filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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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 2019, the Company’s internal control over financial reporting was effective.
Deloitte & Touche LLP, an independent registered public accounting firm, has issued its opinion on the Company’s internal control over financial reporting as of 30 September 2019 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 | |||
| 26 November 2019 | 26 November 2019 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Air Products and Chemicals, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Air Products and Chemicals, Inc. and subsidiaries (the "Company") as of September 30, 2019, the related consolidated income statement, comprehensive income statement, statement of equity, and statement of cash flows, for the year then ended, and the related notes and the schedule listed in Item 15(a)(2) as of and for the year ended September 30, 2019 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2019, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, 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 financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue - On-site Industrial Gas Customer Contracts - Refer to Notes 1 and 3 to the financial statements
Critical Audit Matter Description
On-site industrial gas customer contracts involve large capital investments to construct facilities and serve customers who require large volumes of gases and have relatively constant demand. The Company builds, owns and operates facilities on or near the customer’s facilities to produce and supply the customer with gases under a long-term arrangement. Typically, these contracts have 15 to 20-year terms and contain fixed monthly charges and/or minimum purchase requirements. Revenue associated with these contracts is generally recognized over time during the period in which the Company delivers or makes available the agreed upon quantity of gases. In addition, certain on-site industrial gas contracts contain complex terms and provisions such as tolling arrangements, minimum payment requirements, variable components, and pricing provisions that are specific to a customer arrangement, which may require greater judgment in determining when contractual requirements have been met impacting the timing and amount of revenue to be recorded.
We identified revenue recognition for certain on-site industrial gas customer contracts with complex terms and provisions as a critical audit matter because of the judgments necessary for management to assess complex contract terms and provisions in order to determine the amount and timing of revenue recognition. This required a high degree of auditor judgment when performing procedures to audit management’s determination of the amount and timing of revenue recognition and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to revenue recognition for certain on-site industrial gas customer contracts with complex terms and provisions included the following procedures, among others:
| • | We tested the effectiveness of the Company’s controls related to the amount and timing of revenue recognition, including controls over identifying and assessing complex contract terms and provisions in certain on-site industrial gas customer contracts. |
| • | We evaluated the terms included within customer contracts to assess the accounting for provisions such as tolling arrangements, minimum payment requirements, pricing provisions, and variable components that require management to apply judgment in determining revenue recognition associated with the contract. |
| • | We tested the probability of collection of variable components, including penalties, which impacts the amount of revenue to which the Company is entitled. |
| • | We considered subsequent events, write-offs of customer receivables, collectability, and other factors that would impact the amount and timing of revenue recognition. |
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
November 26, 2019
We have served as the Company's auditor since 2018.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Air Products and Chemicals, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Air Products and Chemicals, Inc. and Subsidiaries (the Company) as of 30 September 2018, the related consolidated income statements, consolidated comprehensive income statements, consolidated statements of cash flows and consolidated statements of equity for each of the years in the two‑year period ended 30 September 2018, and the related notes and financial statement schedule referred to in Item 15(a)(2) in the Form 10-K (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of 30 September 2018, and the results of its operations and its cash flows for each of the years in the two‑year period ended 30 September 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2002 to 2018.
Philadelphia, Pennsylvania
November 20, 2018
The Consolidated Financial Statements
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
Millions of dollars, except for share and per share data
| Year Ended 30 September | 2019 | 2018 | 2017 | ||||||
| Sales | $8,918.9 | $8,930.2 | $8,187.6 | ||||||
| Cost of sales | 5,975.5 | 6,189.5 | 5,751.5 | ||||||
| Facility closure | 29.0 | — | — | ||||||
| Selling and administrative | 750.0 | 760.8 | 713.5 | ||||||
| Research and development | 72.9 | 64.5 | 57.6 | ||||||
| Business separation costs | — | — | 32.5 | ||||||
| Cost reduction and asset actions | 25.5 | — | 151.4 | ||||||
| Goodwill and intangible asset impairment charge | — | — | 162.1 | ||||||
| Gain on exchange of equity affiliate investments | 29.1 | — | — | ||||||
| Other income (expense), net | 49.3 | 50.2 | 121.0 | ||||||
| Operating Income | 2,144.4 | 1,965.6 | 1,440.0 | ||||||
| Equity affiliates' income | 215.4 | 174.8 | 80.1 | ||||||
| Interest expense | 137.0 | 130.5 | 120.6 | ||||||
| Other non-operating income (expense), net | 66.7 | 5.1 | 16.6 | ||||||
| Income From Continuing Operations Before Taxes | 2,289.5 | 2,015.0 | 1,416.1 | ||||||
| Income tax provision | 480.1 | 524.3 | 260.9 | ||||||
| Income From Continuing Operations | 1,809.4 | 1,490.7 | 1,155.2 | ||||||
| Income from discontinued operations, net of tax | — | 42.2 | 1,866.0 | ||||||
| Net Income | 1,809.4 | 1,532.9 | 3,021.2 | ||||||
| Net income attributable to noncontrolling interests of continuing operations | 49.4 | 35.1 | 20.8 | ||||||
| Net Income Attributable to Air Products | $1,760.0 | $1,497.8 | $3,000.4 | ||||||
| Net Income Attributable to Air Products | |||||||||
| Net income from continuing operations | $1,760.0 | $1,455.6 | $1,134.4 | ||||||
| Net income from discontinued operations | — | 42.2 | 1,866.0 | ||||||
| Net Income Attributable to Air Products | $1,760.0 | $1,497.8 | $3,000.4 | ||||||
| Basic Earnings Per Common Share Attributable to Air Products | |||||||||
| Basic earnings per share from continuing operations | $7.99 | $6.64 | $5.20 | ||||||
| Basic earnings per share from discontinued operations | — | .19 | 8.56 | ||||||
| Basic Earnings Per Common Share Attributable to Air Products | $7.99 | $6.83 | $13.76 | ||||||
| Diluted Earnings Per Common Share Attributable to Air Products | |||||||||
| Diluted earnings per share from continuing operations | $7.94 | $6.59 | $5.16 | ||||||
| Diluted earnings per share from discontinued operations | — | .19 | 8.49 | ||||||
| Diluted Earnings Per Common Share Attributable to Air Products | $7.94 | $6.78 | $13.65 | ||||||
| Weighted Average Common Shares — Basic (in millions) | 220.3 | 219.3 | 218.0 | ||||||
| Weighted Average Common Shares — Diluted (in millions) | 221.6 | 220.8 | 219.8 |
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
Millions of dollars
| Year ended 30 September | 2019 | 2018 | 2017 | |||||||||
| Net Income | $1,809.4 | $1,532.9 | $3,021.2 | |||||||||
| Other Comprehensive Income (Loss), net of tax: | ||||||||||||
| Translation adjustments, net of tax of $25.1, $1.1, and ($19.3) | (356.2 | ) | (244.6 | ) | 101.9 | |||||||
| Net gain (loss) on derivatives, net of tax of ($1.5), $9.7, and ($11.0) | (44.1 | ) | 45.9 | (12.6 | ) | |||||||
| Pension and postretirement benefits, net of tax of ($97.9), $55.2, and $109.0 | (326.2 | ) | 179.4 | 251.6 | ||||||||
| Reclassification adjustments: | ||||||||||||
| Currency translation adjustment | (2.6 | ) | 3.1 | 57.3 | ||||||||
| Derivatives, net of tax of $4.5, ($9.2), and $11.7 | 12.3 | (30.4 | ) | 24.2 | ||||||||
| Pension and postretirement benefits, net of tax of $20.5, $44.9, and $50.7 | 63.2 | 133.1 | 110.7 | |||||||||
| Total Other Comprehensive Income (Loss) | (653.6 | ) | 86.5 | 533.1 | ||||||||
| Comprehensive Income | 1,155.8 | 1,619.4 | 3,554.3 | |||||||||
| Net Income Attributable to Noncontrolling Interests | 49.4 | 35.1 | 20.8 | |||||||||
| Other Comprehensive Income (Loss) Attributable to Noncontrolling Interests | (19.9 | ) | (19.0 | ) | 3.7 | |||||||
| Comprehensive Income Attributable to Air Products | $1,126.3 | $1,603.3 | $3,529.8 |
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
Millions of dollars, except for share and per share data
| 30 September | 2019 | 2018 | ||||
| Assets | ||||||
| Current Assets | ||||||
| Cash and cash items | $2,248.7 | $2,791.3 | ||||
| Short-term investments | 166.0 | 184.7 | ||||
| Trade receivables, net | 1,260.2 | 1,207.2 | ||||
| Inventories | 388.3 | 396.1 | ||||
| Prepaid expenses | 77.4 | 129.6 | ||||
| Other receivables and current assets | 477.7 | 373.3 | ||||
| Total Current Assets | 4,618.3 | 5,082.2 | ||||
| Investment in net assets of and advances to equity affiliates | 1,276.2 | 1,277.2 | ||||
| Plant and equipment, net | 10,337.6 | 9,923.7 | ||||
| Goodwill, net | 797.1 | 788.9 | ||||
| Intangible assets, net | 419.5 | 438.5 | ||||
| Noncurrent capital lease receivables | 890.0 | 1,013.3 | ||||
| Other noncurrent assets | 604.1 | 654.5 | ||||
| Total Noncurrent Assets | 14,324.5 | 14,096.1 | ||||
| Total Assets | $18,942.8 | $19,178.3 | ||||
| Liabilities and Equity | ||||||
| Current Liabilities | ||||||
| Payables and accrued liabilities | $1,635.7 | $1,817.8 | ||||
| Accrued income taxes | 86.6 | 59.6 | ||||
| Short-term borrowings | 58.2 | 54.3 | ||||
| Current portion of long-term debt | 40.4 | 406.6 | ||||
| Total Current Liabilities | 1,820.9 | 2,338.3 | ||||
| Long-term debt | 2,907.3 | 2,967.4 | ||||
| Long-term debt – related party | 320.1 | 384.3 | ||||
| Other noncurrent liabilities | 1,712.4 | 1,536.9 | ||||
| Deferred income taxes | 793.8 | 775.1 | ||||
| Total Noncurrent Liabilities | 5,733.6 | 5,663.7 | ||||
| Total Liabilities | 7,554.5 | 8,002.0 | ||||
| Commitments and Contingencies - See Note 18 | ||||||
| Air Products Shareholders’ Equity | ||||||
| Common stock (par value $1 per share; issued 2019 and 2018 - 249,455,584 shares) | 249.4 | 249.4 | ||||
| Capital in excess of par value | 1,070.9 | 1,029.3 | ||||
| Retained earnings | 14,138.4 | 13,409.9 | ||||
| Accumulated other comprehensive loss | (2,375.6 | ) | (1,741.9 | ) | ||
| Treasury stock, at cost (2019 - 29,040,322 shares; 2018 - 29,940,339 shares) | (2,029.5 | ) | (2,089.2 | ) | ||
| Total Air Products Shareholders' Equity | 11,053.6 | 10,857.5 | ||||
| Noncontrolling Interests | 334.7 | 318.8 | ||||
| Total Equity | 11,388.3 | 11,176.3 | ||||
| Total Liabilities and Equity | $18,942.8 | $19,178.3 |
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Millions of dollars
| Year ended 30 September | 2019 | 2018 | 2017 | ||||||
| Operating Activities | |||||||||
| Net income | $1,809.4 | $1,532.9 | $3,021.2 | ||||||
| Less: Net income attributable to noncontrolling interests of continuing operations | 49.4 | 35.1 | 20.8 | ||||||
| Net income attributable to Air Products | 1,760.0 | 1,497.8 | 3,000.4 | ||||||
| Income from discontinued operations | — | (42.2 | ) | (1,866.0 | ) | ||||
| Income from continuing operations attributable to Air Products | 1,760.0 | 1,455.6 | 1,134.4 | ||||||
| Adjustments to reconcile income to cash provided by operating activities: | |||||||||
| Depreciation and amortization | 1,082.8 | 970.7 | 865.8 | ||||||
| Deferred income taxes | 57.6 | (55.4 | ) | (38.0 | ) | ||||
| Tax reform repatriation | 49.4 | 240.6 | — | ||||||
| Facility closure | 29.0 | — | — | ||||||
| Undistributed earnings of unconsolidated affiliates | (75.8 | ) | (59.8 | ) | (65.8 | ) | |||
| Gain on sale of assets and investments | (24.2 | ) | (6.9 | ) | (24.3 | ) | |||
| Share-based compensation | 41.2 | 38.8 | 39.9 | ||||||
| Noncurrent capital lease receivables | 94.6 | 97.4 | 92.2 | ||||||
| Goodwill and intangible asset impairment charge | — | — | 162.1 | ||||||
| Equity method investment impairment charge | — | — | 79.5 | ||||||
| Write-down of long-lived assets associated with cost reduction actions | — | — | 69.2 | ||||||
| Other adjustments | (19.4 | ) | 131.6 | 165.4 | |||||
| Working capital changes that provided (used) cash, excluding effects of acquisitions: | |||||||||
| Trade receivables | (69.0 | ) | (42.8 | ) | (73.6 | ) | |||
| Inventories | (3.0 | ) | (64.2 | ) | 6.4 | ||||
| Other receivables | 79.8 | 128.3 | 105.4 | ||||||
| Payables and accrued liabilities | (41.8 | ) | (277.7 | ) | 163.8 | ||||
| Other working capital | 8.7 | (9.0 | ) | (154.0 | ) | ||||
| Cash Provided by Operating Activities | 2,969.9 | 2,547.2 | 2,528.4 | ||||||
| Investing Activities | |||||||||
| Additions to plant and equipment | (1,989.7 | ) | (1,568.4 | ) | (1,039.7 | ) | |||
| Acquisitions, less cash acquired | (123.2 | ) | (345.4 | ) | (8.2 | ) | |||
| Investment in and advances to unconsolidated affiliates | (15.7 | ) | — | (8.1 | ) | ||||
| Proceeds from sale of assets and investments | 11.1 | 48.8 | 42.5 | ||||||
| Purchases of investments | (172.1 | ) | (530.3 | ) | (2,692.6 | ) | |||
| Proceeds from investments | 190.5 | 748.2 | 2,290.7 | ||||||
| Other investing activities | (14.3 | ) | 5.5 | 3.4 | |||||
| Cash Used for Investing Activities | (2,113.4 | ) | (1,641.6 | ) | (1,412.0 | ) | |||
| Financing Activities | |||||||||
| Long-term debt proceeds | — | .5 | 2.4 | ||||||
| Payments on long-term debt | (428.6 | ) | (418.7 | ) | (483.9 | ) | |||
| Net increase (decrease) in commercial paper and short-term borrowings | 3.9 | (78.5 | ) | (798.6 | ) | ||||
| Dividends paid to shareholders | (994.0 | ) | (897.8 | ) | (787.9 | ) | |||
| Proceeds from stock option exercises | 68.1 | 76.2 | 68.4 | ||||||
| Other financing activities | (19.9 | ) | (41.5 | ) | (41.3 | ) | |||
| Cash Used for Financing Activities | (1,370.5 | ) | (1,359.8 | ) | (2,040.9 | ) | |||
| Discontinued Operations | |||||||||
| Cash used for operating activities | — | (12.8 | ) | (966.2 | ) | ||||
| Cash provided by investing activities | — | 18.6 | 3,750.6 | ||||||
| Cash provided by financing activities | — | — | 69.5 | ||||||
| Cash Provided by Discontinued Operations | — | 5.8 | 2,853.9 | ||||||
| Effect of Exchange Rate Changes on Cash | (28.6 | ) | (33.9 | ) | 13.4 | ||||
| Increase (Decrease) in cash and cash items | (542.6 | ) | (482.3 | ) | 1,942.8 | ||||
| Cash and Cash items – Beginning of Year | 2,791.3 | 3,273.6 | 1,330.8 | ||||||
| Cash and Cash Items – End of Period | $2,248.7 | $2,791.3 | $3,273.6 |
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
Millions of dollars
| Year ended 30 September | 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 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 (loss) | — | — | — | 529.4 | — | 529.4 | 3.7 | 533.1 | ||||||||||||||||
| Dividends on common stock (per share $3.71) | — | — | (808.5 | ) | — | — | (808.5 | ) | — | (808.5 | ) | |||||||||||||
| Dividends to noncontrolling interests | — | — | — | — | — | — | (28.0 | ) | (28.0 | ) | ||||||||||||||
| Share-based compensation | — | 40.7 | — | — | — | 40.7 | — | 40.7 | ||||||||||||||||
| Issuance of treasury shares for stock option and award plans | — | (9.6 | ) | — | — | 63.5 | 53.9 | — | 53.9 | |||||||||||||||
| 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 equity transactions | — | — | (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 | ||||||||||||||
| Net income | — | — | 1,497.8 | — | — | 1,497.8 | 35.1 | 1,532.9 | ||||||||||||||||
| Other comprehensive income | — | — | — | 105.5 | — | 105.5 | (19.0 | ) | 86.5 | |||||||||||||||
| Dividends on common stock (per share $4.25) | — | — | (931.8 | ) | — | — | (931.8 | ) | — | (931.8 | ) | |||||||||||||
| Dividends to noncontrolling interests | — | — | — | — | — | — | (29.9 | ) | (29.9 | ) | ||||||||||||||
| Share-based compensation | — | 38.1 | — | — | — | 38.1 | — | 38.1 | ||||||||||||||||
| Issuance of treasury shares for stock option and award plans | — | (11.3 | ) | — | — | 74.3 | 63.0 | — | 63.0 | |||||||||||||||
| Lu'An joint venture | — | — | — | — | — | — | 227.4 | 227.4 | ||||||||||||||||
| Other equity transactions | — | 1.4 | (2.7 | ) | — | — | (1.3 | ) | 5.9 | 4.6 | ||||||||||||||
| Balance 30 September 2018 | $249.4 | $1,029.3 | $13,409.9 | ($1,741.9 | ) | ($2,089.2 | ) | $10,857.5 | $318.8 | $11,176.3 | ||||||||||||||
| Net income | — | — | 1,760.0 | — | — | 1,760.0 | 49.4 | 1,809.4 | ||||||||||||||||
| Other comprehensive income (loss) | — | — | — | (633.7 | ) | — | (633.7 | ) | (19.9 | ) | (653.6 | ) | ||||||||||||
| Dividends on common stock (per share $4.58) | — | — | (1,008.3 | ) | — | — | (1,008.3 | ) | — | (1,008.3 | ) | |||||||||||||
| Dividends to noncontrolling interests | — | — | — | — | — | (12.2 | ) | (12.2 | ) | |||||||||||||||
| Share-based compensation | — | 40.7 | — | — | — | 40.7 | — | 40.7 | ||||||||||||||||
| Issuance of treasury shares for stock option and award plans | — | 2.2 | — | — | 59.7 | 61.9 | — | 61.9 | ||||||||||||||||
| Cumulative change in accounting principle | — | — | (17.1 | ) | — | (17.1 | ) | — | (17.1 | ) | ||||||||||||||
| Other equity transactions | — | (1.3 | ) | (6.1 | ) | — | — | (7.4 | ) | (1.4 | ) | (8.8 | ) | |||||||||||
| Balance 30 September 2019 | $249.4 | $1,070.9 | $14,138.4 | ($2,375.6 | ) | ($2,029.5 | ) | $11,053.6 | $334.7 | $11,388.3 |
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
1**.** MAJOR ACCOUNTING POLICIES
Basis of Presentation and Consolidation Principles
The accompanying consolidated financial statements of Air Products and Chemicals, Inc. were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Air Products and Chemicals, Inc. and those of its controlled subsidiaries (“we,” “our,” “us,” the “Company,” “Air Products,” or “registrant”), which are generally majority owned. Intercompany transactions and balances are eliminated in consolidation.
We consolidate all entities that we control. The general condition for control is ownership of a majority of the voting interests of an entity. Control may also exist in arrangements where we are the primary beneficiary of a variable interest entity (VIE). An entity that has both the power to direct the activities that most significantly impact the economic performance of a VIE and the obligation to absorb losses or receive benefits significant to the VIE is considered the primary beneficiary of that entity. We have determined that we are not a primary beneficiary of any material VIE.
The results of operations and cash flows for our discontinued operations have been segregated from the results of continuing operations and segment results. There were no assets and liabilities presented as discontinued operations on the consolidated balance sheets. The comprehensive income related to discontinued operations has not been segregated and is included in the consolidated comprehensive income statement for fiscal years 2018 and 2017. Refer to Note 4, Discontinued Operations, for detail of the businesses presented in discontinued operations.
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.
Reclassifications
The consolidated financial statements and accompanying notes reflect accounting guidance that was adopted during fiscal year 2019. Refer to Note 2, New Accounting Guidance, for additional information. Certain prior year information has been reclassified to conform to the fiscal year 2019 presentation.
Estimates and Assumptions
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue when or as performance obligations are satisfied, which occurs when control is transferred to the customer.
We determine the transaction price of our contracts based on the amount of consideration to which we expect to be entitled to receive in exchange for the goods or services provided. Our contracts within the scope of revenue guidance do not contain payment terms that include a significant financing component.
Sales returns and allowances are not a business practice in the industry.
Our sale of gas contracts are either accounted for over time during the period in which we deliver or make available the agreed upon quantity of goods or at a point in time when the customer receives and obtains control of the product, which generally occurs upon delivery. We generally recognize revenue from our sale of gas contracts based on the right to invoice practical expedient.
Our sale of equipment contracts are generally comprised of a single performance obligation as the individual promised goods or services contained within the contracts are integrated with or dependent upon other goods or services in the contract for a single output to the customer. Revenue from our sale of equipment contracts is generally recognized over time as we have an enforceable right to payment for performance completed to date and our performance under the contract terms does not create an asset with alternative use. We recognize these contracts using a cost incurred input method by which costs incurred to date relative to total estimated costs at completion are used to measure progress toward satisfying performance obligations.
Amounts billed for shipping and handling fees are classified as sales in the consolidated income statements. Shipping and handling activities for our sale of equipment contracts may be performed after the customer obtains control of the promised goods. In these cases, we have elected to apply the practical expedient to account for shipping and handling as activities to fulfill the promise to transfer the goods. For our sale of gas contracts, control generally transfers to the customer upon delivery.
Amounts billed for sales and use taxes, value-added taxes, and certain excise and other specific transactional taxes imposed on revenue-producing transactions are presented on a net basis and excluded from sales in the consolidated income statements.
For additional information, refer to Note 3, Revenue Recognition.
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 10, Plant and Equipment, net.
Selling and Administrative
The principal components of selling and administrative expenses are compensation, advertising, and promotional costs.
Postemployment Benefits
We provide termination benefits to employees as part of ongoing benefit arrangements and record a liability for termination benefits when probable and estimable. These criteria are met when management, with the appropriate level of authority, approves and commits to its plan of action for termination; the plan identifies the employees to be terminated and their related benefits; and the plan is to be completed within one year. We do not provide material one-time benefit arrangements.
Fair Value Measurements
We are required to measure certain assets and liabilities at fair value, either upon initial measurement or for subsequent accounting or reporting. For example, fair value is used in the initial measurement of assets and liabilities acquired in a business combination; on a recurring basis in the measurement of derivative financial instruments; and on a nonrecurring basis when long-lived assets are written down to fair value when held for sale or determined to be impaired. Refer to Note 15, Fair Value Measurements, and Note 17, Retirement Benefits, for information on the methods and assumptions used in our fair value measurements.
Financial Instruments
We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The types of derivative financial instruments permitted for such risk management programs are specified in policies set by management. Refer to Note 14, 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 consolidated income statements fluctuates from period to period, depending on the value of the U.S. dollar against foreign currencies. Some transactions are made in currencies different from an entity’s functional currency. Gains and losses from these foreign currency transactions are generally reflected in "Other income (expense), net" on our consolidated income statements as they occur.
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 $14.2, $12.8, and $11.4 in fiscal years 2019, 2018, and 2017, 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, remediation costs, post-remediation monitoring costs, natural resource damages, and outside legal fees. These liabilities include costs related to other potentially responsible parties to the extent that we have reason to believe such parties will not fully pay their proportionate share. They do not consider any claims for recoveries from insurance or other parties and are not discounted.
As assessments and remediation progress at individual sites, the amount of projected cost is reviewed, and the liability is adjusted to reflect additional technical and legal information that becomes available. Management has an established process in place to identify and monitor 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 18, 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 18, 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 20, Share-Based Compensation, for additional information regarding these awards and the models and assumptions used to determine the grant-date fair value of our awards.
Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. A principal temporary difference results from the excess of tax depreciation over book depreciation because accelerated methods of depreciation and shorter useful lives are used for income tax purposes. The cumulative impact of a change in tax rates or regulations is included in income tax expense in the period that includes the enactment date. We recognize deferred tax assets net of existing valuation allowances to the extent we believe that these assets are more likely than not to be realized considering all available evidence.
A tax benefit for an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination based on its technical merits. This position is measured as the largest amount of tax benefit that is greater than 50% likely of being realized. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense. For additional information regarding our income taxes, refer to Note 23, Income Taxes.
Other Non-Operating Income (Expense), net
Other non-operating income (expense), net primarily includes interest income associated with our cash and cash items and short-term investments and non-service cost components of net periodic pension and postretirement benefit cost. Our non-service costs primarily include interest cost, expected return on plan assets, amortization of actuarial gains and losses, and settlements.
Cash and Cash Items
Cash and cash items include cash, time deposits, 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 and certificates of deposit 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. Allowances for doubtful accounts were $88.2 and $91.3 as of 30 September 2019 and 2018, respectively. Provisions to the allowance for doubtful accounts charged against income were $48.8, $24.0, and $45.8 in fiscal years 2019, 2018, and 2017, respectively.
Inventories
We carry inventory that is comprised of finished goods, work-in-process, raw materials and supplies. Refer to Note 8, Inventories, for further detail.
Inventories on our consolidated balance sheets are stated at the lower of cost or net realizable value. We write down our inventories for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions.
Effective 1 July 2018, we determine the cost of all our inventories on a first-in, first-out basis ("FIFO"). Prior to 1 July 2018, we determined the cost of our industrial gas inventories in the United States on a last-in, first-out basis ("LIFO"). We applied this accounting change as a cumulative effect adjustment to cost of sales in the fourth quarter of fiscal year 2018 and did not restate prior period financial statements because the impact was not material. This change decreased our cost of sales by $24.1 for the quarter and fiscal year ended 30 September 2018.
Equity Investments
The equity method of accounting is used when we exercise significant influence but do not have operating control, generally assumed to be 20% – 50% ownership. Under the equity method, original investments are recorded at cost and adjusted by our share of undistributed earnings or losses of these companies. Equity investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.
Plant and Equipment, net
Plant and equipment, net is stated at cost less accumulated depreciation. Construction costs, labor, and applicable overhead related to installations are capitalized. Expenditures for additions and improvements that extend the lives or increase the capacity of plant assets are capitalized. The costs of maintenance and repairs of plant and equipment are charged to expense as incurred.
Fully depreciated assets are retained in the gross plant and equipment and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income. Refer to Note 10, Plant and Equipment, net, for further detail.
Computer Software
We capitalize costs incurred to purchase or develop software for internal use. Capitalized costs include purchased computer software packages, payments to vendors/consultants for development and implementation or modification to a purchased package to meet our requirements, payroll and related costs for employees directly involved in development, and interest incurred while software is being developed. Capitalized computer software costs are reflected in "Plant and equipment, net" on the consolidated balance sheets and are depreciated over the estimated useful life of the software, generally a period of three to five years.
Capitalized Interest
As we build new plant and equipment, we include in the cost of these assets a portion of the interest payments we make during the year. The amount of capitalized interest was $13.5, $19.5, and $19.0 in fiscal years 2019, 2018, and 2017, 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 meeting the held for sale criteria are reported at the lower of carrying amount or fair value less cost to sell.
Asset Retirement Obligations
The fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred. The fair value of the liability is measured using discounted estimated cash flows and is adjusted to its present value in subsequent periods as accretion expense is recorded. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s useful life. Our asset retirement obligations are primarily associated with on-site long-term supply contracts under which we have built a facility on land owned by the customer and are obligated to remove the facility at the end of the contract term. Our asset retirement obligations totaled $208.2 and $190.4 at 30 September 2019 and 2018, respectively.
Goodwill
Business combinations are accounted for using the acquisition method. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price (plus the fair value of any noncontrolling interest and previously held equity interest in the acquiree) over the fair market value of the net assets acquired, including identified intangibles, is recorded as goodwill. Preliminary purchase price allocations are made at the date of acquisition and finalized when information about facts and circumstances that existed as of the acquisition date needed to finalize underlying estimates is obtained or when we determine that such information is not obtainable, within a maximum 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 11, Goodwill, for further detail.
Intangible Assets
Intangible assets with determinable lives primarily consist of customer relationships, purchased patents and technology, and land use rights. The cost of intangible assets with determinable lives is amortized on a straight-line basis over the estimated period of economic benefit. No residual value is estimated for these intangible assets. Indefinite-lived intangible assets consist of trade names and trademarks. Indefinite-lived intangibles are subject to impairment testing at least annually. In addition, intangible assets are tested more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists.
Customer relationships are generally amortized over periods of five to twenty-five years. Purchased patents and technology and other finite-lived intangibles are generally amortized over periods of five to fifteen years. Other intangibles includes land use rights, which are generally amortized over a period of fifty years. Amortizable lives are adjusted whenever there is a change in the estimated period of economic benefit. Refer to Note 12, Intangible Assets, for further detail.
Retirement Benefits
The cost of pension benefits is generally recognized over the employees’ service period. We use actuarial methods and assumptions in the valuation of defined benefit obligations and the determination of expense. Differences between actual and expected results or changes in the value of obligations and plan assets are not recognized in earnings as they occur but, rather, systematically and gradually over subsequent periods. Refer to Note 17, Retirement Benefits, for disclosures related to our pension and other postretirement benefits.
2**.** NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented in Fiscal Year 2019
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued the new revenue standard, which is based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be entitled in exchange for the transfer of goods or services. We adopted this guidance under the modified retrospective approach as of 1 October 2018. Upon adoption, we no longer present "Contracts in progress, less progress billings" on our consolidated balance sheets and have expanded disclosure requirements. Otherwise, adoption of this guidance did not impact our consolidated financial statements, and no adjustment was necessary to opening retained earnings. Accordingly, sales presented during fiscal year 2019 would not change if presented under accounting standards in effect prior to 1 October 2018. Refer to Note 3, Revenue Recognition, for additional information.
Cash Flow Statement Classification
In August 2016, the FASB issued guidance to reduce diversity in practice related to the classification of certain cash receipts and cash payments in the statement of cash flows. We adopted this guidance retrospectively in the first quarter of fiscal year 2019 and elected to use the cumulative earnings approach to determine the classification of distributions received from equity affiliates. As a result, we reclassified net activity from operating activities to investing activities of $7.5 and $5.7 for the fiscal years ended 30 September 2018 and 2017, respectively.
Intra-Entity Asset Transfers
In October 2016, the FASB issued guidance on accounting for the income tax effects of intra-entity transfers of assets other than inventory. Previous guidance prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party. Under the new guidance, the income tax consequences of an intra-entity asset transfer are recognized when the transfer occurs. We adopted this guidance in the first quarter of fiscal year 2019 on a modified retrospective basis through a cumulative-effect adjustment of $17.1 that decreased retained earnings as of 1 October 2018.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued guidance allowing for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act. We adopted this guidance in the fourth quarter and elected to not reclassify the income tax effects stranded in accumulated other comprehensive income to retained earnings. As a result, there was no impact on the Company’s consolidated financial statements. Our policy for releasing the income tax effects from accumulated other comprehensive income utilizes either the specific identification approach or the portfolio approach based on the nature of the underlying item and when it is reclassified to earnings.
New Accounting Guidance to be Implemented
Leases
In February 2016, the FASB issued guidance that requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements.
The Company is the lessee under various agreements for real estate, distribution equipment, aircraft, and vehicles that are currently accounted for as operating leases.
We will adopt this guidance in fiscal year 2020 using a modified retrospective approach with the election to apply the guidance as of the adoption date instead of the earliest comparative period presented in the consolidated financial statements.
Upon adoption, we will elect the following practical expedients provided by this guidance:
| • | The package of practical expedients, which allows us to carry forward the historical lease population and classification, among other things; |
| • | The land easements practical expedient, which allows us to carry forward our current accounting treatment for land easements on existing agreements; |
| • | The hindsight practical expedient, which is used to determine the reasonably certain lease term for existing leases as of the date of adoption; |
| • | The single component practical expedient, which allows us to account for lease and non-lease components associated with that lease as a single component, if certain criteria are met; and |
| • | The short-term leases practical expedient, which allows us to not record the related lease liabilities and right-of-use assets for operating leases in which we are the lessee with a term of 12 months or less. |
We expect adoption of the standard will result in recognition of lease liabilities and right-of-use assets on our consolidated balance sheets of approximately $380 and $340, respectively. The standard will not materially affect our results of operations or liquidity.
Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance on the measurement of credit losses, which requires measurement and recognition of expected credit losses for financial assets, including trade receivables and capital lease receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The method to determine a loss is different from the existing guidance, which requires a credit loss to be recognized when it is probable. The guidance is effective beginning in fiscal year 2021, with early adoption permitted beginning in fiscal year 2020. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
Hedging Activities
In August 2017, the FASB issued guidance on hedging activities to expand the related presentation and disclosure requirements, change how companies assess effectiveness, and eliminate the separate measurement and reporting of hedge ineffectiveness. The guidance also enables more hedging strategies to become eligible for hedge accounting.
We will adopt the new guidance on 1 October 2019 on a prospective basis. The primary impact of adoption will be the presentation in the consolidated income statement of excluded components of our cash flow hedges of intercompany loans. Excluded components are certain portions of the change in fair value of derivative instruments that are excluded from the assessment of hedge effectiveness. Historically, the impacts from changes in value of these components were recorded in "Interest expense." Beginning in fiscal year 2020, we will present these excluded components in "Other non-operating income (expense), net" consistent with the remeasurement of the intercompany loans. In fiscal years 2019 and 2018, the excluded components recognized within "Interest expense” totaled approximately $35 and $40, respectively.
In accordance with the transition provisions of the guidance, the separate measurement of ineffectiveness for our cash flow hedging instruments existing as of the date of adoption should be eliminated through a cumulative-effect adjustment within equity.
Fair Value Measurement Disclosures
In August 2018, the FASB issued guidance which modifies the disclosure requirements for fair value measurements. The guidance is effective in fiscal year 2021, with early adoption permitted. Certain amendments must be applied prospectively and other amendments retrospectively. We are currently evaluating the impact this guidance will have on the disclosures in the notes to our consolidated financial statements.
Retirement Benefit Disclosures
In August 2018, the FASB issued guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance is effective in fiscal year 2021, with early adoption permitted, and must be applied on a retrospective basis. We are currently evaluating the impact this guidance will have on the disclosures in the notes to our consolidated financial statements.
Cloud Computing Implementation Costs
In August 2018, the FASB issued guidance which aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software. The guidance is effective in fiscal year 2021, with early adoption permitted, and may be applied either prospectively or retrospectively. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
Related Party Guidance for Variable Interest Entities
In October 2018, the FASB issued an update which amends the guidance for determining whether a decision-making fee is a variable interest. The amendments require consideration of indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety as currently required. The guidance is effective in fiscal year 2021, with early adoption permitted. The amendments must be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
3**.** REVENUE RECOGNITION
Nature of Goods and Services
The principal activities from which the Company generates its sales from its contracts with customers, separated between our regional industrial gases businesses and industrial gases equipment businesses, are described below with their respective revenue recognition policies. For an overall summary of these policies and discussion on payment terms and presentation, refer to Note 1, Major Accounting Policies.
Industrial Gases – Regional
Our regional industrial gases businesses produce and sell atmospheric gases such as oxygen, nitrogen, and argon (primarily recovered by the cryogenic distillation of air) and process gases such as hydrogen, helium, carbon dioxide, carbon monoxide, syngas, and specialty gases. We distribute gases to our sale of gas customers through different supply modes depending on various factors including the customer's volume requirements and location. Our supply modes are as follows:
On-site Gases—Supply mode associated with customers who require large volumes of gases and have relatively constant demand. Gases are produced and supplied by large facilities we construct on or near the customers’ facilities or by pipeline systems from centrally located production facilities. These sale of gas contracts generally have 15- to 20- year terms. The Company also delivers smaller quantities of product through small on-site plants (cryogenic or non-cryogenic generators), typically via a 10- to 15- year sale of gas contract. The contracts within this supply mode generally contain fixed monthly charges and/or minimum purchase requirements with price escalation provisions that are generally based on external indices. Revenue associated with this supply mode is generally recognized over time during the period in which we deliver or make available the agreed upon quantity of goods.
Merchant Gases—Supply mode associated with liquid bulk and packaged gases customers. Liquid bulk customers receive delivery of product in liquid or gaseous form by tanker or tube trailer. The product is stored, usually in its liquid state, in equipment typically designed and installed by the Company at the customer’s site for vaporizing into a gaseous state as needed. Packaged gases customers receive small quantities of product delivered in either cylinders or dewars. Both liquid bulk and packaged gases sales do not contain minimum purchase requirements as they are governed by contracts and/or purchase orders based on the customer's requirements. These contracts contain stated terms that are generally 5 years or less. Performance obligations associated with this supply mode are satisfied at a point in time when the customer receives and obtains control of the product, which generally occurs upon delivery.
The timing of revenue recognition for our regional industrial gases businesses is generally consistent with our right to invoice the customer. Variable components of consideration that may not be resolved within the month, such as the ability to earn an annual bonus or incur a penalty, are more relevant to on-site contracts and are considered constrained as they can be impacted by a single significant event such as a plant outage, which could occur at the end of a contract period. We consider contract modifications on an individual basis to determine appropriate accounting treatment. However, contract modifications are generally accounted for prospectively as they relate to distinct goods or services associated with future periods of performance.
We mitigate energy and natural gas price risk contractually through pricing formulas, surcharges, and cost pass-through arrangements.
Industrial Gases – Equipment
The Company designs and manufactures equipment for air separation, hydrocarbon recovery and purification, natural gas liquefaction (LNG), and liquid helium and liquid hydrogen transport and storage. The Industrial Gases – Global and the Corporate and other segments serve our sale of equipment customers.
Our sale of equipment contracts are generally comprised of a single performance obligation as the individual promised goods or services contained within the contracts are integrated with or dependent upon other goods or services in the contract for a single output to the customer.
Revenue from our sale of equipment contracts is generally recognized over time as we have an enforceable right to payment for performance completed to date and our performance under the contract terms does not create an asset with alternative use. Otherwise, sale of equipment contracts are satisfied at the point in time the customer obtains control of the equipment, which is generally determined based on the shipping terms of the contract. For contracts recognized over time, we primarily recognize revenue using a cost incurred input method by which costs incurred to date relative to total estimated costs at completion are used to measure progress toward satisfying performance obligations. Costs incurred include material, labor, and overhead costs and represent work contributing and proportionate to the transfer of control to the customer.
Since our contracts are generally comprised of a single performance obligation, contract modifications are typically accounted for as part of the existing contract and are recognized as a cumulative adjustment for the inception-to-date effect of such change. In addition, changes in estimates on projects accounted for under the cost incurred input method are recognized as a cumulative adjustment for the inception-to-date effect of such change. Changes in estimates favorably impacted operating income by approximately $37, $38, and $27 in fiscal years 2019, 2018, and 2017, respectively. Our changes in estimates would not have significantly impacted amounts recorded in prior years.
Disaggregation of Revenue
The table below presents our consolidated sales disaggregated by each of the supply modes described above for each of our reporting segments for the year ended 30 September 2019. We believe this presentation best depicts the nature, timing, type of customer, and contract terms for our sales.
| Industrial Gases– Americas | Industrial Gases– EMEA | Industrial Gases– Asia | Industrial Gases– Global | Corporate and other | Total | % | ||||||||||||||
| 2019 | ||||||||||||||||||||
| On-site | $2,230.6 | $728.4 | $1,622.6 | $— | $— | $4,581.6 | 52 | % | ||||||||||||
| Merchant | 1,642.9 | 1,274.1 | 1,041.0 | — | — | 3,958.0 | 44 | % | ||||||||||||
| Sale of Equipment | — | — | — | 261.0 | 118.3 | 379.3 | 4 | % | ||||||||||||
| Total | $3,873.5 | $2,002.5 | $2,663.6 | $261.0 | $118.3 | $8,918.9 | 100 | % |
Approximately 5% of total consolidated sales for the year ended 30 September 2019 was associated with lease revenue relating to our on-site supply mode and therefore not within the scope of the new revenue standard.
Remaining Performance Obligations
As of 30 September 2019, the transaction price allocated to remaining performance obligations is estimated to be approximately $14 billion. This amount includes fixed-charge contract provisions associated with our on-site and sale of equipment supply modes. We estimate that approximately half of this revenue will be recognized over approximately the next five years and the balance thereafter.
Expected revenue associated with new on-site plants that are not yet onstream is excluded from this amount. In addition, this amount excludes consideration associated with contracts determined to be leases, those with an expected duration of less than one year, and variable consideration for which we recognize revenue at the amount to which we have the right to invoice, including pass-through costs related to energy and natural gas.
In the future, actual amounts will differ due to events outside of our control, including but not limited to inflationary price escalations, currency exchange rates, and terminated or renewed contracts.
Contract Balances
Upon adoption of the new revenue standard, we no longer present "Contracts in progress, less progress billings" on our consolidated balance sheets. The balance as of 30 September 2018 has been reclassified to "Other receivables and current assets."
Our sale of equipment contracts generally contain a single performance obligation which, as discussed below, results in presentation of either a contract asset or contract liability.
The table below details balances arising from contracts with customers as of our most recent balance sheet date and our date of adoption:
| 30 September 2019 | 1 October 2018 | |||||
| Assets | ||||||
| Contract assets – current | $64.3 | $53.0 | ||||
| Contract fulfillment costs – current | 64.5 | 50.7 | ||||
| Liabilities | ||||||
| Contract liabilities – current | 247.4 | 174.5 | ||||
| Contract liabilities – noncurrent | 49.2 | 53.5 |
Contract assets and liabilities result from differences in timing of revenue recognition and customer invoicing. These balances are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.
Contract assets primarily relate to our sale of equipment contracts for which revenue is recognized over time. These balances represent unbilled revenue, which occurs when revenue recognized under the measure of progress exceeds the amount invoiced to our customers. Our ability to invoice the customer for contract asset balances is not only based on the passage of time, but also the achievement of certain contractual milestones. Our contract assets are included within "Other receivables and current assets" on the consolidated balance sheets.
Contract fulfillment costs primarily include deferred costs related to sale of equipment projects that cannot be inventoried and for which we expect to recognize revenue upon transfer of control at project completion or costs related to fulfilling a specific anticipated contract. Contract fulfillment costs are generally classified as current and are included within "Other receivables and current assets" on the consolidated balance sheets.
Costs to obtain a contract, or contract acquisition costs, are capitalized only after we have established a contract with the customer. We elected to apply the practical expedient to expense these costs as they are incurred if the amortization period of the asset that would have otherwise been recognized is one year or less. Our contract acquisition costs capitalized as of 30 September 2019 were not material.
Contract liabilities include advance payments or right to consideration prior to performance under the contract. Contract liabilities are recognized as revenue when or as we perform under the contract. The increase in our contract liabilities – current balance primarily relates to new sale of equipment projects as balances associated with our sale of gas contracts are generally related to fixed charges and are relatively consistent period over period. During the year ended 30 September 2019, we recognized approximately $110 in revenue associated with sale of equipment contracts that was included within our contract liabilities as of 30 September 2018. The current and noncurrent portions of our contract liabilities are included within "Payables and accrued liabilities" and "Other noncurrent liabilities" on our consolidated balance sheets, respectively. Advanced payments from our customers do not represent a significant financing component as these payments are intended for purposes other than financing, such as to meet working capital demands or to protect us from our customer failing to meet its obligations under the terms of the contract.
Changes in contract asset and liability balances during the year ended 30 September 2019 were not materially impacted by any other factors.
4**.** DISCONTINUED OPERATIONS
In fiscal year 2018, income from discontinued operations, net of tax, was $42.2. This included an income tax benefit of $25.6 resulting from the resolution of uncertain tax positions taken in conjunction with the disposition of our former European Homecare business in fiscal year 2012 and an after-tax benefit of $17.6 resulting from the resolution of certain post-closing adjustments associated with the sale of our former Performance Materials Division ("PMD") in fiscal year 2017. These benefits were partially offset by an after-tax loss of $1.0 related to Energy-from-Waste ("EfW").
There were no assets or liabilities presented in discontinued operations on the consolidated balance sheets as of 30 September 2019 or 2018.
The following table details income from discontinued operations, net of tax, on the consolidated income statements for fiscal year 2017:
| 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 of business, 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 related to costs incurred for ongoing project exit activities, administrative costs, and land lease obligations. |
| (B) | As a result of the expected gain on the 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 included expense for income tax reserves for uncertain tax positions of $28.0 gross ($21.0 net) in various jurisdictions. |
In fiscal year 2017, income from discontinued operations, net of tax, of $1,866.0 included a gain of $2,870 ($1,828 after-tax, or $8.32 per share) for the sale of PMD. Refer to Note 5, Materials Technologies Separation, for additional information. In addition, we recorded a loss on the disposal of EfW of $59.3 ($47.1 after-tax) during the first quarter of 2017, primarily for land lease obligations and to update our estimate of the net realizable value of the plant assets. The loss on disposal was recorded as a component of discontinued operations while the liability associated with land lease obligations was and continues to be recorded in continuing operations. As of 30 September 2019, liabilities associated with EfW recorded in continuing operations were approximately $58 and primarily related to the land lease obligations.
5**.** MATERIALS TECHNOLOGIES SEPARATION
As further discussed below, we completed the separation of the divisions comprising the former Materials Technologies segment through the spin-off of EMD as Versum Materials, Inc. and the sale of PMD to Evonik Industries AG ("Evonik") in fiscal year 2017. In connection with the dispositions, we incurred net separation costs of $30.2. The net costs included legal and advisory fees of $32.5, which are reflected on the consolidated income statements as “Business separation costs,” and a pension settlement benefit of $2.3 presented within "Other non-operating income (expense), net." Our fiscal year 2017 income tax provision included net tax benefits of $5.5, primarily related to changes in tax positions on business separation activities.
Spin-off of EMD
On 1 October 2016 (the distribution date), Air Products completed the spin-off of its Electronic Materials Division (EMD) as Versum Materials, Inc. ("Versum"), 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. The spin-off of Versum was treated as a noncash transaction in the consolidated statement 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. We recognized a gain on the sale of $2,870 ($1,828 after-tax, or $8.32 per share), which is reflected within "Income from discontinued operations, net of tax" for the year ended 30 September 2017.
6**.** COST REDUCTION AND ASSET ACTIONS
The charges we record for cost reduction and asset actions are not recorded in segment results. Liabilities associated with these actions are reflected on our consolidated balance sheets within "Payables and accrued liabilities."
Fiscal Year 2019 Cost Reduction Actions
In fiscal year 2019, we recognized an expense of $25.5 for severance and other benefits associated with the elimination or planned elimination of approximately 300 positions. These actions are expected to drive cost synergies primarily within the Industrial Gases – EMEA and the Industrial Gases – Americas segments.
The following table summarizes the carrying amount of the accrual as of 30 September 2019.
| 2019 Charge | $25.5 | ||
| Cash expenditures | (6.9 | ) | |
| Amount reflected in pension liability | (.3 | ) | |
| Currency translation adjustment | (.5 | ) | |
| 30 September 2019 | $17.8 |
Fiscal Year 2017 Cost Reduction and Asset Actions
In fiscal year 2017, we recognized a net expense of $151.4 for cost reduction and asset actions. The net expense included a charge of $154.8 for actions taken in 2017 ("the 2017 charge"), partially offset by the favorable settlement of the remaining $3.4 accrued balance associated with business restructuring actions taken in 2015.
The 2017 charge included $88.5 for asset actions related to the write-down of an air separation unit in the Industrial Gases – EMEA segment that was constructed mainly to provide oxygen to a former EfW plant; the planned sale of a non-industrial gas hardgoods business in the Industrial Gases – Americas segment; and the closure of an LNG heat exchanger manufacturing facility in the Corporate and other segment. The 2017 charge also included $66.3 for severance and other benefits associated with the elimination of approximately 625 positions, primarily in the Corporate and other and Industrial Gases – EMEA segments. 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.
7**.** ACQUISITIONS
Fiscal Year 2019 Business Combinations
As further discussed below, we completed three business combinations in fiscal year 2019.
Exchange of Equity Affiliate Investments
As of 30 September 2018, we held 50% ownership interests in High-Tech Gases (Beijing) Co., Ltd. ("High-Tech Gases") and WuXi Hi-Tech Gas Co., Ltd. ("WuXi"), both of which were joint ventures with another industrial gas company in China. We accounted for these arrangements as equity method investments in our Industrial Gases – Asia segment through 30 April 2019.
On 1 May 2019, we acquired our partner's 50% interest in WuXi in exchange for our 50% interest in High-Tech Gases. The purpose of the exchange was to simplify the current structure of the two entities and to allow each party to serve its customers more efficiently in their respective geographies. Subsequent to the acquisition date, we own 100% of WuXi and no longer have an equity interest in High-Tech Gases.
The exchange resulted in a net gain of $29.1, of which $15.0 resulted from the revaluation of our previously held equity interest in WuXi to its acquisition date fair value and $14.1 resulted from the disposition of our interest in High-Tech Gases. The net gain has been reflected as "Gain on exchange of equity affiliate investments" on our consolidated income statements in fiscal year 2019 and was not recorded in segment results. There were no tax impacts on the exchange.
We revalued our previously held 50% equity interest in WuXi based on an estimated acquisition date fair value of $27.0. We calculated this fair value using a discounted cash flow analysis under the income approach, which required estimates and assumptions regarding projected revenue growth, customer attrition rates, profit margin, and discount rate.
The acquisition of the remaining interest in WuXi was accounted for as a business combination. The results of this business have been consolidated within our Industrial Gases – Asia segment as of the acquisition date. Upon acquisition, we recognized plant and equipment of $28.0, intangible assets of $27.4, and goodwill of $3.9. The intangible assets were primarily customer relationships, having a weighted-average useful life of approximately 10 years. The goodwill recognized on the transaction, none of which is deductible for tax purposes, was recorded in the Industrial Gases – Asia segment and is attributable to expected growth synergies. The acquisition did not materially impact our consolidated income statements for the periods presented.
Other Fiscal Year 2019 Business Combinations
The remaining business combinations completed in fiscal year 2019 had total consideration, net of cash acquired, of $126.6. The largest of these business combinations was the acquisition of ACP Europe SA ("ACP"), the largest independent carbon dioxide business in Continental Europe, which closed on 1 March 2019. We expect this acquisition to enable us to better serve existing merchant customers and pursue new industrial gas growth opportunities across additional European geographies. The results of this business are consolidated within our Industrial Gases – EMEA segment and did not materially impact our consolidated income statements for the periods presented.
Our other 2019 business combinations resulted in the recognition of plant and equipment of $75.1 and goodwill of $44.7, partially offset by net liabilities acquired. The goodwill recognized on the transactions, $1.7 of which is deductible for tax purposes, was primarily recorded in the Industrial Gases – EMEA segment and is attributable to expected growth and cost synergies.
The acquired assets and liabilities resulting from our 2019 business combinations were recorded at their estimated fair values, which were calculated based on a preliminary purchase price allocation prepared by management. We may record adjustments to these assets and liabilities during the preliminary purchase price allocation period, which could be up to one year from the acquisition date.
Fiscal Year 2018 Asset Acquisition
On 26 April 2018 ("the acquisition date"), we completed the formation of Air Products Lu An (Changzhi) Co., Ltd. (“the JV”), a 60%-owned joint venture with Lu’An Clean Energy Company ("Lu’An"). The JV receives coal, steam and power from Lu’An and supplies syngas to Lu’An under a long-term onsite contract. The results of the JV are consolidated within the Industrial Gases – Asia segment.
Air Products contributed four large air separation units to the JV with a carrying value of approximately $300, and the JV acquired gasification and syngas clean-up assets from Lu’An for 7.9 billion RMB (approximately $1.2 billion). As a result, the carrying value of the plant and equipment of the JV was approximately $1.5 billion at the acquisition date.
We accounted for the acquisition of the gasification and syngas clean-up assets as an asset acquisition. In connection with closing the acquisition, we paid net cash of approximately 1.5 billion RMB ($235) and issued equity of 1.4 billion RMB ($227) to Lu'An for their noncontrolling interest in the JV. In addition, Lu'An made a loan of 2.6 billion RMB to the JV with regularly scheduled principal and interest payments at a fixed interest rate of 5.5%, and we established a liability of 2.3 billion RMB for remaining cash payments. The issuance of equity to Lu'An for their noncontrolling interest, the long-term debt, and the liability for the remaining cash payments were noncash transactions that have been excluded from the consolidated statement of cash flows for the fiscal year ended 30 September 2018.
The following table summarizes the liabilities resulting from this acquisition as reflected on our consolidated balance sheets:
| 30 September | 2019 | 2018 | ||||||
| Payables and accrued liabilities | $8.9 | $330.0 | ||||||
| Current portion of long-term debt | 37.8 | — | ||||||
| Long-term debt – related party | 320.1 | 384.3 |
Fiscal Year 2018 Business Combinations
In fiscal year 2018, we completed eight acquisitions that were accounted for as business combinations. These acquisitions had total consideration, net of cash acquired, of $355.4. The largest of the acquisitions was completed during the first quarter of fiscal year 2018 and primarily consisted of three air separation units serving onsite and merchant customers in China, which strengthened our position in the region. The results of this business are consolidated within our Industrial Gases – Asia segment.
8**.** INVENTORIES
The components of inventories are as follows:
| 30 September | 2019 | 2018 | ||||||
| Finished goods | $128.8 | $125.4 | ||||||
| Work in process | 27.5 | 21.2 | ||||||
| Raw materials, supplies and other | 232.0 | 249.5 | ||||||
| Inventories | $388.3 | $396.1 |
9**.** SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATES
The summarized financial information below is on a combined 100% basis and has been compiled based on financial statements of the companies accounted for by the equity method. The amounts presented include the accounts of the following equity affiliates:
| Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (25%); | INOX Air Products Private Limited (50%); | |
| Air Products South Africa (Proprietary) Limited (50%); | Jazan Gas Projects Company (26%); | |
| Bangkok Cogeneration Company Limited (49%); | Kulim Industrial Gases Sdn. Bhd. (50%); | |
| Bangkok Industrial Gases Co., Ltd. (49%); | Sapio Produzione Idrogeno Ossigeno S.r.l. (49%); | |
| Chengdu Air & Gas Products Ltd. (50%); | Tecnologia en Nitrogeno S. de R.L. de C.V. (50%); | |
| Helios S.p.A. (49%); | Tyczka Industrie-Gases GmbH (50%); | |
| INFRA Group (40%); | and principally, other industrial gas producers. |
| 30 September | 2019 | 2018 | ||||||||||
| Current assets | $1,660.6 | $1,556.9 | ||||||||||
| Noncurrent assets | 4,400.4 | 4,340.8 | ||||||||||
| Current liabilities | 725.1 | 635.7 | ||||||||||
| Noncurrent liabilities | 2,853.6 | 2,652.5 | ||||||||||
| Year Ended 30 September | 2019 | 2018 | 2017 | |||||||||
| Net sales | $2,885.6 | $2,663.1 | $2,343.3 | |||||||||
| Sales less cost of sales | 1,193.4 | 1,050.6 | 878.6 | |||||||||
| Operating income | 763.4 | 635.3 | 509.5 | |||||||||
| Net income | 492.4 | 388.0 | 343.5 |
Dividends received from equity affiliates were $144.3, $122.5, and $99.5 in fiscal years 2019, 2018, and 2017, respectively.
The investment in net assets of and advances to equity affiliates as of 30 September 2019 and 2018 included investment in foreign affiliates of $1,275.4 and $1,276.0, respectively.
As of 30 September 2019 and 2018, the amount of investment in companies accounted for by the equity method included equity method goodwill of $42.8 and $42.4, respectively.
Exchange of Equity Affiliate Investments
As of 30 September 2018, we held 50% ownership interests in High-Tech Gases (Beijing) Co., Ltd. ("High-Tech Gases") and WuXi Hi-Tech Gas Co., Ltd. ("WuXi"), both of which were joint ventures with another industrial gas company in China. We accounted for these arrangements as equity method investments in our Industrial Gases – Asia segment through 30 April 2019.
On 1 May 2019, we acquired our partner's 50% interest in WuXi in exchange for our 50% interest in High-Tech Gases. Subsequent to the acquisition date, we own 100% of WuXi and no longer have an equity interest in High-Tech Gases. The results and financial position of this business have been consolidated within our Industrial Gases – Asia segment as of the acquisition date.
Refer to Note 7, Acquisitions, to the consolidated financial statements for additional information.
U.S. Tax Cuts and Jobs Act
For the year ended 30 September 2018, equity affiliates' income includes an expense of $28.5 for our proportionate share of the impact of the U.S. Tax Cuts and Jobs Act primarily recorded during the first quarter of fiscal year 2018. This expense is included in the fiscal year 2018 net income on a 100% basis in the table above. Refer to Note 23, Income Taxes, for additional information.
Equity Affiliate Impairment Charge
During the third quarter of fiscal year 2017, we recorded an other-than-temporary impairment charge of $79.5 on our investment in Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (AHG), a 25%-owned equity affiliate in our Industrial Gases – EMEA segment. The impairment charge is reflected on our consolidated income statements within “Equity affiliates' income." This charge was not deductible for tax purposes and has been excluded from segment results.
The decline in value resulted 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 drove our updated valuation of AHG included 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.
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 26% of the joint venture and guarantees the repayment of its share of an equity bridge loan. ACWA also guarantees their share of the loan. We determined that the joint venture is a variable interest entity, for which we are not the primary beneficiary.
As of 30 September 2018, other noncurrent liabilities included $94.4 for our obligation to make future equity contributions in 2020 based on our proportionate share of the advances received by the joint venture under the loan. During 2019, this balance was reclassified from other noncurrent liabilities to payables and accrued liabilities on our consolidated balance sheets as the obligation is required to be funded within the next twelve months. This noncash transaction has been excluded from the consolidated statement of cash flows for the year ended 30 September 2019.
10**.** PLANT AND EQUIPMENT, NET
The major classes of plant and equipment are as follows:
| 30 September | Useful Life in years | 2019 | 2018 | |||||||||
| Land | $281.5 | $269.4 | ||||||||||
| Buildings | 30 | 946.8 | 988.6 | |||||||||
| Production facilities(A) | 10 | to | 20 | 15,602.1 | 15,082.8 | |||||||
| Distribution and other machinery and equipment(B) | 5 | to | 25 | 4,491.9 | 4,400.9 | |||||||
| Construction in progress | 1,011.4 | 748.5 | ||||||||||
| Plant and equipment, at cost | 22,333.7 | 21,490.2 | ||||||||||
| Less: Accumulated depreciation | 11,996.1 | 11,566.5 | ||||||||||
| Plant and equipment, net | $10,337.6 | $9,923.7 |
| (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 $1,049.7, $940.7, and $843.2 in fiscal years 2019, 2018, and 2017, respectively.
11**.** GOODWILL
Changes to the carrying amount of consolidated goodwill by segment are as follows:
| Industrial Gases– Americas | Industrial Gases– EMEA | Industrial Gases– Asia | Industrial Gases– Global | Corporate and other | Total | |||||||||||||
| Goodwill, net at 30 September 2017 | $163.7 | $402.4 | $135.2 | $20.2 | $— | $721.5 | ||||||||||||
| Acquisitions | — | 29.5 | 38.1 | — | 10.4 | 78.0 | ||||||||||||
| Currency translation and other | (1.6 | ) | (7.5 | ) | (1.4 | ) | (.1 | ) | — | (10.6 | ) | |||||||
| Goodwill, net at 30 September 2018 | $162.1 | $424.4 | $171.9 | $20.1 | $10.4 | $788.9 | ||||||||||||
| Acquisitions | — | 38.5 | 10.1 | — | — | 48.6 | ||||||||||||
| Currency translation and other | (5.8 | ) | (30.6 | ) | (3.5 | ) | (.5 | ) | — | (40.4 | ) | |||||||
| Goodwill, net at 30 September 2019 | $156.3 | $432.3 | $178.5 | $19.6 | $10.4 | $797.1 |
| 30 September | 2019 | 2018 | 2017 | ||||||
| Goodwill, gross | $1,162.2 | $1,194.7 | $1,138.7 | ||||||
| Accumulated impairment losses(A) | (365.1 | ) | (405.8 | ) | (417.2 | ) | |||
| Goodwill, net | $797.1 | $788.9 | $721.5 |
| (A) | Accumulated impairment losses include the impacts of currency translation. These losses are attributable to our Latin America reporting unit (LASA) within the Industrial Gases – Americas segment. |
We review goodwill for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying value of goodwill might not be recoverable. The impairment test for goodwill involves calculating the fair value of each reporting unit and comparing that value to the carrying value. If the fair value of the reporting unit is less than its carrying value, the difference is recorded as a goodwill impairment charge, not to exceed the total amount of goodwill allocated to that reporting unit. During the fourth quarter of fiscal year 2019, we conducted our annual goodwill impairment test and determined that the fair value of all our reporting units exceeded their carrying value.
During the third quarter of fiscal year 2017, we conducted an interim impairment test of the goodwill associated with our Latin America Reporting unit (LASA) within the Industrial Gases – Americas segment. This was driven by Management's decision to lower long-term growth projections in response to declining volumes and weak economic conditions in Latin America during fiscal year 2017. We determined that the fair value of LASA was less than its carrying value and recorded a noncash impairment charge of $145.3, which is 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.
12**.** INTANGIBLE ASSETS
The table below summarizes the major classes of our intangible assets:
| 30 September 2019 | 30 September 2018 | |||||||||||||||||||||||
| Gross | Accumulated Amortization/ Impairment | Net | Gross | Accumulated Amortization/ Impairment | Net | |||||||||||||||||||
| Customer relationships | $487.9 | ($179.8 | ) | $308.1 | $491.9 | ($165.5 | ) | $326.4 | ||||||||||||||||
| Patents and technology | 39.0 | (13.3 | ) | 25.7 | 34.0 | (11.9 | ) | 22.1 | ||||||||||||||||
| Other | 75.0 | (33.4 | ) | 41.6 | 72.6 | (33.8 | ) | 38.8 | ||||||||||||||||
| Total finite-lived intangibles | 601.9 | (226.5 | ) | 375.4 | 598.5 | (211.2 | ) | 387.3 | ||||||||||||||||
| Trade names and trademarks, indefinite-lived | 56.2 | (12.1 | ) | 44.1 | 64.8 | (13.6 | ) | 51.2 | ||||||||||||||||
| Total Intangible Assets | $658.1 | ($238.6 | ) | $419.5 | $663.3 | ($224.8 | ) | $438.5 |
The decrease in net intangible assets in fiscal year 2019 was primarily attributable to amortization and the impact of currency translation, partially offset by intangible assets acquired through an exchange of equity affiliate investments. For additional information on the exchange, refer to Note 7, Acquisitions.
Amortization expense for intangible assets was $33.1, $30.0, and $22.6 in fiscal years 2019, 2018, and 2017, respectively. Refer to Note 1, Major Accounting Policies, for the amortization periods for each major class of intangible assets. The table below details projected annual amortization expense for intangible assets as of 30 September 2019:
| 2020 | $35.3 | ||
| 2021 | 33.5 | ||
| 2022 | 30.8 | ||
| 2023 | 29.6 | ||
| 2024 | 28.6 | ||
| Thereafter | 217.6 | ||
| Total | $375.4 |
Indefinite-lived intangible assets are subject to impairment testing at least annually or more frequently if events or changes in circumstances indicate that potential impairment exists. The impairment test for indefinite-lived intangible assets involves calculating the fair value of the indefinite-lived intangible assets and comparing the fair value to their carrying value. If the fair value is less than the carrying value, the difference is recorded as an impairment loss. During the fourth quarter of fiscal year 2019, we conducted our annual impairment test of indefinite-lived intangible assets and determined that the fair value of all our intangible assets exceeded their carrying value.
During the third quarter of fiscal year 2017, we conducted an interim impairment test of the indefinite-lived intangible assets associated with LASA and recorded a noncash impairment charge of $16.8 to write down the carrying value of the trade names and trademarks to their fair value. The impairment charge has been excluded from the Industrial Gases – Americas segment's operating income and is reflected on our consolidated income statements within “Goodwill and intangible asset impairment charge." As discussed in Note 11, Goodwill, the reduction in value resulted from lowered long-term growth projections. We estimated the fair value of the indefinite-lived intangibles associated with LASA utilizing the royalty savings method, a form of the income approach.
In addition, we tested the recoverability of LASA long-lived assets, including finite-lived intangible assets subject to amortization, in fiscal year 2017 and concluded that they were recoverable from expected future undiscounted cash flows.
13**.** LEASES
Lessee Accounting
Capital leases, primarily for the right to use machinery and equipment, are included with owned plant and equipment within "Plant and Equipment, net" on the consolidated balance sheets in the amount of $23.1 and $21.6 at 30 September 2019 and 2018, respectively. Related amounts of accumulated depreciation are $7.2 and $6.1, 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 $87.0, $82.7, and $65.8 in fiscal years 2019, 2018, and 2017, respectively.
At 30 September 2019, minimum payments due under leases are as follows:
| Capital Leases | Operating Leases | |||||||
| 2020 | $1.7 | $75.1 | ||||||
| 2021 | 2.5 | 62.6 | ||||||
| 2022 | 1.3 | 44.4 | ||||||
| 2023 | 1.1 | 35.9 | ||||||
| 2024 | 1.1 | 28.6 | ||||||
| Thereafter | 12.8 | 171.4 | ||||||
| Total | $20.5 | $418.0 |
The present value of the above future capital lease payments totaled $10.1. Refer to Note 16, Debt.
Lessor Accounting
Certain contracts associated with facilities that are built to provide product to a specific customer have been 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 under a sale of gas agreement. 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. As discussed in Note 2, New Accounting Guidance, upon adoption of the new lease guidance we will elect the package of practical expedients permitted under the transition guidance to carry forward these lease determinations as of 30 September 2019.
Operating Leases
Assets subject to operating lease treatment in which we are the lessor are recorded within "Plant and equipment, net" on the consolidated balance sheets. As of 30 September 2019, plant and equipment, at cost, was $2.9 billion, and accumulated depreciation was $.5 billion. Assets subject to operating leases include those of the Lu’An joint venture, which is discussed in Note 7, Acquisitions.
At 30 September 2019, minimum lease payments expected to be collected are as follows:
| 2020 | $321.7 | ||
| 2021 | 287.3 | ||
| 2022 | 283.1 | ||
| 2023 | 278.4 | ||
| 2024 | 275.5 | ||
| Thereafter | 3,042.5 | ||
| Total | $4,488.5 |
Capital Leases
Lease receivables, net, are primarily included within "Noncurrent capital lease receivables" on our consolidated balance sheets, with the remaining balance in "Other receivables and current assets." Allowances for credit losses associated with capital lease receivables are recorded using the specific identification method. As of 30 September 2019 and 2018, the credit quality of capital lease receivables did not require a material allowance for credit losses.
The components of lease receivables were as follows:
| 30 September | 2019 | 2018 | ||||||
| Gross minimum lease payments receivable | $1,453.2 | $1,673.7 | ||||||
| Unearned interest income | (472.3 | ) | (568.3 | ) | ||||
| Lease Receivables, net | $980.9 | $1,105.4 |
Lease payments collected in fiscal years 2019, 2018, and 2017 were $171.6, $182.7, and $183.6, respectively. These payments reduced the lease receivable balance by $94.6, $97.4, and $92.2 in fiscal years 2019, 2018, and 2017, respectively.
At 30 September 2019, minimum lease payments expected to be collected are as follows:
| 2020 | $162.5 | ||
| 2021 | 156.9 | ||
| 2022 | 145.7 | ||
| 2023 | 139.4 | ||
| 2024 | 133.2 | ||
| Thereafter | 715.5 | ||
| Total | $1,453.2 |
14**.** FINANCIAL INSTRUMENTS
Currency Price Risk Management
Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency-denominated transactions and net investments in foreign operations. It is our policy to seek to minimize our cash flow volatility from changes in currency exchange rates. This is accomplished by identifying and evaluating the risk that our cash flows will change in value due to changes in exchange rates and by executing strategies necessary to manage such exposures. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.
Forward Exchange Contracts
We enter into forward exchange contracts to reduce the cash flow exposure to foreign currency fluctuations associated with highly anticipated cash flows and certain firm commitments, such as the purchase of plant and equipment. We also enter into forward exchange contracts to hedge the cash flow exposure on intercompany loans. This portfolio of forward exchange contracts consists primarily of Euros and U.S. Dollars. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 30 September 2019 is 2.2 years.
Forward exchange contracts are also used to hedge the value of investments in certain foreign subsidiaries and affiliates by creating a liability in a currency in which we have a net equity position. The primary currency pair in this portfolio of forward exchange contracts is Euros and U.S. Dollars.
We also utilize forward exchange contracts that are not designated as hedges. These contracts are used to economically hedge foreign currency-denominated monetary assets and liabilities, primarily working capital. The primary objective of these forward exchange contracts is to protect the value of foreign currency-denominated monetary assets and liabilities from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement. This portfolio of forward exchange contracts consists of many different foreign currency pairs, with a profile that changes from time to time depending on business activity and sourcing decisions.
The table below summarizes our outstanding currency price risk management instruments:
| 30 September 2019 | 30 September 2018 | |||||||||||
| US$ Notional | Years Average Maturity | US$ Notional | Years Average Maturity | |||||||||
| Forward Exchange Contracts | ||||||||||||
| Cash flow hedges | $2,418.2 | 0.5 | $2,489.1 | 0.4 | ||||||||
| Net investment hedges | 830.8 | 0.9 | 457.5 | 1.7 | ||||||||
| Not designated | 1,053.5 | 0.6 | 1,736.1 | 0.8 | ||||||||
| Total Forward Exchange Contracts | $4,302.5 | 0.6 | $4,682.7 | 0.7 |
The notional value of forward exchange contracts not designated decreased from the prior year as a result of maturities.
We also use foreign currency-denominated debt to hedge the foreign currency exposures of our net investment in certain foreign subsidiaries. The designated foreign currency-denominated debt and related accrued interest was €951.3 million ($1,036.9) at 30 September 2019 and €908.8 million ($1,054.6) at 30 September 2018. The designated foreign currency-denominated debt is presented within "Long-term debt" on the consolidated balance sheets.
Debt Portfolio Management
It is our policy to identify on a continuing basis the need for debt capital and evaluate the financial risks inherent in funding the Company with debt capital. Reflecting the result of this ongoing review, our debt portfolio and hedging program are managed with the intent to (1) reduce funding risk with respect to borrowings made by us to preserve our access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) manage the aggregate interest rate risk and the debt portfolio in accordance with certain debt management parameters.
Interest Rate Management Contracts
We enter into interest rate swaps to change the fixed/variable interest rate mix of our debt portfolio in order to maintain the percentage of fixed- and variable-rate debt within the parameters set by management. In accordance with these parameters, the agreements are used to manage interest rate risks and costs inherent in our debt portfolio. Our interest rate management portfolio generally consists of fixed-to-floating interest rate swaps (which are designated as fair value hedges), pre-issuance interest rate swaps and treasury locks (which hedge the interest rate risk associated with anticipated fixed-rate debt issuances and are designated as cash flow hedges), and floating-to-fixed interest rate swaps (which are designated as cash flow hedges). As of 30 September 2019, the outstanding interest rate swaps were denominated in U.S. Dollars. The notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. When interest rate swaps are used to hedge variable-rate debt, the indices of the swaps and the debt to which they are designated are the same. It is our policy not to enter into any interest rate management contracts which lever a move in interest rates on a greater than one-to-one basis.
Cross Currency Interest Rate Swap Contracts
We enter into cross currency interest rate swap contracts when our risk management function deems necessary. These contracts may entail both the exchange of fixed- and floating-rate interest payments periodically over the life of the agreement and the exchange of one currency for another currency at inception and at a specified future date. The contracts are used to hedge either certain net investments in foreign operations or non-functional currency cash flows related to intercompany loans. The current cross currency interest rate swap portfolio consists of fixed-to-fixed swaps primarily between U.S. Dollars and Chinese Renminbi, U.S. Dollars and Indian Rupee, and U.S. Dollars and Chilean Pesos.
The following table summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:
| 30 September 2019 | 30 September 2018 | |||||||||||||||||||||||
| US$ Notional | Average Pay % | Average Receive % | Years Average Maturity | US$ Notional | Average Pay % | Average Receive % | Years Average Maturity | |||||||||||||||||
| Interest rate swaps (fair value hedge) | $200.0 | LIBOR | 2.76 | % | 2.1 | $600.0 | LIBOR | 2.60 | % | 1.6 | ||||||||||||||
| Cross currency interest rate swaps (net investment hedge) | $216.8 | 4.80 | % | 3.31 | % | 3.5 | $201.7 | 4.42 | % | 2.97 | % | 3.1 | ||||||||||||
| Cross currency interest rate swaps (cash flow hedge) | $1,129.3 | 4.92 | % | 3.04 | % | 2.3 | $1,052.7 | 4.99 | % | 2.89 | % | 2.3 | ||||||||||||
| Cross currency interest rate swaps (not designated) | $6.1 | 2.55 | % | 3.72 | % | 4.5 | $80.2 | 4.88 | % | 3.43 | % | 3.9 |
The table below summarizes the fair value and balance sheet location of our outstanding derivatives:
| Balance Sheet | 30 September | Balance Sheet | 30 September | |||||||||||||||||
| Location | 2019 | 2018 | Location | 2019 | 2018 | |||||||||||||||
| Derivatives Designated as Hedging Instruments: | ||||||||||||||||||||
| Forward exchange contracts | Other receivables | $79.0 | $24.9 | Accrued liabilities | $53.8 | $37.0 | ||||||||||||||
| Interest rate management contracts | Other receivables | 24.8 | 24.3 | Accrued liabilities | 1.1 | 2.3 | ||||||||||||||
| Forward exchange contracts | Other noncurrent assets | 11.9 | 19.8 | Other noncurrent liabilities | .7 | 4.6 | ||||||||||||||
| Interest rate management contracts | Other noncurrent assets | 60.9 | 48.7 | Other noncurrent liabilities | .7 | 11.6 | ||||||||||||||
| Total Derivatives Designated as Hedging Instruments | $176.6 | $117.7 | $56.3 | $55.5 | ||||||||||||||||
| Derivatives Not Designated as Hedging Instruments: | ||||||||||||||||||||
| Forward exchange contracts | Other receivables | 38.7 | 7.9 | Accrued liabilities | $36.3 | $14.9 | ||||||||||||||
| Interest rate management contracts | Other receivables | — | 4.0 | Accrued liabilities | — | — | ||||||||||||||
| Forward exchange contracts | Other noncurrent assets | 8.4 | 16.2 | Other noncurrent liabilities | 19.8 | 23.7 | ||||||||||||||
| Interest rate management contracts | Other noncurrent assets | .5 | .3 | Other noncurrent liabilities | — | — | ||||||||||||||
| Total Derivatives Not Designated as Hedging Instruments | $47.6 | $28.4 | $56.1 | $38.6 | ||||||||||||||||
| Total Derivatives | $224.2 | $146.1 | $112.4 | $94.1 |
Refer to Note 15, 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 | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
| Cash Flow Hedges, net of tax: | ||||||||||||||||||||||||||||||||
| Net gain (loss) recognized in OCI (effective portion) | ($35.7 | ) | $2.4 | $— | $— | ($8.4 | ) | $43.5 | ($44.1 | ) | $45.9 | |||||||||||||||||||||
| Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion) | .6 | 7.1 | — | — | — | — | .6 | 7.1 | ||||||||||||||||||||||||
| Net (gain) loss reclassified from OCI to other income (expense), net (effective portion) | 21.8 | (7.8 | ) | — | — | (24.7 | ) | (33.8 | ) | (2.9 | ) | (41.6 | ) | |||||||||||||||||||
| Net (gain) loss reclassified from OCI to interest expense (effective portion) | 12.1 | 1.2 | — | — | 2.6 | 3.9 | 14.7 | 5.1 | ||||||||||||||||||||||||
| Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion) | — | (.5 | ) | — | — | (.1 | ) | (.5 | ) | (.1 | ) | (1.0 | ) | |||||||||||||||||||
| Fair Value Hedges: | ||||||||||||||||||||||||||||||||
| Net gain (loss) recognized in interest expense(B) | $— | $— | $— | $— | $4.3 | ($10.1 | ) | $4.3 | ($10.1 | ) | ||||||||||||||||||||||
| Net Investment Hedges, net of tax: | ||||||||||||||||||||||||||||||||
| Net gain (loss) recognized in OCI | $39.1 | ($.6 | ) | $49.6 | $10.2 | $9.8 | $11.0 | $98.5 | $20.6 | |||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments: | ||||||||||||||||||||||||||||||||
| Net gain (loss) recognized in other income (expense), net(C) | ($1.3 | ) | ($4.0 | ) | $— | $— | $2.0 | ($.8 | ) | $.7 | ($4.8 | ) |
| (A) | Includes the impact on other comprehensive income (OCI) and earnings primarily related to interest rate and cross currency interest rate swaps. |
| (B) | The impact of fair value hedges was largely offset by recognized gains and losses resulting from the impact of changes in related interest rates on outstanding debt. |
| (C) | The impact of the non-designated hedges was largely offset by recognized gains and losses resulting from the impact of changes in exchange rates on assets and liabilities denominated in non-functional currencies. |
The amount of cash unrealized gains and losses related to cash flow hedges as of 30 September 2019 that are expected to be reclassified to earnings in the next twelve months is not material.
The cash flows related to all derivative contracts are reported in the operating activities section of the consolidated statements of cash flows.
Credit Risk-Related Contingent Features
Certain derivative instruments are executed under agreements that require us to maintain a minimum credit rating with both Standard & Poor’s and Moody’s. If our credit rating falls below this threshold, the counterparty to the derivative instruments has the right to request full collateralization on the derivatives’ net liability position. The net liability position of derivatives with credit risk-related contingent features was $30.1 as of 30 September 2019 and $33.4 as of 30 September 2018, respectively. Because our current credit rating is above the various pre-established thresholds, no collateral has been posted on these liability positions.
Counterparty Credit Risk Management
We execute financial derivative transactions with counterparties that are highly rated financial institutions, all of which are investment grade at this time. Some of our underlying derivative agreements give us the right to require the institution to post collateral if its credit rating falls below the pre-established thresholds with Standard & Poor’s or Moody’s. The collateral that the counterparties would be required to post was $157.1 as of 30 September 2019 and $97.6 as of 30 September 2018, respectively. No financial institution is required to post collateral at this time, as all have credit ratings at or above threshold.
15**.** FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, or the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
| Level 1— | Quoted prices (unadjusted) in active markets for identical assets or liabilities. | |
| Level 2— | Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability. | |
| Level 3— | Inputs that are unobservable for the asset or liability based on our own assumptions (about the assumptions market participants would use in pricing the asset or liability). |
The methods and assumptions used to measure the fair value of financial instruments are as follows:
Short-term Investments
Short-term investments primarily include time deposits with original maturities greater than three months and less than one year. We estimated the fair value of our short-term investments, which approximates carrying value as of the balance sheet date, using Level 2 inputs within the fair value hierarchy. Level 2 measurements were based on current interest rates for similar investments with comparable credit risk and time to maturity.
Derivatives
The fair value of our interest rate management contracts and forward exchange contracts are quantified using the income approach and are based on estimates using standard pricing models. These models consider the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. The computation of the fair values of these instruments is generally performed by the Company. These standard pricing models utilize inputs that are derived from or corroborated by observable market data such as interest rate yield curves as well as currency spot and forward rates; therefore, the fair value of our derivatives is classified as a Level 2 measurement. On an ongoing basis, we randomly test a subset of our valuations against valuations received from the transaction’s counterparty to validate the accuracy of our standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions.
Refer to Note 14, Financial Instruments, for a description of derivative instruments, including details related to the balance sheet line classifications.
Long-term Debt, Including Related Party
The fair value of our debt is based on estimates using standard pricing models that consider the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. These standard valuation models utilize observable market data such as interest rate yield curves and currency spot rates; therefore, the fair value of our debt is classified as a Level 2 measurement. We generally perform the computation of the fair value of these instruments.
The carrying values and fair values of financial instruments were as follows:
| 30 September 2019 | 30 September 2018 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
| Assets | ||||||||||||||||
| Derivatives | ||||||||||||||||
| Forward exchange contracts | $138.0 | $138.0 | $68.8 | $68.8 | ||||||||||||
| Interest rate management contracts | 86.2 | 86.2 | 77.3 | 77.3 | ||||||||||||
| Liabilities | ||||||||||||||||
| Derivatives | ||||||||||||||||
| Forward exchange contracts | $110.6 | $110.6 | $80.2 | $80.2 | ||||||||||||
| Interest rate management contracts | 1.8 | 1.8 | 13.9 | 13.9 | ||||||||||||
| Long-term debt, including current portion and related party | 3,267.8 | 3,350.9 | 3,758.3 | 3,788.2 |
The carrying amounts reported on the consolidated balance sheets for cash and cash items, short-term investments, trade receivables, payables and accrued liabilities, accrued income taxes, and short-term borrowings approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the above table.
The following table summarizes assets and liabilities on the consolidated balance sheets that are measured at fair value on a recurring basis:
| 30 September 2019 | 30 September 2018 | |||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Assets at Fair Value | ||||||||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||||||||
| Forward exchange contracts | $138.0 | $— | $138.0 | $— | $68.8 | $— | $68.8 | $— | ||||||||||||||||||||||||
| Interest rate management contracts | 86.2 | — | 86.2 | — | 77.3 | — | 77.3 | — | ||||||||||||||||||||||||
| Total Assets at Fair Value | $224.2 | $— | $224.2 | $— | $146.1 | $— | $146.1 | $— | ||||||||||||||||||||||||
| Liabilities at Fair Value | ||||||||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||||||||
| Forward exchange contracts | $110.6 | $— | $110.6 | $— | $80.2 | $— | $80.2 | $— | ||||||||||||||||||||||||
| Interest rate management contracts | 1.8 | — | 1.8 | — | 13.9 | — | 13.9 | — | ||||||||||||||||||||||||
| Total Liabilities at Fair Value | $112.4 | $— | $112.4 | $— | $94.1 | $— | $94.1 | $— |
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:
| 30 June 2017 | 2017 Loss | |||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Investment in Equity Affiliate(A) | $68.5 | $— | $— | $68.5 | $79.5 |
| (A) | In fiscal year 2017, 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 events during fiscal years 2018 or 2019 requiring reassessment of our investment. For additional information, see Note 9, 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 11, Goodwill, and Note 12, 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.
16**.** DEBT
The tables below summarize our outstanding debt at 30 September 2019 and 2018:
Total Debt
| 30 September | 2019 | 2018 | ||||||
| Short-term borrowings | $58.2 | $54.3 | ||||||
| Current portion of long-term debt(A)(B) | 40.4 | 406.6 | ||||||
| Long-term debt | 2,907.3 | 2,967.4 | ||||||
| Long-term debt – related party(B) | 320.1 | 384.3 | ||||||
| Total Debt | $3,326.0 | $3,812.6 |
| (A) | Fiscal year 2019 includes the current portion of long-term debt owed to a related party of $37.8. |
| (B) | Refer to Note 7, Acquisitions, for additional information regarding related party debt. |
Short-term Borrowings
Short-term borrowings consisted of bank obligations of $58.2 and $54.3 at 30 September 2019 and 2018, respectively. The weighted average interest rate of short-term borrowings outstanding at 30 September 2019 and 2018 was 3.7% and 5.0%, respectively.
Long-term Debt
| 30 September | Fiscal Year Maturities | 2019 | 2018 | |||||||
| 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 4.375% | 2019 | — | 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 1.44% | 2035 to 2050 | 631.9 | 631.9 | |||||||
| Other .25%(A) | — | .9 | ||||||||
| Payable in Other Currencies | ||||||||||
| Eurobonds 2.0% | 2020 | 327.0 | 348.1 | |||||||
| Eurobonds .375% | 2021 | 381.5 | 406.2 | |||||||
| Eurobonds 1.0% | 2025 | 327.0 | 348.1 | |||||||
| Other 2.9% | 2020 to 2023 | 3.8 | 8.0 | |||||||
| Related Party(B) | ||||||||||
| Chinese Renminbi 5.5% | 2020 to 2026 | 357.9 | 384.3 | |||||||
| Capital Lease Obligations | ||||||||||
| Foreign 10.3% | 2020 to 2036 | 10.1 | 10.5 | |||||||
| Total Principal Amount | 3,274.8 | 3,773.6 | ||||||||
| Less: Unamortized discount and debt issuance costs | (12.2 | ) | (15.3 | ) | ||||||
| Less: Fair value hedge accounting adjustments(A) | 5.2 | — | ||||||||
| Total Long-term Debt | 3,267.8 | 3,758.3 | ||||||||
| Less: Current portion of long-term debt | (40.4 | ) | (406.6 | ) | ||||||
| Less: Long-term debt – related party | (320.1 | ) | (384.3 | ) | ||||||
| Long-term Debt | $2,907.3 | $2,967.4 |
| (A) | The Company has entered into LIBOR-based interest rate swap arrangements with various counterparty financial institutions on certain of our outstanding fixed-rate senior notes, which have maturity dates between 2019 and 2022. These interest rate swaps have been designated as fair value hedges of the notes. Refer to Note 14, Financial Instruments, for additional information. The fiscal year 2018 fair value hedge accounting adjustment is reflected as "Other" senior notes in the table above. |
| (B) | Refer to Note 7, Acquisitions, for additional information regarding related party debt. |
Maturities of long-term debt, including related party, in each of the next five years and beyond are as follows:
| 2020 | $367.4 | ||
| 2021 | 440.2 | ||
| 2022 | 439.3 | ||
| 2023 | 453.7 | ||
| 2024 | 453.4 | ||
| Thereafter | 1,120.8 | ||
| Total | $3,274.8 |
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 2019, we are in compliance with all the financial and other covenants under our debt agreements.
As of 30 September 2019, we classified our 2.0% Eurobond of €300.0 million ($327.0) maturing in August 2020 as long-term debt because we have the ability to refinance the debt under the 2017 Credit Agreement. Our current intent is to refinance this debt via the U.S. or European public or private placement markets.
Additional commitments totaling $2.3 are maintained by our foreign subsidiaries, all of which were borrowed and outstanding at 30 September 2019.
Cash paid for interest, net of amounts capitalized, was $155.9, $123.1, and $125.9 in fiscal years 2019, 2018, and 2017, respectively.
2017 Credit Agreement
On 31 March 2017, we entered into a five-year $2,500 revolving credit agreement maturing 31 March 2022 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. On 28 September 2018, we amended the 2017 Credit Agreement to reduce the maximum borrowing capacity to $2,300. No other terms were impacted by the amendment.
The 2017 Credit Agreement provides a source of liquidity for the Company and supports our commercial paper program. The Company’s only financial covenant under the 2017 Credit Agreement 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 2019.
17**.** 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, after which defined contribution plans were offered to new employees. The principal defined contribution plan is the Retirement Savings Plan, in which a substantial portion of the U.S. employees participate. A similar plan is offered to U.K. employees. We also provide other postretirement benefits consisting primarily of healthcare benefits to U.S. retirees who meet age and service requirements.
Defined Benefit Pension Plans
Pension benefits earned are generally based on years of service and compensation during active employment. The cost of our defined benefit pension plans in fiscal years 2019, 2018, and 2017 included the following components:
| 2019 | 2018 | 2017 | ||||||||||||||||||
| U.S. | International | U.S. | International | U.S. | International | |||||||||||||||
| Service cost | $21.4 | $19.3 | $25.5 | $25.5 | $29.0 | $25.9 | ||||||||||||||
| Interest cost | 113.4 | 35.8 | 107.2 | 37.3 | 107.5 | 32.2 | ||||||||||||||
| Expected return on plan assets | (172.5 | ) | (75.1 | ) | (201.6 | ) | (81.7 | ) | (207.7 | ) | (75.2 | ) | ||||||||
| Amortization | ||||||||||||||||||||
| Net actuarial loss | 65.3 | 10.9 | 87.4 | 40.2 | 88.7 | 54.7 | ||||||||||||||
| Prior service cost (credit) | 1.1 | — | 1.6 | — | 2.3 | (.1 | ) | |||||||||||||
| Settlements | 6.2 | .2 | 45.0 | 3.5 | 10.5 | 1.7 | ||||||||||||||
| Curtailments | — | — | — | — | 4.3 | (1.3 | ) | |||||||||||||
| Special termination benefits | .7 | .1 | .4 | — | 2.8 | .4 | ||||||||||||||
| Other | — | .8 | — | 1.5 | — | 1.1 | ||||||||||||||
| Net Periodic Benefit Cost/(Benefit) – Total | $35.6 | ($8.0 | ) | $65.5 | $26.3 | $37.4 | $39.4 | |||||||||||||
| Less: Discontinued Operations | — | — | — | — | (.7 | ) | (4.1 | ) | ||||||||||||
| Net Periodic Benefit Cost/(Benefit) – Continuing Operations | $35.6 | ($8.0 | ) | $65.5 | $26.3 | $36.7 | $35.3 |
Our service costs are primarily included within "Cost of sales" and "Selling and administrative" on our consolidated income statements. The amount of service costs capitalized in fiscal years 2019 and 2018 and the amount of net periodic benefit costs capitalized in fiscal year 2017 were not material. The non-service related costs, including pension settlement losses, are presented outside operating income within "Other non-operating income (expense), net."
During the fourth quarter of fiscal year 2018, we recognized a pension settlement loss of $43.7 primarily in connection with the transfer of certain pension assets and payment obligations for our U.S. salaried and hourly plans to an insurer through the purchase of an irrevocable, nonparticipating group annuity contract. The transaction does not change the amount of the monthly pension benefits received by affected retirees.
Certain of our pension plans provide for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after their retirement date. A participant’s vested benefit is considered settled upon cash payment of the lump sum. We recognize pension settlement losses when cash payments exceed the sum of the service and interest cost components of net periodic benefit cost of the plan for the fiscal year. We recognized pension settlement losses of $6.2, $5.2 and $10.5 in fiscal years 2019, 2018 and 2017, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss, primarily associated with the U.S. supplementary pension plan.
We calculate net periodic benefit cost for a given fiscal year based on assumptions developed at the end of the previous fiscal year. The following table sets forth the weighted average assumptions used in the calculation of net periodic benefit cost:
| 2019 | 2018 | 2017 | ||||||||||||
| U.S. | International | U.S. | International | U.S. | International | |||||||||
| Discount rate – Service cost | 4.3 | % | 2.5 | % | 3.9 | % | 2.6 | % | 3.6 | % | 2.1 | % | ||
| Discount rate – Interest cost | 4.0 | % | 2.2 | % | 3.3 | % | 2.2 | % | 3.0 | % | 1.8 | % | ||
| Expected return on plan assets | 7.0 | % | 5.3 | % | 7.5 | % | 5.8 | % | 8.0 | % | 6.1 | % | ||
| Rate of compensation increase | 3.5 | % | 3.5 | % | 3.5 | % | 3.6 | % | 3.5 | % | 3.5 | % |
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:
| 2019 | 2018 | |||||||||||
| U.S. | International | U.S. | International | |||||||||
| Discount rate | 3.2 | % | 1.5 | % | 4.3 | % | 2.5 | % | ||||
| Rate of compensation increase | 3.5 | % | 3.3 | % | 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:
| 2019 | 2018 | |||||||||||||||
| U.S. | International | U.S. | International | |||||||||||||
| Change in Projected Benefit Obligation | ||||||||||||||||
| Obligation at beginning of year | $2,922.8 | $1,660.5 | $3,357.7 | $1,749.5 | ||||||||||||
| Service cost | 21.4 | 19.3 | 25.5 | 25.5 | ||||||||||||
| Interest cost | 113.4 | 35.8 | 107.2 | 37.3 | ||||||||||||
| Amendments | 1.1 | 4.7 | .1 | .7 | ||||||||||||
| Actuarial loss (gain) | 380.3 | 300.2 | (217.8 | ) | (33.9 | ) | ||||||||||
| Settlements | (12.2 | ) | (1.6 | ) | (193.0 | ) | (24.6 | ) | ||||||||
| Special termination benefits | .7 | .1 | .4 | — | ||||||||||||
| Participant contributions | — | 1.3 | — | 1.4 | ||||||||||||
| Benefits paid | (146.2 | ) | (47.7 | ) | (157.3 | ) | (51.3 | ) | ||||||||
| Currency translation and other | .3 | (108.6 | ) | — | (44.1 | ) | ||||||||||
| Obligation at End of Year | $3,281.6 | $1,864.0 | $2,922.8 | $1,660.5 |
| 2019 | 2018 | |||||||||||||||
| U.S. | International | U.S. | International | |||||||||||||
| Change in Plan Assets | ||||||||||||||||
| Fair value at beginning of year | $2,684.9 | $1,588.2 | $2,869.2 | $1,540.0 | ||||||||||||
| Actual return on plan assets | 289.9 | 208.0 | 150.2 | 115.5 | ||||||||||||
| Company contributions | 16.0 | 24.2 | 14.6 | 53.7 | ||||||||||||
| Participant contributions | — | 1.3 | — | 1.4 | ||||||||||||
| Benefits paid | (146.2 | ) | (47.7 | ) | (157.3 | ) | (51.3 | ) | ||||||||
| Settlements | (12.2 | ) | (1.6 | ) | (191.8 | ) | (24.6 | ) | ||||||||
| Currency translation and other | — | (100.0 | ) | — | (46.5 | ) | ||||||||||
| Fair Value at End of Year | $2,832.4 | $1,672.4 | $2,684.9 | $1,588.2 | ||||||||||||
| Funded Status at End of Year | ($449.2 | ) | ($191.6 | ) | ($237.9 | ) | ($72.3 | ) |
| 2019 | 2018 | |||||||||||||||
| U.S. | International | U.S. | International | |||||||||||||
| Amounts Recognized | ||||||||||||||||
| Noncurrent assets | $17.3 | $11.4 | $28.2 | $103.5 | ||||||||||||
| Accrued liabilities | 18.3 | — | 23.5 | 1.2 | ||||||||||||
| Noncurrent liabilities | 448.2 | 203.0 | 242.6 | 174.6 | ||||||||||||
| Net Liability Recognized | $449.2 | $191.6 | $237.9 | $72.3 |
Fiscal year 2018 settlements in the table above primarily reflect the impact of the transfer of certain pension obligations and plan assets of our U.S. salaried and hourly plans to an insurer through the purchase of an irrevocable, nonparticipating group annuity contract in the fourth quarter of fiscal year 2018.
The changes in plan assets and benefit obligation that have been recognized in other comprehensive income on a pretax basis during fiscal years 2019 and 2018 consist of the following:
| 2019 | 2018 | |||||||||||||||
| U.S. | International | U.S. | International | |||||||||||||
| Net actuarial loss (gain) arising during the period | $262.9 | $161.5 | ($167.7 | ) | ($64.6 | ) | ||||||||||
| Amortization of net actuarial loss | (71.5 | ) | (11.1 | ) | (132.4 | ) | (43.7 | ) | ||||||||
| Prior service cost arising during the period | 1.1 | 4.7 | .1 | .7 | ||||||||||||
| Amortization of prior service cost | (1.1 | ) | — | (1.6 | ) | — | ||||||||||
| Total | $191.4 | $155.1 | ($301.6 | ) | ($107.6 | ) |
The net actuarial gain represents the actual changes in the estimated obligation and plan assets that have not yet been recognized in the consolidated income statements and are included in accumulated other comprehensive loss. Actuarial losses arising during fiscal year 2019 are primarily attributable to lower discount rates and partially offset by higher than expected return on plan assets. Accumulated actuarial gains and losses that exceed a corridor are amortized over the average remaining service period of U.S. participants, which was approximately 7 years as of 30 September 2019. For U.K. participants, accumulated actuarial gains and losses that exceed a corridor are amortized over the average remaining life expectancy, which was approximately 25 years as of 30 September 2019.
The components recognized in accumulated other comprehensive loss on a pretax basis at 30 September consisted of the following:
| 2019 | 2018 | |||||||||||||||
| U.S. | International | U.S. | International | |||||||||||||
| Net actuarial loss | $871.8 | $594.0 | $680.4 | $443.6 | ||||||||||||
| Prior service cost (credit) | 6.6 | 3.6 | 6.6 | (1.1 | ) | |||||||||||
| Net transition liability | — | .4 | — | .4 | ||||||||||||
| Total | $878.4 | $598.0 | $687.0 | $442.9 |
The amount of accumulated other comprehensive loss at 30 September 2019 that is expected to be recognized as a component of net periodic pension cost during fiscal year 2020, excluding amounts that may be recognized through settlement losses, is as follows:
| U.S. | International | |||||||
| Net actuarial loss | $84.2 | $19.2 | ||||||
| Prior service cost (credit) | 1.4 | — |
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 $4,931.6 and $4,376.4 as of 30 September 2019 and 2018, respectively.
The following table provides information on pension plans where the benefit liability exceeds the value of plan assets:
| 30 September 2019 | 30 September 2018 | ||||||||||||
| U.S. | International | U.S. | International | ||||||||||
| Pension Plans with PBO in Excess of Plan Assets: | |||||||||||||
| PBO | $3,069.2 | $521.1 | $2,733.6 | $452.6 | |||||||||
| Fair value of plan assets | 2,602.8 | 318.0 | 2,467.5 | 276.8 | |||||||||
| Pension Plans with ABO in Excess of Plan Assets: | |||||||||||||
| ABO | $2,941.2 | $413.3 | $2,608.6 | $357.9 | |||||||||
| Fair value of plan assets | 2,602.8 | 266.5 | 2,467.5 | 228.2 |
The tables above include several pension arrangements that are not funded because of jurisdictional practice. The ABO and PBO related to these plans as of 30 September 2019 were $92.6 and $99.2, 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. As of 30 September 2019, actual allocations vary from target due to market movements, primarily lower interest rates in the fourth quarter. Subsequent to 30 September 2019, rebalancing actions have been taken so that the U.S. salaried and hourly plan portfolio is within asset allocation target ranges. 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:
| 2019 Target Allocation | 2019 Actual Allocation | 2018 Actual Allocation | ||||||||||||||||||
| U.S. | International | U.S. | International | U.S. | International | |||||||||||||||
| Asset Category | ||||||||||||||||||||
| Equity securities | 43 | - | 58% | 39 | - | 49% | 38 | % | 42 | % | 41 | % | 46 | % | ||||||
| Debt securities | 34 | - | 49% | 51 | - | 61% | 56 | % | 57 | % | 50 | % | 53 | % | ||||||
| Real estate and other | — | - | 10% | —% | 6 | % | — | % | 8 | % | — | % | ||||||||
| Cash | —% | —% | — | % | 1 | % | 1 | % | 1 | % | ||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % |
In fiscal year 2019, the 7.0% expected return for U.S. plan assets was based on a weighted average of estimated long-term returns of major asset classes and the historical performance of plan assets. The estimated long-term return for equity, debt securities, and real estate is 7.8%, 4.7%, and 6.5%, respectively. In determining asset class returns, we take into account historical long-term returns and the value of active management, as well as other economic and market factors.
In fiscal year 2019, the 5.3% expected rate of return for international plan assets was based on a weighted average return for plans outside the U.S., which vary significantly in size, asset structure and expected returns. The expected asset return for the U.K. plan, which represents over 80% of the assets of our International plans, is 5.8% and was derived from expected equity and debt security returns of 7.4% and 2.7%, respectively.
The following table summarizes pension plan assets measured at fair value by asset class (see Note 15, Fair Value Measurements, for definition of the levels):
| 30 September 2019 | 30 September 2018 | ||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| U.S. Qualified Pension Plans | |||||||||||||||||||||||||
| Cash and cash equivalents | $13.7 | $13.7 | $— | $— | $13.8 | $13.8 | $— | $— | |||||||||||||||||
| Equity securities | 401.1 | 401.1 | — | — | 397.9 | 397.9 | — | — | |||||||||||||||||
| Equity mutual funds | 152.9 | 152.9 | — | — | 173.8 | 173.8 | — | — | |||||||||||||||||
| Equity pooled funds | 524.8 | — | 524.8 | — | 545.2 | — | 545.2 | — | |||||||||||||||||
| Fixed income: | |||||||||||||||||||||||||
| Bonds (government and corporate) | 1,572.1 | — | 1,572.1 | — | 1,344.6 | — | 1,344.6 | — | |||||||||||||||||
| Total U.S. Qualified Pension Plans at Fair Value | $2,664.6 | $567.7 | $2,096.9 | $— | $2,475.3 | $585.5 | $1,889.8 | $— | |||||||||||||||||
| Real estate pooled funds(A) | $167.8 | $209.6 | |||||||||||||||||||||||
| Total U.S. Qualified Pension Plans | $2,832.4 | $2,684.9 | |||||||||||||||||||||||
| International Pension Plans | |||||||||||||||||||||||||
| Cash and cash equivalents | $13.4 | $13.4 | $— | $— | $15.8 | $15.8 | $— | $— | |||||||||||||||||
| Equity pooled funds | 711.3 | — | 711.3 | — | 727.9 | — | 727.9 | — | |||||||||||||||||
| Fixed income pooled funds | 679.9 | — | 679.9 | — | 615.2 | — | 615.2 | — | |||||||||||||||||
| Other pooled funds | 13.7 | — | 13.7 | — | 11.6 | — | 11.6 | — | |||||||||||||||||
| Insurance contracts | 254.1 | — | — | 254.1 | 217.7 | — | — | 217.7 | |||||||||||||||||
| Total International Pension Plans | $1,672.4 | $13.4 | $1,404.9 | $254.1 | $1,588.2 | $15.8 | $1,354.7 | $217.7 |
| (A) | Real estate pooled funds consist of funds that invest in properties. These funds generally allow for quarterly redemption with 30 days' notice. Timing for redemption could be delayed based on the priority of our request and the availability of funds. Interests in these funds are valued using the net asset value (NAV) per share practical expedient and are not classified in the fair value hierarchy. |
The following table summarizes changes in fair value of the pension plan assets classified as Level 3, by asset class:
| Other Pooled Funds | Insurance Contracts | Total | ||||||||||
| 30 September 2017 | $7.8 | $41.4 | $49.2 | |||||||||
| Actual return on plan assets: | ||||||||||||
| Assets held at end of year | — | .9 | .9 | |||||||||
| Assets sold during the period | .5 | — | .5 | |||||||||
| Purchases, sales, and settlements, net | (8.3 | ) | 175.4 | 167.1 | ||||||||
| 30 September 2018 | $— | $217.7 | $217.7 | |||||||||
| Actual return on plan assets: | ||||||||||||
| Assets held at end of year | — | 38.1 | 38.1 | |||||||||
| Purchases, sales, and settlements, net | — | (1.7 | ) | (1.7 | ) | |||||||
| 30 September 2019 | $— | $254.1 | $254.1 |
The descriptions and fair value methodologies for the U.S. and International pension plan assets are as follows:
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents approximate fair value due to the short-term maturity.
Equity Securities
Equity securities are valued at the closing market price reported on a U.S. or international exchange where the security is actively traded and are therefore classified as Level 1 assets.
Equity Mutual and Pooled Funds
Shares of mutual funds are valued at the NAV of the fund and are classified as Level 1 assets. Units of pooled funds are valued at the per unit NAV determined by the fund manager based on the value of the underlying traded holdings and are classified as Level 2 assets.
Corporate and Government Bonds
Corporate and government bonds are classified as Level 2 assets, as they are either valued at quoted market prices from observable pricing sources at the reporting date or valued based upon comparable securities with similar yields and credit ratings.
Other Pooled Funds
Other pooled funds classified as Level 2 assets are valued at the NAV of the shares held at year end, which is based on the fair value of the underlying investments. Securities and interests classified as Level 3 assets 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 and discount rates that require inputs with limited observability.
Contributions and Projected Benefit Payments
Pension contributions to funded plans and benefit payments for unfunded plans for fiscal year 2019 were $40.2. Contributions for funded plans resulted primarily from contractual and regulatory requirements. Benefit payments to unfunded plans were due primarily to the timing of retirements. We anticipate contributing $30 to $40 to the defined benefit pension plans in fiscal year 2020. 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 | |||||||
| 2020 | $166.8 | $47.9 | ||||||
| 2021 | 160.0 | 49.1 | ||||||
| 2022 | 166.0 | 50.1 | ||||||
| 2023 | 170.1 | 54.3 | ||||||
| 2024 | 174.1 | 58.0 | ||||||
| 2025-2029 | 919.9 | 308.3 |
These estimated benefit payments are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.
U.K. Lloyds Equalization Ruling
On 26 October 2018, the United Kingdom High Court issued a ruling related to the equalization of pension plan participants’ benefits for the gender effects of Guaranteed Minimum Pensions. As a result of this ruling, we estimated the impact of retroactively increasing benefits in our U.K. plan in accordance with the High Court ruling. We treated the additional benefits as a prior service cost, which resulted in an increase to our projected benefit obligation and accumulated other comprehensive loss of $4.7 during the first quarter of fiscal year 2019. We are amortizing this cost over the average remaining life expectancy of the U.K. participants.
Defined Contribution Plans
We maintain a 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 2,197,262 as of 30 September 2019.
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 fiscal years 2019, 2018, and 2017 were $40.6, $34.2, and $33.7, respectively.
Other Postretirement Benefits
We provide other postretirement benefits consisting primarily of healthcare benefits to certain U.S. retirees who meet age and service requirements. The healthcare benefit is a continued medical benefit until the retiree reaches age 65. Healthcare benefits are contributory, with contributions adjusted periodically. The retiree medical costs are capped at a specified dollar amount, with the retiree contributing the remainder. The cost of these benefits were not material in fiscal years 2019, 2018, and 2017. Accumulated postretirement benefit obligations as of the end of fiscal years 2019 and 2018 were $43.7 and $56.4, respectively, of which $7.7 and $9.4 were current obligations, respectively.
We recognize changes in other postretirement benefit plan obligations in other comprehensive income on a pretax basis. In fiscal years 2019 and 2018, we recognized gains that arose during the period of $6.1 and $3.1, respectively. In fiscal year 2018, we recognized net actuarial loss amortization of $.3. There was no net actuarial loss amortization in fiscal year 2019 as the corridor for the plan was not exceeded.
The net actuarial gain/loss recognized in accumulated other comprehensive loss on a pretax basis was a net gain of $1.7 and a net loss of $4.4 as of 30 September 2019 and 2018, respectively.
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 have no impact on plan obligations.
18**.** COMMITMENTS AND CONTINGENCIES
LITIGATION
We are involved in various legal proceedings, including commercial, competition, environmental, intellectual property, regulatory, product liability, and insurance matters. In September 2010, the Brazilian Administrative Council for Economic Defense (CADE) issued a decision against our Brazilian subsidiary, Air Products Brasil Ltda., and several other Brazilian industrial gas companies for alleged anticompetitive activities. CADE imposed a civil fine of R$179.2 million (approximately $43 at 30 September 2019) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, whose investigation began in 2003, alleging violation of competition laws with respect to the sale of industrial and medical gases. The fines are based on a percentage of our total revenue in Brazil in 2003.
We have denied the allegations made by the authorities and filed an appeal in October 2010 with the Brazilian courts. On 6 May 2014, our appeal was granted and the fine against Air Products Brasil Ltda. was dismissed. CADE has appealed that ruling and the matter remains pending. We, with advice of our outside legal counsel, have assessed the status of this matter and have concluded that, although an adverse final judgment after exhausting all appeals is possible, such a judgment is not probable. As a result, no provision has been made in the consolidated financial statements. We estimate the maximum possible loss to be the full amount of the fine of R$179.2 million (approximately $43 at 30 September 2019) plus interest accrued thereon until final disposition of the proceedings.
Other than this matter, we do not currently believe there are any legal proceedings, individually or in the aggregate, that are reasonably possible to have a material impact on our financial condition, results of operations, or cash flows.
ENVIRONMENTAL
In the normal course of business, we are involved in legal proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA," the federal Superfund law), Resource Conservation and Recovery Act ("RCRA"), and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Presently, there are 31 sites on which a final settlement has not been reached where we, along with others, have been designated a potentially responsible party by the Environmental Protection Agency or are otherwise engaged in investigation or remediation, including cleanup activity at certain of our current and former manufacturing sites. We continually monitor these sites for which we have environmental exposure.
Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The consolidated balance sheets at 30 September 2019 and 2018 included an accrual of $68.9 and $76.8, respectively, primarily as part of other noncurrent liabilities. The environmental liabilities will be paid over a period of up to 30 years. We estimate the exposure for environmental loss contingencies to range from $68 to a reasonably possible upper exposure of $82 as of 30 September 2019.
Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Using reasonably possible alternative assumptions of the exposure level could result in an increase to the environmental accrual. Due to the inherent uncertainties related to environmental exposures, a significant increase to the reasonably possible upper exposure level could occur if a new site is designated, the scope of remediation is increased, a different remediation alternative is identified, or a significant increase in our proportionate share occurs. We do not expect that any sum we may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse impact on our financial position or results of operations in any one year.
Pace
At 30 September 2019, $24.3 of the environmental accrual was related to the Pace facility.
In 2006, we sold our Amines business, which included operations at Pace, Florida, and recognized a liability for retained environmental obligations associated with remediation activities at Pace. We are required by the Florida Department of Environmental Protection (FDEP) and the United States Environmental Protection Agency (USEPA) to continue our remediation efforts. We estimated that it would take a substantial period of time to complete the groundwater remediation, and the costs through completion were estimated to range from $42 to $52. As no amount within the range was a better estimate than another, we recognized a before-tax expense of $42 in fiscal 2006 as a component of income from discontinued operations and recorded an environmental accrual of $42 in continuing operations on the consolidated balance sheets. There has been no change to the estimated exposure range related to the Pace facility.
We have implemented many of the remedial corrective measures at the Pace facility required under 1995 Consent Orders issued by the FDEP and the USEPA. Contaminated soils have been bioremediated, and the treated soils have been secured in a lined on-site disposal cell. Several groundwater recovery systems have been installed to contain and remove contamination from groundwater. We completed an extensive assessment of the site to determine how well existing measures are working, what additional corrective measures may be needed, and whether newer remediation technologies that were not available in the 1990s might be suitable to more quickly and effectively remove groundwater contaminants. Based on assessment results, we completed a focused feasibility study that has identified alternative approaches that may more effectively remove contaminants. We continue to review alternative remedial approaches with the FDEP and have started additional field work to support the design of an improved groundwater recovery network with the objective of targeting areas of higher contaminant concentration and avoiding areas of high groundwater iron which has proven to be a significant operability issue for the project. In the first quarter of 2015, we entered into a new Consent Order with the FDEP requiring us to continue our remediation efforts at the Pace facility. The costs we are incurring under the new Consent Order are consistent with our previous estimates.
Piedmont
At 30 September 2019, $14.7 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. The SCDHEC issued its final approval to the site-wide feasibility study on 13 June 2017 and the Record of Decision for the site on 27 June 2018. Field work has started to support the remedial design, and in the fourth quarter of fiscal year 2018, we signed a Consent Agreement Amendment memorializing our obligations to complete the cleanup of the site. We estimate that source area remediation and groundwater recovery and treatment will continue through 2029. Thereafter, we expect this site to go into a state of monitored natural attenuation through 2047.
We recognized a before-tax expense of $24 in 2008 as a component of income from discontinued operations and recorded an environmental liability of $24 in continuing operations on the consolidated balance sheets. There have been no significant changes to the estimated exposure.
Pasadena
At 30 September 2019, $11.8 of the environmental accrual was related to the Pasadena site.
During the fourth quarter of 2012, management committed to permanently shutting down our polyurethane intermediates (PUI) production facility in Pasadena, Texas. In shutting down and dismantling the facility, we have undertaken certain obligations related to soil and groundwater contaminants. We have been pumping and treating groundwater to control off-site contaminant migration in compliance with regulatory requirements and under the approval of the Texas Commission on Environmental Quality (TCEQ). We estimate that the pump and treat system will continue to operate until 2042.
We plan to perform additional work to address other environmental obligations at the site. This additional work includes remediating, as required, impacted soils, investigating groundwater west of the former PUI facility, performing post closure care for two closed RCRA surface impoundment units, and establishing engineering controls. In 2012, we estimated the total exposure at this site to be $13. There have been no significant changes to the estimated exposure.
ASSET RETIREMENT OBLIGATIONS
Our asset retirement obligations are primarily associated with long-term on-site supply contracts under which we have built a facility on land owned by the customer and are obligated to remove the facility at the end of the contract term. The retirement of assets includes the contractually required removal of a long-lived asset from service and encompasses the sale, removal, abandonment, recycling, or disposal of the assets as required at the end of the contract term. These obligations are primarily reflected within "Other noncurrent liabilities" on the consolidated balance sheets. The timing and/or method of settlement of these obligations are conditional on a future event that may or may not be within our control.
Changes to the carrying amount of our asset retirement obligations were as follows:
| Balance at 30 September 2017 | $144.7 | ||
| Additional accruals | 43.8 | ||
| Liabilities settled | (2.6 | ) | |
| Accretion expense | 7.2 | ||
| Currency translation adjustment | (2.7 | ) | |
| Balance at 30 September 2018 | $190.4 | ||
| Additional accruals | 14.7 | ||
| Liabilities settled | (2.1 | ) | |
| Accretion expense | 8.7 | ||
| Currency translation adjustment | (3.5 | ) | |
| Balance at 30 September 2019 | $208.2 |
The increase in the liability during fiscal year 2018 primarily related to new obligations associated with the Lu'An asset acquisition completed in April 2018.
GUARANTEES AND WARRANTIES
We guaranteed the repayment of our 25% share of an equity bridge loan that has been provided to fund equity commitments to a joint venture arrangement with ACWA Holding in Saudi Arabia. ACWA also guarantees their share of the loan. Our maximum exposure under the guarantee, which expires in 2020, is approximately $100. As of 30 September 2018, other noncurrent liabilities included $94.4 for our obligation to make future equity contributions in 2020 based on our proportionate share of the advances received by the joint venture under the loan. During 2019, this balance was reclassified from other noncurrent liabilities to payables and accrued liabilities on our consolidated balance sheets as the obligation is required to be funded within the next twelve months.
Air Products has also entered into a long-term sale of equipment contract with the joint venture to engineer, procure, and construct the industrial gas facilities that will supply gases to Saudi Aramco. We provided bank guarantees to the joint venture to support our performance under the contract. As of 30 September 2019, our maximum potential payments were $247. 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 2019, maximum potential payments under joint and several guarantees were $26.0. Exposures under the guarantees decline over time and will be completely extinguished by 2024.
To date, no equity contributions or payments have been made since the inception of these guarantees. The fair value of the above guarantees is not material.
We, in the normal course of business operations, have issued product warranties related to equipment sales. Also, contracts often contain standard terms and conditions which typically include a warranty and indemnification to the buyer that the goods and services purchased do not infringe on third-party intellectual property rights. The provision for estimated future costs relating to warranties is not material to the consolidated financial statements.
We do not expect that any sum we may have to pay in connection with guarantees and warranties will have a material adverse effect on our consolidated financial condition, liquidity, or results of operations.
UNCONDITIONAL PURCHASE OBLIGATIONS
We are obligated to make future payments under unconditional purchase obligations as summarized below:
| 2020 | $1,358 | ||
| 2021 | 407 | ||
| 2022 | 369 | ||
| 2023 | 349 | ||
| 2024 | 350 | ||
| Thereafter | 5,477 | ||
| Total | $8,310 |
Approximately $7,100 of our unconditional purchase obligations relate to helium purchases. The majority of these obligations occur after fiscal year 2024. Helium purchases include crude feedstock supply to helium refining plants in North America as well as refined helium purchases from sources around the world. As a rare byproduct of natural gas production in the energy sector, these helium sourcing agreements are medium- to long-term and contain take-if-tendered provisions. The refined helium is distributed globally and sold as a merchant gas, primarily under medium-term requirements contracts. While contract terms in our helium sourcing contracts are generally longer than our customer sales contracts, helium is a rare gas used in applications with few or no substitutions because of its unique physical and chemical properties.
Approximately $160 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.
We estimate our maximum obligation for future purchases of plant and equipment to be approximately $890 based on open purchase orders as of 30 September 2019. This includes spending for the Jiutai coal-to-syngas project. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to reschedule, cancel, or otherwise modify based on our business needs. We have disclosed this obligation in fiscal year 2020; however, timing of actual satisfaction of the obligation may vary.
19**.** CAPITAL STOCK
Common Stock
Authorized common stock consists of 300 million shares with a par value of $1 per share. As of 30 September 2019, 249 million shares were issued, with 220 million outstanding.
On 15 September 2011, the Board of Directors authorized the repurchase of up to $1.0 billion of our outstanding common stock. We repurchase shares pursuant to Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, through repurchase agreements established with several brokers. We did not purchase any of our outstanding shares during fiscal year 2019. At 30 September 2019, $485.3 in share repurchase authorization remains.
The following table reflects the changes in common shares:
| Year ended 30 September | 2019 | 2018 | 2017 | ||||||
| Number of Common Shares Outstanding | |||||||||
| Balance, beginning of year | 219,515,245 | 218,346,074 | 217,350,825 | ||||||
| Issuance of treasury shares for stock option and award plans | 900,017 | 1,169,171 | 995,249 | ||||||
| Balance, end of year | 220,415,262 | 219,515,245 | 218,346,074 |
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 2019 and 2018.
20**.** 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 2019, there were 4,581,960 shares available for future grant under our Long-Term Incentive Plan (LTIP), which is shareholder approved.
Share-based compensation cost recognized in the consolidated income statements is summarized below:
| 2019 | 2018 | 2017 | |||||||
| Before-Tax Share-Based Compensation Cost – Total | $41.2 | $38.8 | $40.7 | ||||||
| Before-Tax Share-Based Compensation Cost – Discontinued Operations | — | — | .8 | ||||||
| Before-Tax Share-Based Compensation Cost – Continuing Operations | $41.2 | $38.8 | $39.9 | ||||||
| Income tax benefit – Continuing Operations | (9.7 | ) | (9.1 | ) | (14.0 | ) | |||
| After-Tax Share-Based Compensation Cost – Continuing Operations | $31.5 | $29.7 | $25.9 |
Before-tax share-based compensation cost is primarily included in selling and administrative expense on our consolidated income statements. The amount of share-based compensation cost capitalized in fiscal years 2019, 2018, and 2017 was not material.
On a total company basis, before-tax share-based compensation cost by type of program was as follows:
| 2019 | 2018 | 2017 | |||||||
| Deferred stock units | $41.1 | $38.3 | $34.5 | ||||||
| Stock options | — | .2 | 1.4 | ||||||
| Restricted stock | .1 | .3 | 4.8 | ||||||
| Before-Tax Share-Based Compensation Cost – Total | $41.2 | $38.8 | $40.7 |
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 ten years after service ends). We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period; however, expense recognition is accelerated for retirement eligible individuals who meet the requirements for vesting upon retirement. We have elected to account for forfeitures as they occur, rather than to estimate them. Forfeitures have not been significant historically.
Market-based deferred stock units vest as long as the employee continues to be employed by the Company and upon the achievement of the performance target. The performance target, which is approved by the Compensation Committee, is 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 beginning 1 October of the fiscal year of grant. We granted 114,929, 105,268, and 117,692 market-based deferred stock units in fiscal years 2019, 2018, and 2017, respectively.
The fair value of market-based deferred stock units was estimated using a Monte Carlo simulation model as these equity awards are tied to a market condition. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards. We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period. The estimated grant-date fair value of market-based deferred stock units was $229.61, $202.50, and $156.87 per unit in fiscal years 2019, 2018, and 2017, respectively. The calculation of the fair value used the following assumptions:
| 2019 | 2018 | 2017 | |||||
| Expected volatility | 17.5 | % | 18.7 | % | 20.6 | % | |
| Risk-free interest rate | 2.8 | % | 1.9 | % | 1.4 | % | |
| Expected dividend yield | 2.6 | % | 2.6 | % | 2.5 | % |
In addition, during fiscal year 2019, we granted 169,666 time-based deferred stock units at a weighted average grant-date fair value of $168.68. In fiscal years 2018 and 2017, we granted 143,379 and 165,121 time-based deferred stock units at a weighted average grant-date fair value of and $162.11 and $143.75, respectively.
| Deferred Stock Units | Shares (000) | Weighted Average Grant-Date Fair Value | |||||
| Outstanding at 30 September 2018 | 940 | $137.78 | |||||
| Granted | 285 | 193.29 | |||||
| Paid out | (113 | ) | 119.59 | ||||
| Forfeited/adjustments | (136 | ) | 136.11 | ||||
| Outstanding at 30 September 2019 | 976 | $156.31 |
Cash payments made for deferred stock units were $1.9, $2.2, and $2.1 in fiscal years 2019, 2018, and 2017, respectively. As of 30 September 2019, there was $49.2 of unrecognized compensation cost related to deferred stock units. The cost is expected to be recognized over a weighted average period of 1.6 years. The total fair value of deferred stock units paid out during fiscal years 2019, 2018, and 2017, including shares vested in prior periods, was $19.2, $38.5, and $36.6, 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. The Company has not issued stock option awards since fiscal year 2015.
A summary of stock option activity is presented below:
| Stock Options | Shares (000) | Weighted Average Exercise Price | |||||
| Outstanding at 30 September 2018 | 2,186 | $89.33 | |||||
| Exercised | (842 | ) | 82.27 | ||||
| Forfeited | — | — | |||||
| Outstanding and Exercisable at 30 September 2019 | 1,344 | $93.75 |
| Stock Options | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | ||||
| Outstanding and Exercisable at 30 September 2019 | 3.4 | $172 |
The aggregate intrinsic value represents the amount by which our closing stock price of $221.86 as of 30 September 2019 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 fiscal years 2019, 2018, and 2017 was $87.2, $90.4, and $57.3, 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 2019, there was no unrecognized compensation cost as all stock option awards were fully vested.
Cash received from option exercises during fiscal year 2019 was $68.1. The total tax benefit realized from stock option exercises in fiscal year 2019 was $20.4, of which $16.4 was the excess tax benefit.
Restricted Stock
The grant-date fair value of restricted stock is estimated on the date of grant based on the closing price of the stock, and compensation cost is generally amortized to expense on a straight-line basis over the vesting period during which employees perform related services. Expense recognition is accelerated for retirement-eligible individuals who would meet the requirements for vesting of awards upon their retirement. We have elected to account for forfeitures as they occur, rather than to estimate them. Forfeitures have not been significant historically.
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 2018 | 42 | $140.28 | |||||
| Vested | (16 | ) | 144.09 | ||||
| Outstanding at 30 September 2019 | 26 | $138.00 |
As of 30 September 2019, there was no unrecognized compensation cost as all restricted stock awards were fully vested. The total fair value of restricted stock vested during fiscal years 2019, 2018, and 2017 was $2.6, $2.2, and $4.1, respectively.
Versum Spin-off
As discussed in Note 4, Discontinued Operations, Air Products completed the spin-off of Versum on 1 October 2016. In connection with the spin-off, 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 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.
21**.** 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 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 | ) | ||||||||
| Other comprehensive income (loss) before reclassifications | 45.9 | (244.6 | ) | 179.4 | (19.3 | ) | ||||||||||
| Amounts reclassified from AOCL | (30.4 | ) | 3.1 | 133.1 | 105.8 | |||||||||||
| Net current period other comprehensive income (loss) | $15.5 | ($241.5 | ) | $312.5 | $86.5 | |||||||||||
| Amount attributable to noncontrolling interest | — | (18.8 | ) | (.2 | ) | (19.0 | ) | |||||||||
| Balance at 30 September 2018 | ($37.6 | ) | ($1,009.8 | ) | ($694.5 | ) | ($1,741.9 | ) | ||||||||
| Other comprehensive loss before reclassifications | (44.1 | ) | (356.2 | ) | (326.2 | ) | (726.5 | ) | ||||||||
| Amounts reclassified from AOCL | 12.3 | (2.6 | ) | 63.2 | 72.9 | |||||||||||
| Net current period other comprehensive loss | ($31.8 | ) | ($358.8 | ) | ($263.0 | ) | ($653.6 | ) | ||||||||
| Amount attributable to noncontrolling interest | (8.0 | ) | (11.7 | ) | (.2 | ) | (19.9 | ) | ||||||||
| Balance at 30 September 2019 | ($61.4 | ) | ($1,356.9 | ) | ($957.3 | ) | ($2,375.6 | ) |
The table below summarizes the reclassifications out of AOCL and the affected line item on the consolidated income statements:
| 2019 | 2018 | 2017 | ||||||||||
| (Gain) Loss on Cash Flow Hedges, net of tax | ||||||||||||
| Sales/Cost of sales | $.6 | $7.1 | $18.3 | |||||||||
| Other income (expense), net | (3.0 | ) | (42.6 | ) | 5.1 | |||||||
| Interest expense | 14.7 | 5.1 | .8 | |||||||||
| Total (Gain) Loss on Cash Flow Hedges, net of tax | $12.3 | ($30.4 | ) | $24.2 | ||||||||
| Currency Translation Adjustment | ||||||||||||
| Cost of sales(A) | $— | $3.1 | $— | |||||||||
| Cost reduction and asset actions(B) | — | — | 8.2 | |||||||||
| Gain on exchange of equity affiliate investments(C) | (2.6 | ) | — | — | ||||||||
| Loss from discontinued operations, net of tax(D) | — | — | 49.1 | |||||||||
| Total Currency Translation Adjustment | ($2.6 | ) | $3.1 | $57.3 | ||||||||
| Pension and Postretirement Benefits, net of tax**(E)** | $63.2 | $133.1 | $110.7 |
| (A) | The fiscal year 2018 impact relates to an equipment sale resulting from the termination of a contract in the Industrial Gases – Asia segment during the first quarter. |
| (B) | The fiscal year 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. |
| (C) | The fiscal year 2019 impact relates to a net gain on the exchange of two equity affiliates with a joint venture partner. Refer to Note 7, Acquisitions, for additional information. |
| (D) | The fiscal year 2017 impact relates to the sale of PMD during the second quarter. |
| (E) | The components of net periodic benefit cost reclassified out of AOCL include items such as prior service cost amortization, actuarial loss amortization, and settlements and are included in “Other non-operating income (expense), net” on the consolidated income statements. Refer to Note 17, Retirement Benefits, for additional information. |
22**.** EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (EPS):
| 30 September | 2019 | 2018 | 2017 | ||||||||
| Numerator | |||||||||||
| Net income from continuing operations | $1,760.0 | $1,455.6 | $1,134.4 | ||||||||
| Net income from discontinued operations | — | 42.2 | 1,866.0 | ||||||||
| Net Income Attributable to Air Products | $1,760.0 | $1,497.8 | $3,000.4 | ||||||||
| Denominator (in millions) | |||||||||||
| Weighted average common shares — Basic | 220.3 | 219.3 | 218.0 | ||||||||
| Effect of dilutive securities | |||||||||||
| Employee stock option and other award plans | 1.3 | 1.5 | 1.8 | ||||||||
| Weighted average common shares — Diluted | 221.6 | 220.8 | 219.8 | ||||||||
| Basic EPS Attributable to Air Products | |||||||||||
| Basic earnings per share from continuing operations | $7.99 | $6.64 | $5.20 | ||||||||
| Basic earnings per share from discontinued operations | — | .19 | 8.56 | ||||||||
| Basic Earnings Per Common Share Attributable to Air Products | $7.99 | $6.83 | $13.76 | ||||||||
| Diluted EPS Attributable to Air Products | |||||||||||
| Diluted earnings per share from continuing operations | $7.94 | $6.59 | $5.16 | ||||||||
| Diluted earnings per share from discontinued operations | — | .19 | 8.49 | ||||||||
| Diluted Earnings Per Common Share Attributable to Air Products | $7.94 | $6.78 | $13.65 |
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 2019 and 2017, respectively. Outstanding share-based awards of .1 million shares were antidilutive and therefore excluded from the computation of diluted EPS for fiscal year 2018.
23**.** INCOME TAXES
The following table summarizes the income of U.S. and foreign operations before taxes:
| 2019 | 2018 | 2017 | ||||||||||
| Income from Continuing Operations Before Taxes | ||||||||||||
| United States | $723.3 | $688.5 | $669.8 | |||||||||
| Foreign | 1,350.8 | 1,151.7 | 666.2 | |||||||||
| Income from equity affiliates | 215.4 | 174.8 | 80.1 | |||||||||
| Total | $2,289.5 | $2,015.0 | $1,416.1 |
On 22 December 2017, the United States enacted the U.S. Tax Cuts and Jobs Act (the “Tax Act” or "Tax reform"), which significantly changed existing U.S. tax laws, including a reduction in the federal corporate income tax rate from 35% to 21%, a deemed repatriation tax on unremitted foreign earnings, as well as other changes. Our consolidated income statements reflect a discrete net income tax expense of $43.8 and $180.6 in fiscal years 2019 and 2018, respectively, related to impacts of the Tax Act.
In fiscal year 2019, our income tax expense reflects the reversal of a non-recurring $56.2 benefit recorded in fiscal year 2018 related to the U.S. taxation of deemed foreign dividends. This was partially offset by a benefit of $12.4 to reduce the total expected costs of the deemed repatriation tax. The non-recurring benefit recorded in fiscal year 2018 was eliminated by regulations issued in fiscal year 2019.
In fiscal year 2018, our consolidated income statements reflect a discrete net income tax expense of $180.6 and a $28.5 reduction to equity affiliates' income for the impacts of the Tax Act. The income tax expense of $180.6 included a cost of $392.4, which included $322.1 for the deemed repatriation tax and $70.3 primarily for additional foreign taxes on the repatriation of foreign earnings. This cost was partially offset by a $211.8 benefit primarily from the re-measurement of our net U.S. deferred tax liabilities at the lower corporate tax rate. The deemed repatriation tax of $322.1 included the $56.2 non-recurring benefit related to the U.S. taxation of deemed foreign dividends that was eliminated in 2019. We have historically asserted our intention to indefinitely reinvest foreign earnings in certain foreign subsidiaries. We reevaluated our historic assertions as a result of enactment of the Tax Act and adjusted our position relative to the indefinitely reinvested earnings of various foreign subsidiaries. The impact of these changes is included in the $70.3 for additional foreign taxes on the repatriation of foreign earnings recorded in fiscal year 2018.
After applying tax credits, the balance of the deemed repatriation tax obligation is $256.8, which we are paying in installments over seven remaining years. As of 30 September 2019, we recorded $215.4 of this obligation on our consolidated balance sheets in noncurrent liabilities.
While our accounting for the provisions of the Tax Act is not provisional, further adjustments to the deemed repatriation tax could result from future U.S. or foreign tax examinations of the years impacted by the calculation or from the issuance of additional federal or state guidance.
As a fiscal year-end taxpayer, certain provisions of the Tax Act became effective in our fiscal year 2018 while other provisions did not become effective until fiscal year 2019. The corporate tax rate reduction was effective as of 1 January 2018 and, accordingly, reduced our 2018 fiscal year U.S. federal statutory rate to a blended rate of approximately 24.5%. The 21% federal tax rate now applies to our fiscal year ended 30 September 2019 and each year thereafter.
The following table details the components of the provision for income taxes:
| 2019 | 2018 | 2017 | ||||||||||
| Current Tax Provision | ||||||||||||
| Federal | $163.7 | $305.1 | $62.8 | |||||||||
| State | 23.3 | 17.7 | 7.0 | |||||||||
| Foreign | 235.5 | 256.9 | 229.1 | |||||||||
| Total Current Tax Provision | 422.5 | 579.7 | 298.9 | |||||||||
| Deferred Tax Provision | ||||||||||||
| Federal | 9.7 | (121.7 | ) | 1.4 | ||||||||
| State | 2.4 | 12.5 | 6.0 | |||||||||
| Foreign | 45.5 | 53.8 | (45.4 | ) | ||||||||
| Total Deferred Tax Provision | 57.6 | (55.4 | ) | (38.0 | ) | |||||||
| Total Income Tax Provision | $480.1 | $524.3 | $260.9 |
Total company income tax payments, net of refunds, were $324.3, $372.0, and $1,348.8 in fiscal years 2019, 2018, and 2017, respectively. Tax payments were higher in fiscal year 2017 due to taxes related to the $2,870 gain on the sale of PMD. Refer to Note 4, Discontinued Operations, for additional information.
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) | 2019 | 2018 | 2017 | ||||||
| U.S. federal statutory tax rate | 21.0 | % | 24.5 | % | 35.0 | % | |||
| State taxes, net of federal benefit | 1.0 | 1.0 | 1.0 | ||||||
| Income from equity affiliates | (2.0 | ) | (2.1 | ) | (2.0 | ) | |||
| Foreign tax differentials | 1.0 | (1.0 | ) | (7.9 | ) | ||||
| Tax on foreign repatriated earnings | .1 | (.4 | ) | (2.2 | ) | ||||
| Domestic production activities | — | (.4 | ) | (.8 | ) | ||||
| Share-based compensation | (.6 | ) | (1.0 | ) | (1.2 | ) | |||
| Tax reform repatriation | 1.9 | 19.5 | — | ||||||
| Tax reform rate change and other | — | (11.1 | ) | — | |||||
| Tax restructuring benefit | — | (1.8 | ) | — | |||||
| Non-deductible goodwill impairment charge | — | — | 3.6 | ||||||
| Non-U.S. subsidiary tax election | — | — | (7.7 | ) | |||||
| Business separation costs | — | — | .2 | ||||||
| Other | (1.4 | ) | (1.2 | ) | .4 | ||||
| Effective Tax Rate | 21.0 | % | 26.0 | % | 18.4 | % |
Foreign tax differentials represent the differences between foreign earnings subject to foreign tax rates that are different than the U.S. federal statutory rate and include tax holidays and incentives. As a result of the reduction in the federal corporate income tax rates under the Tax Act, our effective non-U.S. tax rate is now higher than our fiscal year 2019 U.S. statutory rate of 21.0%. As a result of the lower statutory rate in fiscal year 2019 versus fiscal year 2018, the net impact of foreign tax rates reflects the cost of foreign rates higher than the U.S. federal statutory rate.
Tax on foreign repatriated earnings includes benefits and costs related to U.S. and additional foreign taxation on the current and future repatriation of foreign earnings and a U.S. benefit for related foreign tax credits. In addition, the Tax Act also enacted new provisions related to the taxation of foreign operations, known as Global Intangible Low Tax Income (“GILTI”). We have elected as an accounting policy to account for GILTI as a period cost when incurred. This and various other provisions of the Tax Act did not become effective until fiscal year 2019 and did not impact our tax provision in fiscal year 2018.
The Tax Act repealed the domestic production activities deduction, effective for our fiscal 2019 tax year, and lowered the benefit taken in fiscal year 2018.
Share-based compensation reflects the impact from recognition of $14.6, $21.5, and $17.6 of excess tax benefits in our provision for income taxes during fiscal years 2019, 2018, and 2017, respectively.
In fiscal year 2018, we recognized a tax benefit of $35.7, net of reserves for uncertain tax positions, and a corresponding decrease to net deferred tax liabilities resulting from the restructuring of several foreign subsidiaries.
In fiscal year 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. Refer to Note 11, Goodwill, for additional information regarding the impairment charge.
The significant components of deferred tax assets and liabilities are as follows:
| 30 September | 2019 | 2018 | ||||||
| Gross Deferred Tax Assets | ||||||||
| Retirement benefits and compensation accruals | $227.1 | $153.1 | ||||||
| Tax loss carryforwards | 140.6 | 143.5 | ||||||
| Tax credits and other tax carryforwards | 31.1 | 17.1 | ||||||
| Reserves and accruals | 69.6 | 42.5 | ||||||
| Currency losses | — | 3.8 | ||||||
| Other | 57.7 | 45.4 | ||||||
| Valuation allowance | (92.1 | ) | (105.0 | ) | ||||
| Deferred Tax Assets | 434.0 | 300.4 | ||||||
| Gross Deferred Tax Liabilities | ||||||||
| Plant and equipment | 954.6 | 811.8 | ||||||
| Currency gains | 23.9 | — | ||||||
| Unremitted earnings of foreign entities | 31.0 | 36.1 | ||||||
| Partnership and other investments | 14.8 | 16.3 | ||||||
| Intangible assets | 80.0 | 84.3 | ||||||
| Other | 8.3 | 5.6 | ||||||
| Deferred Tax Liabilities | 1,112.6 | 954.1 | ||||||
| Net Deferred Income Tax Liability | $678.6 | $653.7 |
Deferred tax assets and liabilities are included within the consolidated balance sheets as follows:
| 2019 | 2018 | |||||||
| Deferred Tax Assets | ||||||||
| Other noncurrent assets | $115.2 | $121.4 | ||||||
| Deferred Tax Liabilities | ||||||||
| Deferred income taxes | 793.8 | 775.1 | ||||||
| Net Deferred Income Tax Liability | $678.6 | $653.7 |
Retirement benefits and compensation accruals are impacted significantly by the changes in plan assets and benefit obligations that have been recognized in other comprehensive income. Refer to Note 17, Retirement Benefits, for additional information. Deferred tax liabilities related to plant and equipment increased due to the impact of an increase in accelerated tax depreciation deductions in excess of book depreciation in multiple jurisdictions. The deferred tax component for currency transactions moved into an overall deferred tax liability position due primarily to currency movements on hedging transactions as several foreign based currencies weakened against the U.S. dollar in fiscal year 2019. Reserves and accruals were impacted by an increase in tax deferred deductions related to the timing of recognizing accruals for local tax and accounting purposes.
As of 30 September 2019, the Company had the following deferred tax assets for certain tax credits:
| Jurisdiction | Gross Tax Asset | Expiration Period | ||||
| U.S. State | $1.7 | 2020 - 2034 | ||||
| U.S. Federal | 13.3 | 2024 - 2029 | ||||
| Foreign | 20.8 | 2020 - 2025; Indefinite |
The generation of $13.3 in excess U.S. foreign tax credits in fiscal year 2019 increased the balance of the tax credits and other tax carryforwards component. Of the $20.8 foreign tax credits, $5.8 have indefinite carryforward periods.
As of 30 September 2019, the Company had the following loss carryforwards:
| Jurisdiction | Gross Loss Carryforward | Expiration Period | ||||
| U.S. State Net Operating Loss | $296.3 | 2020 - 2034 | ||||
| U.S. Federal Capital Loss | 1.8 | 2023 | ||||
| Foreign Net Operating Loss | 352.6 | 2020 - 2029; Indefinite | ||||
| Foreign Capital Loss | 262.5 | Indefinite |
Of the $352.6 of foreign net operating loss carryforwards, $148.9 have indefinite carryforward periods.
The valuation allowance as of 30 September 2019 of $92.1 primarily related to $42.8 of foreign credits and loss carryforwards as well as $44.6 related to foreign capital losses that were generated from the loss recorded on the exit from the EfW 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, as of 30 September 2019.
As a result of the Tax Act, we recorded $373.2 of federal income tax from the deemed repatriation tax on approximately $5.8 billion of previously undistributed earnings from our foreign subsidiaries and corporate joint ventures. These earnings are now eligible to be repatriated to the U.S. with reduced U.S. tax impacts. However, such earnings may be subject to foreign withholding and other taxes. We record foreign and U.S. income taxes on the undistributed earnings of our foreign subsidiaries and corporate joint ventures unless those earnings are indefinitely reinvested. The cumulative undistributed earnings that are considered to be indefinitely reinvested in foreign subsidiaries and corporate joint ventures are included in retained earnings on the consolidated balance sheets and amounted to $4.2 billion as of 30 September 2019. An estimated $359.6 in additional foreign withholding and other income taxes would be due if these earnings were remitted as dividends.
A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:
| Unrecognized Tax Benefits | 2019 | 2018 | 2017 | |||||||||
| Balance at beginning of year | $233.6 | $146.4 | $90.2 | |||||||||
| Additions for tax positions of the current year | 7.8 | 26.4 | 47.5 | |||||||||
| Additions for tax positions of prior years | 14.2 | 119.2 | 16.1 | |||||||||
| Reductions for tax positions of prior years | (14.7 | ) | (41.3 | ) | (4.0 | ) | ||||||
| Settlements | (1.5 | ) | (14.2 | ) | (2.0 | ) | ||||||
| Statute of limitations expiration | (3.9 | ) | (2.6 | ) | (3.2 | ) | ||||||
| Foreign currency translation | (3.8 | ) | (.3 | ) | 1.8 | |||||||
| Balance at End of Year | $231.7 | $233.6 | $146.4 |
As of 30 September 2019 and 2018, we had $231.7 and $233.6 of unrecognized tax benefits, excluding interest and penalties, respectively, of which $75.0 and $88.6, respectively, would impact the effective tax rate from continuing operations if recognized.
Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense and totaled $12.0, ($2.4), and $3.7 in fiscal years 2019, 2018, and 2017, respectively. Our accrued balance for interest and penalties was $19.5 and $8.4 as of 30 September 2019 and 2018, respectively.
In fiscal year 2018, $119.2 in additions for tax positions of prior years related primarily to uncertain state tax filing positions taken related to the sale of PMD. Additions for tax positions of the current year in fiscal year 2018 of $26.4 included uncertain tax positions related to the restructuring of foreign subsidiaries and reserves for ongoing transfer pricing uncertainties.
In fiscal year 2018, we received a final audit settlement agreement that resolved uncertainties related to unrecognized tax benefits of $43.1, including interest. This settlement primarily related to tax positions taken in conjunction with the disposition of our Homecare business in 2012. As a result, we recorded an income tax benefit of $25.6, including interest, in income from discontinued operations during 2018. The settlement also resulted in an income tax benefit of approximately $9.1, including interest, in continuing operations for the release of tax reserves on other matters. The reduction in prior year positions and settlement payments also reflect the settlement of U.S. federal tax audits for 2012 through 2014 reported in the first quarter of the year.
We are currently under examination in a number of tax jurisdictions, some of which may be resolved in the next twelve months. As a result, it is reasonably possible that a change in the unrecognized tax benefits may occur during the next twelve months. However, quantification of an estimated range cannot be made as of the date of this report.
We generally remain subject to examination in the following major tax jurisdictions for the years indicated below:
| Major Tax Jurisdiction | Open Tax Years | ||
| North America | |||
| United States – Federal | 2016 | - | 2019 |
| United States – State | 2010 | - | 2019 |
| Canada | 2015 | - | 2019 |
| Europe | |||
| France | 2016 | - | 2019 |
| Germany | 2013 | - | 2019 |
| Netherlands | 2018 | - | 2019 |
| Spain | 2015 | - | 2019 |
| United Kingdom | 2015 | - | 2019 |
| Asia | |||
| China | 2014 | - | 2019 |
| South Korea | 2010 | - | 2019 |
| Taiwan | 2014 | - | 2019 |
| Latin America | |||
| Chile | 2016 | - | 2019 |
24**.** SUPPLEMENTAL INFORMATION
| Other Receivables and Current Assets 30 September | 2019 | 2018 | ||||
| Contract assets | $64.3 | $— | ||||
| Contract fulfillment costs | 64.5 | — | ||||
| Derivative instruments | 142.5 | 61.1 | ||||
| Current capital lease receivables | 90.9 | 92.1 | ||||
| Contracts in progress, less progress billings | — | 77.5 | ||||
| Other | 115.5 | 142.6 | ||||
| Other receivables and current assets | $477.7 | $373.3 |
| Other Noncurrent Assets 30 September | 2019 | 2018 | ||||
| Derivative instruments | $81.7 | $85.0 | ||||
| Noncurrent customer receivable | 118.0 | 92.4 | ||||
| Prepaid tax | 17.0 | 13.2 | ||||
| Deferred tax assets | 115.2 | 121.4 | ||||
| Pension benefits | 28.7 | 131.7 | ||||
| Other | 243.5 | 210.8 | ||||
| Other noncurrent assets | $604.1 | $654.5 |
| Payables and Accrued Liabilities 30 September | 2019 | 2018 | ||||
| Trade creditors | $519.3 | $594.6 | ||||
| Payables associated with Lu'An | 8.9 | 330.0 | ||||
| Contract liabilities | 247.4 | 156.6 | ||||
| Accrued payroll and employee benefits | 186.1 | 201.4 | ||||
| Pension and postretirement benefits | 26.0 | 34.1 | ||||
| Dividends payable | 255.7 | 241.5 | ||||
| Derivative instruments | 91.2 | 54.2 | ||||
| Obligation for future contribution to an equity affiliate | 94.4 | — | ||||
| Other | 206.7 | 205.4 | ||||
| Payables and accrued liabilities | $1,635.7 | $1,817.8 |
| Other Noncurrent Liabilities 30 September | 2019 | 2018 | ||||
| Pension benefits | $651.2 | $417.2 | ||||
| Postretirement benefits | 36.0 | 47.0 | ||||
| Noncurrent customer liability | 118.0 | 92.4 | ||||
| Long-term accrued income taxes related to U.S. tax reform | 215.4 | 184.4 | ||||
| Contingencies related to uncertain tax positions | 123.3 | 113.2 | ||||
| Contract liabilities | 49.2 | 58.2 | ||||
| Environmental liabilities | 59.1 | 64.6 | ||||
| Derivative instruments | 21.2 | 39.9 | ||||
| Asset retirement obligations | 201.9 | 189.5 | ||||
| Obligation for future contribution to an equity affiliate | — | 94.4 | ||||
| Obligations associated with EfW | 57.8 | 63.3 | ||||
| Other | 179.3 | 172.8 | ||||
| Other noncurrent liabilities | $1,712.4 | $1,536.9 |
Facility Closure
In December 2018, one of our customers was subject to a government enforced shutdown due to environmental reasons. As a result, we recognized a charge of $29.0 during the first quarter of fiscal year 2019 primarily related to the write-off of onsite assets. This charge is reflected as “Facility closure” on our consolidated income statements for the fiscal year ended 30 September 2019 and has not been recorded in segment results. Annual sales and operating income associated with this customer prior to the facility closure were not material to the Industrial Gases – Asia segment. We do not expect to recognize additional charges related to this shutdown.
Sales to and Other Income From Related Parties
We have related party sales to some of our equity affiliates and joint venture partners as well as other income primarily from fees charged for use of Air Products' patents and technology. Sales to and other income from related parties totaled approximately $410, $360, and $600 in fiscal years 2019, 2018, and 2017, respectively. Sales agreements with related parties include terms that are consistent with those that we believe would have been negotiated at an arm’s length with an independent party.
25**.** SUMMARY BY QUARTER (UNAUDITED)
The table below provides unaudited selected financial data and weighted average share information for each quarter of fiscal year 2019:
| 2019 | Q1 | Q2 | Q3 | Q4 | Total | |||||||||||||||
| Sales | $2,224.0 | $2,187.7 | $2,224.0 | $2,283.2 | $8,918.9 | |||||||||||||||
| Gross profit | 651.0 | (A) | 713.0 | 758.0 | 792.4 | 2,914.4 | (A) | |||||||||||||
| Cost reduction actions (See Note 6) | — | — | 25.5 | — | 25.5 | |||||||||||||||
| Gain on exchange of equity affiliate investments (See Note 7) | — | — | 29.1 | — | 29.1 | |||||||||||||||
| Operating income | 455.0 | 516.5 | 569.7 | 603.2 | 2,144.4 | |||||||||||||||
| Equity affiliates' income | 52.9 | 46.2 | 56.4 | 59.9 | 215.4 | |||||||||||||||
| Pension settlement loss (See Note 17) | — | 5.0 | — | — | 5.0 | |||||||||||||||
| Income tax provision | 132.1 | (B) | 107.5 | 109.3 | (B) | 131.2 | 480.1 | (B) | ||||||||||||
| Income from continuing operations | 357.0 | 433.5 | 500.2 | 518.7 | 1,809.4 | |||||||||||||||
| Income from discontinued operations, net of tax | — | — | — | — | — | |||||||||||||||
| Net income | 357.0 | 433.5 | 500.2 | 518.7 | 1,809.4 | |||||||||||||||
| Net Income Attributable to Air Products | ||||||||||||||||||||
| Net income from continuing operations | $347.5 | $421.3 | $488.0 | $503.2 | $1,760.0 | |||||||||||||||
| Net income from discontinued operations | — | — | — | — | — | |||||||||||||||
| Net Income Attributable to Air Products | $347.5 | $421.3 | $488.0 | $503.2 | $1,760.0 | |||||||||||||||
| Basic Earnings Per Common Share Attributable to Air Products | ||||||||||||||||||||
| Basic earnings per share from continuing operations | $1.58 | $1.91 | $2.21 | $2.28 | $7.99 | |||||||||||||||
| Basic earnings per share from discontinued operations | — | — | — | — | — | |||||||||||||||
| Basic Earnings Per Common Share Attributable to Air Products | $1.58 | $1.91 | $2.21 | $2.28 | $7.99 | |||||||||||||||
| Diluted Earnings Per Common Share Attributable to Air Products | ||||||||||||||||||||
| Diluted earnings per share from continuing operations | $1.57 | $1.90 | $2.20 | $2.27 | $7.94 | |||||||||||||||
| Diluted earnings per share from discontinued operations | — | — | — | — | — | |||||||||||||||
| Diluted Earnings Per Common Share Attributable to Air Products | $1.57 | $1.90 | $2.20 | $2.27 | $7.94 | |||||||||||||||
| Weighted Average Common Shares (in millions) | ||||||||||||||||||||
| Basic | 219.9 | 220.2 | 220.6 | 220.7 | 220.3 | |||||||||||||||
| Diluted | 221.0 | 221.4 | 221.9 | 222.1 | 221.6 | |||||||||||||||
| Dividend Information | ||||||||||||||||||||
| Dividends declared per common share | $1.10 | $1.16 | $1.16 | $1.16 | $4.58 |
The table below provides unaudited selected financial data and weighted average share information for each quarter of fiscal year 2018:
| 2018 | Q1 | Q2 | Q3 | Q4 | Total | |||||||||||||||
| Sales | $2,216.6 | $2,155.7 | $2,259.0 | $2,298.9 | $8,930.2 | |||||||||||||||
| Gross profit | 644.8 | 649.2 | 713.6 | 733.1 | (C) | 2,740.7 | (C) | |||||||||||||
| Operating income | 460.7 | 455.4 | 515.8 | 533.7 | 1,965.6 | |||||||||||||||
| Equity affiliates' income | 13.8 | 43.7 | 58.1 | 59.2 | 174.8 | |||||||||||||||
| Pension settlement loss (See Note 17) | — | — | — | 43.7 | 43.7 | |||||||||||||||
| Income tax provision | 291.8 | (B) | 56.2 | (D) | 107.1 | 69.2 | (B)(D) | 524.3 | (B)(D) | |||||||||||
| Income from continuing operations | 162.7 | 423.6 | 444.7 | 459.7 | 1,490.7 | |||||||||||||||
| Income from discontinued operations, net of tax (See Note 4) | (1.0 | ) | — | 43.2 | — | 42.2 | ||||||||||||||
| Net income | 161.7 | 423.6 | 487.9 | 459.7 | 1,532.9 | |||||||||||||||
| Net Income Attributable to Air Products | ||||||||||||||||||||
| Net income from continuing operations | $155.6 | $416.4 | $430.7 | $452.9 | $1,455.6 | |||||||||||||||
| Net income from discontinued operations | (1.0 | ) | — | 43.2 | — | 42.2 | ||||||||||||||
| Net Income Attributable to Air Products | $154.6 | $416.4 | $473.9 | $452.9 | $1,497.8 | |||||||||||||||
| Basic Earnings Per Common Share Attributable to Air Products | ||||||||||||||||||||
| Basic earnings per share from continuing operations | $.71 | $1.90 | $1.96 | $2.06 | $6.64 | |||||||||||||||
| Basic earnings per share from discontinued operations | — | — | .20 | — | .19 | |||||||||||||||
| Basic Earnings Per Common Share Attributable to Air Products | $.71 | $1.90 | $2.16 | $2.06 | $6.83 | |||||||||||||||
| Diluted Earnings Per Common Share Attributable to Air Products | ||||||||||||||||||||
| Diluted earnings per share from continuing operations | $.70 | $1.89 | $1.95 | $2.05 | $6.59 | |||||||||||||||
| Diluted earnings per share from discontinued operations | — | — | .20 | — | .19 | |||||||||||||||
| Diluted Earnings Per Common Share Attributable to Air Products | $.70 | $1.89 | $2.15 | $2.05 | $6.78 | |||||||||||||||
| Weighted Average Common Shares (in millions) | ||||||||||||||||||||
| Basic | 218.9 | 219.4 | 219.5 | 219.6 | 219.3 | |||||||||||||||
| Diluted | 220.4 | 220.8 | 220.9 | 220.9 | 220.8 | |||||||||||||||
| Dividend Information | ||||||||||||||||||||
| Dividends declared per common share | $.95 | $1.10 | $1.10 | $1.10 | $4.25 |
| (A) | Includes the impact of a facility closure charge of $29.0 resulting from the government enforced shutdown of a customer. Refer to Note 24, Supplemental Information, for additional information. |
| (B) | Our income tax provision for fiscal years 2019 and 2018 reflects impacts from the U.S. Tax Cuts and Jobs Act (the "Tax Act"). Refer to Note 23, Income Taxes, for additional information. Fiscal year 2019 includes a discrete net income tax expense of $43.8, primarily recorded in the first quarter to finalize our estimates of the impacts of the Tax Act. Fiscal year 2018 includes a discrete net income tax expense of $180.6, primarily recorded in the first quarter for our initial estimates of the impacts of the Tax Act. |
| (C) | Includes the impact of a benefit of $24.1 for the change in inventory valuation method for our United States industrial gas inventories. Refer to Note 1, Major Accounting Policies, for additional information. |
| (D) | Includes an income tax benefit of $35.7, net of reserves for uncertain tax positions, resulting from the restructuring of several foreign subsidiaries, primarily during the second quarter. |
26**.** BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Our reporting segments reflect the manner in which our chief operating decision maker reviews results and allocates resources. Except in the Industrial Gases – EMEA and Corporate and other segments, each reporting segment meets the definition of an operating segment and does not include the aggregation of multiple operating segments. Our Industrial Gases – EMEA and Corporate and other segment each include the aggregation of two operating segments that meet the aggregation criteria under GAAP.
Our reporting segments are:
| • | Industrial Gases – Americas; |
| • | Industrial Gases – EMEA (Europe, Middle East, and Africa); |
| • | Industrial Gases – Asia; |
| • | Industrial Gases – Global; and |
| • | Corporate and other |
Industrial Gases – Regional
The regional Industrial Gases segments (Americas, EMEA, and Asia) include the results of our regional industrial gas businesses, which produce and sell atmospheric gases such as oxygen, nitrogen, argon, and rare gases (primarily recovered by the cryogenic distillation of air), process gases such as hydrogen, helium, carbon dioxide, carbon monoxide, syngas (a mixture of hydrogen and carbon monoxide), and specialty gases, and equipment for the production or processing of gases, such as air separation units and non-cryogenic generators.
We supply gases to customers in many industries, including those in refining, chemical, gasification, metals, electronics, manufacturing, and food and beverage. We distribute gases to our customers through a variety of supply modes including liquid or gaseous bulk supply delivered by tanker or tube trailer and, for smaller customers, packaged gases delivered in cylinders and dewars or small on-sites (cryogenic or non-cryogenic generators). For large-volume customers, we construct an on-site plant adjacent to or near the customer’s facility or deliver product from one of our pipelines.
Electricity is the largest cost component in the production of atmospheric gases, and natural gas is the principal raw material for hydrogen, carbon monoxide, and syngas production. We mitigate energy and natural gas price fluctuations contractually through pricing formulas, surcharges, cost pass-through, and tolling arrangements. The regional Industrial Gases segments also include our share of the results of several joint ventures accounted for by the equity method. The largest of these joint ventures operate in 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 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 our LNG equipment and helium storage and distribution sale of equipment businesses and corporate support functions that benefit all segments. Competition for the sale of equipment businesses is based primarily on technological performance, service, technical know-how, price, and performance guarantees.
Corporate and other also includes income and expense that is not directly associated with the other segments, including foreign exchange gains and losses.
In addition to assets of the global businesses included in this segment, other assets include cash, deferred tax assets, and financial instruments.
Customers
We do not have a homogeneous customer base or end market, and no single customer accounts for more than 10% of our consolidated revenues.
Accounting Policies
The accounting policies of the segments are the same as those described in Note 1, Major Accounting Policies. We evaluate the performance of segments based upon reported segment operating income.
Business Segment
| Industrial Gases– Americas | Industrial Gases– EMEA | Industrial Gases– Asia | Industrial Gases– Global | Corporate and other | Total | ||||||||||||||
| 2019 | |||||||||||||||||||
| Sales | $3,873.5 | $2,002.5 | $2,663.6 | $261.0 | $118.3 | $8,918.9 | (A) | ||||||||||||
| Operating income (loss) | 997.7 | 472.4 | 864.2 | (11.7 | ) | (152.8 | ) | 2,169.8 | (B) | ||||||||||
| Depreciation and amortization | 505.2 | 189.5 | 361.5 | 8.6 | 18.0 | 1,082.8 | |||||||||||||
| Equity affiliates' income | 84.8 | 69.0 | 58.4 | 3.2 | — | 215.4 | (B) | ||||||||||||
| Expenditures for long-lived assets | 545.8 | 216.3 | 1,105.5 | 33.8 | 88.3 | 1,989.7 | |||||||||||||
| Investments in net assets of and advances to equity affiliates | 301.6 | 493.4 | 445.5 | 35.7 | — | 1,276.2 | |||||||||||||
| Total assets | 5,832.2 | 3,250.8 | 6,240.6 | 325.7 | 3,293.5 | 18,942.8 | |||||||||||||
| 2018 | |||||||||||||||||||
| Sales | $3,758.8 | $2,193.3 | $2,458.0 | $436.1 | $84.0 | $8,930.2 | (A) | ||||||||||||
| Operating income (loss) | 927.9 | 445.8 | 689.9 | 53.9 | (176.0 | ) | 1,941.5 | (B) | |||||||||||
| Depreciation and amortization | 485.3 | 198.6 | 265.8 | 8.1 | 12.9 | 970.7 | |||||||||||||
| Equity affiliates' income | 82.0 | 61.1 | 58.3 | 1.9 | — | 203.3 | (B) | ||||||||||||
| Expenditures for long-lived assets | 546.5 | 163.1 | 791.9 | 17.3 | 49.6 | 1,568.4 | |||||||||||||
| Investments in net assets of and advances to equity affiliates | 312.1 | 503.3 | 445.6 | 16.2 | — | 1,277.2 | |||||||||||||
| Total assets | 5,904.0 | 3,280.4 | 5,899.5 | 240.1 | 3,854.3 | 19,178.3 | |||||||||||||
| 2017 | |||||||||||||||||||
| Sales | $3,637.0 | $1,780.4 | $1,964.7 | $722.9 | $82.6 | $8,187.6 | (A) | ||||||||||||
| Operating income (loss) | 946.1 | 395.5 | 532.6 | 71.1 | (171.5 | ) | 1,773.8 | (B) | |||||||||||
| 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 | (B) | ||||||||||||
| Expenditures for long-lived assets | 427.2 | 143.2 | 337.8 | 25.6 | 105.9 | 1,039.7 |
| (A) | The sales information noted above relates to external customers only. All intersegment sales are eliminated in consolidation. Intersegment sales are generally transacted at market pricing. We generally do not have intersegment sales from our regional industrial gases businesses. Equipment manufactured for our regional industrial gases segments are generally transferred at cost and are not reflected as an intersegment sale. |
| (B) | Refer to the Reconciliations to Consolidated Results section below. |
Reconciliations to Consolidated Results
The table below reconciles total operating income in the table above to consolidated operating income as reflected on our consolidated income statements:
| Operating Income | 2019 | 2018 | 2017 | ||||||
| Total | $2,169.8 | $1,941.5 | $1,773.8 | ||||||
| Change in inventory valuation method | — | 24.1 | — | ||||||
| Facility closure | (29.0 | ) | — | — | |||||
| Business separation costs | — | — | (32.5 | ) | |||||
| Cost reduction and asset actions | (25.5 | ) | — | (151.4 | ) | ||||
| Goodwill and intangible asset impairment charge | — | — | (162.1 | ) | |||||
| Gain on exchange of equity affiliate investments | 29.1 | — | — | ||||||
| Gain on land sale | — | — | 12.2 | ||||||
| Consolidated Operating Income | $2,144.4 | $1,965.6 | $1,440.0 |
The table below reconciles total equity affiliates' income in the table above to consolidated equity affiliates' income as reflected on our consolidated income statements:
| Equity Affiliates' Income | 2019 | 2018 | 2017 | ||||||
| Total | $215.4 | $203.3 | $159.6 | ||||||
| Equity method investment impairment charge | — | — | (79.5 | ) | |||||
| Tax reform repatriation - equity method investment | — | (28.5 | ) | — | |||||
| Consolidated Equity Affiliates' Income | $215.4 | $174.8 | $80.1 |
Geographic Information
| Sales to External Customers | 2019 | 2018 | 2017 | ||||||
| United States | $3,351.8 | $3,149.6 | $2,886.8 | ||||||
| Europe, including Middle East | 2,090.3 | 2,292.5 | 2,478.5 | ||||||
| Asia, excluding China and India | 953.1 | 904.0 | 849.6 | ||||||
| China | 1,730.2 | 1,585.7 | 1,143.4 | ||||||
| Other(A) | 793.5 | 998.4 | 829.3 | ||||||
| Total | $8,918.9 | $8,930.2 | $8,187.6 | ||||||
| Long-Lived Assets**(B)** | 2019 | 2018 | 2017 | ||||||
| United States | $3,721.3 | $3,512.7 | $3,407.4 | ||||||
| Europe, including Middle East | 1,278.9 | 1,283.3 | 1,279.0 | ||||||
| Asia, excluding China and India | 933.8 | 899.8 | 778.5 | ||||||
| China | 3,302.6 | 3,066.6 | 1,737.9 | ||||||
| Other(A) | 1,101.0 | 1,161.3 | 1,237.4 | ||||||
| Total | $10,337.6 | $9,923.7 | $8,440.2 |
| (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 $41.3, $33.1, and $64.2 in fiscal years 2019, 2018, and 2017, respectively.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
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