinery and power plant in Jazan, Saudi Arabia.
In October 2021, the supply agreement between JGPC and Aramco was terminated, and JGPC sold its air separation units to Aramco. We initially sold these assets to JGPC and deferred profit proportionate to our 26% ownership in the joint venture. With the termination of the supply agreement and sale of the air separation units complete, we recognized the remaining deferred profit, net of other project finalization costs, in equity affiliates’ income in the first quarter of fiscal year 2022.
As of 30 September 2021, our consolidated balance sheets included $94.4 reflected within "Payables and accrued liabilities" for our obligation to make equity contributions based on our proportionate share of advances received by the joint venture under an equity bridge loan. The joint venture utilized a portion of the proceeds from the sale of the air separation units to repay its outstanding debt, including the equity bridge loan. Accordingly, we recorded a noncash adjustment of $94.4 in the first quarter of fiscal year 2022 to reduce our obligation to zero with a corresponding reduction to the carrying value of our investment in the joint venture. As of 30 September 2022, we no longer have an investment balance in the JGPC joint venture.
Equity Method Investment Impairment
During the fourth quarter of fiscal year 2022, we determined there was an other-than-temporary impairment in two small equity affiliates in the Asia segment. As a result, we recorded a noncash charge of $14.8 to write down the full carrying value of the investments. This charge is reflected on our consolidated income statements within “Equity affiliates' income” and was not recorded in segment results.
India Finance Act 2020
Our consolidated income statements in fiscal year 2020 include a benefit of $33.8 reflected in equity affiliates' income for our share of accumulated dividend distribution taxes released with respect to INOX Air Products Private Limited, an equity affiliate investment in our Asia segment. This benefit, which related to tax legislation passed by the Indian government, was not recorded in segment results. Refer to Note 21, Income Taxes, for additional information. The benefit is included in fiscal year 2020 net income in the summarized financial information table above on a 100% basis.
8. PLANT AND EQUIPMENT, NET
The major classes of plant and equipment are as follows:
| | | | | | | | | | | | | | |
30 September | Useful life | 2022 | | 2021 |
Land | | $266.7 | | | $312.1 | |
Buildings | 30 years | 1,431.3 | | | 1,083.1 | |
Production facilities(A) | 10-20 years | 18,000.5 | | | 18,236.9 | |
| | | | |
| | | | |
| | | | |
Distribution and other machinery and equipment(B) | 5-25 years | 4,784.9 | | | 5,111.6 | |
Construction in progress | | 3,676.7 | | | 2,745.1 | |
Plant and equipment, at cost | | $28,160.1 | | | $27,488.8 | |
Less: Accumulated depreciation | | 13,999.6 | | | 14,234.2 | |
Plant and equipment, net | | $14,160.5 | | | $13,254.6 | |
(A)Depreciable lives of production facilities related to long-term customer supply contracts are generally 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; generally 7.5 years for customer stations; and 5 to 15 years for tractors and trailers.
Depreciation expense was $1,302.7, $1,284.1, and $1,150.5 in fiscal years 2022, 2021, and 2020, respectively.
9. GOODWILL
Changes to the carrying amount of consolidated goodwill by segment are as follows:
| | | | | | | | | | | | | | | | | | | | |
| Americas | Asia | Europe | Middle East and India | Corporate and other | Total |
Goodwill, net at 30 September 2020 | $152.6 | | $180.4 | | $516.3 | | $7.8 | | $34.4 | | $891.5 | |
| | | | | | |
Acquisitions(A) | — | | — | | 21.0 | | — | | — | | 21.0 | |
Currency translation and other | (1.6) | | 3.9 | | (3.8) | | 0.2 | | 0.3 | | (1.0) | |
Goodwill, net at 30 September 2021 | $151.0 | | $184.3 | | $533.5 | | $8.0 | | $34.7 | | $911.5 | |
| | | | | | |
Acquisitions(A) | — | | — | | 17.0 | | 7.5 | | — | | 24.5 | |
Currency translation and other | (7.8) | | (11.6) | | (93.0) | | 0.3 | | (0.9) | | (113.0) | |
Goodwill, net at 30 September 2022 | $143.2 | | $172.7 | | $457.5 | | $15.8 | | $33.8 | | $823.0 | |
(A)Goodwill acquired in fiscal year 2021 was primarily attributable to a business combination completed in the second quarter. Refer to Note 3, Acquisitions, for additional information. In fiscal year 2022, goodwill acquired is primarily attributable to expected cost synergies associated with small business combinations, of which $3.2 is deductible for tax purposes.
| | | | | | | | | | | |
30 September | 2022 | 2021 | 2020 |
Goodwill, gross | $1,096.0 | | $1,239.2 | | $1,230.2 | |
Accumulated impairment losses(A) | (273.0) | | (327.7) | | (338.7) | |
Goodwill, net | $823.0 | | $911.5 | | $891.5 | |
(A)Accumulated impairment losses include the impacts of currency translation. These losses are attributable to our Latin America reporting unit ("LASA") within the 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 2022, we conducted our annual goodwill impairment test and determined that the fair value of all our reporting units exceeded their carrying value.
10. INTANGIBLE ASSETS
The table below summarizes the major classes of our intangible assets:
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| | 2022 | | 2021 |
30 September | | Gross | | Accumulated Amortization/ Impairment | | Net | | Gross | | Accumulated Amortization/ Impairment | | Net |
Finite-lived: | | | | | | | | | | | | |
Customer relationships | | $487.5 | | | ($226.3) | | | $261.2 | | | $552.0 | | | ($234.7) | | | $317.3 | |
Patents and technology | | 33.1 | | | (16.3) | | | 16.8 | | | 36.8 | | | (16.9) | | | 19.9 | |
Other | | 73.4 | | | (37.0) | | | 36.4 | | | 80.5 | | | (37.3) | | | 43.2 | |
Total finite-lived intangible assets | | $594.0 | | | ($279.6) | | | $314.4 | | | $669.3 | | | ($288.9) | | | $380.4 | |
Indefinite-lived: | | | | | | | | | | | | |
Trade names and trademarks | | 42.2 | | | (9.1) | | | 33.1 | | | 51.2 | | | (10.9) | | | 40.3 | |
Total intangible assets | | $636.2 | | | ($288.7) | | | $347.5 | | | $720.5 | | | ($299.8) | | | $420.7 | |
The decrease in net intangible assets in fiscal year 2022 was primarily attributable to currency impacts due to the strengthening of the U.S Dollar as well as amortization.
Amortization expense for intangible assets was $35.5, $37.2, and $34.5 in fiscal years 2022, 2021, and 2020, respectively. Refer to Note 1, Basis of Presentation and Major Accounting Policies, for the amortization periods for each major class of intangible assets.
The table below details the amount of amortization expense expected to be recorded for our finite-lived intangible assets in each of the next five years and thereafter:
| | | | | |
2023 | $29.9 | |
2024 | 28.8 | |
2025 | 27.7 | |
2026 | 26.7 | |
2027 | 26.3 | |
Thereafter | 175.0 | |
Total | $314.4 | |
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 2022, 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.
11. LEASES
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.
Operating lease expense was $105.3, $89.5, and $80.1 for fiscal years 2022, 2021, and 2020, respectively. These amounts do not include short-term and variable lease expenses, which were not material.
Amounts associated with operating leases and their presentation on our consolidated balance sheets are as follows:
| | | | | | | | | | | |
30 September | 2022 | | 2021 |
Operating lease right-of-use assets | | | |
Other noncurrent assets | $694.7 | | | $566.2 | |
Operating lease liabilities | | | |
Payables and accrued liabilities | 90.0 | | | 78.6 | |
Other noncurrent liabilities | 592.1 | | | 503.4 | |
Total operating lease liabilities | $682.1 | | | $582.0 | |
| | | | | | | | | | | |
30 September | 2022 | | 2021 |
Weighted-average remaining lease term in years(A) | 19.1 | | 17.2 |
| | | |
| | | |
Weighted-average discount rate(B) | 2.1 | % | | 1.9 | % |
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(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.
The following maturity analysis of our operating lease liabilities as of 30 September 2022 presents the undiscounted cash flows for each of the next five years and thereafter with a reconciliation to the lease liability recognized on our balance sheet:
| | | | | | | | | | |
| | | | Operating Leases |
2023 | | | | $102.3 | |
2024 | | | | 85.0 | |
2025 | | | | 69.1 | |
2026 | | | | 52.4 | |
2027 | | | | 39.1 | |
Thereafter | | | | 461.3 | |
Total undiscounted lease payments | | | | 809.2 | |
Imputed interest | | | | (127.1) | |
Present value of lease liability recognized on balance sheet | | | | $682.1 | |
The impacts associated with our operating leases on the consolidated statements of cash flows are reflected within "Other adjustments" within operating activities. This includes non-cash operating lease expense of $105.3, $89.5, and $80.1, as well as a use of cash of $128.0, $98.8, and $90.0 for payments on amounts included in the measurement of the lease liability for fiscal years 2022, 2021, and 2020, respectively.
We recorded $252, $259, and $442 of noncash right-of-use asset additions during fiscal years 2022, 2021, and 2020, respectively.
We have additional operating leases that have not yet commenced as of 30 September 2022 having lease payments totaling approximately $120.
Lessor Accounting
Certain contracts associated with facilities that are built to provide product to a specific customer have been accounted for as leases. 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 2022.
In cases for which 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. 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 for which 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 years 2022, 2021, and 2020, we recognized interest income of $59.1, $67.4, and $71.2 on our lease receivables, respectively.
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 on certain on-site assets for which payments are collected over the contract term. As of 30 September 2022 and 2021, our lease receivables, net were $660.9 and $824.7, respectively, and are primarily included within "Noncurrent lease receivables" on our consolidated balance sheets, with the remaining balance in "Other receivables and current assets." The majority of our leases are of high credit quality and were originated prior to fiscal year 2017. As of 30 September 2022 and 2021, the credit quality of lease receivables did not require a material allowance for credit losses.
Lease payments collected in fiscal years 2022, 2021, and 2020 were $153.1, $166.2, and $162.8, respectively. These payments reduced the noncurrent lease receivable balance by $94.0, $98.8, and $91.6 in fiscal years 2022, 2021, and 2020, respectively.
As of 30 September 2022, minimum lease payments expected to be collected, which reconciles to lease receivables, net, were as follows:
| | | | | |
2023 | $126.9 | |
2024 | 122.0 | |
2025 | 116.9 | |
2026 | 107.3 | |
2027 | 94.3 | |
Thereafter | 363.6 | |
Total | 931.0 | |
Unearned interest income | (270.1) | |
Lease Receivables, net | $660.9 | |
12. 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 2022 is 3.7 years.
Forward exchange contracts are also used to hedge the value of investments in certain foreign subsidiaries and affiliates by creating a liability in a currency in which we have a net equity position. The primary currency pair in this portfolio of forward exchange contracts is Euros and U.S. Dollars.
We also utilize forward exchange contracts that are not designated as hedges. These contracts are used to economically hedge foreign currency-denominated monetary assets and liabilities, primarily working capital. The primary objective of these forward exchange contracts is to protect the value of foreign currency-denominated monetary assets and liabilities from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement. This portfolio of forward exchange contracts consists of many different foreign currency pairs, with a profile that changes from time to time depending on our business activity and sourcing decisions.
The table below summarizes our outstanding currency price risk management instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
30 September | | US$ Notional | | Years Average Maturity | | US$ Notional | | Years Average Maturity |
Forward Exchange Contracts | | | | | | | | |
Cash flow hedges | | $4,525.0 | | | 0.7 | | $3,465.2 | | | 0.6 |
Net investment hedges | | 542.2 | | | 2.2 | | 638.0 | | | 3.0 |
Not designated | | 534.3 | | | 0.3 | | 692.6 | | | 0.1 |
Total Forward Exchange Contracts | | $5,601.5 | | | 0.8 | | $4,795.8 | | | 0.8 |
The increase in the notional value of cash flow hedges in fiscal year 2022 is primarily due to the origination of forward exchange contracts that hedge forecasted foreign currency costs for capital projects.
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 €1,265.4 million ($1,240.4) at 30 September 2022 and €1,297.5 million ($1,502.6) at 30 September 2021. 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, we manage our debt portfolio and hedging program with the intent to (1) reduce funding risk with respect to our borrowings 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 2022, 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 the U.S. Dollar and each of the Chinese Renminbi, Indian Rupee, and Chilean Peso.
The table below summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
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) | | $800.0 | | | Various | | 1.64 | % | | 5.0 | | $200.0 | | | LIBOR | | 2.76 | % | | 0.1 |
Cross currency interest rate swaps (net investment hedge) | | $176.7 | | | 4.12 | % | | 3.07 | % | | 1.2 | | $210.2 | | | 4.32 | % | | 3.14 | % | | 2.2 |
Cross currency interest rate swaps (cash flow hedge) | | $785.7 | | | 4.78 | % | | 3.05 | % | | 2.3 | | $1,005.7 | | | 4.98 | % | | 2.93 | % | | 2.7 |
Cross currency interest rate swaps (not designated) | | $37.7 | | | 5.39 | % | | 3.54 | % | | 1.2 | | $4.2 | | | 5.39 | % | | 3.54 | % | | 2.2 |
The table below provides the amounts recorded on the consolidated balance sheet related to cumulative basis adjustments for fair value hedges:
| | | | | | | | | | | | | | | | | |
| Carrying amounts of hedged item | | Cumulative hedging adjustment, included in carrying amount |
30 September | 2022 | 2021 | | 2022 | 2021 |
Current portion of long-term debt | $— | | $400.5 | | | $— | | $0.5 | |
Long-term debt | 2,012.9 | | — | | | (77.1) | | — | |
The table below summarizes the fair value and balance sheet location of our outstanding derivatives. Refer to Note 13, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.
| | | | | | | | | | | | | | | | | | | | |
30 September | Balance Sheet Location | 2022 | 2021 | Balance Sheet Location | 2022 | 2021 |
Derivatives Designated as Hedging Instruments: | | | | | | |
Forward exchange contracts | Other receivables and current assets | $71.6 | | $35.1 | | Payables and accrued liabilities | $226.2 | | $57.2 | |
Interest rate management contracts | Other receivables and current assets | 36.7 | | 16.0 | | Payables and accrued liabilities | — | | 5.2 | |
Forward exchange contracts | Other noncurrent assets | 60.8 | | 5.5 | | Other noncurrent liabilities | 46.9 | | 25.2 | |
Interest rate management contracts | Other noncurrent assets | 12.5 | | 18.1 | | Other noncurrent liabilities | 91.2 | | 27.5 | |
Total Derivatives Designated as Hedging Instruments | | $181.6 | | $74.7 | | | $364.3 | | $115.1 | |
Derivatives Not Designated as Hedging Instruments: | | | | | | |
Forward exchange contracts | Other receivables and current assets | $6.1 | | $8.7 | | Payables and accrued liabilities | $2.1 | | $6.4 | |
| | | | | | |
Forward exchange contracts | Other noncurrent assets | 0.1 | | — | | Other noncurrent liabilities | 0.1 | | — | |
Interest rate management contracts | Other noncurrent assets | 1.3 | | — | | Other noncurrent liabilities | — | | — | |
Total Derivatives Not Designated as Hedging Instruments | | $7.5 | | $8.7 | | | $2.2 | | $6.4 | |
Total Derivatives | | $189.1 | | $83.4 | | | $366.5 | | $121.5 | |
The table below summarizes gains (losses) recognized in other comprehensive income during the period related to our net investment and cash flow hedging relationships:
| | | | | | | | |
| 2022 | 2021 |
Net Investment Hedging Relationships | | |
Forward exchange contracts | $89.8 | | $11.4 | |
Foreign currency debt | 229.6 | | 18.1 | |
Cross currency interest rate swaps | 12.5 | | (7.9) | |
Total Amount Recognized in OCI | 331.9 | | 21.6 | |
Tax effects | (82.1) | | (5.5) | |
Net Amount Recognized in OCI | $249.8 | | $16.1 | |
| | |
Derivatives in Cash Flow Hedging Relationships | | |
Forward exchange contracts | ($310.2) | | $12.7 | |
Forward exchange contracts, excluded components | 2.8 | | (11.7) | |
Other(A) | 123.2 | | (6.7) | |
Total Amount Recognized in OCI | (184.2) | | (5.7) | |
Tax effects | 63.9 | | 9.0 | |
Net Amount Recognized in OCI | ($120.3) | | $3.3 | |
(A)Other primarily includes interest rate and cross currency interest rate swaps for which excluded components are recognized in “Payables and accrued liabilities” and “Other receivables and current assets” as a component of accrued interest payable and accrued interest receivable, respectively. These excluded components are recorded in “Other non-operating income (expense), net” over the life of the cross currency interest rate swap. Other also includes the recognition of our share of gains and losses, net of tax, related to interest rate swaps held by our equity affiliates.
The 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 | | | | Interest Expense | | Other Non-Operating Income (Expense), Net |
| 2022 | 2021 | | 2022 | 2021 | | | | | 2022 | 2021 | | 2022 | 2021 |
Total presented in consolidated income statements that includes effects of hedging below | $12,698.6 | | $10,323.0 | | | $9,338.5 | | $7,186.1 | | | | | | $128.0 | | $141.8 | | | $62.4 | | $73.7 | |
(Gain) Loss Effects of Cash Flow Hedging: | | | | | | | | | | | | | | |
Forward Exchange Contracts: | | | | | | | | | | | | | | |
Amount reclassified from OCI into income | $0.8 | | ($0.8) | | | ($0.1) | | ($0.8) | | | | | | $— | | $— | | | $205.7 | | $5.2 | |
| | | | | | | | | | | | | | |
Amount excluded from effectiveness testing recognized in earnings based on amortization approach | — | | — | | | — | | — | | | | | | — | | — | | | 4.6 | | 9.1 | |
Other: | | | | | | | | | | | | | | |
Amount reclassified from OCI into income | — | | — | | | — | | — | | | | | | 5.8 | | 5.6 | | | (95.1) | | 39.1 | |
| | | | | | | | | | | | | | |
Total (Gain) Loss Reclassified from OCI to Income | 0.8 | | (0.8) | | | (0.1) | | (0.8) | | | | | | 5.8 | | 5.6 | | | 115.2 | | 53.4 | |
Tax effects | (0.3) | | 0.2 | | | (0.3) | | 0.5 | | | | | | (2.2) | | (2.1) | | | (27.5) | | (12.5) | |
Net (Gain) Loss Reclassified from OCI to Income | $0.5 | | ($0.6) | | | ($0.4) | | ($0.3) | | | | | | $3.6 | | $3.5 | | | $87.7 | | $40.9 | |
(Gain) Loss Effects of Fair Value Hedging: | | | | | | | | | | | | | | |
Other: | | | | | | | | | | | | | | |
Hedged items | $— | | $— | | | $— | | $— | | | | | | ($77.6) | | ($5.2) | | | $— | | $— | |
Derivatives designated as hedging instruments | — | | — | | | — | | — | | | | | | 77.6 | | 5.2 | | | — | | — | |
Total (Gain) Loss Recognized in Income | $— | | $— | | | $— | | $— | | | | | | $— | | $— | | | $— | | $— | |
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 |
| 2022 | | 2021 | | 2022 | | 2021 |
The Effects of Derivatives Not Designated as Hedging Instruments: | | | |
Forward Exchange Contracts | ($3.7) | | | $2.8 | | | ($2.9) | | | ($2.7) | |
Other | — | | | — | | | (2.3) | | | 0.5 | |
Total (Gain) Loss Recognized in Income | ($3.7) | | | $2.8 | | | ($5.2) | | | ($2.2) | |
The amount of unrealized gains and losses related to cash flow hedges as of 30 September 2022 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 $114.8 and $53.4 as of 30 September 2022 and 2021, 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 $62.8 and $38.1 as of 30 September 2022 and 2021, respectively. No financial institution is required to post collateral at this time, as all have credit ratings at or above the applicable threshold.
13. 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 12, 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
30 September | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Assets | | | | | | | | |
Derivatives | | | | | | | | |
Forward exchange contracts | | $138.6 | | | $138.6 | | | $49.3 | | | $49.3 | |
Interest rate management contracts | | 50.5 | | | 50.5 | | | 34.1 | | | 34.1 | |
Liabilities | | | | | | | | |
Derivatives | | | | | | | | |
Forward exchange contracts | | $275.3 | | | $275.3 | | | $88.8 | | | $88.8 | |
Interest rate management contracts | | 91.2 | | | 91.2 | | | 32.7 | | | 32.7 | |
Long-term debt, including current portion and related party | | 7,634.1 | | | 6,721.2 | | | 7,634.8 | | | 7,812.2 | |
The carrying amounts reported on the consolidated balance sheets for cash and cash items, short-term investments, trade receivables, payables and accrued liabilities, accrued income taxes, and short-term borrowings approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the above table.
The following table summarizes assets and liabilities on the consolidated balance sheets that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
30 September | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets at Fair Value | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Derivatives | | | | | | | | | | | | | | | | |
Forward exchange contracts | | $138.6 | | | $— | | | $138.6 | | | $— | | | $49.3 | | | $— | | | $49.3 | | | $— | |
Interest rate management contracts | | 50.5 | | | — | | | 50.5 | | | — | | | 34.1 | | | — | | | 34.1 | | | — | |
Total Assets at Fair Value | | $189.1 | | | $— | | | $189.1 | | | $— | | | $83.4 | | | $— | | | $83.4 | | | $— | |
Liabilities at Fair Value | | | | | | | | | | | | | | | | |
Derivatives | | | | | | | | | | | | | | | | |
Forward exchange contracts | | $275.3 | | | $— | | | $275.3 | | | $— | | | $88.8 | | | $— | | | $88.8 | | | $— | |
Interest rate management contracts | | 91.2 | | | — | | | 91.2 | | | — | | | 32.7 | | | — | | | 32.7 | | | — | |
Total Liabilities at Fair Value | | $366.5 | | | $— | | | $366.5 | | | $— | | | $121.5 | | | $— | | | $121.5 | | | $— | |
14. DEBT
The table below summarizes our total outstanding debt as reflected on our consolidated balance sheets:
| | | | | | | | | | | | | | |
30 September | | 2022 | | 2021 |
Short-term borrowings(A) | | $10.7 | | | $2.4 | |
Current portion of long-term debt | | 548.3 | | | 484.5 | |
Long-term debt | | 6,433.8 | | | 6,875.7 | |
Long-term debt – related party | | 652.0 | | | 274.6 | |
Total Debt | | $7,644.8 | | | $7,637.2 | |
(A)Includes bank obligations with weighted average interest rates of 4.2% and 0.6% as of 30 September 2022 and 2021, respectively.
Related Party Debt
Total debt owed to related parties was $781.0 and $358.4 as of 30 September 2022 and 30 September 2021, respectively. "Current portion of long-term debt" includes amounts owed to related parties of $129.0 and $83.8 as of 30 September 2022 and 2021, respectively. Our related party debt includes loans with joint venture partners, including Lu’An Clean Energy Company, as well as shareholder loans associated with the NEOM project. Refer to Note 22, Supplemental Information, for additional information.
Summary of Debt Instruments
The table below summarizes the coupon interest rates, fiscal year maturities, and carrying amounts of our long-term debt, including current portion and amounts owed to related parties:
| | | | | | | | | | | | | | | | | | | | |
30 September | | Maturities | | 2022 | | 2021 |
Payable in U.S. Dollars | | | | | | |
| | | | | | |
| | | | | | |
Medium-term Notes (weighted average rate) | | | | | | |
Series E 7.6% | | 2026 | | $17.2 | | | $17.2 | |
Senior Notes | | | | | | |
Note 3.0% | | 2022 | | — | | | 400.0 | |
Note 2.75% | | 2023 | | 400.0 | | | 400.0 | |
Note 3.35% | | 2024 | | 400.0 | | | 400.0 | |
Note 1.50% | | 2026 | | 550.0 | | | 550.0 | |
Note 1.85% | | 2027 | | 650.0 | | | 650.0 | |
Note 2.05% | | 2030 | | 900.0 | | | 900.0 | |
Note 2.70% | | 2040 | | 750.0 | | | 750.0 | |
Note 2.80% | | 2050 | | 950.0 | | | 950.0 | |
Other (weighted average rate) | | | | | | |
Variable-rate industrial revenue bonds 1.59% | | 2035 to 2050 | | 618.9 | | | 618.9 | |
Other variable-rate 3.42% | | 2024 to 2032 | | 41.4 | | | 14.4 | |
Payable in Other Currencies | | | | | | |
Eurobonds 1.0% | | 2025 | | 294.1 | | | 347.4 | |
Eurobonds 0.50% | | 2028 | | 490.1 | | | 579.1 | |
Eurobonds 0.80% | | 2032 | | 490.1 | | | 579.1 | |
Saudi Riyal Loan Facility variable-rate 4.10% | | 2023 | | 195.6 | | | — | |
New Taiwan Dollar Loan Facility 1.86% | | 2023 to 2028 | | 189.0 | | | 161.8 | |
New Taiwan Dollar Loan Facility 2.66% | | 2026 to 2029 | | 31.5 | | | — | |
Other | | 2023 | | 0.1 | | | 0.3 | |
Related Party Debt | | | | | | |
Chinese Renminbi 5.5% | | 2023 to 2027 | | 321.5 | | | 355.0 | |
Chinese Renminbi 5.7% | | 2033 | | 12.2 | | | 3.4 | |
Finance Lease Obligations (weighted average rate) | | | | | | |
| | | | | | |
Foreign 11.3% | | 2023 to 2036 | | 7.6 | | | 8.1 | |
Total Principal Amount | | | | $7,309.3 | | | $7,684.7 | |
Plus: Related party shareholder loans to NGHC | | | | 447.3 | | | — | |
Less: Unamortized discount and debt issuance costs | | | | (45.4) | | | (50.4) | |
Less: Fair value hedge accounting adjustments(A) | | | | (77.1) | | | 0.5 | |
Total Long-term Debt | | | | $7,634.1 | | | $7,634.8 | |
Less: Current portion of long-term debt | | | | (548.3) | | | (484.5) | |
Less: Long-term debt – related party | | | | (652.0) | | | (274.6) | |
Long-term Debt | | | | $6,433.8 | | | $6,875.7 | |
(A)Refer to Note 12, Financial Instruments, for additional information.
Principal maturities of long-term debt, including current portion and amounts owed to related parties, in each of the next five years and thereafter are as follows:
| | | | | |
2023(A) | $744.0 | |
2024 | 496.8 | |
2025 | 398.4 | |
2026 | 673.6 | |
2027 | 725.0 | |
Thereafter | 4,271.5 | |
Total | $7,309.3 | |
(A)Principal maturities in fiscal year 2023 include the 4.10% Saudi Riyal Loan Facility of $195.6, which is presented within long-term debt on our consolidated balance sheet as of 30 September 2022 as we entered into a Saudi Riyal Loan Facility in October 2022 and utilized the proceeds to repay the outstanding balance. The new facility is due in 2027.
Cash paid for interest, net of amounts capitalized, was $128.5, $150.4, and $67.2 in fiscal years 2022, 2021, and 2020, respectively.
In November 2021, we repaid the 3.0% Senior Note of $400, plus interest, on its maturity date.
Debt Covenants
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 2022, we are in compliance with all the financial and other covenants under our debt agreements.
Credit Facilities
2021 Credit Agreement
On 31 March 2021, we entered into a five-year $2,500 revolving credit agreement with a syndicate of banks (the “2021 Credit Agreement”), under which senior unsecured debt is available to us and certain of our subsidiaries. On 31 March 2022, we amended the 2021 Credit Agreement to exercise our option to increase the maximum borrowing capacity to $2,750 and transition the benchmark rate from LIBOR to the Secured Overnight Financing Rate ("SOFR"). All other terms remain unchanged from the original agreement. The 2021 Credit Agreement provides a source of liquidity and supports our commercial paper program. The only financial covenant in the 2021 Credit Agreement is a maximum ratio of total debt to capitalization (equal to total debt plus total equity) not to exceed 70%. No borrowings were outstanding under the 2021 Credit Agreement as of 30 September 2022.
Other
We have credit facilities available to certain of our foreign subsidiaries totaling $749.0, of which $457.5 was borrowed and outstanding as of 30 September 2022. The amount borrowed and outstanding as of 30 September 2021 was $176.2.
2020 Debt Issuance
In fiscal year 2020, we issued U.S. Dollar- and Euro-denominated fixed-rate notes with aggregate principal amounts of $3.8 billion and €1.0 billion, respectively. Our consolidated statement of cash flows for the fiscal year ended 30 September 2020 includes long-term debt proceeds of $4,895.8 from these issuances.
15. 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 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended 30 September |
| 2022 | | 2021 | | 2020 |
| U.S. | Inter- national | Total | | U.S. | Inter- national | Total | | U.S. | Inter- national | Total |
Service cost | $18.3 | | $21.5 | | $39.8 | | | $21.3 | | $23.4 | | $44.7 | | | $23.4 | | $23.3 | | $46.7 | |
Non-service (benefit) cost: | | | | | | | | | | | |
Interest cost | 73.9 | | 28.9 | | 102.8 | | | 68.9 | | 25.2 | | 94.1 | | | 91.2 | | 24.8 | | 116.0 | |
Expected return on plan assets | (168.3) | | (67.4) | | (235.7) | | | (194.5) | | (83.4) | | (277.9) | | | (188.7) | | (77.4) | | (266.1) | |
Prior service cost amortization | 1.3 | | — | | 1.3 | | | 1.2 | | — | | 1.2 | | | 1.2 | | — | | 1.2 | |
Actuarial loss amortization | 66.0 | | 14.7 | | 80.7 | | | 78.5 | | 19.3 | | 97.8 | | | 83.7 | | 19.5 | | 103.2 | |
Settlements | 6.0 | | 0.2 | | 6.2 | | | 1.3 | | 0.5 | | 1.8 | | | 5.0 | | 0.2 | | 5.2 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other | — | | 1.3 | | 1.3 | | | — | | 1.0 | | 1.0 | | | — | | 0.8 | | 0.8 | |
Net Periodic (Benefit) Cost | ($2.8) | | ($0.8) | | ($3.6) | | | ($23.3) | | ($14.0) | | ($37.3) | | | $15.8 | | ($8.8) | | $7.0 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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 2022, 2021 and 2020 were not material. The non-service related costs, including pension settlement losses, are presented outside operating income within "Other non-operating income (expense), net."
Certain of our pension plans provide for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after their retirement date. A participant’s vested benefit is considered settled upon cash payment of the lump sum. We recognize pension 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 $6.0, $1.3 and $5.0 in fiscal years 2022, 2021 and 2020, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| U.S. | International | | U.S. | International | | U.S. | International |
| | | | | | | | |
Discount rate – Service cost | 3.0 | % | 1.9 | % | | 3.0 | % | 1.6 | % | | 3.3 | % | 1.5 | % |
Discount rate – Interest cost | 2.3 | % | 1.6 | % | | 2.1 | % | 1.2 | % | | 2.9 | % | 1.3 | % |
Expected return on plan assets | 5.8 | % | 4.0 | % | | 6.8 | % | 4.7 | % | | 7.0 | % | 5.0 | % |
Rate of compensation increase | 3.5 | % | 3.3 | % | | 3.5 | % | 3.3 | % | | 3.5 | % | 3.3 | % |
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | U.S. | | International | | U.S. | | International |
Discount rate | | 5.6 | % | | 4.7 | % | | 2.9 | % | | 1.8 | % |
Rate of compensation increase | | 3.5 | % | | 3.4 | % | | 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | U.S. | | International | | U.S. | | International |
Change in Projected Benefit Obligation | | | | | | | | |
Obligation at beginning of year | | $3,335.3 | | | $1,969.6 | | | $3,423.8 | | | $1,949.7 | |
Service cost | | 18.3 | | | 21.5 | | | 21.3 | | | 23.4 | |
Interest cost | | 73.9 | | | 28.9 | | | 68.9 | | | 25.2 | |
Amendments | | 1.5 | | | 0.1 | | | 0.5 | | | — | |
Actuarial (gain) loss | | (793.8) | | | (575.2) | | | (17.7) | | | (30.9) | |
| | | | | | | | |
| | | | | | | | |
Settlements | | (19.2) | | | (0.9) | | | (3.0) | | | (1.8) | |
| | | | | | | | |
Participant contributions | | — | | | 1.2 | | | — | | | 1.3 | |
Benefits paid | | (165.2) | | | (53.0) | | | (158.5) | | | (52.8) | |
Currency translation and other | | — | | | (254.7) | | | — | | | 55.5 | |
Obligation at End of Year | | $2,450.8 | | | $1,137.5 | | | $3,335.3 | | | $1,969.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | U.S. | | International | | U.S. | | International |
Change in Plan Assets | | | | | | | | |
Fair value at beginning of year | | $3,343.7 | | | $1,905.0 | | | $3,048.3 | | | $1,726.8 | |
Actual return on plan assets | | (778.3) | | | (498.5) | | | 450.0 | | | 140.1 | |
Company contributions | | 23.0 | | | 21.7 | | | 6.9 | | | 37.7 | |
Participant contributions | | — | | | 1.2 | | | — | | | 1.3 | |
| | | | | | | | |
Benefits paid | | (165.2) | | | (53.0) | | | (158.5) | | | (52.8) | |
Settlements | | (19.2) | | | (0.9) | | | (3.0) | | | (1.8) | |
Currency translation and other | | — | | | (253.5) | | | — | | | 53.7 | |
Fair Value at End of Year | | $2,404.0 | | | $1,122.0 | | | $3,343.7 | | | $1,905.0 | |
Funded Status at End of Year | | ($46.8) | | | ($15.5) | | | $8.4 | | | ($64.6) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | U.S. | | International | | U.S. | | International |
Amounts Recognized | | | | | | | | |
Noncurrent assets | | $36.4 | | | $97.5 | | | $90.5 | | | $128.7 | |
Accrued liabilities | | 5.8 | | | 0.4 | | | 19.6 | | | 0.5 | |
Noncurrent liabilities | | 77.4 | | | 112.6 | | | 62.5 | | | 192.8 | |
Net Asset (Liability) Recognized | | ($46.8) | | | ($15.5) | | | $8.4 | | | ($64.6) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The changes in plan assets and benefit obligation that have been recognized in other comprehensive income on a pretax basis during fiscal years 2022 and 2021 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | U.S. | | International | | U.S. | | International |
Net actuarial (gain) loss arising during the period | | $152.8 | | | ($9.3) | | | ($273.2) | | | ($87.6) | |
Amortization of net actuarial loss | | (72.0) | | | (14.9) | | | (79.8) | | | (19.8) | |
Prior service cost arising during the period | | 1.5 | | | 0.1 | | | 0.5 | | | — | |
Amortization of prior service cost | | (1.3) | | | — | | | (1.2) | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total | | $81.0 | | | ($24.1) | | | ($353.7) | | | ($107.4) | |
The net actuarial gains and losses represent 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 2022 are primarily attributable to lower than expected returns on plan assets that were partially offset by higher discount rates. Accumulated actuarial gains and losses that exceed a corridor are amortized over the average remaining service period of active U.S. participants, which was approximately seven years as of 30 September 2022. For U.K. participants, accumulated actuarial gains and losses that exceed a corridor are amortized over the average remaining life expectancy, which was approximately 23 years as of 30 September 2022.
The components recognized in accumulated other comprehensive loss on a pretax basis at 30 September consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | U.S. | | International | | U.S. | | International |
Net actuarial loss | | $525.5 | | | $511.6 | | | $444.7 | | | $535.8 | |
Prior service cost | | 6.5 | | | 3.7 | | | 6.3 | | | 3.6 | |
Net transition liability | | — | | | 0.4 | | | — | | | 0.4 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total | | $532.0 | | | $515.7 | | | $451.0 | | | $539.8 | |
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 $3,491.4 and $5,140.0 as of 30 September 2022 and 2021, respectively.
The following table provides information on pension plans where the benefit liability exceeds the value of plan assets:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
30 September | U.S. | International | | U.S. | International |
Pension Plans with PBO in Excess of Plan Assets: | | | | | |
PBO | $2,289.7 | | $284.9 | | | $82.1 | | $456.6 | |
Fair value of plan assets | 2,206.5 | | 171.8 | | | — | | 263.4 | |
PBO in excess of plan assets | $83.2 | | $113.1 | | | $82.1 | | $193.2 | |
Pension Plans with ABO in Excess of Plan Assets: | | | | | |
ABO | $50.5 | | $101.3 | | | $79.2 | | $416.8 | |
Fair value of plan assets | — | | 20.1 | | | — | | 263.4 | |
ABO in excess of plan assets | $50.5 | | $81.2 | | | $79.2 | | $153.4 | |
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 2022 were $56.7 and $60.8, respectively. As of 30 September 2022, the U.S. salaried pension plan had a PBO in excess of plan assets, which resulted in an increase to the U.S. balances presented above. As of 30 September 2021, the U.S. salaried pension plan had plan assets in excess of both PBO and ABO.
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. The U.S. and U.K. plans' investment managers are authorized to utilize derivatives to manage interest and inflation exposure.
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. As of 30 September 2022, the U.S pension plan was at target with respect to the fixed income securities portfolio. The company continues to monitor the investment portfolio and various investment markets and will take action accordingly. 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:
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| | 2022 Target Allocation | | 2022 Actual Allocation | | 2021 Actual Allocation |
| | U.S. | | International | | U.S. | | International | | U.S. | | International |
Asset Category | | | | | | | | | | | | |
Equity securities | | 17 - 29% | | 10 - 36% | | 17 | % | | 31 | % | | 30 | % | | 36 | % |
Fixed income securities | | 66 - 80% | | 64 - 90% | | 73 | % | | 68 | % | | 64 | % | | 63 | % |
Real estate and other | | 3 - 5% | | — | % | | 10 | % | | — | % | | 6 | % | | — | % |
Cash | | — | % | | — | % | | — | % | | 1 | % | | — | % | | 1 | % |
Total | | | | | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
In fiscal year 2022, the 5.8% 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. In determining the estimated long-term 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, and input from our actuaries and investment advisors.
In fiscal year 2022, the 4.0% 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 approximately 80% of the assets of our International plans, was 4.3% and was derived from expected equity and debt security returns.
The table below summarizes pension plan assets measured at fair value by asset class (see Note 13, Fair Value Measurements, for definition of the levels):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
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 | $14.0 | | $14.0 | | $— | | $— | | | $14.8 | | $14.8 | | $— | | $— | |
Equity securities | 127.4 | | 127.4 | | — | | — | | | 325.3 | | 325.3 | | — | | — | |
Equity mutual funds | 84.5 | | 84.5 | | — | | — | | | 243.4 | | 243.4 | | — | | — | |
Equity pooled funds | 188.4 | | — | | 188.4 | | — | | | 448.7 | | — | | 448.7 | | — | |
| | | | | | | | | |
Fixed income securities | 1,759.1 | | — | | 1,759.1 | | — | | | 2,125.6 | | — | | 2,125.6 | | — | |
Total U.S. Qualified Pension Plans at Fair Value | $2,173.4 | | $225.9 | | $1,947.5 | | $— | | | $3,157.8 | | $583.5 | | $2,574.3 | | $— | |
Real estate pooled funds(A) | 230.6 | | | | | | 185.9 | | | | |
Total U.S. Qualified Pension Plans | $2,404.0 | | | | | | $3,343.7 | | | | |
International Pension Plans | | | | | | | | | |
Cash and cash equivalents | $12.1 | | $12.1 | | $— | | $— | | | $16.8 | | $16.8 | | $— | | $— | |
Equity pooled funds | 348.1 | | — | | 348.1 | | — | | | 676.4 | | — | | 676.4 | | — | |
Fixed income pooled funds | 589.9 | | — | | 536.4 | | 53.5 | | | 948.5 | | — | | 948.5 | | — | |
Other pooled funds | 16.4 | | — | | 16.4 | | — | | | 16.7 | | — | | 16.7 | | — | |
Insurance contracts | 155.5 | | — | | — | | 155.5 | | | 246.6 | | — | | — | | 246.6 | |
Total International Pension Plans | $1,122.0 | | $12.1 | | $900.9 | | $209.0 | | | $1,905.0 | | $16.8 | | $1,641.6 | | $246.6 | |
(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 table below summarizes changes in fair value of the pension plan assets classified as Level 3:
| | | | | | | | | | | |
| Insurance Contracts | Fixed Income Pooled Funds | Total Level 3 |
Balance at 30 September 2020 | $256.5 | | $— | | $256.5 | |
Purchases, sales, and settlements, net | (2.0) | | — | | (2.0) | |
Actual return on plan assets held at end of year | (7.9) | | — | | (7.9) | |
| | | |
Balance at 30 September 2021 | $246.6 | | $— | | $246.6 | |
Purchases, sales, and settlements, net | — | | 80.3 | | 80.3 | |
Actual return on plan assets held at end of year | (91.1) | | (26.8) | | (117.9) | |
| | | |
Balance at 30 September 2022 | $155.5 | | $53.5 | | $209.0 | |
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 daily closing price as reported by the fund. The mutual funds are required to publish their daily NAV and to transact at that price. The mutual funds are deemed to be actively traded 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.
Fixed Income Securities
Corporate and government bonds, and related fixed income securities, 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. U.S. plan fixed income investments primarily include U.S. corporate bonds, U.S. treasury investments, interest rate swaps, total return swaps, and U.S. treasury future contracts.
Fixed Income Pooled Funds
Fixed income pooled funds are classified as either Level 2 or Level 3 assets depending on the underlying investments of the fund. Fixed income pooled funds classified as Level 2 assets may hold government bonds, index linked bonds, corporate bonds, cash, and derivative instruments. The NAV of these assets is based on quoted market pricing from observable pricing sources or valued based upon comparable securities with similar yields, credit ratings, or factors as of the reporting date. Fixed income pooled funds classified as Level 3 may hold high yield bonds, emerging market debt, loans, structured credit, and other instruments. Due to the limited market activity of the underlying securities, the NAV of these assets is based on the fund manager's estimate of the fair value of the shares held as of the reporting date.
Other Pooled Funds
Other pooled funds are classified as Level 2 assets, as they 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 2022 were $44.7. 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 $25 to $35 to the defined benefit pension plans in fiscal year 2023. 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 |
2023 | | $171.7 | | | $53.4 | |
2024 | | 175.4 | | | 57.7 | |
2025 | | 179.3 | | | 58.3 | |
2026 | | 181.7 | | | 62.3 | |
2027 | | 184.0 | | | 64.3 | |
2028-2032 | | 944.2 | | | 356.0 | |
These estimated benefit payments are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.
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 1,914,842 as of 30 September 2022.
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 2022, 2021, and 2020 were $60.6, $53.3, and $45.6, respectively.
Other Postretirement Benefits
We provide other postretirement benefits consisting primarily of healthcare benefits to certain U.S. retirees who meet age and service requirements. The healthcare benefit is a continued medical benefit until the retiree reaches age 65. Healthcare benefits are contributory, with contributions adjusted periodically. The retiree medical costs are capped at a specified dollar amount, with the retiree contributing the remainder. The cost of these benefits was not material in fiscal years 2022, 2021, and 2020. Accumulated postretirement benefit obligations as of the end of fiscal years 2022 and 2021 were $19.9 and $27.4, respectively, of which $4.9 and $5.5 were current obligations, respectively.
We recognize changes in other postretirement benefit plan obligations in other comprehensive income on a pretax basis. During fiscal years 2022 and 2021 we recognized a loss of $0.5 and a gain of $5.4, respectively, that arose during the period, and $1.6 and $1.8 of net actuarial gain amortization, respectively.
The net actuarial gain recognized in accumulated other comprehensive loss on a pretax basis was $4.5 and $6.6 as of 30 September 2022 and 2021, respectively.
16. COMMITMENTS AND CONTINGENCIES
Litigation
We are involved in various legal proceedings, including commercial, competition, environmental, intellectual property, regulatory, product liability, and insurance matters. We do not currently believe there are any legal proceedings, individually or in the aggregate, that are reasonably possible to have a material impact on our financial condition, results of operations, or cash flows.
In September 2010, the Brazilian Administrative Council for Economic Defense ("CADE") issued a decision against our Brazilian subsidiary, Air Products Brasil Ltda., and several other Brazilian industrial gas companies for alleged anticompetitive activities. CADE imposed a civil fine of R$179.2 million (approximately $33 at 30 September 2022) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, following an investigation beginning in 2003, which alleged 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. In the event of an adverse final judgment, we estimate the maximum possible loss to be the full amount of the fine of R$179.2 million (approximately $33 at 30 September 2022) plus interest accrued thereon until final disposition of the proceedings.
Additionally, Winter Storm Uri, a severe winter weather storm in the U.S. Gulf Coast in February 2021, disrupted our operations and caused power and natural gas prices to spike significantly in Texas. We remain in litigation of a dispute regarding energy management services related to the impact of this event, and other disputes may arise from such power price increases. In addition, legislative action may affect power supply and energy management charges. While it is reasonably possible that we could incur additional costs related to power supply and energy management services in Texas related to the winter storm, it is too early to estimate potential losses, if any, given significant unknowns resulting from the unusual nature of this event.
Environmental
In the normal course of business, we are involved in legal proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA," the federal Superfund law), Resource Conservation and Recovery Act ("RCRA"), and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Presently, there are 30 sites on which a final settlement or remediation has not been achieved where we, along with others in some cases, have been designated a potentially responsible party by environmental authorities 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 2022 and 2021 included an accrual of $71.3 and $76.7, respectively, primarily as part of other noncurrent liabilities. The environmental liabilities will be paid over a period of up to 30 years. We estimate the exposure for environmental loss contingencies to range from $71 to a reasonably possible upper exposure of $84 as of 30 September 2022.
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 2022, $38.2 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 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 ancillary equipment, in addition to future capital to consider the extended time horizon for remediation at the site. As a result of these changes, we increased our environmental accrual for this site by $19 in continuing operations on the consolidated balance sheets and recognized a before-tax expense of $19 in results from discontinued operations in the second quarter of fiscal year 2020. There have been no significant changes to the estimated exposure range related to the Pace facility since 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 completed additional field work during 2021 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. The design of the optimized recovery system will likely be finalized in fiscal year 2023 with construction to begin thereafter. 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 five years.
Piedmont
At 30 September 2022, $7.4 of the environmental accrual was related to the Piedmont site.
On 30 June 2008, we sold our Elkton, Maryland, and Piedmont, South Carolina, production facilities and the related North American atmospheric emulsions and global pressure sensitive adhesives businesses. In connection with the sale, we recognized a liability for retained environmental obligations associated with remediation activities at the Piedmont site. This site is under active remediation for contamination caused by an insolvent prior owner.
We are required by the South Carolina Department of Health and Environmental Control ("SCDHEC") to address both contaminated soil and groundwater. Numerous areas of soil contamination have been addressed, and contaminated groundwater is being recovered and treated. The SCDHEC issued its final approval to the site-wide feasibility study on 13 June 2017 and the Record of Decision for the site on 27 June 2018, after which we signed a Consent Agreement Amendment memorializing our obligations to complete the cleanup of the site. Remediation is ongoing in accordance with the design, which includes in-situ chemical oxidation treatment, as well as the operation of a soil vapor extraction system to remove volatile organic compounds from the unsaturated soils beneath the impacted areas of the plant. 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 2022, $10.7 of the environmental accrual was related to the Pasadena site.
During the fourth quarter of 2012, management committed to permanently shutting down our polyurethane intermediates ("PUI") production facility in Pasadena, Texas. In shutting down and dismantling the facility, we have undertaken certain obligations related to soil and groundwater contaminants. We have been pumping and treating groundwater to control off-site contaminant migration in compliance with regulatory requirements and under the approval of the Texas Commission on Environmental Quality. We estimate that the pump and treat system will continue to operate until 2042.
We continue to progress on 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, continuing post closure care for two closed RCRA surface impoundment units, and maintaining engineering controls. Additionally, a chemical reduction pilot test to evaluate treating source material was conducted, and is currently undergoing performance monitoring. 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 2020 | $241.4 | |
Additional accruals | 16.5 | |
Liabilities settled | (4.1) | |
Accretion expense | 10.5 | |
Currency translation adjustment | 5.3 | |
Balance at 30 September 2021 | $269.6 | |
Additional accruals | 17.9 | |
Liabilities settled | (7.8) | |
Accretion expense | 11.1 | |
Currency translation adjustment | (16.1) | |
Balance at 30 September 2022 | $274.7 | |
Warranties and Guarantees
We do not expect that any sum we may have to pay in connection with warranties and guarantees will have a material adverse effect on our consolidated financial condition, liquidity, or results of operations.
Warranties
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.
Guarantees
To date, no equity contributions or payments have been made since the inception of the guarantees discussed below. The fair value of these guarantees is not material.
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 2022, maximum potential payments under joint and several guarantees were $23.0. Exposures under the guarantees decline over time and will be completely extinguished by 2024.
We also have a long-term sale of equipment contract with the JIGPC joint venture to engineer, procure, and construct the industrial gas facilities that will supply gases to Aramco. We provided bank guarantees to the joint venture to support our performance under the contract. As of 30 September 2022, our maximum potential payments were $244.5.
Unconditional Purchase Obligations
We are obligated to make future payments under unconditional purchase obligations as summarized below:
| | | | | |
2023 | $3,788 | |
2024 | 500 | |
2025 | 489 | |
2026 | 522 | |
2027 | 549 | |
Thereafter | 4,740 | |
Total | $10,588 | |
Approximately $6.6 billion of our unconditional purchase obligations relate to helium and rare gases. The majority of our obligations occur after fiscal year 2027. 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 $3.1 billion based on open purchase orders as of 30 September 2022. 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 2023; 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 for 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.
17. CAPITAL STOCK
Common Stock
Authorized common stock consists of 300 million shares with a par value of $1 per share. As of 30 September 2022, 249 million shares were issued, with 222 million issued and 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 2022. At 30 September 2022, $485.3 in share repurchase authorization remained available.
A summary of the changes in common shares issued and outstanding in fiscal year 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | |
Fiscal Year Ended 30 September | | 2022 | | 2021 | | 2020 |
Number of common shares, beginning of year | | 221,396,755 | | | 221,017,459 | | | 220,415,262 | |
Issuance of treasury shares for stock option and award plans | | 441,941 | | | 379,296 | | | 602,197 | |
Number of common shares, end of year | | 221,838,696 | | | 221,396,755 | | | 221,017,459 | |
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 2022 and 2021.
18. SHARE-BASED COMPENSATION
Our outstanding share-based compensation programs include deferred stock units and stock options. During the fiscal year ended 30 September 2022, we granted market-based and time-based deferred stock units. We have not issued stock option awards since fiscal year 2015. The terms of our share-based awards are fixed at the grant date. We issue shares from treasury stock upon payout of deferred stock units and exercise of stock options. As of 30 September 2022, there were 1.5 million shares available for future grant under our Long-Term Incentive Plan ("LTIP"), which is shareholder approved.
Share-based compensation cost recognized on the consolidated income statements is summarized below:
| | | | | | | | | | | |
| 2022 | 2021 | 2020 |
Before-tax share-based compensation cost | $49.5 | | $44.5 | | $55.8 | |
| | | |
| | | |
Income tax benefit | (12.1) | | (11.0) | | (13.0) | |
After-tax share-based compensation cost | $37.4 | | $33.5 | | $42.8 | |
Before-tax share-based compensation cost relates to deferred stock units and is primarily included in "Selling and administrative" on our consolidated income statements. The amount of share-based compensation cost capitalized in fiscal years 2022, 2021, and 2020 was not material.
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 are 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 the S&P 500 Index (for fiscal year 2022 awards) or a defined peer group (for awards granted prior to fiscal year 2022) over a three-year performance period beginning 1 October of the fiscal year of grant. We granted 74,364, 77,251, and 80,215 market-based deferred stock units in fiscal years 2022, 2021, and 2020, 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 $427.23, $235.48, and $275.19 per unit in fiscal years 2022, 2021, and 2020, respectively. The calculation of the fair value of these market-based deferred stock units used the following assumptions:
| | | | | | | | | | | | | | |
| | 2022 | 2021 | 2020 |
Expected volatility | | 30.5 | % | 29.9 | % | 17.8 | % |
Risk-free interest rate | | 0.8 | % | 0.2 | % | 1.6 | % |
Expected dividend yield | | 2.1 | % | 2.1 | % | 2.4 | % |
In addition, in fiscal year 2022, we granted 120,996 time-based deferred stock units at a weighted average grant-date fair value of $278.67. In fiscal years 2021 and 2020, we granted 110,555 and 123,448 time-based deferred stock units at a weighted average grant-date fair value of $282.48 and $230.92, respectively.
A summary of deferred stock unit activity in fiscal year 2022 is presented below:
| | | | | | | | | | | | | | |
| | Shares (000) | | Weighted Average Grant-Date Fair Value |
Deferred stock units outstanding at 30 September 2021 | | 854 | | | $194.12 | |
| | | | |
| | | | |
Granted | | 195 | | | 329.65 | |
Paid out | | (343) | | | 196.95 | |
Forfeited | | (40) | | | 266.51 | |
Adjusted | | 64 | | | 161.64 | |
Deferred stock units outstanding at 30 September 2022 | | 730 | | | $222.13 | |
Cash payments made for deferred stock units totaled $5.5, $5.2, and $4.8 in fiscal years 2022, 2021, and 2020, respectively. As of 30 September 2022, there was $56.0 of unrecognized compensation cost related to deferred stock units. This cost is expected to be recognized over a weighted average period of 1.6 years. The total fair value of deferred stock units paid out during fiscal years 2022, 2021, and 2020, including shares vested in prior periods, was $92.9, $88.0, and $65.4, 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. As of 30 September 2022, there was no unrecognized compensation cost as all stock option awards were fully vested.
A summary of stock option activity in fiscal year 2022 is presented below:
| | | | | | | | | | | | | | |
| | Shares (000) | | Weighted Average Exercise Price |
Stock options outstanding and exercisable at 30 September 2021 | | 801 | | | $99.79 | |
| | | | |
| | | | |
| | | | |
Exercised | | (237) | | | 84.75 | |
| | | | |
Stock options outstanding and exercisable at 30 September 2022 | | 564 | | | $106.14 | |
| | | | |
The weighted average remaining contractual term of stock options outstanding and exercisable at 30 September 2022 was 1.3 years. The aggregate intrinsic value of these stock options was $71.3, which represents the amount by which our closing stock price of $232.73 as of 30 September 2022 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 2022, 2021, and 2020 was $20.2, $29.0, and $65.7, 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 2022 was $19.3. The total tax benefit realized from stock option exercises in fiscal year 2022 was $11.2, of which $10.5 was the excess tax benefit.
19. 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 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 (loss) income | | ($14.2) | | | $233.4 | | | $14.3 | | | $233.5 | |
Amount attributable to noncontrolling interests | | (21.1) | | | 19.3 | | | (0.2) | | | (2.0) | |
Balance at 30 September 2020 | | ($54.5) | | | ($1,142.8) | | | ($942.8) | | | ($2,140.1) | |
Other comprehensive income before reclassifications | | 3.3 | | | 267.3 | | | 274.3 | | | 544.9 | |
Amounts reclassified from AOCL | | 43.5 | | | — | | | 74.6 | | | 118.1 | |
Net current period other comprehensive income | | $46.8 | | | $267.3 | | | $348.9 | | | $663.0 | |
Amount attributable to noncontrolling interest | | 20.6 | | | 18.3 | | | (0.1) | | | 38.8 | |
Balance at 30 September 2021 | | ($28.3) | | | ($893.8) | | | ($593.8) | | | ($1,515.9) | |
Other comprehensive loss before reclassifications | | (120.3) | | | (1,230.5) | | | (112.2) | | | (1,463.0) | |
Amounts reclassified from AOCL | | 91.4 | | | 7.3 | | | 64.8 | | | 163.5 | |
Net current period other comprehensive loss | | ($28.9) | | | ($1,223.2) | | | ($47.4) | | | ($1,299.5) | |
| | | | | | | | |
Amount attributable to noncontrolling interest | | 14.7 | | | (44.6) | | | 0.6 | | | (29.3) | |
Balance at 30 September 2022 | | ($71.9) | | | ($2,072.4) | | | ($641.8) | | | ($2,786.1) | |
The table below summarizes the reclassifications out of AOCL and the affected line item on the consolidated income statements:
| | | | | | | | | | | | | | | | | | | | |
Fiscal Year Ended 30 September | | 2022 | | 2021 | | 2020 |
Loss (Gain) on Cash Flow Hedges, net of tax | | | | | | |
Sales | | $0.5 | | | ($0.6) | | | ($0.2) | |
Cost of sales | | (0.4) | | | (0.3) | | | (0.8) | |
| | | | | | |
Interest expense | | 3.6 | | | 3.5 | | | 2.8 | |
Other non-operating income (expense), net | | 87.7 | | | 40.9 | | | (59.5) | |
Total Loss (Gain) on Cash Flow Hedges, net of tax | | $91.4 | | | $43.5 | | | ($57.7) | |
| | | | | | |
Currency Translation Adjustment | | | | | | |
| | | | | | |
| | | | | | |
Business and asset actions | | $5.1 | | | $— | | | $— | |
| | | | | | |
Income from discontinued operations, net of tax | | 2.2 | | | — | | | — | |
Currency Translation Adjustment | | $7.3 | | | $— | | | $— | |
| | | | | | |
Pension and Postretirement Benefits, net of tax(A) | | $64.8 | | | $74.6 | | | $82.5 | |
(A)The components of net periodic benefit cost reclassified out of AOCL include items such as prior service cost amortization, actuarial loss amortization, and settlements and are included in “Other non-operating income (expense), net” on the consolidated income statements. Refer to Note 15, Retirement Benefits, for additional information.
20. EARNINGS PER SHARE
The table below details the computation of basic and diluted earnings per share ("EPS"):
| | | | | | | | | | | | | | | | | |
Fiscal Year Ended 30 September | 2022 | | 2021 | | 2020 |
Numerator | | | | | |
Net income from continuing operations | $2,243.5 | | | $2,028.8 | | | $1,901.0 | |
Net income (loss) from discontinued operations | 12.6 | | | 70.3 | | | (14.3) | |
Net Income Attributable to Air Products | $2,256.1 | | | $2,099.1 | | | $1,886.7 | |
| | | | | |
Denominator (in millions) | | | | | |
Weighted average common shares — Basic | 222.0 | | | 221.6 | | | 221.2 | |
Effect of dilutive securities | | | | | |
Employee stock option and other award plans | 0.5 | | | 0.9 | | | 1.1 | |
Weighted average common shares — Diluted | 222.5 | | | 222.5 | | | 222.3 | |
| | | | | |
Per Share Data* | | | | | |
Basic EPS from continuing operations | $10.11 | | | $9.16 | | | $8.59 | |
Basic EPS from discontinued operations | 0.06 | | | 0.32 | | | (0.06) | |
Basic EPS Attributable to Air Products | $10.16 | | | $9.47 | | | $8.53 | |
Diluted EPS from continuing operations | $10.08 | | | $9.12 | | | $8.55 | |
Diluted EPS from discontinued operations | 0.06 | | | 0.32 | | | (0.06) | |
Diluted EPS Attributable to Air Products | $10.14 | | | $9.43 | | | $8.49 | |
*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 2022, 2021 and 2020.
21. INCOME TAXES
The table below summarizes income from U.S. and foreign operations before taxes:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
United States income | | $947.9 | | | $924.6 | | | $943.7 | |
Foreign income | | 1,325.3 | | | 1,288.7 | | | 1,215.3 | |
Equity affiliates' income | | 481.5 | | | 294.1 | | | 264.8 | |
Income from continuing operations before taxes | | $2,754.7 | | | $2,507.4 | | | $2,423.8 | |
The table below details the components of our income tax provision:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Current Tax Provision | | | | | | |
Federal | | $149.1 | | | $85.6 | | | $26.9 | |
State | | 30.1 | | | 28.4 | | | 23.8 | |
Foreign | | 289.3 | | | 254.8 | | | 262.7 | |
Total current tax provision | | 468.5 | | | 368.8 | | | 313.4 | |
Deferred Tax Provision | | | | | | |
Federal | | 15.6 | | | 54.7 | | | 108.8 | |
State | | (1.9) | | | (0.1) | | | (3.6) | |
Foreign | | 18.6 | | | 39.4 | | | 59.8 | |
Total deferred tax provision | | 32.3 | | | 94.0 | | | 165.0 | |
Total income tax provision | | $500.8 | | | $462.8 | | | $478.4 | |
Cash Paid for Taxes (Net of Cash Refunds)
Income tax payments, net of refunds, were $369.2, $383.8, and $379.9 in fiscal years 2022, 2021, and 2020, respectively. Fiscal year 2022 and 2021 reflect income tax refunds associated with discontinued operations of $59.6 and $6.7, respectively.
India Finance Act 2020
On 27 March 2020, the Indian government passed Finance Act 2020 (the "India Finance Act"), which amended rules regarding the taxation of dividends declared and distributed by Indian companies. Under the India Finance Act, future dividends declared or distributed by an Indian company are no longer subject to dividend distribution tax. Instead, any non-resident recipient is subject to a withholding tax. Our income tax provision for the fiscal year ended 30 September 2020 reflected an expense of $20.3 for estimated withholding taxes that we may incur on future dividends related to INOX Air Products Private Limited ("INOX"), an equity affiliate investment in our Asia segment. Additionally, we recorded a benefit of $33.8 within "Equity affiliates' income" for our share of accumulated dividend distribution taxes released with respect to INOX.
U.S. Tax Cuts and Jobs Act
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 to 21%, a deemed repatriation tax on unremitted foreign earnings, as well as other changes. As of 30 September 2022, our outstanding liability for the deemed repatriation tax was $155.2, of which $134.6 is presented within noncurrent liabilities on our consolidated balance sheets. We are paying this obligation in installments over four remaining years.
Inflation Reduction Act and CHIPS and Science Act of 2022
In August 2022, the U.S. Inflation Reduction Act of 2022 and the CHIPS and Science Act of 2022 were signed into law. These acts include, among other provisions, a corporate alternative minimum tax of 15%, an excise tax on the repurchase of corporate stock, various climate and energy provisions, and incentives for investment in semiconductor manufacturing. We are evaluating the impact these acts could have on our financial statements, including the impact of tax incentives for carbon sequestration and clean hydrogen production once our new projects in these areas come on-stream in the U.S.
Effective Tax Rate
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 provided below:
| | | | | | | | | | | | | | | | | | | | |
(Percent of income before taxes) | | 2022 | | 2021 | | 2020 |
U.S. federal statutory tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
State taxes, net of federal benefit | | 0.8 | | | 0.9 | | | 0.6 | |
Income from equity affiliates | | (3.4) | | | (2.5) | | | (2.3) | |
Foreign tax differentials | | 0.7 | | | 0.5 | | | 0.1 | |
Tax on foreign repatriated earnings | | 0.7 | | | 0.7 | | | 0.9 | |
Share-based compensation | | (0.7) | | | (0.7) | | | (0.8) | |
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| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Other | | (0.9) | | | (1.4) | | | 0.2 | |
Effective Tax Rate | | 18.2 | % | | 18.5 | % | | 19.7 | % |
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. 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 in 2020 due to an extension of the holiday period in China. The impact of tax holidays in fiscal years 2022 and 2021 was not material.
Tax on foreign repatriated earnings includes benefits and costs related to U.S. and foreign taxation on the current and future repatriation of foreign earnings and a U.S. benefit for related foreign tax credits. The effective tax rate in 2020 reflects impacts from the India Finance Act 2020 discussed above. 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.
Equity affiliates’ income, which is primarily presented net of income taxes on our consolidated income statements, favorably impacts our effective tax rate. The increase in the impact for fiscal year 2022 is primarily due to the results of the new JIGPC joint venture as well as recognition of the remaining deferred profit associated with air separation units previously sold to Jazan Gas Project Company, net of other project finalization costs.
Share-based compensation reflects the impact from recognition of $18.3, $17.0, and $20.0 of excess tax benefits in our provision for income taxes during fiscal years 2022, 2021, and 2020, respectively.
In fiscal year 2021, other includes net tax benefits of $21.5, including interest, resulting from the release of U.S. unrecognized tax benefits upon expiration of the statute of limitations on uncertain tax positions taken in prior years.
Deferred Tax Assets and Liabilities
The significant components of deferred tax assets and liabilities are as follows:
| | | | | | | | | | | | | | |
30 September | | 2022 | | 2021 |
Gross Deferred Tax Assets | | | | |
Retirement benefits and compensation accruals | | $77.2 | | | $69.4 | |
Tax loss carryforwards | | 126.3 | | | 120.9 | |
Tax credits and other tax carryforwards | | 39.2 | | | 27.3 | |
Reserves and accruals | | 55.4 | | | 74.5 | |
| | | | |
Currency losses | | — | | | 30.4 | |
Other | | 68.3 | | | 44.0 | |
Valuation allowance | | (100.1) | | | (97.6) | |
Deferred Tax Assets | | 266.3 | | | 268.9 | |
Gross Deferred Tax Liabilities | | | | |
Plant and equipment | | 1,187.6 | | | 1,171.8 | |
Currency gains | | 22.5 | | | — | |
| | | | |
Unremitted earnings of foreign entities | | 72.9 | | | 69.1 | |
Partnership and other investments | | 16.1 | | | 15.3 | |
Intangible assets | | 69.8 | | | 86.2 | |
Other | | 9.1 | | | 7.2 | |
Deferred Tax Liabilities | | 1,378.0 | | | 1,349.6 | |
Net Deferred Income Tax Liability | | $1,111.7 | | | $1,080.7 | |
Deferred tax assets and liabilities are included within the consolidated balance sheets as follows:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Deferred Tax Assets | | | | |
Other noncurrent assets | | $135.7 | | | $100.2 | |
Deferred Tax Liabilities | | | | |
Deferred income taxes | | 1,247.4 | | | 1,180.9 | |
Net Deferred Income Tax Liability | | $1,111.7 | | | $1,080.7 | |
Deferred tax assets for "Reserves and accruals" and "Other" were impacted by changes in tax deferred deductions related to the timing of recognizing accruals for local tax and accounting purposes as well as foreign currency movement. The deferred tax component for currency transactions moved into an overall deferred tax liability position due primarily to currency movements on hedging transactions as several foreign based currencies weakened against the U.S. dollar in fiscal year 2022.
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. Deferred tax liabilities related to Intangible assets decreased primarily due to amortization deductions for book purposes being in excess of that for tax purposes as well as foreign currency movement.
As of 30 September 2022, we had the following deferred tax assets for certain tax credits:
| | | | | | | | | | | | | | |
Jurisdiction | | Gross Tax Asset | | Expiration Period |
U.S. State | | $2.7 | | | 2023 - 2035 |
U.S. Federal | | 15.7 | | | 2028 - 2032 |
Credits in Foreign Jurisdictions | | 18.5 | | | 2025 - 2041; Indefinite |
Of the $18.5 credits in foreign jurisdictions, $12.2 have indefinite carryforward periods.
As of 30 September 2022, we had the following loss carryforwards:
| | | | | | | | | | | | | | |
Jurisdiction | | Gross Loss Carryforward | | Expiration Period |
U.S. State Net Operating Loss | | $279.5 | | | 2023 - 2040 |
U.S. State Capital Loss | | 36.3 | | | 2023 - 2027 |
U.S. Federal Capital Loss | | 88.8 | | | 2025 - 2027 |
Foreign Net Operating Loss | | 268.8 | | | 2023 - 2038; Indefinite |
Foreign Capital Loss | | 181.1 | | | Indefinite |
Of the $268.8 of foreign net operating loss carryforwards, $94.6 have indefinite carryforward periods.
The valuation allowance was $100.1 and $97.6 as of 30 September 2022 and 2021, respectively. As of 30 September 2022, the balance primarily related to $26.8 of foreign credits and loss carryforwards, $14.0 of U.S. federal foreign income tax credits, and $45.3 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 2022.
Our U.S. federal and U.S. state capital losses primarily related to a loss realized upon the divestiture of our Russian subsidiary in fiscal year 2022. We believe it is more likely than not that we will recognize sufficient U.S. capital gain income in the future to utilize our capital losses before expiration.
We record income taxes on the undistributed earnings of our foreign subsidiaries and corporate joint ventures unless those earnings are indefinitely reinvested. Such earnings may be subject to foreign withholding and other taxes. 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 $6.7 billion as of 30 September 2022. An estimated $621.6 in additional foreign withholding and other income taxes would be due if these earnings were remitted as dividends.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of the unrecognized tax benefits, which excludes interest and penalties, is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Unrecognized tax benefits balance at beginning of year | | $140.3 | | | $237.0 | | | $231.7 | |
Additions for tax positions of the current year | | 7.4 | | | 14.5 | | | 7.6 | |
Additions for tax positions of prior years | | 6.6 | | | 3.5 | | | 17.7 | |
Reductions for tax positions of prior years | | (15.4) | | | (8.2) | | | (4.1) | |
Settlements | | (0.6) | | | (3.1) | | | (1.2) | |
Statute of limitations expiration | | (25.5) | | | (104.6) | | | (14.0) | |
Foreign currency translation | | (9.3) | | | 1.2 | | | (0.7) | |
Unrecognized tax benefits balance at end of year | | $103.5 | | | $140.3 | | | $237.0 | |
Of our unrecognized tax benefits as of 30 September 2022, $74.9 would impact the effective tax rate from continuing operations if recognized.
In fiscal year 2022, reserves for unrecognized tax benefits decreased $25.5 due to statute of limitation expirations. We released reserves of $17.2 related to the sale of PMD. Upon release of the reserves, we recorded income tax benefits of $14.8 as a component of discontinued operations. The PMD reserve was net of related deferred tax assets of $2.4. Fiscal year 2022 also reflects a $15.4 reduction for tax positions of prior years. This was primarily due to a $10.6 reduction caused by changes to income tax rates.
In fiscal year 2021, reserves for unrecognized tax benefits decreased $104.6 due to statute of limitation expirations. We released reserves of $65.6 related to the sale of PMD, $8.2 associated with our former Energy-from-Waste business (“EfW”), and $27.5 for other reserves, including those associated with a tax election benefit related to a non-U.S. subsidiary in 2017. Upon release of the reserves related to PMD and EfW, we recorded income tax benefits of $51.8 and $8.2, respectively, as a component of discontinued operations. The PMD reserve was net of related deferred tax assets of $13.8. The release of other reserves of $27.5 was net of related deferred tax assets of $8.4 and resulted in an income tax benefit, including interest, of $21.5.
Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense and totaled $1.2, ($0.2), and $6.1 in fiscal years 2022, 2021, and 2020, respectively. Our 2022 and 2021 expense reflects a benefit from the reversal of accrued interest on reserves released during the period. Our accrued balance for interest and penalties was $22.6 and $24.9 as of 30 September 2022 and 2021, respectively.
Income Tax Examinations
We are currently under examination in a number of tax jurisdictions. It is reasonably possible that a change in our unrecognized tax benefits may occur in fiscal year 2022 if any of these examinations are resolved 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 | 2018 - 2022 |
United States – State | 2013 - 2022 |
Canada | 2015 - 2022 |
Europe | |
France | 2019 - 2022 |
Germany | 2017 - 2022 |
Netherlands | 2018 - 2022 |
Spain | 2017 - 2022 |
United Kingdom | 2019 - 2022 |
Asia | |
China | 2012 - 2022 |
South Korea | 2014 - 2022 |
Taiwan | 2017 - 2022 |
Latin America | |
Chile | 2018 - 2022 |
22. SUPPLEMENTAL INFORMATION
NEOM Green Hydrogen Project
In the fourth quarter of fiscal year 2020, we announced the NEOM Green Hydrogen Project (the "NEOM project”), a multi-billion dollar green hydrogen-based ammonia production facility powered by renewable energy located in the NEOM city of the Kingdom of Saudi Arabia. We, along with our joint venture partners, ACWA Power and NEOM Company, are equal owners in the newly formed NEOM Green Hydrogen Company joint venture (“NGHC”) that will develop, construct, own, operate, and finance the NEOM project. The NEOM project is expected to be financed through non-recourse project financing and the partners’ investments.
During the third quarter of fiscal year 2022, we entered into an agreement with NGHC under which we commenced construction of the NEOM project. In addition, we executed an agreement with NGHC under which we will be the exclusive offtaker of green ammonia produced by the NEOM project under a long-term take-if-tendered agreement. The NEOM project is expected to be on-stream in 2026. We intend to transport green ammonia around the world to be dissociated to produce green hydrogen, primarily for the transportation market.
Air Products has one-third of the voting interests in the NGHC joint venture; however, substantially all the activities of the joint venture involve or are conducted on behalf of Air Products. Since we have disproportionately few voting rights relative to our economic interests in the joint venture, we determined that NGHC is a variable interest entity. In addition, we determined that we are the primary beneficiary of NGHC since we have the power to unilaterally direct certain significant activities, including key design and construction decisions, and we share power with our joint venture partners related to other activities that are significant to the economic performance of NGHC. Therefore, we consolidated NGHC within the Middle East and India segment beginning in the third quarter of fiscal year 2022.
As of 30 September 2022, our consolidated balance sheet includes the following balances attributable to NGHC: $275 in "Cash and cash items," $23 in "Other receivables and current assets," $219 in "Plant and equipment, net," $58 in "Payables and accrued liabilities," $447 in "Long-term debt – related party," and $30 in "Noncontrolling interests."
Business and Asset Actions
During the fourth quarter of fiscal year 2022, we divested our small industrial gas business in Russia due to Russia's invasion of Ukraine. As a result, we recorded a noncash charge of $73.7, which included transaction costs and cumulative currency translation losses. This charge is reflected as "Business and asset actions" on our consolidated income statements and was not recorded in the results of our Europe segment.
Related Party Transactions
We have related party sales to some of our equity affiliates and joint venture partners as well as other income primarily from fees charged for use of Air Products' patents and technology. Sales to and other income from related parties totaled approximately $300, $225, and $335 for the fiscal years ended 30 September 2022, 2021, and 2020, respectively. Sales agreements with related parties include terms that are consistent with those that we believe would have been negotiated at an arm’s length with an independent party. As of 30 September 2022 and 2021, our consolidated balance sheets included related party trade receivables of approximately $55 and $90, respectively.
In addition, refer to Note 14, Debt, for information concerning debt owed to related parties.
Facility Closure
During the second quarter of fiscal year 2021, we recorded a charge of $23.2 primarily for a noncash write-down of assets associated with a contract termination in the Americas segment. This charge is reflected as "Facility closure" on our consolidated income statements for the fiscal year ended 30 September 2021 and was not recorded in the results of the Americas segment.
Company Headquarters Relocation Income (Expense)
During the second quarter of fiscal year 2020, we sold property at our former corporate headquarters located in Trexlertown, Pennsylvania. We received net proceeds of $44.1 and recorded a gain of $33.8, which is reflected on our consolidated income statements as "Company headquarters relocation income (expense)" for the fiscal year ended 30 September 2020. The gain was not recorded in the results of the Corporate and other segment.
Supplemental Balance Sheet Information
| | | | | | | | |
Other Receivables and Current Assets | | |
| | |
30 September | 2022 | 2021 |
Derivative instruments | $114.4 | | $59.8 | |
| | |
Contract fulfillment costs | 84.1 | | 125.5 | |
Contract assets | 69.0 | | 119.4 | |
Current lease receivables | 77.8 | | 84.4 | |
Other | 170.5 | | 161.8 | |
Other receivables and current assets | $515.8 | | $550.9 | |
| | | | | | | | |
Other Noncurrent Assets | | |
| | |
30 September | 2022 | 2021 |
Operating lease right-of-use assets | $694.7 | | $566.2 | |
Pension benefits | 133.9 | | 219.2 | |
Long-term deposits on plant and equipment | 200.0 | | 200.0 | |
Deferred tax assets | 135.7 | | 100.2 | |
Prepaid tax | 17.0 | | 75.0 | |
Investments other than equity method | 66.7 | | 66.9 | |
Derivative instruments | 74.7 | | 23.6 | |
| | |
Other | 319.1 | | 255.4 | |
Other noncurrent assets | $1,641.8 | | $1,506.5 | |
| | | | | | | | |
Payables and Accrued Liabilities | | |
| | |
30 September | 2022 | 2021 |
Trade creditors | $1,120.7 | | $736.8 | |
| | |
Contract liabilities | 439.1 | | 366.8 | |
Dividends payable | 359.4 | | 332.1 | |
Accrued payroll and employee benefits | 249.1 | | 221.2 | |
Obligation for future contribution to an equity affiliate | — | | 150.0 | |
Current lease obligations | 90.0 | | 78.6 | |
Derivative instruments | 228.3 | | 68.8 | |
Pension and postretirement benefits | 11.1 | | 25.6 | |
| | |
| | |
| | |
Other | 273.9 | | 238.4 | |
Payables and accrued liabilities | $2,771.6 | | $2,218.3 | |
| | | | | | | | |
Other Noncurrent Liabilities | | |
| | |
30 September | 2022 | 2021 |
Operating lease liabilities | $592.1 | | $503.4 | |
Asset retirement obligations | 265.0 | | 258.0 | |
Pension benefits | 190.0 | | 255.3 | |
Postretirement benefits | 15.0 | | 22.1 | |
| | |
Derivative instruments | 138.2 | | 52.7 | |
Long-term accrued income taxes related to U.S. tax reform | 134.6 | | 157.1 | |
Contingencies related to uncertain tax positions | 95.6 | | 111.8 | |
Contract liabilities | 67.2 | | 58.4 | |
Environmental liabilities | 61.8 | | 68.5 | |
| | |
| | |
| | |
Other | 131.7 | | 153.6 | |
Other noncurrent liabilities | $1,691.2 | | $1,640.9 | |
23. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
During the fiscal year ended 30 September 2022, we managed our operations, assessed performance, and reported earnings under the following reporting segments:
•Americas;
•Asia;
•Europe;
•Middle East and India; and
•Corporate and other
Our reporting segments reflect the manner in which our chief operating decision maker reviews results and allocates resources. We evaluate the performance of our segments based upon reported segment operating income. Except for the Corporate and other segment, each reporting segment meets the definition of an operating segment and does not include the aggregation of multiple operating segments. Our Corporate and other segment includes the aggregation of three operating segments that meet the aggregation criteria under GAAP.
Industrial Gases – Regional
The results of our regional industrial gas businesses are reflected in the Americas, Asia, Europe, and Middle East and India segments. These businesses produce and sell gases to diversified customers in dozens of industries, including those in refining, chemicals, metals, electronics, manufacturing, medical, and food. Our industrial gas portfolio includes atmospheric gases such as oxygen, nitrogen, and argon; process gases such as hydrogen, helium, carbon dioxide (CO2), and carbon monoxide, as well as a mixture of hydrogen and carbon monoxide, or "syngas;" and specialty gases. Our regional industrial gas businesses also develop, build, and operate equipment such as air separation units and non-cryogenic generators for the production or processing of gases. We offer our industrial gas products through a variety of supply modes as described in Note 4, Revenue Recognition.
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.
Our regional industrial gas 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.
Corporate and other
The Corporate and other segment includes sales of cryogenic and gas processing equipment for air separation that 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. Our Corporate and other segment also includes the results of our liquefied natural gas ("LNG"), turbo machinery equipment and services, and distribution sale of equipment businesses. Competition for our sale of equipment businesses is based primarily on technological performance, service, technical know-how, price, and performance guarantees.
Our Corporate and other segment also incurs costs to provide corporate support functions and global management activities that benefit all segments. These costs include those for product development, research and development, and administrative support. The results of our Corporate and other segment also include income and expense not directly associated with the regional segments, such as foreign exchange gains and losses.
In addition to assets of the global businesses included in this segment, other assets include cash and cash items, short-term investments, 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 sales.
Business Segment Information
| | | | | | | | | | | | | | | | | | | | | | | |
| Americas | Asia | Europe | Middle East and India | Corporate and other | Total | |
2022 | | | | | | | |
Sales | $5,368.9 | | $3,143.3 | | $3,086.1 | | $129.5 | | $970.8 | | $12,698.6 | | (A) |
Operating income (loss) | 1,174.4 | | 898.3 | | 503.4 | | 21.1 | | (184.7) | | 2,412.5 | | (B) |
Depreciation and amortization | 629.5 | | 436.5 | | 195.2 | | 26.9 | | 50.1 | | 1,338.2 | | |
Equity affiliates' income | 98.2 | | 22.1 | | 78.2 | | 293.9 | | 3.9 | | 496.3 | | (B) |
Expenditures for long-lived assets | 1,353.1 | | 779.2 | | 312.6 | | 271.6 | | 210.0 | | 2,926.5 | | |
Investments in net assets of and advances to equity affiliates | 434.4 | | 268.9 | | 435.0 | | 2,143.3 | | 72.2 | | 3,353.8 | | |
Total assets | 8,237.7 | | 6,968.7 | | 3,645.1 | | 2,980.7 | | 5,360.4 | | 27,192.6 | | |
2021(C) | | | | | | | |
Sales | $4,167.6 | | $2,920.8 | | $2,345.6 | | $99.3 | | $789.7 | | $10,323.0 | | (A) |
Operating income (loss) | 1,065.5 | | 838.3 | | 529.4 | | 28.0 | | (193.4) | | 2,267.8 | | (B) |
Depreciation and amortization | 611.9 | | 444.4 | | 204.5 | | 25.3 | | 35.2 | | 1,321.3 | | |
Equity affiliates' income | 112.5 | | 35.9 | | 62.8 | | 76.4 | | 6.5 | | 294.1 | | (B) |
Expenditures for long-lived assets | 909.6 | | 792.3 | | 300.3 | | 71.0 | | 391.0 | | 2,464.2 | | |
Investments in net assets of and advances to equity affiliates | 383.8 | | 330.4 | | 455.4 | | 409.7 | | 70.0 | | 1,649.3 | | |
Total assets | 7,092.5 | | 7,349.4 | | 3,830.3 | | 800.6 | | 7,786.4 | | 26,859.2 | | |
2020(C) | | | | | | | |
Sales | $3,630.7 | | $2,716.5 | | $1,847.0 | | $79.3 | | $582.8 | | $8,856.3 | | (A) |
Operating income (loss) | 1,012.4 | | 870.3 | | 454.8 | | 18.5 | | (152.2) | | 2,203.8 | | (B) |
Depreciation and amortization | 559.5 | | 399.4 | | 175.9 | | 20.0 | | 30.2 | | 1,185.0 | | |
Equity affiliates' income | 84.3 | | 32.1 | | 51.8 | | 51.9 | | 10.9 | | 231.0 | | (B) |
Expenditures for long-lived assets | 1,264.7 | | 690.3 | | 295.9 | | 31.7 | | 226.4 | | 2,509.0 | | |
| | | | | | | |
| | | | | | | |
(A)Sales relate to external customers only. All intersegment sales are eliminated in consolidation.
(B)Refer to the Reconciliations to Consolidated Results section below.
(C)Segment information presented for fiscal years 2021 and 2020 has been updated to reflect the reorganization of our reporting segments effective 1 October 2021. The reorganization included the separation of our former Industrial Gases – EMEA (Europe, Middle East, and Africa) segment into two separate reporting segments: (1) Europe and (2) Middle East and India. The results of an affiliate formerly reflected in the Asia segment are now reported in the Middle East and India segment. Additionally, the results of our Industrial Gases – Global operating segment are reflected in the Corporate and other segment. The reorganization did not impact the Americas segment.
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:
| | | | | | | | | | | |
Fiscal Year Ended 30 September | 2022 | 2021 | 2020 |
Total | $2,412.5 | | $2,267.8 | | $2,203.8 | |
| | | |
Facility closure | — | | (23.2) | | — | |
Business and asset actions | (73.7) | | — | | — |
| | | |
| | | |
| | | |
| | | |
| | | |
Gain on exchange with joint venture partner | — | | 36.8 | | — | |
Company headquarters relocation income (expense) | — | | — | | 33.8 | |
| | | |
Consolidated Operating Income | $2,338.8 | | $2,281.4 | | $2,237.6 | |
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:
| | | | | | | | | | | |
Fiscal Year Ended 30 September | 2022 | 2021 | 2020 |
Total | $496.3 | | $294.1 | | $231.0 | |
Equity method investment impairment charge | (14.8) | | — | | — | |
India Finance Act 2020 | — | | — | | 33.8 | |
| | | |
Consolidated Equity Affiliates' Income | $481.5 | | $294.1 | | $264.8 | |
Geographic Information
The geographic information presented below is based on country of origin.
Sales to External Customers
| | | | | | | | | | | |
Fiscal Year Ended 30 September | 2022 | 2021 | 2020 |
United States | $5,230.2 | | $3,895.8 | | $3,359.6 | |
| | | |
| | | |
| | | |
China | 1,989.8 | | 1,828.0 | | 1,719.7 | |
| | | |
| | | |
Other foreign operations | 5,478.6 | | 4,599.2 | | 3,777.0 | |
Total | $12,698.6 | | $10,323.0 | | $8,856.3 | |
| | | |
Long-Lived Assets(A) | | | |
| | | |
30 September | 2022 | 2021 | 2020 |
United States | $6,022.0 | | $5,187.8 | | $4,633.9 | |
| | | |
| | | |
| | | |
China | 3,886.0 | | 4,137.7 | | 3,719.4 | |
| | | |
| | | |
Other foreign operations | 4,252.5 | | 3,929.1 | | 3,611.4 | |
Total | $14,160.5 | | $13,254.6 | | $11,964.7 | |
(A)"Long-lived assets" represents plant and equipment, net.