filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
258K characters. Original on sec.gov · Markdown
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Air Products’ management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting, which is defined in the following sentences, is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
| (i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| (ii) | provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of inherent limitations, internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, the effectiveness of our internal control over financial reporting may vary over time. Our processes contain self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
Management has evaluated the effectiveness of its internal control over financial reporting based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that, as of 30 September 2017, the Company’s internal control over financial reporting was effective.
KPMG LLP, an independent registered public accounting firm, has issued its opinion on the Company’s internal control over financial reporting as of 30 September 2017 as stated in its report which appears herein.
| /s/ Seifi Ghasemi | /s/ M. Scott Crocco | |||
| Seifi Ghasemi | M. Scott Crocco | |||
| Chairman, President, and | Executive Vice President and | |||
| Chief Executive Officer | Chief Financial Officer | |||
| 16 November 2017 | 16 November 2017 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Air Products and Chemicals, Inc.:
We have audited the accompanying consolidated balance sheets of Air Products and Chemicals, Inc. and Subsidiaries (the Company) as of 30 September 2017 and 2016, and the related consolidated income statements, consolidated comprehensive income statements, consolidated statements of cash flows, and equity for each of the years in the three-year period ended 30 September 2017. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule referred to in Item 15(a)(2) in this Form 10-K. We have also audited the Company’s internal control over financial reporting as of 30 September 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Air Products and Chemicals, Inc. and Subsidiaries as of 30 September 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended 30 September 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, Air Products and Chemicals, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of 30 September 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
Philadelphia, Pennsylvania
16 November 2017
The Consolidated Financial Statements
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
| Year ended 30 September (Millions of dollars, except for share and per share data) | 2017 | 2016 | 2015 | ||||||
| Sales | $ | 8,187.6 | $ | 7,503.7 | $ | 7,824.3 | |||
| Cost of sales | 5,753.4 | 5,176.6 | 5,598.2 | ||||||
| Selling and administrative | 715.6 | 685.0 | 773.0 | ||||||
| Research and development | 57.8 | 71.6 | 76.4 | ||||||
| Business separation costs | 30.2 | 50.6 | 7.5 | ||||||
| Business restructuring and cost reduction actions | 151.4 | 34.5 | 180.1 | ||||||
| Pension settlement loss | 10.5 | 5.1 | 19.3 | ||||||
| Goodwill and intangible asset impairment charge | 162.1 | — | — | ||||||
| Gain on previously held equity interest | — | — | 17.9 | ||||||
| Other income (expense), net | 121.0 | 49.4 | 45.5 | ||||||
| Operating Income | 1,427.6 | 1,529.7 | 1,233.2 | ||||||
| Equity affiliates' income | 80.1 | 147.0 | 152.3 | ||||||
| Interest expense | 120.6 | 115.2 | 102.8 | ||||||
| Other non-operating income (expense), net | 29.0 | — | — | ||||||
| Loss on extinguishment of debt | — | 6.9 | 16.6 | ||||||
| Income From Continuing Operations Before Taxes | 1,416.1 | 1,554.6 | 1,266.1 | ||||||
| Income tax provision | 260.9 | 432.6 | 300.2 | ||||||
| Income From Continuing Operations | 1,155.2 | 1,122.0 | 965.9 | ||||||
| Income (Loss) From Discontinued Operations, net of tax | 1,866.0 | (460.5 | ) | 351.7 | |||||
| Net Income | 3,021.2 | 661.5 | 1,317.6 | ||||||
| Net Income Attributable to Noncontrolling Interests of Continuing Operations | 20.8 | 22.5 | 32.6 | ||||||
| Net Income Attributable to Noncontrolling Interests of Discontinued Operations | — | 7.9 | 7.1 | ||||||
| Net Income Attributable to Air Products | $ | 3,000.4 | $ | 631.1 | $ | 1,277.9 | |||
| Net Income Attributable to Air Products | |||||||||
| Income from continuing operations | $ | 1,134.4 | $ | 1,099.5 | $ | 933.3 | |||
| Income (Loss) from discontinued operations | 1,866.0 | (468.4 | ) | 344.6 | |||||
| Net Income Attributable to Air Products | $ | 3,000.4 | $ | 631.1 | $ | 1,277.9 | |||
| Basic Earnings Per Common Share Attributable to Air Products | |||||||||
| Income from continuing operations | $ | 5.20 | $ | 5.08 | $ | 4.34 | |||
| Income (Loss) from discontinued operations | 8.56 | (2.16 | ) | 1.61 | |||||
| Net Income Attributable to Air Products | $ | 13.76 | $ | 2.92 | $ | 5.95 | |||
| Diluted Earnings Per Common Share Attributable to Air Products | |||||||||
| Income from continuing operations | $ | 5.16 | $ | 5.04 | $ | 4.29 | |||
| Income (Loss) from discontinued operations | 8.49 | (2.15 | ) | 1.59 | |||||
| Net Income Attributable to Air Products | $ | 13.65 | $ | 2.89 | $ | 5.88 | |||
| Weighted Average Common Shares — Basic (in millions) | 218.0 | 216.4 | 214.9 | ||||||
| Weighted Average Common Shares — Diluted (in millions) | 219.8 | 218.3 | 217.3 |
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
| Year ended 30 September (Millions of dollars) | 2017 | 2016 | 2015 | |||||||||
| Net Income | $ | 3,021.2 | $ | 661.5 | $ | 1,317.6 | ||||||
| Other Comprehensive Income (Loss), net of tax: | ||||||||||||
| Translation adjustments, net of tax of ($19.3), ($19.8), and $45.2 | 101.9 | 9.9 | (699.3 | ) | ||||||||
| Net gain (loss) on derivatives, net of tax of ($11.0), $9.1, and ($16.0) | (12.6 | ) | 13.7 | (35.0 | ) | |||||||
| Pension and postretirement benefits, net of tax of $109.0, ($157.4), and ($148.5) | 251.6 | (335.1 | ) | (278.5 | ) | |||||||
| Reclassification adjustments: | ||||||||||||
| Currency translation adjustment | 57.3 | 2.7 | — | |||||||||
| Derivatives, net of tax of $11.7, ($9.4), and $7.0 | 24.2 | (36.0 | ) | 20.8 | ||||||||
| Pension and postretirement benefits, net of tax of $50.7, $43.0, and $47.7 | 110.7 | 87.2 | 97.0 | |||||||||
| Total Other Comprehensive Income (Loss) | 533.1 | (257.6 | ) | (895.0 | ) | |||||||
| Comprehensive Income | 3,554.3 | 403.9 | 422.6 | |||||||||
| Net Income Attributable to Noncontrolling Interests | 20.8 | 30.4 | 39.7 | |||||||||
| Other Comprehensive Income (Loss) Attributable to Noncontrolling Interests | 3.7 | 4.8 | (11.0 | ) | ||||||||
| Comprehensive Income Attributable to Air Products | $ | 3,529.8 | $ | 368.7 | $ | 393.9 |
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
| 30 September (Millions of dollars, except for share data) | 2017 | 2016 | ||||
| Assets | ||||||
| Current Assets | ||||||
| Cash and cash items | $ | 3,273.6 | $ | 1,293.2 | ||
| Short-term investments | 404.0 | — | ||||
| Trade receivables, net | 1,174.0 | 1,146.2 | ||||
| Inventories | 335.4 | 255.0 | ||||
| Contracts in progress, less progress billings | 84.8 | 64.6 | ||||
| Prepaid expenses | 191.4 | 93.9 | ||||
| Other receivables and current assets | 403.3 | 538.2 | ||||
| Current assets of discontinued operations | 10.2 | 926.2 | ||||
| Total Current Assets | 5,876.7 | 4,317.3 | ||||
| Investment in net assets of and advances to equity affiliates | 1,286.9 | 1,283.6 | ||||
| Plant and equipment, net | 8,440.2 | 8,259.7 | ||||
| Goodwill, net | 721.5 | 845.1 | ||||
| Intangible assets, net | 368.3 | 387.9 | ||||
| Noncurrent capital lease receivables | 1,131.8 | 1,221.7 | ||||
| Other noncurrent assets | 641.8 | 671.0 | ||||
| Noncurrent assets of discontinued operations | — | 1,042.3 | ||||
| Total Noncurrent Assets | 12,590.5 | 13,711.3 | ||||
| Total Assets | $ | 18,467.2 | $ | 18,028.6 | ||
| Liabilities and Equity | ||||||
| Current Liabilities | ||||||
| Payables and accrued liabilities | $ | 1,814.3 | $ | 1,652.2 | ||
| Accrued income taxes | 98.6 | 117.9 | ||||
| Short-term borrowings | 144.0 | 935.8 | ||||
| Current portion of long-term debt | 416.4 | 365.4 | ||||
| Current liabilities of discontinued operations | 15.7 | 211.8 | ||||
| Total Current Liabilities | 2,489.0 | 3,283.1 | ||||
| Long-term debt | 3,402.4 | 3,909.7 | ||||
| Other noncurrent liabilities | 1,611.9 | 1,816.5 | ||||
| Deferred income taxes | 778.4 | 710.4 | ||||
| Noncurrent liabilities of discontinued operations | — | 1,095.5 | ||||
| Total Noncurrent Liabilities | 5,792.7 | 7,532.1 | ||||
| Total Liabilities | 8,281.7 | 10,815.2 | ||||
| Commitments and Contingencies – See Note 17 | ||||||
| Air Products Shareholders’ Equity | ||||||
| Common stock (par value $1 per share; issued 2017 and 2016 - 249,455,584 shares) | 249.4 | 249.4 | ||||
| Capital in excess of par value | 1,001.1 | 970.0 | ||||
| Retained earnings | 12,846.6 | 10,475.5 | ||||
| Accumulated other comprehensive loss | (1,847.4 | ) | (2,388.3 | ) | ||
| Treasury stock, at cost (2017 - 31,109,510 shares; 2016 - 32,104,759 shares) | (2,163.5 | ) | (2,227.0 | ) | ||
| Total Air Products Shareholders' Equity | 10,086.2 | 7,079.6 | ||||
| Noncontrolling Interests | 99.3 | 133.8 | ||||
| Total Equity | 10,185.5 | 7,213.4 | ||||
| Total Liabilities and Equity | $ | 18,467.2 | $ | 18,028.6 |
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended 30 September (Millions of dollars) | 2017 | 2016 | 2015 | ||||||
| Operating Activities | |||||||||
| Net income | $ | 3,021.2 | $ | 661.5 | $ | 1,317.6 | |||
| Less: Net income attributable to noncontrolling interests of continuing operations | 20.8 | 22.5 | 32.6 | ||||||
| Less: Net income attributable to noncontrolling interests of discontinued operations | — | 7.9 | 7.1 | ||||||
| Net income attributable to Air Products | 3,000.4 | 631.1 | 1,277.9 | ||||||
| (Income) Loss from discontinued operations attributable to Air Products | (1,866.0 | ) | 468.4 | (344.6 | ) | ||||
| Income from continuing operations attributable to Air Products | 1,134.4 | 1,099.5 | 933.3 | ||||||
| Adjustments to reconcile income to cash provided by operating activities: | |||||||||
| Depreciation and amortization | 865.8 | 854.6 | 858.5 | ||||||
| Deferred income taxes | (38.0 | ) | 61.8 | 9.4 | |||||
| Loss on extinguishment of debt | — | 6.9 | 16.6 | ||||||
| Gain on previously held equity interest | — | — | (17.9 | ) | |||||
| Undistributed earnings of unconsolidated affiliates | (60.1 | ) | (51.1 | ) | (101.8 | ) | |||
| Gain on sale of assets and investments | (24.3 | ) | (7.3 | ) | (29.7 | ) | |||
| Share-based compensation | 39.9 | 31.0 | 39.5 | ||||||
| Noncurrent capital lease receivables | 92.2 | 85.5 | (10.1 | ) | |||||
| Goodwill and intangible asset impairment charge | 162.1 | — | — | ||||||
| Equity method investment impairment charge | 79.5 | — | — | ||||||
| Write-down of long-lived assets associated with restructuring | 69.2 | — | 40.2 | ||||||
| Other adjustments | 165.4 | 156.7 | 53.0 | ||||||
| Working capital changes that provided (used) cash, excluding effects of acquisitions and divestitures: | |||||||||
| Trade receivables | (73.6 | ) | (44.8 | ) | (40.7 | ) | |||
| Inventories | 6.4 | 32.2 | 38.0 | ||||||
| Contracts in progress, less progress billings | (19.3 | ) | 28.2 | 16.9 | |||||
| Other receivables | 124.7 | (6.7 | ) | 48.9 | |||||
| Payables and accrued liabilities | 163.8 | 60.1 | 134.9 | ||||||
| Other working capital | (154.0 | ) | (47.8 | ) | 58.0 | ||||
| Cash Provided by Operating Activities | 2,534.1 | 2,258.8 | 2,047.0 | ||||||
| Investing Activities | |||||||||
| Additions to plant and equipment | (1,039.7 | ) | (907.7 | ) | (1,162.4 | ) | |||
| Acquisitions, less cash acquired | (8.2 | ) | — | (34.5 | ) | ||||
| Investment in and advances to unconsolidated affiliates | (8.1 | ) | — | (4.3 | ) | ||||
| Proceeds from sale of assets and investments | 42.5 | 44.6 | 55.3 | ||||||
| Purchases of investments | (2,692.6 | ) | — | — | |||||
| Proceeds from investments | 2,290.7 | — | — | ||||||
| Other investing activities | (2.3 | ) | (1.7 | ) | (.8 | ) | |||
| Cash Used for Investing Activities | (1,417.7 | ) | (864.8 | ) | (1,146.7 | ) | |||
| Financing Activities | |||||||||
| Long-term debt proceeds | 2.4 | 386.9 | 340.3 | ||||||
| Payments on long-term debt | (483.9 | ) | (480.4 | ) | (699.4 | ) | |||
| Net (decrease) increase in commercial paper and short-term borrowings | (798.6 | ) | (144.2 | ) | 285.2 | ||||
| Dividends paid to shareholders | (787.9 | ) | (721.2 | ) | (677.5 | ) | |||
| Proceeds from stock option exercises | 68.4 | 141.3 | 121.3 | ||||||
| Payment for subsidiary shares to noncontrolling interests | — | — | (278.4 | ) | |||||
| Other financing activities | (41.3 | ) | (42.6 | ) | (51.9 | ) | |||
| Cash Used for Financing Activities | (2,040.9 | ) | (860.2 | ) | (960.4 | ) | |||
| Discontinued Operations | |||||||||
| Cash (used for) provided by operating activities | (966.2 | ) | 401.9 | 422.7 | |||||
| Cash provided by (used for) investing activities | 3,750.6 | (204.2 | ) | (453.0 | ) | ||||
| Cash provided by (used for) financing activities | 69.5 | 555.9 | (16.9 | ) | |||||
| Cash (Used for) Provided by Discontinued Operations | 2,853.9 | 753.6 | (47.2 | ) | |||||
| Effect of Exchange Rate Changes on Cash | 13.4 | 7.5 | (22.9 | ) | |||||
| Increase (Decrease) in cash and cash items | 1,942.8 | 1,294.9 | (130.2 | ) | |||||
| Cash and Cash items – Beginning of Year | 1,330.8 | 206.4 | 336.6 | ||||||
| Cash and Cash Items – End of Period | $ | 3,273.6 | $ | 1,501.3 | $ | 206.4 | |||
| Less: Cash and Cash Items – Discontinued Operations | $ | — | $ | 208.1 | $ | 23.3 | |||
| Cash and Cash Items – Continuing Operations | $ | 3,273.6 | $ | 1,293.2 | $ | 183.1 |
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
| Year ended 30 September (Millions of dollars) | Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Air Products Shareholders’ Equity | Non- controlling Interests | Total Equity | ||||||||||||||||
| Balance 30 September 2014 | $ | 249.4 | $ | 842.0 | $ | 9,993.2 | $ | (1,241.9 | ) | $ | (2,476.9 | ) | $ | 7,365.8 | $ | 155.6 | $ | 7,521.4 | ||||||
| Net income | 1,277.9 | 1,277.9 | 28.2 | 1,306.1 | ||||||||||||||||||||
| Other comprehensive loss | (884.0 | ) | (884.0 | ) | (11.0 | ) | (895.0 | ) | ||||||||||||||||
| Cash dividends ($3.20 per share) | (687.9 | ) | (687.9 | ) | (687.9 | ) | ||||||||||||||||||
| Share-based compensation expense | 43.7 | 43.7 | 43.7 | |||||||||||||||||||||
| Issuance of treasury shares for stock option and award plans | (15.1 | ) | 117.3 | 102.2 | 102.2 | |||||||||||||||||||
| Tax benefit of stock option and award plans | 32.0 | 32.0 | 32.0 | |||||||||||||||||||||
| Dividends to noncontrolling interests | (38.0 | ) | (38.0 | ) | ||||||||||||||||||||
| Purchase of noncontrolling interests | (.3 | ) | (.3 | ) | (.2 | ) | (.5 | ) | ||||||||||||||||
| Other | 2.4 | (2.8 | ) | (.4 | ) | (2.5 | ) | (2.9 | ) | |||||||||||||||
| Balance 30 September 2015 | $ | 249.4 | $ | 904.7 | $ | 10,580.4 | $ | (2,125.9 | ) | $ | (2,359.6 | ) | $ | 7,249.0 | $ | 132.1 | $ | 7,381.1 | ||||||
| Net income | 631.1 | 631.1 | 30.4 | 661.5 | ||||||||||||||||||||
| Other comprehensive income (loss) | (262.4 | ) | (262.4 | ) | 4.8 | (257.6 | ) | |||||||||||||||||
| Cash dividends ($3.39 per share) | (733.7 | ) | (733.7 | ) | (733.7 | ) | ||||||||||||||||||
| Share-based compensation expense | 37.6 | 37.6 | 37.6 | |||||||||||||||||||||
| Issuance of treasury shares for stock option and award plans | (5.5 | ) | 132.6 | 127.1 | 127.1 | |||||||||||||||||||
| Tax benefit of stock option and award plans | 33.2 | 33.2 | 33.2 | |||||||||||||||||||||
| Dividends to noncontrolling interests | (33.6 | ) | (33.6 | ) | ||||||||||||||||||||
| Other | (2.3 | ) | (2.3 | ) | .1 | (2.2 | ) | |||||||||||||||||
| Balance 30 September 2016 | $ | 249.4 | $ | 970.0 | $ | 10,475.5 | $ | (2,388.3 | ) | $ | (2,227.0 | ) | $ | 7,079.6 | $ | 133.8 | $ | 7,213.4 | ||||||
| Net income | 3,000.4 | 3,000.4 | 20.8 | 3,021.2 | ||||||||||||||||||||
| Other comprehensive income | 529.4 | 529.4 | 3.7 | 533.1 | ||||||||||||||||||||
| Cash dividends ($3.71 per share) | (808.5 | ) | (808.5 | ) | (808.5 | ) | ||||||||||||||||||
| Share-based compensation expense | 40.7 | 40.7 | 40.7 | |||||||||||||||||||||
| Issuance of treasury shares for stock option and award plans | (9.6 | ) | 63.5 | 53.9 | 53.9 | |||||||||||||||||||
| Dividends to noncontrolling interests | (28.0 | ) | (28.0 | ) | ||||||||||||||||||||
| Spin-off of Versum | 175.0 | 11.5 | 186.5 | (33.9 | ) | 152.6 | ||||||||||||||||||
| Cumulative change in accounting principle | 8.8 | 8.8 | 8.8 | |||||||||||||||||||||
| Other | (4.6 | ) | (4.6 | ) | 2.9 | (1.7 | ) | |||||||||||||||||
| Balance 30 September 2017 | $ | 249.4 | $ | 1,001.1 | $ | 12,846.6 | $ | (1,847.4 | ) | $ | (2,163.5 | ) | $ | 10,086.2 | $ | 99.3 | $ | 10,185.5 |
The accompanying notes are an integral part of these statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except for share and per share data)
- MAJOR ACCOUNTING POLICIES
Basis of Presentation and Consolidation Principles
The accompanying consolidated financial statements of Air Products and Chemicals, Inc. were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of Air Products and Chemicals, Inc. and those of its controlled subsidiaries (“we,” “our,” “us,” the “Company,” “Air Products,” or “registrant”), which are generally majority owned. Intercompany transactions and balances are eliminated in consolidation.
We consolidate all entities that we control. The general condition for control is ownership of a majority of the voting interests of an entity. Control may also exist in arrangements where we are the primary beneficiary of a variable interest entity (VIE). An entity that has both the power to direct the activities that most significantly impact the economic performance of a VIE and the obligation to absorb the losses or receive the benefits significant to the VIE is considered the primary beneficiary of that entity. We have determined that we are not a primary beneficiary in any material VIE.
Reclassifications
The results of the divisions comprising the former Materials Technologies segment and the former Energy‑from‑Waste segment have been presented as discontinued operations. Refer to Note 3, Discontinued Operations, for additional details. The results of operations and cash flows of these businesses have been removed from the results of continuing operations and segment results for all periods presented. The assets and liabilities of the discontinued operations have been reclassified and are segregated in the consolidated balance sheets. The comprehensive income related to these businesses has not been segregated and is included in the consolidated comprehensive income statement for all periods presented. The notes to the consolidated financial statements, unless otherwise indicated, are on a continuing operations basis. The term "total company" includes both continuing and discontinued operations.
The consolidated financial statements and accompanying notes reflect accounting guidance that was adopted during fiscal year 2017. Refer to Note 2, New Accounting Guidance, for additional information. Certain prior year information has been reclassified to conform to the fiscal year 2017 presentation.
Estimates and Assumptions
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized as risk and title to the product transfer to the customer (which generally occurs at the time shipment is made), the sales price is fixed or determinable, and collectability is reasonably assured. Sales returns and allowances are not a business practice in the industry.
Revenue from equipment sale contracts is recorded primarily using the percentage-of-completion method. Under this method, revenue from the sale of major equipment, such as liquefied natural gas (LNG) heat exchangers and large air separation units, is recognized based on costs or labor hours incurred to date compared with total estimated costs or labor hours to be incurred. When adjustments in estimated total contract revenues or estimated total costs or labor hours are required, any changes in the estimated profit from prior estimates are recognized in the current period for the inception-to-date effect of such change. Changes in estimates on projects accounted for under the percentage-of-completion method favorably impacted operating income by approximately $27 in fiscal year 2017 and approximately $20 in fiscal year 2016. Our changes in estimates would not have significantly impacted amounts recorded in prior years. Changes in estimates during fiscal year 2015 were not significant.
Certain contracts associated with facilities that are built to provide product to a specific customer are required to be accounted for as leases. In cases where operating lease treatment is appropriate, there is no difference in revenue recognition over the life of the contract as compared to accounting for the contract as product sales. In cases where capital lease treatment is appropriate, the timing of revenue and expense recognition is impacted. Revenue and expense are recognized up front for the sale of equipment component of the contract as compared to revenue recognition over the life of the arrangement under contracts not qualifying as capital leases. Additionally, a portion of the revenue representing interest income from the financing component of the lease receivable is reflected as sales over the life of the contract. Allowances for credit losses associated with capital lease receivables are recorded using the specific identification method. As of 30 September 2017 and 2016, the credit quality of capital lease receivables did not require a material allowance for credit losses.
If an arrangement involves multiple deliverables, the delivered items are considered separate units of accounting if the items have value on a stand-alone basis. Revenues are allocated to each deliverable based upon relative selling prices derived from company specific evidence.
Amounts billed for shipping and handling fees are classified as sales in the consolidated income statements.
Amounts billed for sales and use taxes, value-added taxes, and certain excise and other specific transactional taxes imposed on revenue-producing transactions are presented on a net basis and excluded from sales in the consolidated income statements. We record a liability until remitted to the respective taxing authority.
Cost of Sales
Cost of sales predominantly represents the cost of tangible products sold. These costs include labor, raw materials, plant engineering, power, depreciation, production supplies and materials packaging costs, and maintenance costs. Costs incurred for shipping and handling are also included in cost of sales.
Depreciation
Depreciation is recorded using the straight-line method, which deducts equal amounts of the cost of each asset from earnings every year over its expected economic useful life. The principal lives for major classes of plant and equipment are summarized in Note 9, Plant and Equipment, net.
Selling and Administrative
The principal components of selling and administrative expenses are compensation, advertising, and promotional costs. Selling and administrative expenses also include costs for functional support previously provided to EMD and PMD and in support of transition services agreements with Versum and with Evonik, for which the reimbursement is reflected in "Other income (expense), net" on our consolidated income statements.
Postemployment Benefits
We provide termination benefits to employees as part of ongoing benefit arrangements and record a liability for termination benefits when probable and estimable. These criteria are met when management, with the appropriate level of authority, approves and commits to its plan of action for termination; the plan identifies the employees to be terminated and their related benefits; and the plan is to be completed within one year. We do not provide material one-time benefit arrangements.
Fair Value Measurements
We are required to measure certain assets and liabilities at fair value, either upon initial measurement or for subsequent accounting or reporting. For example, fair value is used in the initial measurement of net assets acquired in a business combination; on a recurring basis in the measurement of derivative financial instruments; and on a nonrecurring basis when long-lived assets are written down to fair value when held for sale or determined to be impaired. Refer to Note 14, Fair Value Measurements, for information on the methods and assumptions used in our fair value measurements.
Financial Instruments
We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The types of derivative financial instruments permitted for such risk management programs are specified in policies set by management. Refer to Note 13, Financial Instruments, for further detail on the types and use of derivative instruments into which we enter.
Major financial institutions are counterparties to all of these derivative contracts. We have established counterparty credit guidelines and generally enter into transactions with financial institutions of investment grade or better.
Management believes the risk of incurring losses related to credit risk is remote, and any losses would be immaterial to the consolidated financial results, financial condition, or liquidity.
We recognize derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, we generally designate the derivative as either (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), (2) a hedge of a net investment in a foreign operation (net investment hedge), or (3) a hedge of the fair value of a recognized asset or liability (fair value hedge).
The following details the accounting treatment of our cash flow, fair value, net investment, and non-designated hedges:
| • | Changes in the fair value of a derivative that is designated as and meets the cash flow hedge criteria are recorded in accumulated other comprehensive loss (AOCL) to the extent effective and then recognized in earnings when the hedged items affect earnings. |
| • | Changes in the fair value of a derivative that is designated as and meets all the required criteria for a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. |
| • | Changes in the fair value of a derivative and foreign currency debt that are designated as and meet all the required criteria for a hedge of a net investment are recorded as translation adjustments in AOCL. |
| • | Changes in the fair value of a derivative that is not designated as a hedge are recorded immediately in earnings. |
We formally document the relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. This process includes relating derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also formally assess, at the inception of the hedge and on an ongoing basis, whether derivatives are highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we will discontinue hedge accounting with respect to that derivative prospectively.
Foreign Currency
Since we do business in many foreign countries, fluctuations in currency exchange rates affect our financial position and results of operations.
In most of our foreign operations, the local currency is considered the functional currency. Foreign subsidiaries translate their assets and liabilities into U.S. dollars at current exchange rates in effect at the end of the fiscal period. The gains or losses that result from this process are shown as translation adjustments in AOCL in the equity section of the balance sheet.
The revenue and expense accounts of foreign subsidiaries are translated into U.S. dollars at the average exchange rates that prevail during the period. Therefore, the U.S. dollar value of these items on the income statement fluctuates from period to period, depending on the value of the dollar against foreign currencies. Some transactions are made in currencies different from an entity’s functional currency. Gains and losses from these foreign currency transactions are generally reflected in "Other income (expense), net" on our consolidated income statements as they occur.
Environmental Expenditures
Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Remediation costs are capitalized if the costs improve the Company’s property as compared with the condition of the property when originally constructed or acquired, or if the costs prevent environmental contamination from future operations. We expense environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. The amounts charged to income from continuing operations related to environmental matters totaled $11.4, $12.2, and $11.8 in 2017, 2016, and 2015, respectively.
The measurement of environmental liabilities is based on an evaluation of currently available information with respect to each individual site and considers factors such as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. An environmental liability related to cleanup of a contaminated site might include, for example, a provision for one or more of the following types of costs: site investigation and testing costs, cleanup costs, costs related to soil and water contamination resulting from tank ruptures, post-remediation monitoring costs, 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 take into account any claims for recoveries from insurance or other parties and are not discounted.
As assessments and remediation progress at individual sites, the amount of projected cost is reviewed, and the liability is adjusted to reflect additional technical and legal information that becomes available. Management has an established process in place to identify and monitor the Company’s environmental exposures. An environmental accrual analysis is prepared and maintained that lists all environmental loss contingencies, even where an accrual has not been established. This analysis assists in monitoring the Company’s overall environmental exposure and serves as a tool to facilitate ongoing communication among the Company’s technical experts, environmental managers, environmental lawyers, and financial management to ensure that required accruals are recorded and potential exposures disclosed.
Given inherent uncertainties in evaluating environmental exposures, actual costs to be incurred at identified sites in future periods may vary from the estimates. Refer to Note 17, Commitments and Contingencies, for additional information on the Company’s environmental loss contingencies.
The accruals for environmental liabilities are reflected in the consolidated balance sheets, primarily as part of other noncurrent liabilities.
Litigation
In the normal course of business, we are involved in legal proceedings. We accrue a liability for such matters when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency includes estimates of potential damages and other directly related costs expected to be incurred. Refer to Note 17, Commitments and Contingencies, for additional information on our current legal proceedings.
Share-Based Compensation
We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. We expense the grant-date fair value of these awards over the vesting period during which employees perform related services. Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. Refer to Note 19, Share-Based Compensation, for information on the models and assumptions used to determine the grant-date fair value of our awards.
Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. A principal temporary difference results from the excess of tax depreciation over book depreciation because accelerated methods of depreciation and shorter useful lives are used for income tax purposes. The cumulative impact of a change in tax rates or regulations is included in income tax expense in the period that includes the enactment date. We recognize deferred tax assets net of existing valuation allowance to the extent we believe that these assets are more likely than not to be realized considering all available evidence.
A tax benefit for an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination based on its technical merits. This position is measured as the largest amount of tax benefit that is greater than 50% likely of being realized. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense. For additional information regarding our income taxes, refer to Note 22, Income Taxes.
Other Non-Operating Income (Expense), net
Beginning in the second quarter of fiscal year 2017, other non-operating income (expense), net includes interest income associated with our cash and cash items and short-term investments. Interest income was included in "Other income (expense), net" in 2016 and 2015. Interest income in previous periods was not material.
Cash and Cash Items
Cash and cash items include cash, time deposits, treasury securities, and certificates of deposit acquired with an original maturity of three months or less.
Short-term investments
Short-term investments include time deposits with original maturities greater than three months and less than one year.
Trade Receivables, net
Trade receivables comprise amounts owed to us through our operating activities and are presented net of allowances for doubtful accounts. The allowances for doubtful accounts represent estimated uncollectible receivables associated with potential customer defaults on contractual obligations. A provision for customer defaults is made on a general formula basis when it is determined that the risk of some default is probable and estimable but cannot yet be associated with specific customers. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience, and existing economic conditions. The allowance also includes amounts for certain customers where a risk of default has been specifically identified, considering factors such as the financial condition of the customer and customer disputes over contractual terms and conditions. Allowance for doubtful accounts were $93.5 and $55.3 as of fiscal year end 30 September 2017 and 2016, respectively. Provisions to the allowance for doubtful accounts charged against income were $45.8, $21.8 and $25.9 in 2017, 2016, and 2015, respectively.
Inventories
Inventories are stated at the lower of cost or market. We write down our inventories for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions.
We utilize the last-in, first-out (LIFO) method for determining the cost of inventories in the United States for the Industrial Gases regional and global segments. Inventories for these segments outside of the United States are accounted for on the first-in, first-out (FIFO) method, as the LIFO method is generally not permitted in the foreign jurisdictions where these segments operate. At the business segment level, inventories are recorded at FIFO and the LIFO pool adjustments are not allocated to the business segments.
Equity Investments
The equity method of accounting is used when we exercise significant influence but do not have operating control, generally assumed to be 20% – 50% ownership. Under the equity method, original investments are recorded at cost and adjusted by our share of undistributed earnings or losses of these companies. Equity investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.
Plant and Equipment
Plant and equipment is stated at cost less accumulated depreciation. Construction costs, labor, and applicable overhead related to installations are capitalized. Expenditures for additions and improvements that extend the lives or increase the capacity of plant assets are capitalized. The costs of maintenance and repairs of plant and equipment are charged to expense as incurred.
Fully depreciated assets are retained in the gross plant and equipment and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income. Refer to Note 9, Plant and Equipment, net, for further detail.
Computer Software
We capitalize costs incurred to purchase or develop software for internal use. Capitalized costs include purchased computer software packages, payments to vendors/consultants for development and implementation or modification to a purchased package to meet our requirements, payroll and related costs for employees directly involved in development, and interest incurred while software is being developed. Capitalized computer software costs are reflected in "Plant and equipment, net" on the consolidated balance sheets and are depreciated over the estimated useful life of the software, generally a period of three to ten years.
Capitalized Interest
As we build new plant and equipment, we include in the cost of these assets a portion of the interest payments we make during the year. The amount of capitalized interest was $19.0, $32.7, and $49.1 in 2017, 2016, and 2015, respectively.
Impairment of Long-Lived Assets
Long-lived assets are grouped for impairment testing at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets and liabilities and are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. We assess recoverability by comparing the carrying amount of the asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If an asset group is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset group’s carrying amount exceeds its fair value. Long-lived assets to be sold 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 $144.7 and $119.9 at 30 September 2017 and 2016, respectively.
Goodwill
Business combinations are accounted for using the acquisition method. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair market values. Any excess purchase price 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 needed to affirm underlying estimates is obtained, within a maximum allocation period of one year.
Goodwill is subject to impairment testing at least annually. In addition, goodwill is tested more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. Refer to Note 10, Goodwill, for further detail.
Intangible Assets
Intangible assets with determinable lives primarily consist of customer relationships, purchased patents and technology, and land use rights. The cost of intangible assets with determinable lives is amortized on a straight-line basis over the estimated period of economic benefit. No residual value is estimated for these intangible assets. Indefinite-lived intangible assets consist of trade names and trademarks. Indefinite-lived intangibles are subject to impairment testing at least annually. In addition, intangible assets are tested more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists.
Customer relationships are generally amortized over periods of five to twenty-five years. Purchased patents and technology and other are generally amortized over periods of five to fifteen years. Land use rights, which are included in other intangibles, are generally amortized over a period of fifty years. Amortizable lives are adjusted whenever there is a change in the estimated period of economic benefit. Refer to Note 11, Intangible Assets, for further detail.
Retirement Benefits
The cost of pension benefits is recognized over the employees’ service period. We use actuarial methods and assumptions in the valuation of defined benefit obligations and the determination of expense. Differences between actual and expected results or changes in the value of obligations and plan assets are not recognized in earnings as they occur but, rather, systematically and gradually over subsequent periods. Refer to Note 16, Retirement Benefits, for disclosures related to our pension and other postretirement benefits.
- NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented in 2017
Simplifying Goodwill Impairment Test
In January 2017, the Financial Accounting Standards Board (FASB) issued guidance to simplify the test for goodwill impairment by eliminating Step 2, which measured the impairment loss based on the fair value of goodwill. Under the new guidance, an impairment loss will be recognized for the amount by which the carrying amount of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The guidance is effective for annual or interim goodwill impairments tests conducted in fiscal year 2021, with early adoption permitted, and should be applied prospectively. We elected to early adopt this guidance during the third quarter of fiscal year 2017.
Share-Based Compensation
In March 2016, the FASB issued an update to simplify the accounting for employee share-based payments, including the income tax impacts, the classification on the statement of cash flows, and forfeitures. We elected to early adopt this guidance in the first quarter of fiscal year 2017. The new guidance requires excess tax benefits and deficiencies to be recognized in the income statement rather than in additional paid-in capital on the balance sheet. As a result of applying this change prospectively, we recognized $17.6 of excess tax benefits in our provision for income taxes during fiscal year 2017. In addition, adoption of the new guidance resulted in an $8.8 cumulative-effect adjustment to retained earnings as of 1 October 2016 to recognize deferred taxes for U.S. state net operating loss and other carryforwards attributable to excess tax benefits. We retrospectively applied the guidance on cash flow presentation, which requires excess tax benefits to be presented as an operating activity rather than as a financing activity. Cash paid on employees’ behalf related to shares withheld for tax purposes continues to be classified as a financing activity. Forfeitures have not been significant historically. We have elected to account for forfeitures as they occur, rather than to estimate them.
Share-Based Compensation Modification Accounting
In May 2017, the FASB issued an update to amend the scope of modification accounting associated with share-based payment awards. The guidance limits the use of modification accounting to instances where the fair value, vesting conditions, or award classification are different immediately before and after the modification. This guidance is effective in fiscal year 2019, with early adoption permitted, and should be applied prospectively. We adopted this guidance during the fourth quarter of fiscal year 2017. This guidance did not have a significant impact on our consolidated financial statements upon adoption.
Consolidation Analysis
In February 2015, the FASB issued an update to amend current consolidation guidance. The guidance impacts the analysis an entity must perform in determining if it should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures. We adopted this guidance in the first quarter of fiscal year 2017. This guidance did not have a significant impact on our consolidated financial statements upon adoption.
Debt Issuance Costs
In April 2015, the FASB issued guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt instead of as a separate deferred asset. In addition, guidance was issued to allow for a policy election on the presentation of debt issuance costs associated with a line-of-credit arrangement, regardless of whether there are any outstanding borrowings. We adopted the guidance during the first quarter of fiscal year 2017 on a retrospective basis. The guidance resulted in a reclassification adjustment that decreased other noncurrent assets by $17.0 with a corresponding decrease to
long-term debt as of 30 September 2016. We will continue to present debt issuance costs associated with a line-of-credit arrangement as a deferred asset, regardless of whether there are any outstanding borrowings.
Adoption of this guidance also impacted the presentation of debt issuance costs related to our discontinued operations. As of 30 September 2016, noncurrent assets and noncurrent liabilities of discontinued operations were both reduced by $9.6.
Definition of a Business
In January 2017, the FASB issued guidance that clarifies the definition of a business to assist in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, fewer transactions are expected to be accounted for as business combinations. We elected to early adopt this guidance prospectively beginning in the first quarter of fiscal year 2017. This guidance did not have a significant impact on our consolidated financial statements upon adoption.
New Accounting Guidance to be Implemented
Revenue Recognition
In May 2014, the FASB issued guidance based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be entitled in exchange for the transfer of goods or services. We have the option to adopt the standard in either fiscal year 2018 or 2019, either retrospectively or as a cumulative-effect adjustment as of the date of adoption under the modified retrospective approach. We expect to adopt this guidance in fiscal year 2019 under the modified retrospective approach, which will result in a cumulative-effect adjustment as of 1 October 2018. To date, we have focused on identifying potential impacts on our onsite gases and sale of equipment businesses and on efforts needed to meet the expanded disclosure requirements. Our evaluation of the effect of the new standard will extend over future periods.
Leases
In February 2016, the FASB issued guidance which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements. The guidance is effective in fiscal year 2020, with early adoption permitted, and must be applied using a modified retrospective approach. We are currently evaluating the impact of adopting this new guidance on the consolidated financial statements, including the assessment of our current lease population under the revised definition of what qualifies as a leased asset. The Company is the lessee under various agreements for real estate, distribution equipment, aircraft, and vehicles that are currently accounted for as operating leases as discussed in Note 12, Leases. The new guidance will require the Company to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. The Company is currently considered the lessor under certain agreements associated with facilities that are built to provide product to a specific customer.
Derivative Contract Novations
In March 2016, the FASB issued guidance to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require re-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is effective in fiscal year 2018, with early adoption permitted. We do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.
Credit Losses on Financial Instruments
In June 2016, the FASB issued an update on the measurement of credit losses, which requires measurement and recognition of expected credit losses for financial assets, including trade receivables and capital lease receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The method to determine a loss is different from the existing guidance, which requires a credit loss to be recognized when it is probable. The guidance is effective beginning in fiscal year 2021, with early adoption permitted beginning in fiscal year 2020. We are currently evaluating the impact this update will have on our consolidated financial statements.
Cash Flow Statement Classification
In August 2016, the FASB issued guidance to reduce diversity in practice on how certain cash receipts and cash payments are classified in the statement of cash flows. The guidance is effective beginning fiscal year 2019, with early adoption permitted, and should be applied retrospectively. We are currently evaluating the impact of adopting this new guidance on the consolidated financial statements
Intra-Entity Asset Transfers
In October 2016, the FASB issued guidance on the accounting for the income tax effects of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. Under the new guidance, the income tax consequences of an intra-entity asset transfer are recognized when the transfer occurs. The guidance is effective beginning in fiscal year 2019, with early adoption permitted as of the beginning of an annual reporting period. The guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the date of adoption. We are currently evaluating the impact this guidance will have on our consolidated financial statements and plan to adopt the guidance in fiscal year 2019.
Derecognition of Nonfinancial Assets
In February 2017, the FASB issued an update to clarify the scope of guidance on gains and losses from the derecognition of nonfinancial assets and to add guidance for partial sales of nonfinancial assets. The update must be adopted at the same time as the new guidance on revenue recognition discussed above, which we intend to adopt in fiscal year 2019. The guidance may be applied retrospectively or with a cumulative-effect adjustment to retained earnings at the date of adoption. We are currently evaluating the impact this update will have on our consolidated financial statements.
Presentation of Net Periodic Pension and Postretirement Benefit Cost
In March 2017, the FASB issued guidance for improving the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that the service cost component of the net periodic benefit cost be presented in the same line items as other compensation costs arising from services rendered by employees during the period. The other components of net periodic benefit cost (e.g., interest cost, expected return on plan assets, and amortization of actuarial gains/losses) should be presented in the income statement separately from the service cost component and outside of operating income. The amendments also allow only the service cost component to be eligible for capitalization when applicable. The guidance is effective beginning in fiscal year 2019, with early adoption permitted as of the beginning of fiscal year 2018. The amendments should be applied retrospectively for the presentation requirements and prospectively for the capitalization of the service cost component requirements. We expect to early adopt this guidance beginning fiscal year 2018.
We currently classify all net periodic pension costs within operating costs, primarily within cost of sales and selling and administrative expense. The line item classification changes required by the new guidance will not impact the Company's pretax earnings or net income; however, operating income and other non-operating income (expense), net will change by offsetting amounts that are not expected to be material to the Company's consolidated financial statements.
Hedging Activities
In August 2017, the FASB issued guidance on hedging activities to expand the related presentation and disclosure requirements, change how companies assess effectiveness, and eliminate the separate measurement and reporting of hedge ineffectiveness. The guidance also enables more financial and nonfinancial hedging strategies to become eligible for hedge accounting. The guidance is effective in fiscal year 2020, with early adoption permitted. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment to eliminate the separate measurement of ineffectiveness within equity as of the beginning of the fiscal year the guidance is adopted. The amended presentation and disclosure guidance is applied prospectively. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
- DISCONTINUED OPERATIONS
Materials Technologies
On 16 September 2015, we announced plans to separate our Materials Technologies segment, which contained two divisions, the Electronic Materials Division (EMD) and the Performance Materials Division (PMD). As further discussed below, we completed the separation of EMD through the spin-off of Versum Materials, Inc. (Versum) and the sale of PMD to Evonik Industries AG (Evonik) in fiscal year 2017. As a result, these divisions are reflected in our consolidated financial statements as discontinued operations for all periods presented.
Spin-off of EMD
On 1 October 2016 (the distribution date), Air Products completed the spin-off of Versum into a separate and independent public company. The spin-off was completed by way of a distribution to Air Products’ stockholders of all of the then issued and outstanding shares of common stock of Versum on the basis of one share of Versum common stock for every two shares of Air Products’ common stock held as of the close of business on 21 September 2016 (the record date for the distribution). Fractional shares of Versum common stock were not distributed to Air Products' common stockholders. Air Products’ stockholders received cash in lieu of fractional shares. As a result of the distribution, Versum is now an independent public company, and its common stock is listed under the symbol “VSM” on the New York Stock Exchange. The spin-off of Versum was treated as a noncash transaction in the consolidated statements of cash flows in fiscal year 2017.
Sale of PMD
On 3 January 2017, we completed the sale of PMD to Evonik for $3.8 billion in cash. A gain of $2,870 ($1,828 after‑tax, or $8.32 per share) was recognized on the sale. A portion of the proceeds from the sale have been included in "Short-term investments" on the consolidated balance sheets. Interest income earned on the sale proceeds has been reflected on the consolidated income statements within “Other non-operating income (expense), net."
Energy-from-Waste
On 29 March 2016, the Board of Directors approved the Company’s exit of its Energy‑from‑Waste (EfW) business and efforts to start up and operate the two EfW projects located in Tees Valley, United Kingdom, were discontinued. Since that time, the EfW segment has been presented as a discontinued operation.
During the second quarter of fiscal year 2016, we recorded a loss of $945.7 ($846.6 after-tax) to write down plant assets to their estimated net realizable value and record a liability for plant disposition and other costs. Income tax benefits related only to one of the projects as the other did not qualify for a local tax deduction. We estimated the net realizable value of the projects assuming an orderly liquidation of assets capable of being marketed on a secondary equipment market based on market quotes and our experience with selling similar equipment. An asset’s orderly liquidation value is the amount that could be realized from a liquidation sale, given a reasonable period of time to find a buyer, selling the asset in the existing condition where it is located, and assuming the highest and best use of the asset by market participants. A valuation allowance of $58.0 and unrecognized tax benefits of $7.9 were recorded relating to deferred tax assets on capital assets generated from the loss.
During the first quarter of fiscal year 2017, we determined that it is unlikely for a buyer to assume the remaining assets and contract obligations, including land lease obligations. As a result, we recorded an additional loss of $59.3 ($47.1 after-tax) in results of discontinued operations, of which $53.0 was recorded primarily for land lease obligations and $6.3 was recorded to update our estimate of the net realizable value of the plant assets as of 31 December 2016. There have been no changes to our estimates during the remainder of fiscal year 2017. We may incur additional exit costs in future periods related to other outstanding commitments.
The following table summarizes the carrying amount of the accrual for our actions to dispose of the EfW business at 30 September 2017:
| Asset Actions | Contract Actions/ Other | Total | |||||||
| Loss on disposal of business | $ | 913.5 | $ | 32.2 | $ | 945.7 | |||
| Noncash expenses | (913.5 | ) | — | (913.5 | ) | ||||
| Cash expenditures | — | (18.6 | ) | (18.6 | ) | ||||
| Currency translation adjustment | — | (1.4 | ) | (1.4 | ) | ||||
| 30 September 2016 | $ | — | $ | 12.2 | $ | 12.2 | |||
| Loss on disposal of business | 6.3 | 53.0 | 59.3 | ||||||
| Noncash expenses | (6.3 | ) | — | (6.3 | ) | ||||
| Cash expenditures | — | (1.4 | ) | (1.4 | ) | ||||
| Currency translation adjustment | — | 7.3 | 7.3 | ||||||
| Amount reflected in other noncurrent liabilities | — | (65.3 | ) | (65.3 | ) | ||||
| 30 September 2017 | $ | — | $ | 5.8 | $ | 5.8 |
The loss on disposal was recorded as a component of discontinued operations. The amount reflected in other noncurrent liabilities primarily relates to land lease obligations and is recorded in continuing operations. The remaining accrual is reflected in current liabilities of discontinued operations.
Summarized Financial Information of Discontinued Operations
The following tables detail the businesses and major line items that comprise income from discontinued operations, net of tax, on the consolidated income statements:
| Total | |||||||||
| Performance | Energy-from- | Discontinued | |||||||
| Year Ended 30 September 2017 | Materials | Waste(A) | Operations | ||||||
| Sales | $ | 254.8 | $ | — | $ | 254.8 | |||
| Cost of sales | 182.3 | 13.8 | 196.1 | ||||||
| Selling and administrative | 22.5 | .7 | 23.2 | ||||||
| Research and development | 5.1 | — | 5.1 | ||||||
| Other income (expense), net | .3 | (2.0 | ) | (1.7 | ) | ||||
| Operating Income (Loss) | 45.2 | (16.5 | ) | 28.7 | |||||
| Equity affiliates’ income | .3 | — | .3 | ||||||
| Income (Loss) Before Taxes | 45.5 | (16.5 | ) | 29.0 | |||||
| Income tax benefit(B) | (50.8 | ) | (5.7 | ) | (56.5 | ) | |||
| Income (Loss) From Operations of Discontinued Operations, net of tax | 96.3 | (10.8 | ) | 85.5 | |||||
| Gain (Loss) on Disposal, net of tax(C) | 1,827.6 | (47.1 | ) | 1,780.5 | |||||
| Income (Loss) From Discontinued Operations, net of tax | $ | 1,923.9 | $ | (57.9 | ) | $ | 1,866.0 |
| (A) | The loss from operations of discontinued operations for EfW primarily relates to costs incurred for ongoing project exit activities, administrative costs, and land lease obligations. |
| (B) | As a result of the expected gain on sale of PMD, we released valuation allowances related to capital loss and net operating loss carryforwards primarily during the first quarter of 2017 that favorably impacted our income tax provision within discontinued operations by approximately $69. |
| (C) | After-tax gain on sale of $1,827.6 includes expense for income tax reserves for uncertain tax positions of $28.0 gross ($21.0 net) in various jurisdictions. |
| Total | ||||||||||||
| Electronic | Performance | Energy-from- | Discontinued | |||||||||
| Year Ended 30 September 2016 | Materials | Materials | Waste(A) | Operations | ||||||||
| Sales | $ | 961.6 | $ | 1,059.1 | $ | — | $ | 2,020.7 | ||||
| Cost of sales | 521.6 | 704.5 | 24.6 | 1,250.7 | ||||||||
| Selling and administrative | 87.7 | 76.6 | 2.8 | 167.1 | ||||||||
| Research and development | 40.8 | 19.6 | .9 | 61.3 | ||||||||
| Other income (expense), net | 2.2 | 4.2 | (12.7 | ) | (6.3 | ) | ||||||
| Operating Income (Loss) | 313.7 | 262.6 | (41.0 | ) | 535.3 | |||||||
| Equity affiliates’ income | .2 | 1.4 | — | 1.6 | ||||||||
| Interest expense | .3 | — | — | .3 | ||||||||
| Income (Loss) Before Taxes(B) | 313.6 | 264.0 | (41.0 | ) | 536.6 | |||||||
| Income tax provision (benefit) | 73.4 | 80.5 | (3.4 | ) | 150.5 | |||||||
| Income (Loss) From Operations of Discontinued Operations, net of tax | 240.2 | 183.5 | (37.6 | ) | 386.1 | |||||||
| Loss on Disposal, net of tax | — | — | (846.6 | ) | (846.6 | ) | ||||||
| Income (Loss) From Discontinued Operations, net of tax | 240.2 | 183.5 | (884.2 | ) | (460.5 | ) | ||||||
| Net Income Attributable to Noncontrolling Interests of Discontinued Operations | 7.9 | — | — | 7.9 | ||||||||
| Net Income (Loss) From Discontinued Operations | $ | 232.3 | $ | 183.5 | $ | (884.2 | ) | $ | (468.4 | ) |
| (A) | The loss from operations of discontinued operations for EfW primarily relates to project suspension costs, land lease obligations, and administrative costs. |
| (B) | In fiscal year 2016, income before taxes from operations of discontinued operations attributable to Air Products was $527.1. |
| Total | ||||||||||||
| Electronic | Performance | Energy-from- | Discontinued | |||||||||
| Year Ended 30 September 2015 | Materials | Materials | Waste(A) | Operations | ||||||||
| Sales | $ | 984.1 | $ | 1,086.5 | $ | — | $ | 2,070.6 | ||||
| Cost of sales | 586.8 | 754.0 | 5.1 | 1,345.9 | ||||||||
| Selling and administrative | 86.4 | 79.9 | 2.4 | 168.7 | ||||||||
| Research and development | 37.5 | 23.2 | 1.7 | 62.4 | ||||||||
| Other income (expense), net(B) | (18.5 | ) | (9.2 | ) | — | (27.7 | ) | |||||
| Operating Income (Loss) | 254.9 | 220.2 | (9.2 | ) | 465.9 | |||||||
| Equity affiliates’ income | 1.0 | 1.2 | — | 2.2 | ||||||||
| Interest expense | .1 | .6 | — | .7 | ||||||||
| Income (Loss) Before Taxes(C) | 255.8 | 220.8 | (9.2 | ) | 467.4 | |||||||
| Income tax provision (benefit) | 49.7 | 68.4 | (2.4 | ) | 115.7 | |||||||
| Income (Loss) From Discontinued Operations, net of tax | 206.1 | 152.4 | (6.8 | ) | 351.7 | |||||||
| Net Income Attributable to Noncontrolling Interests of Discontinued Operations | 7.1 | — | — | 7.1 | ||||||||
| Net Income (Loss) From Discontinued Operations | $ | 199.0 | $ | 152.4 | $ | (6.8 | ) | $ | 344.6 |
| (A) | The loss from operations of discontinued operations for EfW primarily relates to land lease obligations and administrative costs. |
| (B) | Primarily includes business restructuring and cost reduction actions. |
| (C) | In fiscal year 2015, income before taxes from operations of discontinued operations attributable to Air Products was $458.9. |
The following tables detail the businesses and major line items that comprise assets and liabilities of discontinued operations on the consolidated balance sheets:
| Total | ||||||||||
| Performance | Energy-from- | Discontinued | ||||||||
| 30 September 2017 | Materials | Waste | Operations | |||||||
| Assets | ||||||||||
| Current Assets | ||||||||||
| Plant and equipment, net | $ | — | $ | 10.2 | $ | 10.2 | ||||
| Total Current Assets | — | 10.2 | 10.2 | |||||||
| Total Assets | $ | — | $ | 10.2 | $ | 10.2 | ||||
| Liabilities | ||||||||||
| Current Liabilities | ||||||||||
| Payables and accrued liabilities | $ | 9.2 | $ | 6.5 | $ | 15.7 | ||||
| Total Current Liabilities | 9.2 | 6.5 | 15.7 | |||||||
| Total Liabilities | $ | 9.2 | $ | 6.5 | $ | 15.7 |
| Total | ||||||||||||
| Electronic | Performance | Energy-from- | Discontinued | |||||||||
| 30 September 2016 | Materials | Materials | Waste | Operations | ||||||||
| Assets | ||||||||||||
| Current Assets | ||||||||||||
| Cash and cash items | $ | 170.6 | $ | 37.5 | $ | — | $ | 208.1 | ||||
| Trade receivables, net | 134.7 | 159.0 | — | 293.7 | ||||||||
| Inventories | 138.1 | 226.8 | — | 364.9 | ||||||||
| Plant and equipment, net | — | — | 18.2 | 18.2 | ||||||||
| Other receivables and current assets | 34.5 | 5.6 | 1.2 | 41.3 | ||||||||
| Total Current Assets | 477.9 | 428.9 | 19.4 | 926.2 | ||||||||
| Plant and equipment, net | 296.5 | 296.5 | — | 593.0 | ||||||||
| Goodwill, net | 180.0 | 125.0 | — | 305.0 | ||||||||
| Intangible assets, net | 75.1 | 25.0 | — | 100.1 | ||||||||
| Other noncurrent assets | 37.5 | 6.7 | — | 44.2 | ||||||||
| Total Noncurrent Assets | 589.1 | 453.2 | — | 1,042.3 | ||||||||
| Total Assets | $ | 1,067.0 | $ | 882.1 | $ | 19.4 | $ | 1,968.5 | ||||
| Liabilities | ||||||||||||
| Current Liabilities | ||||||||||||
| Payables and accrued liabilities | $ | 85.8 | $ | 72.5 | $ | 19.0 | $ | 177.3 | ||||
| Accrued income taxes | 22.7 | 6.0 | — | 28.7 | ||||||||
| Current portion of long-term debt | 5.8 | — | — | 5.8 | ||||||||
| Total Current Liabilities | 114.3 | 78.5 | 19.0 | 211.8 | ||||||||
| Long-term debt | 981.8 | — | — | 981.8 | ||||||||
| Deferred income taxes | 50.3 | 6.4 | — | 56.7 | ||||||||
| Other noncurrent liabilities | 47.4 | 9.6 | — | 57.0 | ||||||||
| Total Noncurrent Liabilities | 1,079.5 | 16.0 | — | 1,095.5 | ||||||||
| Total Liabilities | $ | 1,193.8 | $ | 94.5 | $ | 19.0 | $ | 1,307.3 |
- MATERIALS TECHNOLOGIES SEPARATION
Business Separation Costs
In connection with the disposition of the divisions comprising the former Materials Technologies segment, we incurred separation costs of $30.2, $50.6, and $7.5 in 2017, 2016, and 2015, respectively. These costs are reflected on the consolidated income statements as “Business separation costs” and include legal, advisory, and pension related costs.
Our fiscal year 2017 income tax provision includes net tax benefits of $5.5 primarily related to changes in tax positions on business separation activities. Our fiscal year 2016 income tax provision includes additional tax expense related to the separation of $51.8, of which $45.7 resulted from a dividend that was declared in June 2016 to repatriate $443.8 from a subsidiary in South Korea to the U.S. in anticipation of the separation of EMD from the industrial gases business in South Korea.
Transition Services Agreements
In connection with the spin-off of Versum, we entered into various agreements necessary to effect the spin-off and to govern the ongoing relationships between Air Products and Versum after the separation, including a transition services agreement by which we provide certain transition services to Versum. We expect all transition services to end in 2018. Seifi Ghasemi, chairman, president and chief executive officer of Air Products, is serving as non‑executive chairman of the Versum Board of Directors.
In connection with the sale of PMD, we entered into a transition services agreement by which we provide certain transition services to Evonik for no longer than 12 months from the date of sale of 3 January 2017.
The reimbursement for costs in support of the transition services agreements with Versum and Evonik has been reflected on the consolidated income statements within “Other income (expense), net.”
Loss on Extinguishment of Debt
On 30 September 2016, in anticipation of the spin-off, Versum entered into certain financing transactions to allow for a cash distribution of $550.0 and a distribution in-kind of senior unsecured notes (the "Notes") issued by Versum with an aggregate principal amount of $425.0 to Air Products. Air Products then exchanged these Notes with certain financial institutions for $418.3 of Air Products’ outstanding commercial paper. This noncash exchange, which was excluded from the consolidated statements of cash flows, resulted in a loss of $6.9 that has been reflected on the consolidated income statements as “Loss on extinguishment of debt.” This loss was deductible for tax purposes.
- BUSINESS RESTRUCTURING AND COST REDUCTION ACTIONS
The charges we record for business restructuring and cost reduction actions have been excluded from segment operating income.
Cost Reduction Actions
In fiscal year 2017, we recognized a net expense of $151.4. The year-to-date net expense included a charge of $154.8 for actions taken during fiscal year 2017, partially offset by the favorable settlement of the remaining $3.4 accrued balance associated with business restructuring actions taken in 2015. Asset actions of $88.5 included charges resulting from the write-down of an air separation unit in the Industrial Gases – EMEA segment that was constructed mainly to provide oxygen to one of the Energy-from-Waste plants, the planned sale of a non-industrial gas hardgoods business in the Industrial Gases – Americas segment, and the closure of a facility in the Corporate and other segment that manufactured liquefied natural gas (LNG) heat exchangers. During fiscal year 2017, severance and other benefits totaled $66.3 and related to the elimination or planned elimination of approximately 625 positions, primarily in the Corporate and other segment and in the Industrial Gases – EMEA segment. The actions in the Corporate and other segment were driven by the reorganization of our engineering, manufacturing, and technology functions.
The 2017 charge related to the segments as follows: $39.3 in Industrial Gases – Americas, $77.9 in Industrial Gases – EMEA, $.9 in Industrial Gases – Asia, $2.5 in Industrial Gases – Global, and $34.2 in Corporate and other.
In fiscal year 2016, we recognized an expense of $34.5 for severance and other benefits related to cost reduction actions which resulted in the elimination of approximately 610 positions. The expenses related primarily to the Industrial Gases – Americas segment and the Industrial Gases – EMEA segment.
The following table summarizes the carrying amount of the accrual for cost reduction actions at 30 September 2017:
| Severance and Other Benefits | Asset Actions/Other | Total | ||||||||||
| 2016 Charge | $ | 34.5 | $ | — | $ | 34.5 | ||||||
| Amount reflected in pension liability | (.9 | ) | — | (.9 | ) | |||||||
| Cash expenditures | (21.6 | ) | — | (21.6 | ) | |||||||
| Currency translation adjustment | .3 | — | .3 | |||||||||
| 30 September 2016 | $ | 12.3 | $ | — | $ | 12.3 | ||||||
| 2017 Charge | 66.3 | 88.5 | 154.8 | |||||||||
| Noncash expenses | — | (84.2 | ) | (84.2 | ) | |||||||
| Amount reflected in pension liability | (2.0 | ) | — | (2.0 | ) | |||||||
| Amount reflected in other noncurrent liabilities | — | (2.2 | ) | (2.2 | ) | |||||||
| Cash expenditures | (35.7 | ) | (1.2 | ) | (36.9 | ) | ||||||
| Currency translation adjustment | (.3 | ) | — | (.3 | ) | |||||||
| 30 September 2017 | $ | 40.6 | $ | .9 | $ | 41.5 |
Business Realignment and Reorganization
On 18 September 2014, we announced plans to reorganize the Company, including realignment of our businesses in new reporting segments and other organizational changes, effective as of 1 October 2014. As a result of this reorganization, we incurred severance and other charges.
In fiscal year 2015, we recognized an expense of $180.1. Severance and other benefits totaled $131.5 and related to the elimination of approximately 1,700 positions. Asset and associated contract actions totaled $48.6 and related primarily to a plant shutdown in the Corporate and other segment and the exit of a product line within the Industrial Gases – Global segment. The 2015 charges related to the segments as follows: $31.7 in Industrial Gases – Americas, $52.2 in Industrial Gases – EMEA, $10.3 in Industrial Gases – Asia, $37.0 in Industrial Gases – Global, and $48.9 in Corporate and other.
During the fourth quarter of 2014, an expense of $11.1 was incurred relating to the elimination of approximately 40 positions.
The following table summarizes the carrying amount of the accrual for the business realignment and reorganization at 30 September 2017:
| Severance and Other Benefits | Asset Actions/Other | Total | ||||||||||
| 2014 Charge | $ | 11.1 | $ | — | $ | 11.1 | ||||||
| Cash expenditures | (1.7 | ) | — | (1.7 | ) | |||||||
| 30 September 2014 | $ | 9.4 | $ | — | $ | 9.4 | ||||||
| 2015 Charge | 131.5 | 48.6 | 180.1 | |||||||||
| Amount reflected in pension liability | (11.2 | ) | — | (11.2 | ) | |||||||
| Noncash expenses | — | (40.2 | ) | (40.2 | ) | |||||||
| Cash expenditures | (100.3 | ) | (1.2 | ) | (101.5 | ) | ||||||
| Currency translation adjustment | (.4 | ) | — | (.4 | ) | |||||||
| 30 September 2015 | $ | 29.0 | $ | 7.2 | $ | 36.2 | ||||||
| Cash expenditures | (28.6 | ) | (3.8 | ) | (32.4 | ) | ||||||
| Currency translation adjustment | (.4 | ) | — | (.4 | ) | |||||||
| 30 September 2016 | $ | — | $ | 3.4 | $ | 3.4 | ||||||
| Accrual settlement | — | (3.4 | ) | (3.4 | ) | |||||||
| 30 September 2017 | $ | — | $ | — | $ | — |
- BUSINESS COMBINATION
On 30 December 2014, we acquired our partner’s equity ownership interest in a liquefied atmospheric industrial gases production joint venture in North America for $22.6, which increased our ownership from 50% to 100%. The transaction was accounted for as a business combination, and subsequent to the acquisition, the results are consolidated within our Industrial Gases – Americas segment. The assets acquired, primarily plant and equipment, were recorded at their fair market values as of the acquisition date.
The acquisition date fair value of the previously held equity interest was determined using a discounted cash flow analysis under the income approach. The twelve months ended 30 September 2015 include a gain of $17.9 as a result of revaluing our previously held equity interest to fair value as of the acquisition date. This gain is reflected on the consolidated income statements as “Gain on previously held equity interest.”
- INVENTORIES
The components of inventories are as follows:
| 30 September | 2017 | 2016 | ||||||
| Finished goods | $ | 120.0 | $ | 131.3 | ||||
| Work in process | 15.7 | 18.3 | ||||||
| Raw materials, supplies and other | 223.0 | 117.1 | ||||||
| Total FIFO Cost | 358.7 | 266.7 | ||||||
| Less: Excess of FIFO cost over LIFO cost | (23.3 | ) | (11.7 | ) | ||||
| Inventories | $ | 335.4 | $ | 255.0 |
Inventories valued using the LIFO method comprised 48.7% and 22.9% of consolidated inventories before LIFO adjustment at 30 September 2017 and 2016, respectively. Liquidation of LIFO inventory layers in 2017, 2016, and 2015 did not materially affect the results of operations.
FIFO cost approximates replacement cost.
- SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATES
The summarized financial information below is on a combined 100% basis and has been compiled based on financial statements of the companies accounted for by the equity method. The amounts presented include the accounts of the following equity affiliates:
| Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (25%); | INOX Air Products Limited (50%); | |
| Air Products South Africa (Proprietary) Limited (50%); | Jazan Gas Projects Company (25%); | |
| Bangkok Cogeneration Company Limited (49%); | Kulim Industrial Gases Sdn. Bhd. (50%); | |
| Bangkok Industrial Gases Co., Ltd. (49%); | Sapio Produzione Idrogeno Ossigeno S.r.l. (49%); | |
| Chengdu Air & Gas Products Ltd. (50%); | Tecnologia en Nitrogeno S. de R.L. de C.V. (50%); | |
| Helios S.p.A. (49%); | Tyczka Industrie-Gases GmbH (50%); | |
| High-Tech Gases (Beijing) Co., Ltd. (50%); | WuXi Hi-Tech Gas Co., Ltd. (50%); | |
| INFRA Group (40%); | and principally, other industrial gas producers. |
| 30 September | 2017 | 2016 | ||||||||||
| Current assets | $ | 1,333.2 | $ | 1,436.7 | ||||||||
| Noncurrent assets | 4,026.9 | 3,063.3 | ||||||||||
| Current liabilities | 666.8 | 694.8 | ||||||||||
| Noncurrent liabilities | 2,194.3 | 1,540.4 | ||||||||||
| Year Ended 30 September | 2017 | 2016 | 2015 | |||||||||
| Net sales | $ | 2,343.3 | $ | 2,271.6 | $ | 2,460.5 | ||||||
| Sales less cost of sales | 878.6 | 871.5 | 922.7 | |||||||||
| Operating income | 509.5 | 482.1 | 512.4 | |||||||||
| Net income | 343.5 | 334.1 | 343.5 |
The increase in noncurrent assets and noncurrent liabilities is primarily related to Jazan Gas Projects Company.
Dividends received from equity affiliates were $99.5, $95.9, and $50.5 in 2017, 2016, and 2015, respectively.
The investment in net assets of and advances to equity affiliates as of 30 September 2017 and 2016 included investment in foreign affiliates of $1,285.1 and $1,281.5, respectively.
As of 30 September 2017 and 2016, the amount of investment in companies accounted for by the equity method included equity method goodwill in the amount of $45.8 and $109.5, respectively. The decrease was primarily driven by an other-than-temporary impairment of our investment in an equity affiliate in Saudi Arabia discussed below.
Equity Affiliate Impairment Charge
During the third quarter of fiscal year 2017, Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (AHG), a 25%‑owned equity affiliate in our Industrial Gases – EMEA segment, completed a review of its business plan and outlook. As a result of the revised business plan, we determined there was an other-than-temporary impairment of our investment in AHG and, therefore, recorded a noncash impairment charge of $79.5 to reduce the carrying value of our investment. This charge is reflected on our consolidated income statements within “Equity affiliates' income” and was not deductible for tax purposes. This charge has been excluded from segment results.
The decline in value results from expectations for lower future cash flows to be generated by AHG, primarily due to challenging economic conditions in Saudi Arabia, including the impacts of lower prices in the oil and gas industry, increased competition, and capital project growth opportunities not materializing as anticipated. The AHG investment was valued based on the results of the income and market valuation approaches.
The income approach utilized a discount rate based on a market-participant, risk-adjusted weighted average cost of capital, which considers industry required rates of return on debt and equity capital for a target industry capital structure adjusted for risks associated with size and geography. Other significant estimates and assumptions that drive our updated valuation of AHG include revenue growth rates and profit margins that were lower than those upon acquisition and our assessment of AHG's business improvement plan effectiveness.
Under the market approach, we estimated fair value based on market multiples of revenue and earnings derived from publicly-traded industrial gases companies engaged in similar lines of business, adjusted to reflect differences in size and growth prospects.
As of 30 September 2017, the carrying value of our investment in AHG is $66.7 and is reflected in our Industrial Gases – EMEA segment. The investment is reported in “Investment in net assets of and advances to equity affiliates” on our consolidated balance sheets.
There have been no other significant changes to our investments in equity affiliates during fiscal year 2017.
Jazan
On 19 April 2015, a joint venture between Air Products and ACWA Holding entered into a 20-year oxygen and nitrogen supply agreement to supply Saudi Aramco’s oil refinery and power plant being built in Jazan, Saudi Arabia. Air Products owns 25% of the joint venture and guarantees the repayment of its share of an equity bridge loan. ACWA also guarantees their share of the loan. We determined that the joint venture is a variable interest entity, for which we are not the primary beneficiary.
As of 30 September 2017 and 2016, other noncurrent liabilities included $94.4 for our obligation to make future equity contributions based on our proportionate share of the advances received by the joint venture under the loan. During fiscal year 2016 and 2015, we recorded noncash transactions that resulted in an increase of $26.9 and $67.5, respectively, to our investment in net assets of and advances to equity affiliates. These noncash transactions have been excluded from the consolidated statement of cash flows. In total, we expect to invest approximately $100 in this joint venture. There has been no change to our investment during fiscal year 2017.
Air Products has a long-term sale of equipment contract with the joint venture to engineer, procure, and construct the industrial gas facilities that will supply the gases to Saudi Aramco. Sales related to this contract are included in the results of our Industrial Gases – Global segment and were approximately $540 and $300 during fiscal year 2017 and 2016, respectively. Sales related to this contract were not material during fiscal year 2015.
- PLANT AND EQUIPMENT, NET
The major classes of plant and equipment are as follows:
| 30 September | Useful Life in years | 2017 | 2016 | ||||||||
| Land | $ | 231.0 | $ | 202.9 | |||||||
| Buildings | 30 | 977.8 | 918.6 | ||||||||
| Production facilities(A) | 10 to 20 | 13,577.1 | 12,391.9 | ||||||||
| Distribution and other machinery and equipment(B) | 5 to 25 | 3,944.0 | 3,821.0 | ||||||||
| Construction in progress | 817.9 | 1,325.8 | |||||||||
| Plant and equipment, at cost | 19,547.8 | 18,660.2 | |||||||||
| Less: accumulated depreciation | 11,107.6 | 10,400.5 | |||||||||
| Plant and equipment, net | $ | 8,440.2 | $ | 8,259.7 |
| (A) | Depreciable lives of production facilities related to long-term customer supply contracts are matched to the contract lives. |
| (B) | The depreciable lives for various types of distribution equipment are 10 to 25 years for cylinders, depending on the nature and properties of the product; 20 years for tanks; 7.5 years for customer stations; and 5 to 15 years for tractors and trailers. |
Depreciation expense was $843.2, $832.3, and $834.5 in 2017, 2016, and 2015, respectively.
- GOODWILL
Changes to the carrying amount of consolidated goodwill by segment are as follows:
| Industrial Gases– Americas | Industrial Gases– EMEA | Industrial Gases– Asia | Industrial Gases– Global | Total | |||||||||||
| Goodwill, net at 30 September 2015 | $ | 297.6 | $ | 386.5 | $ | 133.1 | $ | 19.9 | $ | 837.1 | |||||
| Currency translation | 11.5 | (5.9 | ) | 2.1 | .3 | 8.0 | |||||||||
| Goodwill, net at 30 September 2016 | $ | 309.1 | $ | 380.6 | $ | 135.2 | $ | 20.2 | $ | 845.1 | |||||
| Impairment loss | (145.3 | ) | — | — | — | (145.3 | ) | ||||||||
| Acquisitions | — | 3.5 | — | — | 3.5 | ||||||||||
| Currency translation | (.1 | ) | 18.3 | — | — | 18.2 | |||||||||
| Goodwill, net at 30 September 2017 | $ | 163.7 | $ | 402.4 | $ | 135.2 | $ | 20.2 | $ | 721.5 |
| 30 September | 2017 | 2016 | 2015 | ||||||
| Goodwill, gross | $ | 1,138.7 | $ | 1,103.7 | $ | 1,080.8 | |||
| Accumulated impairment losses | (417.2 | ) | (258.6 | ) | (243.7 | ) | |||
| Goodwill, net | $ | 721.5 | $ | 845.1 | $ | 837.1 |
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. As described in Note 2, New Accounting Guidance, we elected to early adopt new accounting guidance that simplifies the test for goodwill impairment during the third quarter of fiscal year 2017.
For the first nine months of fiscal year 2017, volumes declined in our Latin America reporting unit (LASA), and overall revenue growth did not meet expectations. Due to weak economic conditions in Latin America and expectations for continued volume weakness in the Latin American countries and markets in which we operate, we lowered our long-term growth projections. We conducted an interim impairment test of the goodwill associated with LASA within the Industrial Gases – Americas segment as of 30 June 2017. As a result, we recorded a noncash goodwill impairment charge of $145.3, which has been reflected on our consolidated income statements within “Goodwill and intangible asset impairment charge.” This charge was not deductible for tax purposes and has been excluded from segment operating income.
LASA includes assets and goodwill associated with operations in Chile and other Latin American countries. We estimated the fair value of LASA based on two valuation approaches, the income approach and the market approach. We reviewed relevant facts and circumstances in determining the weighting of the approaches.
Under the income approach, we estimated the fair value of LASA based on the present value of estimated future cash flows. Cash flow projections were based on management’s estimates of revenue growth rates and EBITDA margins, taking into consideration business and market conditions for the Latin American countries and markets in which we operate. We calculated the discount rate based on a market-participant, risk-adjusted weighted average cost of capital, which considers industry‑specific rates of return on debt and equity capital for a target industry capital structure, adjusted for risks associated with business size and geography.
Under the market approach, we estimated fair value based on market multiples of revenue and earnings derived from publicly-traded industrial gases companies and regional manufacturing companies, adjusted to reflect differences in size and growth prospects.
Management judgment is required in the determination of each assumption utilized in the valuation model, and actual results could differ from our estimates.
The accumulated impairment losses of $417.2 as of 30 September 2017 are attributable to LASA within the Industrial Gases– Americas segment and include the LASA impairment charge recorded in fiscal year 2014 as well as the impacts of currency translation on the losses.
Prior to completing the LASA goodwill impairment test, we tested the recoverability of LASA’s long-lived assets and other indefinite-lived intangible assets. Refer to Note 11, Intangible Assets, for additional information.
During the fourth quarter of 2017, we conducted our annual goodwill impairment test. We determined that the fair value of all our reporting units exceeded their carrying value except LASA, for which the fair value equaled the carrying value.
- INTANGIBLE ASSETS
The table below provides details of acquired intangible assets:
| 30 September 2017 | 30 September 2016 | |||||||||||||||||||||||
| Gross | Accumulated Amortization/ Impairment | Net | Gross | Accumulated Amortization/ Impairment | Net | |||||||||||||||||||
| Customer relationships | $ | 424.1 | $ | (142.3 | ) | $ | 281.8 | $ | 400.6 | $ | (118.2 | ) | $ | 282.4 | ||||||||||
| Patents and technology | 13.4 | (10.6 | ) | 2.8 | 13.6 | (10.1 | ) | 3.5 | ||||||||||||||||
| Other | 73.4 | (36.6 | ) | 36.8 | 73.0 | (33.7 | ) | 39.3 | ||||||||||||||||
| Total finite-lived intangibles | 510.9 | (189.5 | ) | 321.4 | 487.2 | (162.0 | ) | 325.2 | ||||||||||||||||
| Trade names and trademarks, indefinite-lived | 67.8 | (20.9 | ) | 46.9 | 66.2 | (3.5 | ) | 62.7 | ||||||||||||||||
| Total Intangible Assets | $ | 578.7 | $ | (210.4 | ) | $ | 368.3 | $ | 553.4 | $ | (165.5 | ) | $ | 387.9 |
The decrease in net intangible assets from 2016 to 2017 is primarily due to amortization and an impairment charge recorded during the third quarter of fiscal year 2017. Amortization expense for intangible assets was $22.6, $22.3, and $24.0 in 2017, 2016, and 2015, respectively. Refer to Note 1, Major Accounting Policies, for amortization periods associated with our intangible assets.
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.
As discussed in Note 10, Goodwill, in response to weak Latin America economic conditions and expectations for continued volume weakness in the Latin American countries and markets in which we operate, we lowered our long-term growth projections. An interim impairment test of indefinite-lived intangibles associated with LASA was conducted as of 30 June 2017 utilizing the royalty savings method, a form of the income approach. We determined that the carrying value of trade names and trademarks was in excess of fair value, and as a result, we recorded a noncash impairment charge of $16.8 to reduce these indefinite-lived intangible assets to their fair value. This charge is reflected within “Goodwill and intangible asset impairment charge” on our consolidated income statements. These trade names and trademarks are included in our Industrial Gases – Americas segment. This charge has been excluded from segment operating income. We tested the recoverability of LASA long-lived assets, including finite-lived intangible assets subject to amortization, and concluded that they were recoverable from expected future undiscounted cash flows.
In the fourth quarter of 2017, we conducted our annual impairment test of indefinite-lived intangibles and found no indications of impairment.
Projected annual amortization expense for intangible assets as of 30 September 2017 is as follows:
| 2018 | $ | 22.1 | |
| 2019 | 21.8 | ||
| 2020 | 21.6 | ||
| 2021 | 20.1 | ||
| 2022 | 17.4 | ||
| Thereafter | 218.4 | ||
| Total | $ | 321.4 |
- LEASES
Lessee Accounting
Capital leases, primarily for the right to use machinery and equipment, are included with owned plant and equipment on the consolidated balance sheet in the amount of $22.3 and $22.4 at 30 September 2017 and 2016, respectively. Related amounts of accumulated depreciation are $5.3 and $4.5, respectively.
Operating leases principally relate to real estate and also include aircraft, distribution equipment, and vehicles. Certain leases include escalation clauses, renewal, and/or purchase options. Rent expense is recognized on a straight-line basis over the minimum lease term. Rent expense under operating leases, including month-to-month agreements, was $65.8 in 2017, $67.6 in 2016, and $70.4 in 2015.
At 30 September 2017, minimum payments due under leases associated with continuing operations are as follows:
| Capital Leases | Operating Leases | |||||||
| 2018 | $ | 2.2 | $ | 56.6 | ||||
| 2019 | 1.8 | 45.8 | ||||||
| 2020 | 1.6 | 35.2 | ||||||
| 2021 | 3.0 | 27.1 | ||||||
| 2022 | 1.5 | 22.9 | ||||||
| Thereafter | 19.9 | 126.6 | ||||||
| Total | $ | 30.0 | $ | 314.2 |
The present value of the above future capital lease payments totaled $10.8. Refer to Note 15, Debt.
Included in the operating lease payments disclosed above are future minimum payments due under leases related to the Energy-from-Waste discontinued operations (i.e., Tees Valley, United Kingdom ) of approximately $2 in each of the next five years and $40 thereafter, for a total lease commitment of approximately $50. As discussed in Note 3, Discontinued Operations, during the first quarter of 2017, we recorded an accrual for these lease obligations to other noncurrent liabilities in continuing operations.
Lessor Accounting
As discussed under Revenue Recognition in Note 1, Major Accounting Policies, certain contracts associated with facilities that are built to provide product to a specific customer are required to be accounted for as leases. Lease receivables, net, are primarily included in noncurrent capital lease receivables on our consolidated balance sheets, with the remaining balance in other receivables and current assets.
The components of lease receivables were as follows:
| 30 September | 2017 | 2016 | ||||||
| Gross minimum lease payments receivable | $ | 1,897.0 | $ | 2,072.6 | ||||
| Unearned interest income | (671.9 | ) | (762.7 | ) | ||||
| Lease Receivables, net | $ | 1,225.1 | $ | 1,309.9 |
Lease payments collected in 2017, 2016, and 2015 were $183.6, $186.0, and $146.6, respectively. These payments reduced the lease receivable balance by $92.2, $85.5, and $68.8 in 2017, 2016, and 2015, respectively.
At 30 September 2017, minimum lease payments expected to be collected are as follows:
| 2018 | $ | 182.0 | |
| 2019 | 176.4 | ||
| 2020 | 171.4 | ||
| 2021 | 165.5 | ||
| 2022 | 154.1 | ||
| Thereafter | 1,047.6 | ||
| Total | $ | 1,897.0 |
- FINANCIAL INSTRUMENTS
Currency Price Risk Management
Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency-denominated transactions and net investments in foreign operations. It is our policy to minimize our cash flow volatility from changes in currency exchange rates. This is accomplished by identifying and evaluating the risk that our cash flows will change in value due to changes in exchange rates and by executing the appropriate strategies necessary to manage such exposures. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.
Forward Exchange Contracts
We enter into forward exchange contracts to reduce the cash flow exposure to foreign currency fluctuations associated with highly anticipated cash flows and certain firm commitments, such as the purchase of plant and equipment. We also enter into forward exchange contracts to hedge the cash flow exposure on intercompany loans. This portfolio of forward exchange contracts consists primarily of Euros and U.S. Dollars. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 30 September 2017 is 1.8 years.
Forward exchange contracts are also used to hedge the value of investments in certain foreign subsidiaries and affiliates by creating a liability in a currency in which we have a net equity position. The primary currency pair in this portfolio of forward exchange contracts is Euros and U.S. Dollars.
In addition to the forward exchange contracts that are designated as hedges, we utilize forward exchange contracts that are not designated as hedges. These contracts are used to economically hedge foreign currency-denominated monetary assets and liabilities, primarily working capital. The primary objective of these forward exchange contracts is to protect the value of foreign currency-denominated monetary assets and liabilities from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement. This portfolio of forward exchange contracts consists of many different foreign currency pairs, with a profile that changes from time to time depending on business activity and sourcing decisions.
The table below summarizes our outstanding currency price risk management instruments:
| 30 September 2017 | 30 September 2016 | |||||||||||
| US$ Notional | Years Average Maturity | US$ Notional | Years Average Maturity | |||||||||
| Forward Exchange Contracts | ||||||||||||
| Cash flow hedges | $ | 3,150.2 | .4 | $ | 4,130.3 | .5 | ||||||
| Net investment hedges | 675.5 | 3.0 | 968.2 | 2.7 | ||||||||
| Not designated | 273.8 | .1 | 2,648.3 | .4 | ||||||||
| Total Forward Exchange Contracts | $ | 4,099.5 | .8 | $ | 7,746.8 | .7 |
The notional value of forward exchange contracts not designated in the table above includes forward contracts which were hedging intercompany loans that were repaid prior to their original maturity dates in anticipation of the spin-off of Versum. The forward exchange contracts no longer qualified as cash flow hedges due to the early repayment of the loans. We entered into additional forward exchange contracts to offset these outstanding positions to eliminate any future earnings impact. The decrease in notional value from 30 September 2016 to 30 September 2017 is primarily due to the maturity of the aforementioned intercompany loan hedges and their offsetting positions.
In addition to the above, we use foreign currency-denominated debt to hedge the foreign currency exposures of our net investment in certain foreign subsidiaries. The designated foreign currency-denominated debt and related accrued interest included €912.2 million ($1,077.7) at 30 September 2017 and €920.7 million ($1,034.4) at 30 September 2016. The designated foreign currency-denominated debt is located on the balance sheet in the long-term debt line item.
Debt Portfolio Management
It is our policy to identify on a continuing basis the need for debt capital and evaluate the financial risks inherent in funding the Company with debt capital. Reflecting the result of this ongoing review, the debt portfolio and hedging program are managed with the objectives and intent to (1) reduce funding risk with respect to borrowings made by us to preserve our access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) manage the aggregate interest rate risk and the debt portfolio in accordance with certain debt management parameters.
Interest Rate Management Contracts
We enter into interest rate swaps to change the fixed/variable interest rate mix of our debt portfolio in order to maintain the percentage of fixed- and variable-rate debt within the parameters set by management. In accordance with these parameters, the agreements are used to manage interest rate risks and costs inherent in our debt portfolio. Our interest rate management portfolio generally consists of fixed-to-floating interest rate swaps (which are designated as fair value hedges), pre-issuance interest rate swaps and treasury locks (which hedge the interest rate risk associated with anticipated fixed-rate debt issuances and are designated as cash flow hedges), and floating-to-fixed interest rate swaps (which are designated as cash flow hedges). At 30 September 2017, the outstanding interest rate swaps were denominated in U.S. Dollars. The notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. When interest rate swaps are used to hedge variable-rate debt, the indices of the swaps and the debt to which they are designated are the same. It is our policy not to enter into any interest rate management contracts which lever a move in interest rates on a greater than one-to-one basis.
Cross Currency Interest Rate Swap Contracts
We enter into cross currency interest rate swap contracts when our risk management function deems necessary. These contracts may entail both the exchange of fixed- and floating-rate interest payments periodically over the life of the agreement and the exchange of one currency for another currency at inception and at a specified future date. The contracts are used to hedge either certain net investments in foreign operations or nonfunctional currency cash flows related to intercompany loans. The current cross currency interest rate swap portfolio consists of fixed-to-fixed swaps primarily between U.S. Dollars and offshore Chinese Renminbi, U.S. Dollars and Chilean Pesos, and U.S. Dollars and British Pound Sterling.
The following table summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:
| 30 September 2017 | 30 September 2016 | |||||||||||||||||||||||
| US$ Notional | Average Pay % | Average Receive % | Years Average Maturity | US$ Notional | Average Pay % | Average Receive % | Years Average Maturity | |||||||||||||||||
| Interest rate swaps (fair value hedge) | $ | 600.0 | LIBOR | 2.28 | % | 1.3 | $ | 600.0 | LIBOR | 2.28 | % | 2.3 | ||||||||||||
| Cross currency interest rate swaps (net investment hedge) | $ | 539.7 | 3.27 | % | 2.59 | % | 1.9 | $ | 517.7 | 3.24 | % | 2.43 | % | 2.6 | ||||||||||
| Cross currency interest rate swaps (cash flow hedge) | $ | 1,095.7 | 4.96 | % | 2.78 | % | 2.4 | $ | 1,088.9 | 4.77 | % | 2.72 | % | 3.3 | ||||||||||
| Cross currency interest rate swaps (not designated) | $ | 41.6 | 3.28 | % | 2.32 | % | 1.7 | $ | 27.4 | 3.62 | % | .81 | % | 1.8 |
The table below summarizes the fair value and balance sheet location of our outstanding derivatives:
| Balance Sheet | 30 September | Balance Sheet | 30 September | |||||||||||||||||
| Location | 2017 | 2016 | Location | 2017 | 2016 | |||||||||||||||
| Derivatives Designated as Hedging Instruments: | ||||||||||||||||||||
| Forward exchange contracts | Other receivables | $ | 81.7 | $ | 72.3 | Accrued liabilities | $ | 82.0 | $ | 44.0 | ||||||||||
| Interest rate management contracts | Other receivables | 11.1 | 19.9 | Accrued liabilities | 10.7 | — | ||||||||||||||
| Forward exchange contracts | Other noncurrent assets | 27.1 | 44.4 | Other noncurrent liabilities | 13.8 | 9.1 | ||||||||||||||
| Interest rate management contracts | Other noncurrent assets | 102.6 | 160.0 | Other noncurrent liabilities | 22.2 | 12.0 | ||||||||||||||
| Total Derivatives Designated as Hedging Instruments | $ | 222.5 | $ | 296.6 | $ | 128.7 | $ | 65.1 | ||||||||||||
| Derivatives Not Designated as Hedging Instruments: | ||||||||||||||||||||
| Forward exchange contracts | Other receivables | 1.1 | 77.1 | Accrued liabilities | $ | 2.2 | $ | 29.5 | ||||||||||||
| Interest rate management contracts | Other receivables | — | — | Accrued liabilities | 1.0 | — | ||||||||||||||
| Interest rate management contracts | Other noncurrent assets | 4.2 | — | Other noncurrent liabilities | — | .7 | ||||||||||||||
| Total Derivatives Not Designated as Hedging Instruments | $ | 5.3 | $ | 77.1 | $ | 3.2 | $ | 30.2 | ||||||||||||
| Total Derivatives | $ | 227.8 | $ | 373.7 | $ | 131.9 | $ | 95.3 |
Refer to Note 14, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.
The table below summarizes the gain or loss related to our cash flow hedges, fair value hedges, net investment hedges, and derivatives not designated as hedging instruments:
| Year Ended 30 September | ||||||||||||||||||||||||||||||||
| Forward Exchange Contracts | Foreign Currency Debt | Other(A) | Total | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
| Cash Flow Hedges, net of tax: | ||||||||||||||||||||||||||||||||
| Net gain (loss) recognized in OCI (effective portion) | $ | .3 | $ | 10.5 | $ | — | $ | — | $ | (12.9 | ) | $ | 3.2 | $ | (12.6 | ) | $ | 13.7 | ||||||||||||||
| Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion) | 18.3 | .2 | — | — | — | — | 18.3 | .2 | ||||||||||||||||||||||||
| Net (gain) loss reclassified from OCI to other income (expense), net (effective portion) | (3.8 | ) | (25.7 | ) | — | — | 10.5 | (20.3 | ) | 6.7 | (46.0 | ) | ||||||||||||||||||||
| Net (gain) loss reclassified from OCI to interest expense (effective portion) | (2.1 | ) | 6.7 | — | — | 2.9 | 3.3 | .8 | 10.0 | |||||||||||||||||||||||
| Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion) | (1.6 | ) | (.2 | ) | — | — | — | — | (1.6 | ) | (.2 | ) | ||||||||||||||||||||
| Fair Value Hedges: | ||||||||||||||||||||||||||||||||
| Net gain (loss) recognized in interest expense(B) | $ | — | $ | — | $ | — | $ | — | $ | (14.7 | ) | $ | (8.8 | ) | $ | (14.7 | ) | $ | (8.8 | ) | ||||||||||||
| Net Investment Hedges, net of tax: | ||||||||||||||||||||||||||||||||
| Net gain (loss) recognized in OCI | $ | (11.1 | ) | $ | 17.4 | $ | (32.8 | ) | $ | (9.6 | ) | $ | (15.6 | ) | $ | 35.0 | $ | (59.5 | ) | $ | 42.8 | |||||||||||
| Derivatives Not Designated as Hedging Instruments: | ||||||||||||||||||||||||||||||||
| Net gain (loss) recognized in other income (expense), net(C) | $ | 4.1 | $ | (1.8 | ) | $ | — | $ | — | $ | (2.4 | ) | $ | (1.6 | ) | $ | 1.7 | $ | (3.4 | ) |
| (A) | Other includes the impact on other comprehensive income (OCI) and earnings primarily related to interest rate and cross currency interest rate swaps. |
| (B) | The impact of fair value hedges noted above was largely offset by recognized gains and losses resulting from the impact of changes in related interest rates on outstanding debt. |
| (C) | The impact of the non-designated hedges noted above was largely offset by recognized gains and losses resulting from the impact of changes in exchange rates on assets and liabilities denominated in nonfunctional currencies. |
The amount of cash flow hedges’ unrealized gains and losses at 30 September 2017 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 $34.6 as of 30 September 2017 and $11.2 as of 30 September 2016. 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 $138.5 as of 30 September 2017 and $267.6 as of 30 September 2016. No financial institution is required to post collateral at this time, as all have credit ratings at or above the threshold.
- FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
| Level 1— | Quoted prices (unadjusted) in active markets for identical assets or liabilities. | |
| Level 2— | Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability. | |
| Level 3— | Inputs that are unobservable for the asset or liability based on our own assumptions (about the assumptions market participants would use in pricing the asset or liability). |
The methods and assumptions used to measure the fair value of financial instruments are as follows:
Short-term Investments
Short-term investments include time deposits with original maturities greater than three months and less than one year. The estimated fair value of the short-term investments, which approximates carrying value as of 30 September 2017 and 2016, was determined using level 2 inputs within the fair value hierarchy. Level 2 measurements were based on current interest rates for similar investments with comparable credit risk and time to maturity.
Derivatives
The fair value of our interest rate management contracts and forward exchange contracts are quantified using the income approach and are based on estimates using standard pricing models. These models take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. The computation of the fair values of these instruments is generally performed by the Company. These standard pricing models utilize inputs which are derived from or corroborated by observable market data such as interest rate yield curves as well as currency spot and forward rates. Therefore, the fair value of our derivatives is classified as a level 2 measurement. On an ongoing basis, we randomly test a subset of our valuations against valuations received from the transaction’s counterparty to validate the accuracy of our standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions.
Refer to Note 13, Financial Instruments, for a description of derivative instruments, including details on the balance sheet line classifications.
Long-term Debt
The fair value of our debt is based on estimates using standard pricing models that take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match
both the time to maturity and currency of the underlying instruments. These standard valuation models utilize observable market data such as interest rate yield curves and currency spot rates. Therefore, the fair value of our debt is classified as a level 2 measurement. We generally perform the computation of the fair value of these instruments.
The carrying values and fair values of financial instruments were as follows:
| 30 September 2017 | 30 September 2016 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
| Assets | ||||||||||||||||
| Derivatives | ||||||||||||||||
| Forward exchange contracts | $ | 109.9 | $ | 109.9 | $ | 193.8 | $ | 193.8 | ||||||||
| Interest rate management contracts | 117.9 | 117.9 | 179.9 | 179.9 | ||||||||||||
| Liabilities | ||||||||||||||||
| Derivatives | ||||||||||||||||
| Forward exchange contracts | $ | 98.0 | $ | 98.0 | $ | 82.6 | $ | 82.6 | ||||||||
| Interest rate management contracts | 33.9 | 33.9 | 12.7 | 12.7 | ||||||||||||
| Long-term debt, including current portion | 3,818.8 | 3,928.2 | 4,275.1 | 4,474.0 |
The carrying amounts reported in the balance sheet for cash and cash items, short-term investments, trade receivables, payables and accrued liabilities, accrued income taxes, and short-term borrowings approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the above table.
The following table summarizes assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets:
| 30 September 2017 | 30 September 2016 | |||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Assets at Fair Value | ||||||||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||||||||
| Forward exchange contracts | $ | 109.9 | $ | — | $ | 109.9 | $ | — | $ | 193.8 | $ | — | $ | 193.8 | $ | — | ||||||||||||||||
| Interest rate management contracts | 117.9 | — | 117.9 | — | 179.9 | — | 179.9 | — | ||||||||||||||||||||||||
| Total Assets at Fair Value | $ | 227.8 | $ | — | $ | 227.8 | $ | — | $ | 373.7 | $ | — | $ | 373.7 | $ | — | ||||||||||||||||
| Liabilities at Fair Value | ||||||||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||||||||
| Forward exchange contracts | $ | 98.0 | $ | — | $ | 98.0 | $ | — | $ | 82.6 | $ | — | $ | 82.6 | $ | — | ||||||||||||||||
| Interest rate management contracts | 33.9 | — | 33.9 | — | 12.7 | — | 12.7 | — | ||||||||||||||||||||||||
| Total Liabilities at Fair Value | $ | 131.9 | $ | — | $ | 131.9 | $ | — | $ | 95.3 | $ | — | $ | 95.3 | $ | — |
The following is a tabular presentation of nonrecurring fair value measurements along with the level within the fair value hierarchy in which the fair value measurement in its entirety falls:
| 31 December 2016 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | 2017 Loss | 2016 Loss | ||||||||||||||||||
| Plant and Equipment – Continuing operations (A) | $ | 1.4 | $ | — | $ | — | $ | 1.4 | $ | 45.7 | $ | — | |||||||||||
| Plant and Equipment—Discontinued operations(A) | $ | 11.0 | $ | — | $ | — | $ | 11.0 | $ | 6.3 | $ | 913.5 |
| (A) | We assessed the recoverability of the carrying value of assets associated with the EfW discontinued operation, including the air separation unit within continuing operations of our Industrial Gases – EMEA segment. We based our estimates primarily on an orderly liquidation valuation which resulted in losses for the difference between the orderly liquidation value and net book value of the assets as of 31 December 2016 during fiscal year 2017. There have been no significant updates to our estimates as of 30 September 2017. For additional information, see Note 3, Discontinued Operations, and Note 5, Business Restructuring and Cost Reduction Actions. |
| 30 June 2017 | 2017 Loss | |||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Investment in Equity Affiliate(A) | $ | 68.5 | $ | — | $ | — | $ | 68.5 | $ | 79.5 |
| (A) | We assessed the recoverability of the carrying value of our equity investment in AHG. We estimated the fair value of our investment using weighting of the results of the income and market approaches. An impairment loss was recognized for the difference between the carrying amount and the fair value of the investment as of 30 June 2017. There have been no updates to our estimates as of 30 September 2017. For additional information, see Note 8, Summarized Financial Information of Equity Affiliates. |
During the third quarter ended 30 June 2017, we recognized a goodwill impairment charge of $145.3 and an intangible asset impairment charge of $16.8 associated with our LASA reporting unit. Refer to Note 10, Goodwill, and Note 11, Intangible Assets, for more information related to these charges and the associated fair value measurement methods and significant inputs/assumptions, which were classified as Level 3 since unobservable inputs were utilized in the fair value measurements.
- DEBT
The tables below summarize our outstanding debt at 30 September 2017 and 2016:
Total Debt
| 30 September | 2017 | 2016 | ||||||
| Short-term borrowings | $ | 144.0 | $ | 935.8 | ||||
| Current portion of long-term debt | 416.4 | 365.4 | ||||||
| Long-term debt | 3,402.4 | 3,909.7 | ||||||
| Total Debt | $ | 3,962.8 | $ | 5,210.9 |
Short-term Borrowings
| 30 September | 2017 | 2016 | ||||||
| Bank obligations | $ | 144.0 | $ | 133.1 | ||||
| Commercial paper | — | 802.7 | ||||||
| Total Short-term Borrowings | $ | 144.0 | $ | 935.8 |
The weighted average interest rate of short-term borrowings outstanding at 30 September 2017 and 2016 was 4.6% and 1.1%, respectively.
Cash paid for interest, net of amounts capitalized, was $125.9 in 2017, $120.6 in 2016, and $96.8 in 2015.
Long-term Debt
| 30 September | Fiscal Year Maturities | 2017 | 2016 | |||||||
| Payable in U.S. Dollars | ||||||||||
| Debentures | ||||||||||
| 8.75% | 2021 | $ | 18.4 | $ | 18.4 | |||||
| Medium-term Notes (weighted average rate) | ||||||||||
| Series E 7.6% | 2026 | 17.2 | 17.2 | |||||||
| Senior Notes | ||||||||||
| Note 1.2% | 2018 | 400.0 | 400.0 | |||||||
| Note 4.375% | 2019 | 400.0 | 400.0 | |||||||
| Note 3.0% | 2022 | 400.0 | 400.0 | |||||||
| Note 2.75% | 2023 | 400.0 | 400.0 | |||||||
| Note 3.35% | 2024 | 400.0 | 400.0 | |||||||
| Other (weighted average rate) | ||||||||||
| Variable-rate industrial revenue bonds .87% | 2035 to 2050 | 631.9 | 769.9 | |||||||
| Other .89% | 2018 to 2019 | 10.9 | 25.7 | |||||||
| Payable in Other Currencies | ||||||||||
| Eurobonds 4.625% | 2017 | — | 337.0 | |||||||
| Eurobonds 2.0% | 2020 | 354.4 | 337.0 | |||||||
| Eurobonds 1.0% | 2025 | 354.4 | 337.0 | |||||||
| Eurobonds .375% | 2021 | 413.5 | 393.2 | |||||||
| Other 4.3% | 2018 to 2022 | 25.8 | 52.9 | |||||||
| Capital Lease Obligations | ||||||||||
| United States 5.0% | 2018 | .2 | .5 | |||||||
| Foreign 10.7% | 2018 to 2036 | 10.6 | 9.7 | |||||||
| Total Principal Amount | 3,837.3 | 4,298.5 | ||||||||
| Less: Unamortized Discount and Debt Issuance Costs | (18.5 | ) | (23.4 | ) | ||||||
| Total Long-term Debt | 3,818.8 | 4,275.1 | ||||||||
| Less: Current portion of long-term debt | (416.4 | ) | (365.4 | ) | ||||||
| Long-term Debt | $ | 3,402.4 | $ | 3,909.7 |
Maturities of long-term debt in each of the next five years and beyond are as follows:
| 2018 | $ | 416.4 | |
| 2019 | 409.0 | ||
| 2020 | 356.1 | ||
| 2021 | 433.3 | ||
| 2022 | 401.0 | ||
| Thereafter | 1,821.5 | ||
| Total | $ | 3,837.3 |
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 2017, we are in compliance with all the financial and other covenants under our debt agreements.
Additional commitments totaling $23.4 are maintained by our foreign subsidiaries, all of which were borrowed and outstanding at 30 September 2017.
2017 Credit Agreement
On 31 March 2017, we entered into a five-year $2,500.0 revolving credit agreement with a syndicate of banks (the “2017 Credit Agreement”), under which senior unsecured debt is available to both the Company and certain of its subsidiaries. The 2017 Credit Agreement provides a source of liquidity for the Company and supports its commercial paper program. The Company’s only financial covenant is a maximum ratio of total debt to total capitalization (total debt plus total equity) no greater than 70%. No borrowings were outstanding under the 2017 Credit Agreement as of 30 September 2017.
The 2017 Credit Agreement terminates and replaces our previous $2,690.0 revolving credit agreement (the “2013 Credit Agreement”), which was to mature 30 April 2018. No borrowings were outstanding under the previous agreement at the time of its termination, and no early termination penalties were incurred.
Loss on Extinguishment of Debt
In September 2016, we exchanged notes issued to us by Versum in anticipation of the spin-off. The exchange resulted in a loss of $6.9. Refer to Note 4, Materials Technologies Separation, for additional information. In September 2015, we made a payment of $146.6 to redeem 3,000,000 Unidades de Fomento (“UF”) Series E 6.30% Bonds due 22 January 2030 that had a carrying value of $130.0 and resulted in a net loss of $16.6. The fiscal year 2016 and 2015 losses are reflected on the consolidated income statements as “Loss on extinguishment of debt.”
- RETIREMENT BENEFITS
The Company and certain of its subsidiaries sponsor defined benefit pension plans and defined contribution plans that cover a substantial portion of its worldwide employees. The principal defined benefit pension plans are the U.S. salaried pension plan and the U.K. pension plan. These plans were closed to new participants in 2005 and were replaced with defined contribution plans. The principal defined contribution plan is the Retirement Savings Plan, in which a substantial portion of the U.S. employees participate; a similar plan is offered to U.K. employees. We also provide other postretirement benefits consisting primarily of healthcare benefits to U.S. retirees who meet age and service requirements.
Defined Benefit Pension Plans
Pension benefits earned are generally based on years of service and compensation during active employment. The cost of our defined benefit pension plans included the following components:
| 2017 | 2016 | 2015 | ||||||||||||||||||
| U.S. | International | U.S. | International | U.S. | International | |||||||||||||||
| Service cost | $ | 29.0 | $ | 25.9 | $ | 36.5 | $ | 24.3 | $ | 42.2 | $ | 31.3 | ||||||||
| Interest cost | 107.5 | 32.2 | 110.7 | 44.3 | 124.7 | 57.8 | ||||||||||||||
| Expected return on plan assets | (207.7 | ) | (75.2 | ) | (202.0 | ) | (78.3 | ) | (202.0 | ) | (79.8 | ) | ||||||||
| Amortization | ||||||||||||||||||||
| Net actuarial loss | 88.7 | 54.7 | 85.3 | 35.6 | 78.9 | 41.4 | ||||||||||||||
| Prior service cost | 2.3 | (.1 | ) | 2.8 | (.2 | ) | 2.8 | — | ||||||||||||
| Settlements | 10.5 | 1.7 | 5.1 | 1.3 | 18.9 | 2.3 | ||||||||||||||
| Curtailments | 4.3 | (1.3 | ) | — | (1.1 | ) | 5.3 | — | ||||||||||||
| Special termination benefits | 2.8 | .4 | 2.0 | — | 7.2 | 1.5 | ||||||||||||||
| Other | — | 1.1 | (.3 | ) | 2.1 | 1.0 | 2.1 | |||||||||||||
| Net Periodic Benefit Cost – Total | $ | 37.4 | $ | 39.4 | $ | 40.1 | $ | 28.0 | $ | 79.0 | $ | 56.6 | ||||||||
| Less: Discontinued Operations | (.7 | ) | (4.1 | ) | (7.9 | ) | (4.4 | ) | (12.9 | ) | (7.7 | ) | ||||||||
| Net Periodic Benefit Cost – Continuing Operations | $ | 36.7 | $ | 35.3 | $ | 32.2 | $ | 23.6 | $ | 66.1 | $ | 48.9 |
Net periodic benefit cost is primarily included in cost of sales, selling and administrative expense, and pension settlement loss on our consolidated income statements. The amount of net periodic benefit cost capitalized in 2017, 2016, and 2015 was not material.
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. In 2017, 2016, and 2015, we recognized pension settlement losses of $10.5, $5.1 and $19.3 in results from continuing operations, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss, primarily associated with the U.S. Supplementary Pension Plan. Special termination benefits are primarily related to the business restructuring and cost reduction actions initiated in their respective years.
In connection with the disposition of the two divisions comprising the former Materials Technologies segment, we incurred settlement, curtailment, and special termination benefits totaling $6.0 for the year ended 30 September 2017, of which $2.5 was reflected in "Business separation costs" and $3.5 was reflected in the results of discontinued operations on the consolidated income statements.
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:
| 2017 | 2016 | 2015 | ||||||||||||
| U.S. | International | U.S. | International | U.S. | International | |||||||||
| Discount rate(A) | 3.5 | % | 2.0 | % | 4.3 | % | 3.3 | % | 4.3 | % | 3.6 | % | ||
| Expected return on plan assets | 8.0 | % | 6.1 | % | 8.0 | % | 6.3 | % | 8.3 | % | 6.1 | % | ||
| Rate of compensation increase | 3.5 | % | 3.5 | % | 3.5 | % | 3.5 | % | 3.5 | % | 3.6 | % |
| (A) | Effective in 2016, the Company began to measure the service cost and interest cost components of pension expense by applying spot rates along the yield curve to the relevant projected cash flows, as we believe this provides a better measurement of these costs. The Company accounted for this in 2016 as a change in accounting estimate and, accordingly, accounted for it on a prospective basis. This change did not affect the measurement of the total benefit obligation. The 2017 discount rates used to measure the service cost and interest cost of our U.S. pension plans were 3.6% and 3.0%, respectively. The rates used to measure the service cost and interest cost of our major International pension plans were 2.1% and 1.8%, respectively. The previous method would have used a single discount rate for both service and interest costs. |
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:
| 2017 | 2016 | |||||||||||
| U.S. | International | U.S. | International | |||||||||
| Discount rate | 3.8 | % | 2.4 | % | 3.5 | % | 2.0 | % | ||||
| Rate of compensation increase | 3.5 | % | 3.6 | % | 3.5 | % | 3.5 | % |
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:
| 2017 | 2016 | |||||||||||||||
| U.S. | International | U.S. | International | |||||||||||||
| Change in Projected Benefit Obligation | ||||||||||||||||
| Obligation at beginning of year | $ | 3,477.7 | $ | 1,849.6 | $ | 3,139.9 | $ | 1,647.9 | ||||||||
| Service cost | 29.0 | 25.9 | 36.5 | 24.3 | ||||||||||||
| Interest cost | 107.5 | 32.2 | 110.7 | 44.3 | ||||||||||||
| Amendments | 1.9 | — | 1.2 | — | ||||||||||||
| Actuarial (gain) loss | (68.0 | ) | (132.4 | ) | 380.2 | 376.4 | ||||||||||
| Divestitures | — | (34.1 | ) | — | — | |||||||||||
| Curtailments | (17.3 | ) | (4.2 | ) | (.4 | ) | (1.2 | ) | ||||||||
| Settlement (gain) loss | 7.0 | — | 5.4 | (3.4 | ) | |||||||||||
| Special termination benefits | 2.8 | — | 2.0 | — | ||||||||||||
| Participant contributions | — | 1.4 | — | 1.6 | ||||||||||||
| Benefits paid | (182.9 | ) | (46.5 | ) | (197.4 | ) | (46.6 | ) | ||||||||
| Currency translation/other | — | 57.6 | (.4 | ) | (193.7 | ) | ||||||||||
| Obligation at End of Year | $ | 3,357.7 | $ | 1,749.5 | $ | 3,477.7 | $ | 1,849.6 |
| 2017 | 2016 | |||||||||||||||
| U.S. | International | U.S. | International | |||||||||||||
| Change in Plan Assets | ||||||||||||||||
| Fair value at beginning of year | $ | 2,705.3 | $ | 1,411.1 | $ | 2,613.6 | $ | 1,302.8 | ||||||||
| Actual return on plan assets | 319.6 | 87.9 | 275.2 | 273.2 | ||||||||||||
| Company contributions | 27.2 | 42.2 | 13.9 | 65.4 | ||||||||||||
| Participant contributions | — | 1.4 | — | 1.6 | ||||||||||||
| Divestitures | — | (3.0 | ) | — | — | |||||||||||
| Benefits paid | (182.9 | ) | (46.5 | ) | (197.4 | ) | (46.6 | ) | ||||||||
| Settlements | — | (5.3 | ) | — | (3.4 | ) | ||||||||||
| Currency translation/other | — | 52.2 | — | (181.9 | ) | |||||||||||
| Fair Value at End of Year | $ | 2,869.2 | $ | 1,540.0 | $ | 2,705.3 | $ | 1,411.1 | ||||||||
| Funded Status at End of Year | $ | (488.5 | ) | $ | (209.5 | ) | $ | (772.4 | ) | $ | (438.5 | ) |
| Amounts Recognized | ||||||||||||||||
| Noncurrent assets | $ | 5.3 | $ | 13.1 | $ | — | $ | — | ||||||||
| Accrued liabilities | (12.6 | ) | — | (24.1 | ) | — | ||||||||||
| Noncurrent liabilities | (481.2 | ) | (222.6 | ) | (748.3 | ) | (438.5 | ) | ||||||||
| Net Amount Recognized | $ | (488.5 | ) | $ | (209.5 | ) | $ | (772.4 | ) | $ | (438.5 | ) |
The above table in 2016 includes the projected benefit obligation and plan assets associated with discontinued businesses. Upon completion of the spin-off of Versum on 1 October 2016, the Company transferred defined benefit pension assets and obligations that resulted in a net decrease in the underfunded status of the Company's sponsored pension plans of $24. Additionally, as a result of the transfer of unrecognized losses to Versum, accumulated other comprehensive loss, net of tax, decreased by approximately $5. In connection with the sale of PMD to Evonik on 3 January 2017, the Company transferred defined benefit pension obligations that resulted in a net decrease in the underfunded status of the Company's sponsored pension plans of $7.
Certain U.S. plans offered terminated vested participants an election to receive their accrued pension benefit as a one-time lump sum payment in 2016. Benefits paid in 2016 include $52.9 of lump sum cash payments in connection with this offering.
The changes in plan assets and benefit obligation that have been recognized in other comprehensive income on a pretax basis during 2017 and 2016 consist of the following:
| 2017 | 2016 | |||||||||||||||
| U.S. | International | U.S. | International | |||||||||||||
| Net actuarial (gain) loss arising during the period | $ | (189.8 | ) | $ | (162.0 | ) | $ | 311.8 | $ | 172.1 | ||||||
| Amortization of net actuarial loss | (103.3 | ) | (55.7 | ) | (90.4 | ) | (36.5 | ) | ||||||||
| Prior service cost (credit) arising during the period | 1.9 | — | 1.2 | (.1 | ) | |||||||||||
| Amortization of prior service cost | (2.3 | ) | .1 | (2.8 | ) | .2 | ||||||||||
| Total | $ | (293.5 | ) | $ | (217.6 | ) | $ | 219.8 | $ | 135.7 |
The net actuarial (gain) loss represents the actual changes in the estimated obligation and plan assets that have not yet been recognized in the consolidated income statements and are included in accumulated other comprehensive loss. Actuarial gains arising during 2017 are primarily attributable to higher discount rates and higher than expected return on plan assets. Accumulated actuarial gains and losses that exceed a corridor are amortized over the average remaining service period of participants, which was approximately 9 years as of 30 September 2017.
The components recognized in accumulated other comprehensive loss on a pretax basis at 30 September consisted of:
| 2017 | 2016 | |||||||||||||||
| U.S. | International | U.S. | International | |||||||||||||
| Net actuarial loss | $ | 980.5 | $ | 551.9 | $ | 1,273.6 | $ | 769.6 | ||||||||
| Prior service cost (credit) | 8.1 | (1.8 | ) | 8.5 | (1.9 | ) | ||||||||||
| Net transition liability | — | .4 | — | .4 | ||||||||||||
| Total | $ | 988.6 | $ | 550.5 | $ | 1,282.1 | $ | 768.1 |
The amount of accumulated other comprehensive loss at 30 September 2017 that is expected to be recognized as a component of net periodic pension cost during fiscal year 2018, excluding discontinued operations and amounts that may be recognized through settlement losses, is as follows:
| U.S. | International | |||||||
| Net actuarial loss | $ | 88.5 | $ | 39.9 | ||||
| Prior service cost (credit) | 1.5 | (.1 | ) |
The accumulated benefit obligation (ABO) is the actuarial present value of benefits attributed to employee service rendered to a particular date, based on current salaries. The ABO for all defined benefit pension plans was $4,842.8 and $4,954.9 as of 30 September 2017 and 2016, respectively.
The following table provides information on pension plans where the benefit liability exceeds the value of plan assets:
| 30 September 2017 | 30 September 2016 | ||||||||||||
| U.S. | International | U.S. | International | ||||||||||
| Pension Plans with PBO in Excess of Plan Assets: | |||||||||||||
| PBO | $ | 3,116.7 | $ | 465.7 | $ | 3,477.7 | $ | 1,849.6 | |||||
| Fair value of plan assets | 2,623.0 | 243.1 | 2,705.3 | 1,411.1 | |||||||||
| Pension Plans with ABO in Excess of Plan Assets: | |||||||||||||
| ABO | $ | 2,951.0 | $ | 365.6 | $ | 3,242.5 | $ | 1,673.6 | |||||
| Fair value of plan assets | 2,623.0 | 197.1 | 2,705.3 | 1,370.1 |
Included in the tables above are several pension arrangements that are not funded because of jurisdictional practice. The ABO and PBO related to these plans as of 30 September 2017 were $99.0 and $107.8, respectively.
Pension Plan Assets
Our pension plan investment strategy is to invest in diversified portfolios to earn a long-term return consistent with acceptable risk in order to pay retirement benefits and meet regulatory funding requirements while minimizing company cash contributions over time. De-risking strategies are also employed for closed plans as funding improves, generally resulting in higher allocations to long duration bonds. The plans invest primarily in passive and actively managed equity and debt securities. Equity investments are diversified geographically and by investment style and market capitalization. Fixed income investments include sovereign, corporate and asset-backed securities generally denominated in the currency of the plan.
Asset allocation targets are established based on the long-term return, volatility and correlation characteristics of the asset classes, the profiles of the plans’ liabilities, and acceptable levels of risk. Actual allocations vary from target due to market changes and are reviewed regularly. Assets are routinely rebalanced through contributions, benefit payments, and otherwise as deemed appropriate. The actual and target allocations at the measurement date are as follows:
| 2017 Target Allocation | 2017 Actual Allocation | 2016 Actual Allocation | ||||||||||||||||
| U.S. | International | U.S. | International | U.S. | International | |||||||||||||
| Asset Category | ||||||||||||||||||
| Equity securities | 46-66% | 46-57% | 58 | % | 53 | % | 65 | % | 60 | % | ||||||||
| Debt securities | 32-42% | 41-53% | 34 | % | 46 | % | 28 | % | 38 | % | ||||||||
| Real estate/other | 0-10% | 0-2% | 7 | % | 1 | % | 7 | % | 1 | % | ||||||||
| Cash | — | — | 1 | % | — | % | — | % | 1 | % | ||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % |
In 2017, the 8.0% expected return for U.S. plan assets was based on a weighted average of estimated long-term returns of major asset classes and the historical performance of plan assets. The estimated long-term return for equity, debt securities, and real estate is 8.2%, 5.0%, and 7.0%, respectively. In determining asset class returns, we take into account historical long-term returns and the value of active management, as well as other economic and market factors.
In 2017, the 6.1% expected rate of return for international plan assets was based on a weighted average return for plans outside the U.S., which vary significantly in size, asset structure and expected returns. The expected asset return for the U.K. plan, which represents over 80% of the assets of our International plans, is 6.6% and was derived from expected equity and debt security returns of 7.3% and 3.5%, respectively.
The following table summarizes pension plan assets measured at fair value by asset class (see Note 14, Fair Value Measurements, for definition of the levels):
| 30 September 2017 | 30 September 2016 | ||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| U.S. Qualified Pension Plans | |||||||||||||||||||||||||
| Cash and cash equivalents | $ | 13.6 | $ | 13.6 | $ | — | $ | — | $ | 12.7 | $ | 12.7 | $ | — | $ | — | |||||||||
| Equity securities | 598.6 | 598.6 | — | — | 637.0 | 637.0 | — | — | |||||||||||||||||
| Equity mutual funds | 276.5 | 276.5 | — | — | 300.2 | 300.2 | — | — | |||||||||||||||||
| Equity pooled funds | 787.0 | — | 787.0 | — | 815.5 | — | 815.5 | — | |||||||||||||||||
| Fixed income: | |||||||||||||||||||||||||
| Bonds (government and corporate) | 985.7 | — | 985.7 | — | 747.8 | — | 747.8 | — | |||||||||||||||||
| Real estate pooled funds | 207.8 | — | — | 207.8 | 192.1 | — | — | 192.1 | |||||||||||||||||
| Total U.S. Qualified Pension Plans | $ | 2,869.2 | $ | 888.7 | $ | 1,772.7 | $ | 207.8 | $ | 2,705.3 | $ | 949.9 | $ | 1,563.3 | $ | 192.1 | |||||||||
| International Pension Plans | |||||||||||||||||||||||||
| Cash and cash equivalents | $ | 7.3 | $ | 7.3 | $ | — | $ | — | $ | 6.6 | $ | 6.6 | $ | — | $ | — | |||||||||
| Equity pooled funds | 821.4 | — | 821.4 | — | 854.8 | — | 854.8 | — | |||||||||||||||||
| Fixed income pooled funds | 651.3 | — | 651.3 | — | 486.9 | — | 486.9 | — | |||||||||||||||||
| Other pooled funds | 18.6 | — | 10.8 | 7.8 | 17.0 | — | 9.7 | 7.3 | |||||||||||||||||
| Insurance contracts | 41.4 | — | — | 41.4 | 45.8 | — | — | 45.8 | |||||||||||||||||
| Total International Pension Plans | $ | 1,540.0 | $ | 7.3 | $ | 1,483.5 | $ | 49.2 | $ | 1,411.1 | $ | 6.6 | $ | 1,351.4 | $ | 53.1 |
The above table in 2016 includes plan assets associated with discontinued businesses. Upon completion of the spin-off of Versum on 1 October 2016, the Company transferred approximately $3 of international plan assets.
The following table summarizes changes in fair value of the pension plan assets classified as Level 3, by asset class:
| Real Estate Pooled Funds | Other Pooled Funds | Insurance Contracts | Total | |||||||||||||
| 30 September 2015 | $ | 174.2 | $ | 6.6 | $ | 45.3 | $ | 226.1 | ||||||||
| Actual return on plan assets: | ||||||||||||||||
| Assets held at end of year | 17.9 | .1 | 3.2 | 21.2 | ||||||||||||
| Assets sold during the period | — | .3 | — | .3 | ||||||||||||
| Purchases, sales, and settlements, net | — | .3 | (2.7 | ) | (2.4 | ) | ||||||||||
| 30 September 2016 | $ | 192.1 | $ | 7.3 | $ | 45.8 | $ | 245.2 | ||||||||
| Actual return on plan assets: | ||||||||||||||||
| Assets held at end of year | 15.7 | 1.2 | (1.0 | ) | 15.9 | |||||||||||
| Assets sold during the period | — | .3 | — | .3 | ||||||||||||
| Purchases, sales, and settlements, net | — | (1.0 | ) | (3.4 | ) | (4.4 | ) | |||||||||
| 30 September 2017 | $ | 207.8 | $ | 7.8 | $ | 41.4 | $ | 257.0 |
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.
Mutual and Pooled Funds
Shares of mutual funds are valued at the net asset value (NAV) of the fund and are classified as Level 1 assets. Units of pooled funds are valued at the per unit NAV determined by the fund manager and are classified as Level 2 assets.
Corporate and Government Bonds
Corporate and government bonds are classified as Level 2 assets, as they are either valued at quoted market prices from observable pricing sources at the reporting date or valued based upon comparable securities with similar yields and credit ratings.
Real Estate Pooled Funds
Real estate pooled funds are classified as Level 3 assets, as they are carried at the estimated fair value of the underlying properties. Estimated fair value is calculated utilizing a combination of key inputs, such as revenue and expense growth rates, terminal capitalization rates, and discount rates. These key inputs are consistent with practices prevailing within the real estate investment management industry.
Other Pooled Funds
Other pooled funds classified as Level 2 assets are valued at the NAV of the shares held at year end, which is based on the fair value of the underlying investments. Securities and interests classified as Level 3 are carried at the estimated fair value. The estimated fair value is based on the fair value of the underlying investment values, which includes estimated bids from brokers or other third-party vendor sources that utilize expected cash flow streams and other uncorroborated data including counterparty credit quality, default risk, discount rates, and the overall capital market liquidity.
Insurance Contracts
Insurance contracts are classified as Level 3 assets, as they are carried at contract value, which approximates the estimated fair value. The estimated fair value is based on the fair value of the underlying investment of the insurance company.
Contributions and Projected Benefit Payments
Pension contributions to funded plans and benefit payments for unfunded plans for fiscal year 2017 were $64.1. Contributions for funded plans resulted primarily from contractual and regulatory requirements. Benefit payments to unfunded plans were due primarily to the timing of retirements and cost reduction actions. We anticipate contributing $50 to $70 to the defined benefit pension plans in 2018. 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 | |||||||
| 2018 | $ | 158.5 | $ | 50.9 | ||||
| 2019 | 163.4 | 53.4 | ||||||
| 2020 | 167.3 | 53.8 | ||||||
| 2021 | 171.4 | 56.8 | ||||||
| 2022 | 177.2 | 59.3 | ||||||
| 2023-2027 | 938.5 | 333.3 |
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 nonleveraged employee stock ownership plan (ESOP) which forms part of the Air Products and Chemicals, Inc. Retirement Savings Plan (RSP). The ESOP was established in May of 2002. The balance of the RSP is a qualified defined contribution plan including a 401(k) elective deferral component. A substantial portion of U.S. employees are eligible and participate.
We treat dividends paid on ESOP shares as ordinary dividends. Under existing tax law, we may deduct dividends which are paid with respect to shares held by the plan. Shares of the Company’s common stock in the ESOP totaled 2,483,225 as of 30 September 2017.
Our contributions to the RSP include a Company core contribution for certain eligible employees who do not receive their primary retirement benefit from the defined benefit pension plans, with the core contribution based on a percentage of pay that is dependent on years of service. For the RSP, we also make matching contributions on overall employee contributions as a percentage of the employee contribution and include an enhanced contribution for certain eligible employees that do not participate in the defined benefit pension plans. Worldwide contributions, excluding discontinued operations, expensed to income in 2017, 2016, and 2015 were $33.7, $34.6, and $36.8, 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 our other postretirement benefit plans includes the following components:
| 2017 | 2016 | 2015 | ||||||||||
| Service cost | $ | 1.1 | $ | 2.2 | $ | 2.8 | ||||||
| Interest cost | 1.6 | 2.0 | 2.2 | |||||||||
| Amortization of net actuarial loss | .2 | .7 | .8 | |||||||||
| Net Periodic Postretirement Cost | $ | 2.9 | $ | 4.9 | $ | 5.8 | ||||||
| Less: Discontinued Operations | $ | — | $ | (.4 | ) | $ | (.7 | ) | ||||
| Net Periodic Postretirement Cost – Continuing Operations | $ | 2.9 | $ | 4.5 | $ | 5.1 |
We calculate net periodic postretirement cost for a given fiscal year based on assumptions developed at the end of the previous fiscal year. The discount rate assumption used in the calculation of net periodic postretirement cost for 2017, 2016, and 2015 was 1.9%, 2.4%, and 2.6%, respectively.
We measure the other postretirement benefits as of 30 September. The discount rate assumption used in the calculation of the accumulated postretirement benefit obligation was 2.4% and 1.9% for 2017 and 2016, respectively.
The following table reflects the change in the accumulated postretirement benefit obligation and the amounts recognized in the consolidated balance sheets:
| 2017 | 2016 | |||||||
| Obligation at beginning of year | $ | 86.3 | $ | 86.9 | ||||
| Service cost | 1.1 | 2.2 | ||||||
| Interest cost | 1.6 | 2.0 | ||||||
| Actuarial loss (gain) | (7.2 | ) | 7.5 | |||||
| Curtailment gain | (3.5 | ) | — | |||||
| Benefits paid | (11.3 | ) | (12.3 | ) | ||||
| Obligation at End of Year | $ | 67.0 | $ | 86.3 |
| Amounts Recognized | ||||||||
| Accrued liabilities | $ | 10.0 | $ | 11.4 | ||||
| Noncurrent liabilities | 57.0 | 74.9 |
In 2016, the above table included the projected benefit obligations associated with discontinued businesses.
The changes in benefit obligation that have been recognized in other comprehensive income on a pretax basis during 2017 and 2016 for our other postretirement benefit plans consist of the following:
| 2017 | 2016 | |||||||
| Net actuarial loss (gain) arising during the period | $ | (10.7 | ) | $ | 7.5 | |||
| Amortization of net actuarial loss | (.2 | ) | (.7 | ) | ||||
| Total | $ | (10.9 | ) | $ | 6.8 |
The net actuarial loss recognized in accumulated other comprehensive loss on a pretax basis was $7.8 at 30 September 2017 and $18.7 at 30 September 2016. Of the 30 September 2017 net actuarial loss, it is estimated that $.3, which excludes discontinued operations, will be amortized into net periodic postretirement cost during fiscal year 2018.
The effect of a change in the healthcare trend rate is tempered by a cap on the average retiree medical cost. The expected per capita claims costs are currently assumed to be greater than the annual cap; therefore, the assumed healthcare cost trend rate, ultimate trend rate, and the year the ultimate trend rate is reached in 2017 and 2016 does not apply as it has no impact on plan obligations.
Projected benefit payments are as follows:
| 2018 | $ | 10.1 | |
| 2019 | 9.5 | ||
| 2020 | 9.0 | ||
| 2021 | 8.4 | ||
| 2022 | 7.7 | ||
| 2023-2027 | 24.2 |
These estimated benefit payments are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.
- COMMITMENTS AND CONTINGENCIES
LITIGATION
We are involved in various legal proceedings, including commercial, competition, environmental, health, safety, product liability, and insurance matters. In September 2010, the Brazilian Administrative Council for Economic Defense (CADE) issued a decision against our Brazilian subsidiary, Air Products Brasil Ltda., and several other Brazilian industrial gas companies for alleged anticompetitive activities. CADE imposed a civil fine of R$179.2 million (approximately $57 at 30 September 2017) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, whose investigation began in 2003, alleging violation of competition laws with respect to the sale of industrial and medical gases. The fines are based on a percentage of our total revenue in Brazil in 2003.
We have denied the allegations made by the authorities and filed an appeal in October 2010 with the Brazilian courts. On 6 May 2014, our appeal was granted and the fine against Air Products Brasil Ltda. was dismissed. CADE has appealed that ruling and the matter remains pending. We, with advice of our outside legal counsel, have assessed the status of this matter and have concluded that, although an adverse final judgment after exhausting all appeals is possible, such a judgment is not probable. As a result, no provision has been made in the consolidated financial statements. We estimate the maximum possible loss to be the full amount of the fine of R$179.2 million (approximately $57 at 30 September 2017) plus interest accrued thereon until final disposition of the proceedings.
Other than this matter, we do not currently believe there are any legal proceedings, individually or in the aggregate, that are reasonably possible to have a material impact on our financial condition, results of operations, or cash flows.
ENVIRONMENTAL
In the normal course of business, we are involved in legal proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA: the federal Superfund law); Resource Conservation and Recovery Act (RCRA); and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Presently, there are approximately 32 sites on which a final settlement has not been reached where we, along with others, have been designated a potentially responsible party by the Environmental Protection Agency or are otherwise engaged in investigation or remediation, including cleanup activity at certain of our current and former manufacturing sites. We continually monitor these sites for which we have environmental exposure.
Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The consolidated balance sheets at 30 September 2017 and 2016 included an accrual of $83.6 and $81.4, 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 $83 to a reasonably possible upper exposure of $97 as of 30 September 2017.
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 2017, $28.9 of the environmental accrual was related to the Pace facility.
In 2006, we sold our Amines business, which included operations at Pace, Florida, and recognized a liability for retained environmental obligations associated with remediation activities at Pace. We are required by the Florida Department of Environmental Protection (FDEP) and the United States Environmental Protection Agency (USEPA) to continue our remediation efforts. We estimated that it would take a substantial period of time to complete the groundwater remediation, and the costs through completion were estimated to range from $42 to $52. As no amount within the range was a better estimate than another, we recognized a pretax expense in fiscal 2006 of $42 as a component of income from discontinued operations and recorded an environmental accrual of $42 in continuing operations on the consolidated balance sheets. There has been no change to the estimated exposure range related to the Pace facility.
We have implemented many of the remedial corrective measures at the Pace facility required under 1995 Consent Orders issued by the FDEP and the USEPA. Contaminated soils have been bioremediated, and the treated soils have been secured in a lined on-site disposal cell. Several groundwater recovery systems have been installed to contain and remove contamination from groundwater. We completed an extensive assessment of the site to determine how well existing measures are working, what additional corrective measures may be needed, and whether newer remediation technologies that were not available in the 1990s might be suitable to more quickly and effectively remove groundwater contaminants. Based on assessment results, we completed a focused feasibility study that has identified alternative approaches that may more effectively remove contaminants. We continue to review alternative remedial approaches with the FDEP and recently started additional field work to support the design of an improved groundwater recovery network with the objective of targeting areas of higher contaminant concentration and avoiding areas of high groundwater iron which has proven to be a significant operability issue for the project. In the first quarter of 2015, we entered into a new Consent Order with the FDEP requiring us to continue our remediation efforts at the Pace facility. The costs we are incurring under the new Consent Order are expected to be consistent with our previous estimates.
Piedmont
At 30 September 2017, $16.7 of the environmental accrual was related to the Piedmont site.
On 30 June 2008, we sold our Elkton, Maryland, and Piedmont, South Carolina, production facilities and the related North American atmospheric emulsions and global pressure sensitive adhesives businesses. In connection with the sale, we recognized a liability for retained environmental obligations associated with remediation activities at the Piedmont site. This site is under active remediation for contamination caused by an insolvent prior owner. We are required by the South Carolina Department of Health and Environmental Control (SCDHEC) to address both contaminated soil and groundwater. Numerous areas of soil contamination have been addressed, and contaminated groundwater is being recovered and treated. On 13 June 2017, the SCDHEC issued its final approval to the site-wide feasibility study, and with that we will be moving towards a record of decision for the Piedmont site and into the final remedial design phase of this project. We estimate that it will take until 2019 to complete source area remediation, with groundwater recovery and treatment continuing through 2029. Thereafter, we are expecting this site to go into a state of monitored natural attenuation through 2047. We recognized a pretax expense in 2008 of $24 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 2017, $12.1 of the environmental accrual was related to the Pasadena site.
During the fourth quarter of 2012, management committed to permanently shutting down our polyurethane intermediates (PUI) production facility in Pasadena, Texas. In shutting down and dismantling the facility, we have undertaken certain obligations related to soil and groundwater contaminants. We have been pumping and treating groundwater to control off-site contaminant migration in compliance with regulatory requirements and under the approval of the Texas Commission on Environmental Quality (TCEQ). We estimate that the pump and treat system will continue to operate until 2042. We plan to perform additional work to address other environmental obligations at the site. This additional work includes remediating, as required, impacted soils, investigating groundwater west of the former PUI facility, performing post closure care for two closed RCRA surface impoundment units, and establishing engineering controls. In 2012, we estimated the total exposure at this site to be $13. There have been no significant changes to the estimated exposure.
ASSET RETIREMENT OBLIGATIONS
Our asset retirement obligations are primarily associated with on-site long-term supply contracts under which we have built a facility on land owned by the customer and are obligated to remove the facility at the end of the contract term. The retirement of assets includes the contractually required removal of a long-lived asset from service and encompasses the sale, removal, abandonment, recycling, or disposal of the assets as required at the end of the contract terms. The timing and/or method of settlement of these obligations are conditional on a future event that may or may not be within our control.
Changes to the carrying amount of our asset retirement obligations are as follows:
| Balance at 30 September 2015 | $ | 109.4 | |
| Additional accruals | 10.4 | ||
| Liabilities settled | (4.4 | ) | |
| Accretion expense | 5.4 | ||
| Currency translation adjustment | (.9 | ) | |
| Balance at 30 September 2016 | $ | 119.9 | |
| Additional accruals | 22.7 | ||
| Liabilities settled | (4.1 | ) | |
| Accretion expense | 5.8 | ||
| Currency translation adjustment | .4 | ||
| Balance at 30 September 2017 | $ | 144.7 |
These obligations are primarily reflected in "Other noncurrent liabilities" on the consolidated balance sheets.
GUARANTEES AND WARRANTIES
In April 2015, we entered into joint venture arrangements in Saudi Arabia. An equity bridge loan has been provided to the joint venture until 2020 to fund equity commitments. We guaranteed the repayment of our 25% share of this loan, and our venture partner guaranteed repayment of its share. Our maximum exposure under the guarantee is approximately $100. As of 30 September 2017 and 2016, we recorded a noncurrent liability of $94.4 for our obligation to make future equity contributions based on our proportionate share of the advances received by the joint venture under the loan.
Air Products has also entered into a long-term sale of equipment contract with the joint venture to engineer, procure, and construct the industrial gas facilities that will supply gases to Saudi Aramco. We have provided bank guarantees to the joint venture of up to $262 to support our performance under the contract. Exposures under the guarantees decline over time and will be completely extinguished after completion of the project.
We are party to an equity support agreement and operations guarantee related to an air separation facility constructed in Trinidad for a venture in which we own 50%. At 30 September 2017, maximum potential payments under joint and several guarantees were $28.0. Exposures under the guarantees decline over time and will be completely extinguished by 2024.
During the first quarter of 2014, we sold the remaining portion of our Homecare business and entered into an operations guarantee related to obligations under certain homecare contracts assigned in connection with the transaction. Our maximum potential payment under the guarantee is £20 million (approximately $25 at 30 September 2017), and our exposure will be extinguished by 2020.
To date, no equity contributions or payments have been made since the inception of these guarantees. The fair value of the above guarantees is not material.
We, in the normal course of business operations, have issued product warranties related to equipment sales. Also, contracts often contain standard terms and conditions which typically include a warranty and indemnification to the buyer that the goods and services purchased do not infringe on third-party intellectual property rights. The provision for estimated future costs relating to warranties is not material to the consolidated financial statements.
We do not expect that any sum we may have to pay in connection with guarantees and warranties will have a material adverse effect on our consolidated financial condition, liquidity, or results of operations.
UNCONDITIONAL PURCHASE OBLIGATIONS
We are obligated to make future payments under unconditional purchase obligations as summarized below:
| 2018 | $ | 822 | |
| 2019 | 234 | ||
| 2020 | 275 | ||
| 2021 | 309 | ||
| 2022 | 285 | ||
| Thereafter | 4,608 | ||
| Total | $ | 6,533 |
Approximately $5,600 of our unconditional purchase obligations relate to helium purchases, which include crude feedstock supply to multiple helium refining plants in North America as well as refined helium purchases from sources around the world. As a rare byproduct of natural gas production in the energy sector, these helium sourcing agreements are medium- to long-term and contain take-or-pay provisions. The refined helium is distributed globally and sold as a merchant gas, primarily under medium-term requirements contracts. While contract terms in the energy sector are longer than those in merchant, helium is a rare gas used in applications with few or no substitutions because of its unique physical and chemical properties.
Approximately $280 of our long-term unconditional purchase obligations relate to feedstock supply for numerous HyCO (hydrogen, carbon monoxide, and syngas) facilities. The price of feedstock supply is principally related to the price of natural gas. However, long-term take-or-pay sales contracts to HyCO customers are generally matched to the term of the feedstock supply obligations and provide recovery of price increases in the feedstock supply. Due to the matching of most long-term feedstock supply obligations to customer sales contracts, we do not believe these purchase obligations would have a material effect on our financial condition or results of operations.
The unconditional purchase obligations also include other product supply and purchase commitments and electric power and natural gas supply purchase obligations, which are primarily pass-through contracts with our customers.
Purchase commitments to spend approximately $300 for additional plant and equipment are included in the unconditional purchase obligations in 2018. In addition, we have purchase commitments totaling approximately $180 in 2018 relating to our long-term sale of equipment project for Saudi Aramco’s Jazan oil refinery.
- CAPITAL STOCK
Common Stock
Authorized common stock consists of 300 million shares with a par value of $1 per share. As of 30 September 2017, 249 million shares were issued, with 218 million outstanding.
On 15 September 2011, the Board of Directors authorized the repurchase of up to $1,000 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 2017. At 30 September 2017, $485.3 in share repurchase authorization remains.
The following table reflects the changes in common shares:
| Year ended 30 September | 2017 | 2016 | 2015 | ||||||
| Number of Common Shares Outstanding | |||||||||
| Balance, beginning of year | 217,350,825 | 215,359,113 | 213,538,144 | ||||||
| Issuance of treasury shares for stock option and award plans | 995,249 | 1,991,712 | 1,820,969 | ||||||
| Balance, end of year | 218,346,074 | 217,350,825 | 215,359,113 |
Preferred Stock
Authorized preferred stock consists of 25 million shares with a par value of $1 per share, of which 2.5 million were designated as Series A Junior Participating Preferred Stock. There were no shares issued or outstanding as of 30 September 2017 and 2016.
- SHARE-BASED COMPENSATION
We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. Under all programs, the terms of the awards are fixed at the grant date. We issue shares from treasury stock upon the payout of deferred stock units, the exercise of stock options, and the issuance of restricted stock awards. Share information presented is on a total company basis. As of 30 September 2017, there were 4,922,382 shares available for future grant under our Long-Term Incentive Plan (LTIP), which is shareholder approved.
In connection with the spin-off of Versum, the Company adjusted the number of deferred stock units and stock options pursuant to existing anti-dilution provisions in the LTIP to preserve the intrinsic value of the awards immediately before and after the separation. The outstanding awards will continue to vest over the original vesting period defined at the grant date. Outstanding awards at the time of spin-off were primarily converted into awards of the holders' employer following the separation.
Stock awards held upon separation were adjusted based upon the conversion ratio of Air Products' New York Stock Exchange (“NYSE”) volume weighted-average closing stock price on 30 September 2016 ($150.35) to the NYSE volume weighted-average opening stock price on 3 October 2016 ($140.38), or 1.071. The adjustment to the awards did not result in incremental fair value, and no incremental compensation expense was recorded related to the conversion of these awards.
Share-based compensation cost recognized in the consolidated income statements is summarized below:
| 2017 | 2016 | 2015 | |||||||
| Before-Tax Share-Based Compensation Cost – Total | $ | 40.7 | $ | 37.6 | $ | 45.7 | |||
| Before-Tax Share-Based Compensation Cost – Discontinued Operations | .8 | 6.6 | 6.2 | ||||||
| Before-Tax Share-Based Compensation Cost – Continuing Operations | $ | 39.9 | $ | 31.0 | $ | 39.5 | |||
| Income tax benefit – Continuing Operations | (14.0 | ) | (10.8 | ) | (13.8 | ) | |||
| After-Tax Share-Based Compensation Cost – Continuing Operations | $ | 25.9 | $ | 20.2 | $ | 25.7 |
Before-tax share-based compensation cost is primarily included in selling and administrative expense on our consolidated income statements. The amount of share-based compensation cost capitalized in 2017, 2016, and 2015 was not material.
On a total company basis, before-tax share-based compensation cost by type of program was as follows:
| 2017 | 2016 | 2015 | |||||||
| Deferred stock units | $ | 34.5 | $ | 29.9 | $ | 28.8 | |||
| Stock options | 1.4 | 4.2 | 12.6 | ||||||
| Restricted stock | 4.8 | 3.5 | 4.3 | ||||||
| Before-Tax Share-Based Compensation Cost – Total | $ | 40.7 | $ | 37.6 | $ | 45.7 |
Deferred Stock Units
We have granted deferred stock units to executives, selected employees, and outside directors. These deferred stock units entitle the recipient to one share of common stock upon vesting, which is conditioned, for employee recipients, on continued employment during the deferral period and may be conditioned on achieving certain performance targets. We grant deferred stock unit awards with a two- to five-year deferral period that is subject to payout upon death, disability, or retirement. Deferred stock units issued to outside directors are paid after service on the Board of Directors ends at the time elected by the director (not to exceed 10 years after service ends). We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period; however, expense recognition is accelerated for retirement eligible individuals who meet the requirements for vesting upon retirement.
Market-based deferred stock units vest as long as the employee continues to be employed by the Company and upon the achievement of the performance target. The performance target, which is approved by the Compensation Committee, is the Company’s total shareholder return (share price appreciation and dividends paid) in relation to a defined peer group over a three‑year performance period. In 2017, we granted 117,692 market-based deferred stock units that are earned out at the end of the three-year performance period beginning 1 October 2016 and ending 30 September 2019. In 2016, we granted 130,167 market-based deferred stock units that are earned out at the end of the three-year performance period beginning 1 October 2015 and ending 30 September 2018.
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 calculation of the fair value of market-based deferred stock units used the following assumptions:
| 2017 | 2016 | |||||
| Expected volatility | 20.6 | % | 20.5 | % | ||
| Risk-free interest rate | 1.4 | % | 1.2 | % | ||
| Expected dividend yield | 2.5 | % | 2.2 | % |
The estimated grant-date fair value of market-based deferred stock units was $156.87 and $135.49 per unit in 2017 and 2016, respectively.
In addition, during 2017, we granted 165,121 time-based deferred stock units at a weighted average grant-date fair value of $143.75.
| Deferred Stock Units | Shares (000) | Weighted Average Grant-Date Fair Value | |||||
| Outstanding at 30 September 2016 | 1,001 | $ | 119.44 | ||||
| Equitable adjustment upon separation(A) | 65 | — | |||||
| Surrender upon separation(B) | (89 | ) | 132.88 | ||||
| Granted | 283 | 148.89 | |||||
| Paid out | (235 | ) | 83.65 | ||||
| Forfeited/adjustments | (50 | ) | 121.99 | ||||
| Outstanding at 30 September 2017 | 975 | $ | 127.29 |
| (A) | Applicable deferred stock units have been adjusted by the conversion ratio of 1.071 to preserve the intrinsic value immediately before and after the spin-off of Versum. |
| (B) | In connection with the spin-off of Versum, EMD employees surrendered their outstanding Air Products equity awards, which were converted into Versum equity awards of equivalent fair value. |
Cash payments made for deferred stock units were $2.1, $2.9, and $9.6 in 2017, 2016, and 2015, respectively. As of 30 September 2017, there was $39.0 of unrecognized compensation cost related to deferred stock units. The cost is expected to be recognized over a weighted average period of 2.0 years. The total fair value of deferred stock units paid out during 2017, 2016, and 2015, including shares vested in prior periods, was $36.6, $41.6, and $35.5, respectively.
Stock Options
We have granted awards of options to purchase common stock to executives and selected employees. The exercise price of stock options equals the market price of our stock on the date of the grant. Options generally vest incrementally over three years, and remain exercisable for ten years from the date of grant. In 2017 and 2016, no stock options were awarded.
Fair values of stock options were estimated using a Black Scholes model that used the assumptions noted in the table below. Expected volatility and expected dividend yield are based on actual historical experience of our stock and dividends over the historical period equal to the expected life. The expected life represents the period of time that options granted are expected to be outstanding based on an analysis of Company-specific historical exercise data. Ranges are used when certain groups of employees exhibit different behavior, such as timing of exercise. The risk-free rate is based on the U.S. Treasury Strips with terms equal to the expected time of exercise as of the grant date.
| 2015 | |||
| Expected volatility | 30.3 | % | |
| Expected dividend yield | 2.6 | % | |
| Expected life (in years) | 7.5 | ||
| Risk-free interest rate | 2.2 | % |
The weighted average grant-date fair value of options granted during 2015 was $37.19 per option.
A summary of stock option activity is presented below:
| Stock Options | Shares (000) | Weighted Average Exercise Price | |||||
| Outstanding at 30 September 2016 | 3,916 | $ | 90.28 | ||||
| Equitable adjustment upon separation(A) | 277 | — | |||||
| Surrender upon separation(B) | (102 | ) | 97.63 | ||||
| Exercised | (886 | ) | 80.76 | ||||
| Forfeited | (3 | ) | 105.28 | ||||
| Outstanding at 30 September 2017 | 3,202 | $ | 84.85 | ||||
| Exercisable at 30 September 2017 | 3,149 | $ | 84.00 |
| Stock Options | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | ||||
| Outstanding at 30 September 2017 | 4.3 | $ | 213 | |||
| Exercisable at 30 September 2017 | 4.3 | $ | 212 |
| (A) | Applicable deferred stock units have been adjusted by the conversion ratio of 1.071 to preserve the intrinsic value immediately before and after the spin-off of Versum. |
| (B) | In connection with the spin-off of Versum, EMD employees surrendered their outstanding Air Products equity awards, which were converted into Versum equity awards of equivalent fair value. |
The aggregate intrinsic value represents the amount by which our closing stock price of $151.22 as of 30 September 2017 exceeds the exercise price multiplied by the number of in-the-money options outstanding or exercisable.
On a total company basis, the intrinsic value of stock options exercised during 2017, 2016, and 2015 was $57.3, $115.3, and $115.5, respectively.
Compensation cost is generally recognized over the stated vesting period consistent with the terms of the arrangement (i.e., either on a straight-line or graded-vesting basis). Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. As of 30 September 2017, there was $.1 of unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted average period of 0.2 years.
Cash received from option exercises during 2017 was $68.4. The total tax benefit realized from stock option exercises in 2017 was $19.9, of which $13.9 was the excess tax benefit.
Restricted Stock
The grant-date fair value of restricted stock is estimated on the date of grant based on the closing price of the stock, and compensation cost is generally amortized to expense on a straight-line basis over the vesting period during which employees perform related services. Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement.
We have issued shares of restricted stock to certain officers. Participants are entitled to cash dividends and to vote their respective shares. Restrictions on shares lift in one to four years or upon the earlier of retirement, death, or disability. The shares are nontransferable while subject to forfeiture.
A summary of restricted stock activity is presented below:
| Restricted Stock | Shares (000) | Weighted Average Grant-Date Fair Value | |||||
| Outstanding at 30 September 2016 | 85 | $ | 128.16 | ||||
| Vested | (29 | ) | 113.50 | ||||
| Outstanding at 30 September 2017 | 56 | $ | 135.74 |
As of 30 September 2017, there was $.4 of unrecognized compensation cost related to restricted stock awards. The cost is expected to be recognized over a weighted average period of 1.4 years. The total fair value of restricted stock vested during 2017, 2016, and 2015 was $4.1, $4.3, and $1.4, respectively.
- ACCUMULATED OTHER COMPREHENSIVE LOSS
The table below summarizes changes in AOCL, net of tax, attributable to Air Products:
| Derivatives qualifying as hedges | Foreign currency translation adjustments | Pension and postretirement benefits | Total | |||||||||||||
| Balance at 30 September 2014 | $ | (28.5 | ) | $ | (268.7 | ) | $ | (944.7 | ) | $ | (1,241.9 | ) | ||||
| Other comprehensive loss before reclassifications | (35.0 | ) | (699.3 | ) | (278.5 | ) | (1,012.8 | ) | ||||||||
| Amounts reclassified from AOCL | 20.8 | — | 97.0 | 117.8 | ||||||||||||
| Net current period other comprehensive loss | $ | (14.2 | ) | $ | (699.3 | ) | $ | (181.5 | ) | $ | (895.0 | ) | ||||
| Amount attributable to noncontrolling interest | .2 | (11.5 | ) | .3 | (11.0 | ) | ||||||||||
| Balance at 30 September 2015 | $ | (42.9 | ) | $ | (956.5 | ) | $ | (1,126.5 | ) | $ | (2,125.9 | ) | ||||
| Other comprehensive income (loss) before reclassifications | 13.7 | 9.9 | (335.1 | ) | (311.5 | ) | ||||||||||
| Amounts reclassified from AOCL | (36.0 | ) | 2.7 | 87.2 | 53.9 | |||||||||||
| Net current period other comprehensive income (loss) | $ | (22.3 | ) | $ | 12.6 | $ | (247.9 | ) | $ | (257.6 | ) | |||||
| Amount attributable to noncontrolling interest | (.2 | ) | 5.4 | (.4 | ) | 4.8 | ||||||||||
| Balance at 30 September 2016 | $ | (65.0 | ) | $ | (949.3 | ) | $ | (1,374.0 | ) | $ | (2,388.3 | ) | ||||
| Other comprehensive income (loss) before reclassifications | (12.6 | ) | 101.9 | 251.6 | 340.9 | |||||||||||
| Amounts reclassified from AOCL | 24.2 | 57.3 | 110.7 | 192.2 | ||||||||||||
| Net current period other comprehensive income | $ | 11.6 | $ | 159.2 | $ | 362.3 | $ | 533.1 | ||||||||
| Spin-off of Versum | .2 | 6.0 | 5.3 | 11.5 | ||||||||||||
| Amount attributable to noncontrolling interest | (.1 | ) | 3.0 | .8 | 3.7 | |||||||||||
| Balance at 30 September 2017 | $ | (53.1 | ) | $ | (787.1 | ) | $ | (1,007.2 | ) | $ | (1,847.4 | ) |
The table below summarizes the reclassifications out of accumulated other comprehensive loss and the affected line item on the consolidated income statements:
| 2017 | 2016 | 2015 | ||||||||||
| (Gain) Loss on Cash Flow Hedges, net of tax | ||||||||||||
| Sales/Cost of sales | $ | 18.3 | $ | .2 | $ | .6 | ||||||
| Other income (expense), net | 5.1 | (46.2 | ) | 16.9 | ||||||||
| Interest expense | .8 | 10.0 | 3.3 | |||||||||
| Total (Gain) Loss on Cash Flow Hedges, net of tax | $ | 24.2 | $ | (36.0 | ) | $ | 20.8 | |||||
| Currency Translation Adjustment | ||||||||||||
| Business restructuring and cost reduction actions(A) | $ | 8.2 | $ | — | $ | — | ||||||
| Income from discontinued operations, net of tax(B) | 49.1 | 2.7 | — | |||||||||
| Total Currency Translation Adjustment | $ | 57.3 | $ | 2.7 | $ | — | ||||||
| Pension and Postretirement Benefits, net of tax(C) | $ | 110.7 | $ | 87.2 | $ | 97.0 |
| (A) | The fiscal year 2017 impact relates to the planned sale of a non-industrial gas hardgoods business in the Industrial Gases – Americas segment recorded in the third quarter. |
| (B) | The fiscal year 2017 impact relates to the sale of PMD during the second quarter. The fiscal year 2016 impact primarily relates to the sale of an equity affiliate in the first quarter. |
| (C) | The components include items such as prior service cost amortization, actuarial loss amortization, and settlements and are reflected in net periodic benefit cost. Refer to Note 16, Retirement Benefits. |
- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (EPS):
| 30 September | 2017 | 2016 | 2015 | |||||||||
| Numerator | ||||||||||||
| Income from continuing operations | $ | 1,134.4 | $ | 1,099.5 | $ | 933.3 | ||||||
| Income (Loss) from discontinued operations | 1,866.0 | (468.4 | ) | 344.6 | ||||||||
| Net Income Attributable to Air Products | $ | 3,000.4 | $ | 631.1 | $ | 1,277.9 | ||||||
| Denominator (in millions) | ||||||||||||
| Weighted average common shares — Basic | 218.0 | 216.4 | 214.9 | |||||||||
| Effect of dilutive securities | ||||||||||||
| Employee stock option and other award plans | 1.8 | 1.9 | 2.4 | |||||||||
| Weighted average common shares — Diluted | 219.8 | 218.3 | 217.3 | |||||||||
| Basic EPS Attributable to Air Products | ||||||||||||
| Income from continuing operations | $ | 5.20 | $ | 5.08 | $ | 4.34 | ||||||
| Income (Loss) from discontinued operations | 8.56 | (2.16 | ) | 1.61 | ||||||||
| Net Income Attributable to Air Products | $ | 13.76 | $ | 2.92 | $ | 5.95 | ||||||
| Diluted EPS Attributable to Air Products | ||||||||||||
| Income from continuing operations | $ | 5.16 | $ | 5.04 | $ | 4.29 | ||||||
| Income (Loss) from discontinued operations | 8.49 | (2.15 | ) | 1.59 | ||||||||
| Net Income Attributable to Air Products | $ | 13.65 | $ | 2.89 | $ | 5.88 |
Diluted EPS attributable to Air Products reflects the potential dilution that could occur if stock options or other share-based awards were exercised or converted into common stock. The dilutive effect is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used by the Company to purchase common stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. There were no antidilutive outstanding share-based awards in fiscal year 2017. Outstanding share-based awards of .2 million shares were antidilutive and therefore excluded from the computation of diluted EPS for 2016 and 2015.
- INCOME TAXES
The following table summarizes the income of U.S. and foreign operations before taxes:
| 2017 | 2016 | 2015 | ||||||||||
| Income from Continuing Operations before Taxes | ||||||||||||
| United States | $ | 669.8 | $ | 631.7 | $ | 507.5 | ||||||
| Foreign | 666.2 | 775.9 | 606.3 | |||||||||
| Income from equity affiliates | 80.1 | 147.0 | 152.3 | |||||||||
| Total | $ | 1,416.1 | $ | 1,554.6 | $ | 1,266.1 |
The following table shows the components of the provision for income taxes:
| 2017 | 2016 | 2015 | ||||||||||
| Current Tax Provision | ||||||||||||
| Federal | $ | 62.8 | $ | 171.0 | $ | 117.0 | ||||||
| State | 7.0 | 21.2 | 8.1 | |||||||||
| Foreign | 229.1 | 178.6 | 165.7 | |||||||||
| 298.9 | 370.8 | 290.8 | ||||||||||
| Deferred Tax Provision | ||||||||||||
| Federal | 1.4 | 45.0 | 1.5 | |||||||||
| State | 6.0 | 2.8 | 17.8 | |||||||||
| Foreign | (45.4 | ) | 14.0 | (9.9 | ) | |||||||
| (38.0 | ) | 61.8 | 9.4 | |||||||||
| Income Tax Provision | $ | 260.9 | $ | 432.6 | $ | 300.2 |
The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. A reconciliation of the differences between the United States federal statutory tax rate and the effective tax rate is as follows:
| (Percent of income before taxes) | 2017 | 2016 | 2015 | ||||||
| U.S. federal statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
| State taxes, net of federal benefit | 1.0 | 1.2 | 1.1 | ||||||
| Income from equity affiliates | (2.0 | ) | (3.3 | ) | (4.0 | ) | |||
| Foreign tax differentials | (7.9 | ) | (6.6 | ) | (5.9 | ) | |||
| U.S. taxes on foreign earnings | (2.2 | ) | (3.1 | ) | (2.1 | ) | |||
| Domestic production activities | (.8 | ) | (.8 | ) | (1.0 | ) | |||
| Non-deductible goodwill impairment charge | 3.6 | — | — | ||||||
| Non-U.S. subsidiary tax election | (7.7 | ) | — | — | |||||
| Business separation costs | .2 | 4.2 | .2 | ||||||
| Share-based compensation | (1.2 | ) | — | — | |||||
| Other | .4 | 1.2 | .4 | ||||||
| Effective Tax Rate | 18.4 | % | 27.8 | % | 23.7 | % |
Total company income tax payments, net of refunds, were $1,348.8 in 2017, $440.8 in 2016, and $392.9 in 2015.
Foreign tax differentials represent the differences between foreign earnings subject to foreign tax rates lower than the U.S. federal statutory tax rate of 35.0%. Foreign earnings are subject to local country tax rates that are generally below the 35.0% U.S. federal statutory rate and include tax holidays and incentives. As a result, our effective non-U.S. tax rate is typically lower than the U.S. statutory rate. If foreign pre-tax earnings increase relative to U.S. pre-tax earnings, this rate difference could increase. The jurisdictions in which we earn pre-tax earnings subject to lower foreign taxes than the U.S. statutory rate include South Korea, Taiwan, the United Kingdom, China, Canada, Spain and Belgium. As approximately 80% of the undistributed earnings are in countries with a statutory tax rate of 24% or higher, we do not generate a disproportionate amount of taxable income in countries with very low tax rates. U.S. taxes on foreign earnings are a tax benefit primarily due to foreign tax credits on the repatriation of foreign earnings to the U.S.
In 2017, the effective tax rate was impacted by a tax election made with respect to a Chilean holding company resulting in an income tax benefit of $111.4 on tax losses related to investments in Chile. The effective tax rate was also impacted by a goodwill impairment charge of $145.3 for which no tax benefits were available. See Note 10, Goodwill, for additional information regarding the impairment charge.
During the first quarter of fiscal year 2017, we adopted new accounting guidance that requires excess tax benefits and deficiencies from share-based compensation to be recognized in the income statement rather than in additional paid-in capital on the balance sheet. As a result of applying this change prospectively, we recognized $17.6 of excess tax benefits in our provision for income taxes during fiscal year 2017. See Note 2, New Accounting Guidance, for additional information.
In 2016, the effective tax rate was impacted by tax costs of $51.8 incurred in anticipation of the tax-free spin-off of Versum, primarily for a dividend declared during the third quarter of 2016 to repatriate $443.8 from a subsidiary in South Korea to the U.S. Previously, most of these foreign earnings were considered to be indefinitely reinvested. In addition, a tax benefit was not available on a significant portion of the business separation costs. See Note 4, Materials Technologies Separation, for additional information.
The significant components of deferred tax assets and liabilities are as follows:
| 30 September | 2017 | 2016 | ||||||
| Gross Deferred Tax Assets | ||||||||
| Retirement benefits and compensation accruals | $ | 370.1 | $ | 527.6 | ||||
| Tax loss carryforwards | 64.5 | 101.1 | ||||||
| Tax credits and other tax carryforwards | 76.1 | 56.0 | ||||||
| Reserves and accruals | 88.2 | 74.9 | ||||||
| Partnership and other investments | — | 5.8 | ||||||
| Currency losses | 20.7 | — | ||||||
| Other | 37.2 | 19.3 | ||||||
| Valuation allowance | (107.7 | ) | (165.1 | ) | ||||
| Deferred Tax Assets | 549.1 | 619.6 | ||||||
| Gross Deferred Tax Liabilities | ||||||||
| Plant and equipment | 1,035.6 | 985.1 | ||||||
| Currency gains | — | 46.8 | ||||||
| Unremitted earnings of foreign entities | 20.9 | 5.4 | ||||||
| Partnership and other investments | 5.4 | — | ||||||
| Intangible assets | 81.9 | 91.0 | ||||||
| Other | 9.2 | 16.7 | ||||||
| Deferred Tax Liabilities | 1,153.0 | 1,145.0 | ||||||
| Net Deferred Income Tax Liability | $ | 603.9 | $ | 525.4 |
Deferred tax assets and liabilities are included within the consolidated financial statements as follows:
| 2017 | 2016 | |||||||
| Deferred Tax Assets | ||||||||
| Other noncurrent assets | $ | 174.5 | $ | 185.0 | ||||
| Deferred Tax Liabilities | ||||||||
| Deferred income taxes | 778.4 | 710.4 | ||||||
| Net Deferred Income Tax Liability | $ | 603.9 | $ | 525.4 |
Gross federal tax credit carryforwards as of 30 September 2017 were $53.9. The federal tax carryforwards have expiration periods between 2025 and 2027. Gross state loss and tax credit carryforwards as of 30 September 2017 were $75.2 and $1.2, respectively. The state tax carryforwards have expiration periods between 2024 and 2034. Gross foreign loss and tax credit carryforwards as of 30 September 2017 were $247.3 and $21.0, respectively. Foreign tax carryforwards of $221.7 have expiration periods between 2018 and 2027; the remainder have unlimited carryforward periods.
The valuation allowance as of 30 September 2017 of $107.7, primarily related to the tax benefit of foreign loss carryforwards of $52.4 as well as foreign capital assets of $49.1 that were generated from the loss recorded on the exit from the Energy-from-Waste business in 2016. If events warrant the reversal of the valuation allowance, it would result in a reduction of tax expense. We believe it is more likely than not that future earnings and reversal of deferred tax liabilities will be sufficient to utilize our deferred tax assets, net of existing valuation allowance, at 30 September 2017. The reduction in the valuation allowances and tax loss carryforwards in 2017 was primarily due to the gain on sale of the PMD business, which resulted in the utilization of federal capital loss carryforwards as well as certain state loss carryforward balances from the prior year. See Note 3, Discontinued Operations, for additional information. This reduction was offset in part by an increase in foreign tax loss carryforwards. Retirement benefits and compensation accruals are impacted significantly by the changes in plan assets and benefit obligation that have been recognized in other comprehensive income. See Note 16, Retirement Benefits, for additional information. The repayment of a Eurobond of €300 million ($317.2) that matured on 15 March 2017, resulted in a significant reduction of the deferred tax liabilities related to currency gains.
We record U.S. income taxes on the undistributed earnings of our foreign subsidiaries and corporate joint ventures unless those earnings are indefinitely reinvested outside of the U.S. These 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 $6,032.5 as of 30 September 2017. An estimated $1,443.9 in U.S. income and foreign withholding taxes would be due if these earnings were remitted as dividends after payment of all deferred taxes.
A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:
| Unrecognized Tax Benefits | 2017 | 2016 | 2015 | |||||||||
| Balance at beginning of year | $ | 90.2 | $ | 83.8 | $ | 93.1 | ||||||
| Additions for tax positions of the current year | 47.5 | 12.5 | 4.7 | |||||||||
| Additions for tax positions of prior years | 16.1 | 2.9 | 3.0 | |||||||||
| Reductions for tax positions of prior years | (4.0 | ) | — | (2.2 | ) | |||||||
| Settlements | (2.0 | ) | (5.6 | ) | (.6 | ) | ||||||
| Statute of limitations expiration | (3.2 | ) | (2.9 | ) | (8.3 | ) | ||||||
| Foreign currency translation | 1.8 | (.5 | ) | (5.9 | ) | |||||||
| Balance at End of Year | $ | 146.4 | $ | 90.2 | $ | 83.8 |
At 30 September 2017 and 2016, we had $146.4 and $90.2 of unrecognized tax benefits, excluding interest and penalties, of which $73.8 and $46.5, respectively, would impact the effective tax rate if recognized.
Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense and totaled $3.7 in 2017, $1.8 in 2016, and $(1.9) in 2015. Our accrued balance for interest and penalties was $12.1 and $8.4 as of 30 September 2017 and 2016, respectively. The additions to unrecognized tax benefits in 2017 include unrecognized tax positions of $34.1 in various jurisdictions related to the sale of the PMD business and the spin-off of the EMD business. See Note 3, Discontinued Operations, and Note 4, Materials Technologies Separation, for additional information.
We are currently under examination in a number of tax jurisdictions, some of which may be resolved in the next twelve months. As a result, it is reasonably possible that a change in the unrecognized tax benefits may occur during the next twelve months. However, quantification of an estimated range cannot be made at this time.
We generally remain subject to examination in the following major tax jurisdictions for the years indicated below:
| Major Tax Jurisdiction | Open Tax Years |
| North America | |
| United States | 2011-2017 |
| Canada | 2013-2017 |
| Europe | |
| France | 2014-2017 |
| Germany | 2012-2017 |
| Netherlands | 2012-2017 |
| Spain | 2011-2017 |
| United Kingdom | 2014-2017 |
| Asia | |
| China | 2012-2017 |
| South Korea | 2010-2017 |
| Taiwan | 2012-2017 |
| Latin America | |
| Chile | 2013-2017 |
- SUPPLEMENTAL INFORMATION
| Other Receivables and Current Assets 30 September | 2017 | 2016 | ||||
| Derivative instruments | $ | 93.9 | $ | 169.3 | ||
| Other receivables | 188.0 | 181.7 | ||||
| Current capital lease receivables | 93.3 | 88.2 | ||||
| Prepaid inventory | — | 92.8 | ||||
| Other | 28.1 | 6.2 | ||||
| Other receivables and current assets | $ | 403.3 | $ | 538.2 |
| Other Noncurrent Assets 30 September | 2017 | 2016 | ||||
| Derivative instruments | $ | 133.9 | $ | 204.4 | ||
| Other long-term receivables | 82.1 | 16.9 | ||||
| Prepaid tax | 5.1 | 37.0 | ||||
| Deferred tax assets | 174.5 | 185.0 | ||||
| Pension benefits | 18.4 | — | ||||
| Deposits | 34.8 | 36.5 | ||||
| Other | 193.0 | 191.2 | ||||
| Other noncurrent assets | $ | 641.8 | $ | 671.0 |
| Payables and Accrued Liabilities 30 September | 2017 | 2016 | ||||
| Trade creditors | $ | 659.5 | $ | 578.8 | ||
| Customer advances | 438.9 | 371.2 | ||||
| Accrued payroll and employee benefits | 187.1 | 217.1 | ||||
| Pension and postretirement benefits | 22.6 | 35.5 | ||||
| Dividends payable | 207.5 | 186.9 | ||||
| Outstanding payments in excess of certain cash balances | 4.5 | 11.9 | ||||
| Accrued interest expense | 42.2 | 47.9 | ||||
| Derivative instruments | 95.9 | 73.5 | ||||
| Severance and other costs associated with business restructuring and cost reduction actions | 41.5 | 15.7 | ||||
| Other | 114.6 | 113.7 | ||||
| Payables and accrued liabilities | $ | 1,814.3 | $ | 1,652.2 |
| Other Noncurrent Liabilities 30 September | 2017 | 2016 | ||||
| Pension benefits | $ | 703.8 | $ | 1,155.1 | ||
| Postretirement benefits | 57.0 | 74.9 | ||||
| Other employee benefits | 99.3 | 104.1 | ||||
| Contingencies related to uncertain tax positions | 130.6 | 78.0 | ||||
| Advance payments | 39.0 | 43.8 | ||||
| Environmental liabilities | 72.3 | 70.3 | ||||
| Derivative instruments | 36.0 | 21.8 | ||||
| Asset retirement obligations | 144.0 | 116.1 | ||||
| Obligation for future contribution to an equity affiliate | 94.4 | 94.4 | ||||
| Obligations associated with EfW | 65.3 | — | ||||
| Other | 170.2 | 58.0 | ||||
| Other noncurrent liabilities | $ | 1,611.9 | $ | 1,816.5 |
| Other Income (Expense), Net 30 September | 2017 | 2016 | 2015 | ||||||
| Technology and royalty income | $ | 20.8 | $ | 19.0 | $ | 22.8 | |||
| Interest income(A) | 1.5 | 6.1 | 4.2 | ||||||
| Foreign exchange | 4.3 | (7.2 | ) | (22.6 | ) | ||||
| Sale of assets and investments | 24.3 | 8.8 | 36.3 | ||||||
| Contract settlements | 14.3 | 12.6 | — | ||||||
| Transition service agreements reimbursement(B) | 38.4 | — | — | ||||||
| Other | 17.4 | 10.1 | 4.8 | ||||||
| Other income (expense), net | $ | 121.0 | $ | 49.4 | $ | 45.5 |
| (A) | Beginning in the second quarter of fiscal year 2017, interest income associated with our short-term investments is reflected on the consolidated income statements in "Other non-operating income (expense), net." |
| (B) | Reflects reimbursement for costs in support of transition services agreements with Versum for EMD and with Evonik for PMD. Refer to Note 4, Materials Technologies Separation, for additional information. |
Gain on Land Sales
During the fourth quarter of 2017, we sold a parcel of land resulting in a gain of $12.2. During the fourth quarter of 2015, we sold two parcels of land resulting in a gain of $33.6. The gains are reflected in sale of assets and investments in the table above.
Redeemable Noncontrolling Interest
In July 2015, we completed the purchase of an additional 30.5% equity interest in our Indura S.A. subsidiary for $277.9. We currently have a 97.8% controlling equity interest in Indura S.A. As redeemable noncontrolling interest is not part of total equity, the impacts below are excluded from our consolidated statements of equity.
The following is a summary of the changes in redeemable noncontrolling interest for the year ended 30 September 2015:
| Balance at 30 September 2014 | $ | 287.2 | |
| Net income | 11.5 | ||
| Dividends | (2.0 | ) | |
| Purchase of noncontrolling interest | (277.9 | ) | |
| Currency translation adjustment | (18.8 | ) | |
| Balance at 30 September 2015 | $ | — |
- SUMMARY BY QUARTER (UNAUDITED)
These tables summarize the unaudited results of operations for each quarter of 2017 and 2016:
| 2017 | Q1 | Q2 | Q3 | Q4 | Total | |||||||||||||||
| Sales | $ | 1,882.5 | $ | 1,980.1 | $ | 2,121.9 | $ | 2,203.1 | $ | 8,187.6 | ||||||||||
| Gross profit(A) | 564.4 | 576.3 | 635.7 | 657.8 | 2,434.2 | |||||||||||||||
| Business separation costs(B) | 30.2 | — | — | — | 30.2 | |||||||||||||||
| Business restructuring and cost reduction actions(C) | 50.0 | 10.3 | 42.7 | 48.4 | 151.4 | |||||||||||||||
| Pension settlement loss(D) | — | 4.1 | 5.5 | .9 | 10.5 | |||||||||||||||
| Goodwill and intangible asset impairment charge(E) | — | — | 162.1 | — | 162.1 | |||||||||||||||
| Gain on land sale(F) | — | — | — | 12.2 | 12.2 | |||||||||||||||
| Operating income(A) | 328.1 | 391.2 | 252.6 | 455.7 | 1,427.6 | |||||||||||||||
| Equity affiliates' income (loss) | 38.0 | 34.2 | (36.9 | ) | (G) | 44.8 | 80.1 | (G) | ||||||||||||
| Income tax provision (benefit) | 78.4 | 94.5 | 89.3 | (1.3 | ) | (H) | 260.9 | (H) | ||||||||||||
| Net income | 306.4 | 2,135.7 | 104.1 | 475.0 | 3,021.2 | |||||||||||||||
| Net income attributable to Air Products | ||||||||||||||||||||
| Income from continuing operations | 251.6 | 304.4 | 104.2 | 474.2 | 1,134.4 | |||||||||||||||
| Income (Loss) from discontinued operations | 48.2 | 1,825.6 | (I) | (2.3 | ) | (5.5 | ) | 1,866.0 | (I) | |||||||||||
| Net income attributable to Air Products | 299.8 | 2,130.0 | 101.9 | 468.7 | 3,000.4 | |||||||||||||||
| Basic Earnings Per Common Share Attributable to Air Products | ||||||||||||||||||||
| Income from continuing operations | 1.16 | 1.40 | .48 | 2.17 | 5.20 | |||||||||||||||
| Income (Loss) from discontinued operations | .22 | 8.38 | (.01 | ) | (.02 | ) | 8.56 | |||||||||||||
| Net income attributable to Air Products | 1.38 | 9.78 | .47 | 2.15 | 13.76 | |||||||||||||||
| Diluted Earnings Per Common Share Attributable to Air Products | ||||||||||||||||||||
| Income from continuing operations | 1.15 | 1.39 | .47 | 2.15 | 5.16 | |||||||||||||||
| Income (Loss) from discontinued operations | .22 | 8.31 | (.01 | ) | (.02 | ) | 8.49 | |||||||||||||
| Net income attributable to Air Products | 1.37 | 9.70 | .46 | 2.13 | 13.65 | |||||||||||||||
| Dividends declared per common share | .86 | .95 | .95 | .95 | 3.71 | |||||||||||||||
| Market price per common share – High | 150.45 | 149.46 | 147.66 | 152.26 | ||||||||||||||||
| Market price per common share – Low | 129.00 | 133.63 | 134.09 | 141.88 |
| 2016 | Q1 | Q2 | Q3 | Q4 | Total | |||||||||||||||
| Sales | $ | 1,866.3 | $ | 1,777.4 | $ | 1,914.5 | $ | 1,945.5 | $ | 7,503.7 | ||||||||||
| Gross profit(A) | 570.4 | 564.4 | 594.3 | 598.0 | 2,327.1 | |||||||||||||||
| Business separation costs(B) | 12.0 | 7.4 | 9.5 | 21.7 | 50.6 | |||||||||||||||
| Business restructuring and cost reduction actions(C) | — | 10.7 | 13.2 | 10.6 | 34.5 | |||||||||||||||
| Pension settlement loss(D) | — | 2.0 | 1.0 | 2.1 | 5.1 | |||||||||||||||
| Operating income(A) | 372.5 | 371.6 | 394.6 | 391.0 | 1,529.7 | |||||||||||||||
| Equity affiliates' income | 33.3 | 32.3 | 42.1 | 39.3 | 147.0 | |||||||||||||||
| Loss on extinguishment of debt(J) | — | — | — | 6.9 | 6.9 | |||||||||||||||
| Income tax provision | 96.4 | 93.5 | (K) | 145.9 | (K) | 96.8 | (K) | 432.6 | (K) | |||||||||||
| Net income (loss) | 372.0 | (465.5 | ) | 354.1 | 400.9 | 661.5 | ||||||||||||||
| Net income attributable to Air Products | ||||||||||||||||||||
| Income from continuing operations | 280.9 | 278.9 | 250.3 | 289.4 | 1,099.5 | |||||||||||||||
| Income (Loss) from discontinued operations | 82.7 | (752.2 | ) | 96.5 | 104.6 | (468.4 | ) | |||||||||||||
| Net income (loss) attributable to Air Products | 363.6 | (473.3 | ) | 346.8 | 394.0 | 631.1 | ||||||||||||||
| Basic Earnings Per Common Share Attributable to Air Products | ||||||||||||||||||||
| Income from continuing operations | 1.30 | 1.29 | 1.16 | 1.33 | 5.08 | |||||||||||||||
| Income (Loss) from discontinued operations | .38 | (3.48 | ) | .44 | .48 | (2.16 | ) | |||||||||||||
| Net income (loss) attributable to Air Products | 1.68 | (2.19 | ) | 1.60 | 1.81 | 2.92 | ||||||||||||||
| Diluted Earnings Per Common Share Attributable to Air Products | ||||||||||||||||||||
| Income from continuing operations | 1.29 | 1.28 | 1.15 | 1.32 | 5.04 | |||||||||||||||
| Income (Loss) from discontinued operations | .38 | (3.45 | ) | .44 | .48 | (2.15 | ) | |||||||||||||
| Net income (loss) attributable to Air Products | 1.67 | (2.17 | ) | 1.59 | 1.80 | 2.89 | ||||||||||||||
| Dividends declared per common share | .81 | .86 | .86 | .86 | 3.39 | |||||||||||||||
| Market price per common share – High | 133.78 | 136.88 | 141.53 | 146.82 | ||||||||||||||||
| Market price per common share – Low | 117.80 | 106.63 | 124.78 | 127.72 |
| (A) | Changes in estimates on projects accounted for under the percentage of completion method favorably impacted income by approximately $27 in fiscal year 2017 and $20 in fiscal year 2016, primarily during the fourth quarter. For additional information, see Note 1, Major Accounting Policies (Revenue Recognition). |
| (B) | For additional information, see Note 4, Materials Technologies Separation. |
| (C) | For additional information, see Note 5, Business Restructuring and Cost Reduction Actions. |
| (D) | For additional information, see Note 16, Retirement Benefits. |
| (E) | For additional information, see Note 10, Goodwill, and Note 11, Intangible Assets. |
| (F) | The gain is reflected on the consolidated income statements in "Other income (expense), net." For additional information, see Note 23, Supplemental Information. |
| (G) | Includes the impact of an other-than-temporary impairment of an investment in an equity affiliate. For additional information, see Note 8, Summarized Financial Information of Equity Affiliates. |
| (H) | Includes the impact of a tax election benefit related to a non-U.S. subsidiary. For additional information, see Note 22, Income Taxes. |
| (I) | Includes the after-tax gain on the sale of PMD. For additional information, see Note 3, Discontinued Operations. |
| (J) | For additional information, see Note 15, Debt. |
| (K) | Includes income tax expense for tax costs associated with business separation. For additional information, see Note 4, Materials Technologies Separation. |
- BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Our reporting segments reflect the manner in which our chief operating decision maker reviews results and allocates resources. Except in the 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 liquefied natural gas (LNG) and helium storage and distribution sale of equipment businesses are aggregated within the Corporate and other segment.
Our reporting segments are:
| • | Industrial Gases – Americas |
| • | Industrial Gases – EMEA (Europe, Middle East, and Africa) |
| • | Industrial Gases – Asia |
| • | Industrial Gases – Global |
| • | Corporate and other |
Industrial Gases – Regional
The regional Industrial Gases segments (Americas, EMEA, and Asia) include the results of our regional industrial gas businesses, which produce and sell atmospheric gases such as oxygen, nitrogen, and argon (primarily recovered by the cryogenic distillation of air) and process gases such as hydrogen, carbon monoxide, helium, syngas, and specialty gases. We supply gases to customers in many industries, including those in metals, glass, chemical processing, energy production and refining, food processing, metallurgical industries, medical, and general manufacturing. We distribute gases to our customers through a variety of supply modes including liquid or gaseous bulk supply delivered by tanker or tube trailer and, for smaller customers, packaged gases delivered in cylinders and dewars or small on-sites (cryogenic or non-cryogenic generators). For large-volume customers, we construct an on-site plant adjacent to or near the customer’s facility or deliver product from one of our pipelines. We are the world’s largest provider of hydrogen, which is used by refiners to facilitate the conversion of heavy crude feedstock and lower the sulfur content of gasoline and diesel fuels.
Electricity is the largest cost component in the production of atmospheric gases, and natural gas is the principal raw material for hydrogen, carbon monoxide, and syngas production. We mitigate energy and natural gas prices contractually through pricing formulas, surcharges, and cost pass-through arrangements. The regional Industrial Gases segments also include our share of the results of several joint ventures accounted for by the equity method. The largest of these joint ventures operate in Mexico, Italy, South Africa, India, Saudi Arabia, and Thailand. Each of the regional Industrial Gases segments competes against global industrial gas companies as well as regional competitors. Competition is based primarily on price, reliability of supply, and the development of industrial gas applications. We derive a competitive advantage in locations where we have pipeline networks, which enable us to provide reliable and economic supply of products to larger customers.
Industrial Gases – Global
The Industrial Gases – Global segment includes cryogenic and gas processing equipment sales for air separation. The equipment is sold worldwide to customers in a variety of industries, including chemical and petrochemical manufacturing, oil and gas recovery and processing, and steel and primary metals processing. The Industrial Gases – Global segment also includes centralized global costs associated with management of all the Industrial Gases segments. These costs include Industrial Gases global administrative costs, product development costs, and research and development costs. We compete with a large number of firms for all the offerings included in the Industrial Gases – Global segment. Competition in the equipment businesses is based primarily on technological performance, service, technical know-how, price, and performance guarantees.
Corporate and other
The Corporate and other segment includes two ongoing global businesses (our LNG equipment business and our liquid helium and liquid hydrogen transport and storage container businesses), and corporate support functions that benefit all the segments. Competition for the two sale of equipment businesses is based primarily on technological performance, service, technical know-how, price, and performance guarantees. Corporate and other also includes income and expense that is not directly associated with the business segments, including foreign exchange gains and losses and stranded costs. Stranded costs result from functional support previously provided to the two divisions comprising the former Materials Technologies segment. The majority of these costs are reimbursed to Air Products pursuant to short-term transition services agreements under which Air Products provides transition services to Versum for EMD and to Evonik for PMD. The reimbursement for costs in support of the transition services has been reflected on the consolidated income statements within “Other income (expense), net.” Refer to Note 4, Materials Technologies Separation, for additional information.
Also included are LIFO inventory adjustments, as the business segments use FIFO, and the LIFO pool adjustments are not allocated to the business segments.
In addition to assets of the global businesses included in this segment, other assets include cash, deferred tax assets, and financial instruments.
Customers
We do not have a homogeneous customer base or end market, and no single customer accounts for more than 10% of our consolidated revenues.
Accounting Policies
The accounting policies of the segments are the same as those described in Note 1, Major Accounting Policies. We evaluate the performance of segments based upon reported segment operating income.
Business Segment
| Industrial Gases– Americas | Industrial Gases– EMEA | Industrial Gases– Asia | Industrial Gases– Global | Corporate and other | Segment Total | |||||||||||||
| 2017 | ||||||||||||||||||
| Sales to external customers | $ | 3,637.0 | $ | 1,780.4 | $ | 1,964.7 | $ | 722.9 | $ | 82.6 | $ | 8,187.6 | ||||||
| Operating income (loss) | 950.6 | 387.1 | 531.2 | 71.3 | (170.6 | ) | 1,769.6 | |||||||||||
| Depreciation and amortization | 464.4 | 177.1 | 203.2 | 8.9 | 12.2 | 865.8 | ||||||||||||
| Equity affiliates' income | 58.1 | 47.1 | 53.5 | .9 | — | 159.6 | ||||||||||||
| Expenditures for long-lived assets | 427.2 | 143.2 | 337.8 | 25.6 | 105.9 | 1,039.7 | ||||||||||||
| Investments in net assets of and advances to equity affiliates | 287.5 | 508.6 | 471.8 | 19.0 | — | 1,286.9 | ||||||||||||
| Total assets | 5,840.8 | 3,276.1 | 4,412.1 | 279.6 | 4,648.4 | 18,457.0 | ||||||||||||
| 2016 | ||||||||||||||||||
| Sales to external customers | $ | 3,344.1 | $ | 1,704.4 | $ | 1,720.4 | $ | 498.8 | $ | 236.0 | $ | 7,503.7 | ||||||
| Operating income (loss) | 893.2 | 384.6 | 451.0 | (21.3 | ) | (87.6 | ) | 1,619.9 | ||||||||||
| Depreciation and amortization | 443.6 | 185.7 | 197.9 | 7.9 | 19.5 | 854.6 | ||||||||||||
| Equity affiliates' income | 52.7 | 36.5 | 57.8 | — | — | 147.0 | ||||||||||||
| Expenditures for long-lived assets | 406.6 | 159.5 | 313.3 | 6.0 | 22.3 | 907.7 | ||||||||||||
| Investments in net assets of and advances to equity affiliates | 250.6 | 580.5 | 442.5 | 10.0 | — | 1,283.6 | ||||||||||||
| Total assets | 5,896.7 | 3,178.6 | 4,232.7 | 367.6 | 2,384.5 | 16,060.1 | ||||||||||||
| 2015 | ||||||||||||||||||
| Sales to external customers | $ | 3,694.5 | $ | 1,866.4 | $ | 1,661.3 | $ | 286.7 | $ | 315.4 | $ | 7,824.3 | ||||||
| Operating income (loss) | 806.1 | 331.3 | 389.3 | (51.6 | ) | (86.5 | ) | 1,388.6 | ||||||||||
| Depreciation and amortization | 417.5 | 194.3 | 209.9 | 16.5 | 20.3 | 858.5 | ||||||||||||
| Equity affiliates' income (loss) | 64.6 | 42.4 | 46.1 | (.8 | ) | — | 152.3 | |||||||||||
| Expenditures for long-lived assets | 414.5 | 215.6 | 402.5 | 94.8 | 35.0 | 1,162.4 | ||||||||||||
| Investments in net assets of and advances to equity affiliates | 249.7 | 564.1 | 421.7 | 14.3 | — | 1,249.8 | ||||||||||||
| Total assets | 5,782.5 | 3,324.1 | 4,159.1 | 370.5 | 1,123.8 | 14,760.0 |
Below is a reconciliation of segment total operating income to consolidated operating income:
| Operating Income | 2017 | 2016 | 2015 | ||||||
| Segment total | $ | 1,769.6 | $ | 1,619.9 | $ | 1,388.6 | |||
| Business separation costs | (30.2 | ) | (50.6 | ) | (7.5 | ) | |||
| Business restructuring and cost reduction actions | (151.4 | ) | (34.5 | ) | (180.1 | ) | |||
| Pension settlement loss | (10.5 | ) | (5.1 | ) | (19.3 | ) | |||
| Goodwill and intangible asset impairment charge | (162.1 | ) | — | — | |||||
| Gain on previously held equity interest | — | — | 17.9 | ||||||
| Gain on land sales(A) | 12.2 | — | 33.6 | ||||||
| Consolidated Total | $ | 1,427.6 | $ | 1,529.7 | $ | 1,233.2 |
| (A) | Reflected on the consolidated income statements in “Other income (expense), net.” |
Below is a reconciliation of segment total equity affiliates' income to consolidated equity affiliates' income:
| Equity Affiliates' Income | 2017 | 2016 | 2015 | ||||||
| Segment total | $ | 159.6 | $ | 147.0 | $ | 152.3 | |||
| Equity method investment impairment charge | (79.5 | ) | — | — | |||||
| Consolidated Total | $ | 80.1 | $ | 147.0 | $ | 152.3 |
Below is a reconciliation of segment total assets to consolidated total assets:
| Total Assets | 2017 | 2016 | 2015 | ||||||
| Segment total | $ | 18,457.0 | $ | 16,060.1 | $ | 14,760.0 | |||
| Discontinued operations | 10.2 | 1,968.5 | 2,556.6 | ||||||
| Consolidated Total | $ | 18,467.2 | $ | 18,028.6 | $ | 17,316.6 |
The sales information noted above relates to external customers only. All intersegment sales are eliminated in consolidation. The Industrial Gases – Global segment had intersegment sales of $239.0 in 2017, $232.4 in 2016, and $242.8 in 2015. These sales are generally transacted at market pricing. For all other segments, intersegment sales are not material for all periods presented. Equipment manufactured for our regional industrial gases segments are generally transferred at cost and not reflected as an intersegment sale.
Geographic Information
| Sales to External Customers | 2017 | 2016 | 2015 | ||||||
| United States | $ | 2,886.8 | $ | 2,911.7 | $ | 3,369.8 | |||
| Europe, including Middle East | 2,478.5 | 2,186.5 | 1,989.2 | ||||||
| Asia, excluding China and India | 849.6 | 721.4 | 736.8 | ||||||
| China | 1,143.4 | 1,020.4 | 957.8 | ||||||
| Other(A) | 829.3 | 663.7 | 770.7 | ||||||
| Total | $ | 8,187.6 | $ | 7,503.7 | $ | 7,824.3 | |||
| Long-Lived Assets(B) | 2017 | 2016 | 2015 | ||||||
| United States | $ | 3,407.4 | $ | 3,411.4 | $ | 3,502.9 | |||
| Europe, including Middle East | 1,279.0 | 1,292.5 | 1,379.8 | ||||||
| Asia, excluding China and India | 778.5 | 707.0 | 627.1 | ||||||
| China | 1,737.9 | 1,675.8 | 1,682.8 | ||||||
| Other(A) | 1,237.4 | 1,173.0 | 1,044.7 | ||||||
| Total | $ | 8,440.2 | $ | 8,259.7 | $ | 8,237.3 |
| (A) | Includes Canada, Latin America, and India. |
| (B) | Long-lived assets include plant and equipment, net. |
Geographic information is based on country of origin. Included in United States revenues are export sales to third‑party customers of $64.2 in 2017, $134.9 in 2016, and $231.5 in 2015.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable
Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK · Next: Item 9A. CONTROLS AND PROCEDURES