filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
| Three Months Ended | ||||||||||||||
| 31 December | ||||||||||||||
| (Millions of U.S. Dollars, except for share and per share data) | 2023 | 2022 | ||||||||||||
| Sales | $2,997.4 | $3,174.7 | ||||||||||||
| Cost of sales | 2,067.2 | 2,272.3 | ||||||||||||
| Selling and administrative expense | 238.4 | 234.4 | ||||||||||||
| Research and development expense | 25.7 | 24.4 | ||||||||||||
| Other income (expense), net | 0.8 | 8.4 | ||||||||||||
| Operating Income | 666.9 | 652.0 | ||||||||||||
| Equity affiliates' income | 158.4 | 110.0 | ||||||||||||
| Interest expense | 53.5 | 41.2 | ||||||||||||
| Other non-operating income (expense), net | (14.8) | (0.6) | ||||||||||||
| Income Before Taxes | 757.0 | 720.2 | ||||||||||||
| Income tax provision | 135.4 | 136.4 | ||||||||||||
| Net Income | 621.6 | 583.8 | ||||||||||||
| Net income attributable to noncontrolling interests | 12.3 | 11.6 | ||||||||||||
| Net Income Attributable to Air Products | $609.3 | $572.2 | ||||||||||||
| Per Share Data (U.S. Dollars per share) | ||||||||||||||
| Basic earnings per share attributable to Air Products | $2.74 | $2.58 | ||||||||||||
| Diluted earnings per share attributable to Air Products | $2.73 | $2.57 | ||||||||||||
| Weighted Average Common Shares (in millions) | ||||||||||||||
| Basic | 222.5 | 222.2 | ||||||||||||
| Diluted | 222.8 | 222.6 |
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(Unaudited)
| Three Months Ended | |||||||||||
| 31 December | |||||||||||
| (Millions of U.S. Dollars) | 2023 | 2022 | |||||||||
| Net Income | $621.6 | $583.8 | |||||||||
| Other Comprehensive Income, net of tax: | |||||||||||
| Translation adjustments, net of tax of ($29.8) and ($38.0) | 380.6 | 509.6 | |||||||||
| Net (loss) gain on derivatives, net of tax of $5.5 and $38.2 | (161.1) | 121.0 | |||||||||
| Pension and postretirement benefits, net of tax of $— and $2.4 | — | 6.7 | |||||||||
| Reclassification adjustments: | |||||||||||
| Derivatives, net of tax of ($12.8) and ($21.7) | (42.2) | (68.7) | |||||||||
| Pension and postretirement benefits, net of tax of $4.2 and $3.7 | 13.7 | 11.9 | |||||||||
| Total Other Comprehensive Income | 191.0 | 580.5 | |||||||||
| Comprehensive Income | $812.6 | $1,164.3 | |||||||||
| Net Income Attributable to Noncontrolling Interests | 12.3 | 11.6 | |||||||||
| Other Comprehensive (Loss) Income Attributable to Noncontrolling Interests | (138.1) | 12.7 | |||||||||
| Comprehensive Income Attributable to Air Products | $938.4 | $1,140.0 |
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| 31 December | 30 September | ||||||||||
| (Millions of U.S. Dollars, except for share and per share data) | 2023 | 2023 | |||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash items | $1,962.6 | $1,617.0 | |||||||||
| Short-term investments | 271.8 | 332.2 | |||||||||
| Trade receivables, net | 1,725.4 | 1,700.4 | |||||||||
| Inventories | 709.3 | 651.8 | |||||||||
| Prepaid expenses | 206.8 | 177.0 | |||||||||
| Other receivables and current assets | 773.6 | 722.1 | |||||||||
| Total Current Assets | 5,649.5 | 5,200.5 | |||||||||
| Investment in net assets of and advances to equity affiliates | 4,685.2 | 4,617.8 | |||||||||
| Plant and equipment, at cost | 34,793.9 | 32,746.3 | |||||||||
| Less: accumulated depreciation | 15,858.4 | 15,274.2 | |||||||||
| Plant and equipment, net | 18,935.5 | 17,472.1 | |||||||||
| Goodwill, net | 899.4 | 861.7 | |||||||||
| Intangible assets, net | 339.1 | 334.6 | |||||||||
| Operating lease right-of-use assets, net | 978.8 | 974.0 | |||||||||
| Noncurrent lease receivables | 485.9 | 494.7 | |||||||||
| Financing receivables | 1,119.1 | 817.2 | |||||||||
| Other noncurrent assets | 1,025.7 | 1,229.9 | |||||||||
| Total Noncurrent Assets | 28,468.7 | 26,802.0 | |||||||||
| Total Assets(A) | $34,118.2 | $32,002.5 | |||||||||
| Liabilities and Equity | |||||||||||
| Current Liabilities | |||||||||||
| Payables and accrued liabilities | $2,717.9 | $2,890.1 | |||||||||
| Accrued income taxes | 166.9 | 131.2 | |||||||||
| Short-term borrowings | 16.4 | 259.5 | |||||||||
| Current portion of long-term debt | 218.0 | 615.0 | |||||||||
| Total Current Liabilities | 3,119.2 | 3,895.8 | |||||||||
| Long-term debt | 11,715.4 | 9,280.6 | |||||||||
| Long-term debt – related party | 157.9 | 150.7 | |||||||||
| Noncurrent operating lease liabilities | 635.1 | 631.1 | |||||||||
| Other noncurrent liabilities | 1,111.5 | 1,118.0 | |||||||||
| Deferred income taxes | 1,250.0 | 1,266.0 | |||||||||
| Total Noncurrent Liabilities | 14,869.9 | 12,446.4 | |||||||||
| Total Liabilities(A) | 17,989.1 | 16,342.2 | |||||||||
| Commitments and Contingencies - See Note 10 | |||||||||||
| Air Products Shareholders’ Equity | |||||||||||
| Common stock (par value $1 per share; issued 2024 and 2023 - 249,455,584 shares) | 249.4 | 249.4 | |||||||||
| Capital in excess of par value | 1,200.0 | 1,190.5 | |||||||||
| Retained earnings | 17,510.0 | 17,289.7 | |||||||||
| Accumulated other comprehensive loss | (2,120.3) | (2,449.4) | |||||||||
| Treasury stock, at cost (2024 - 27,154,533 shares; 2023 - 27,255,739 shares) | (1,966.1) | (1,967.3) | |||||||||
| Total Air Products Shareholders’ Equity | 14,873.0 | 14,312.9 | |||||||||
| Noncontrolling Interests(A) | 1,256.1 | 1,347.4 | |||||||||
| Total Equity | 16,129.1 | 15,660.3 | |||||||||
| Total Liabilities and Equity | $34,118.2 | $32,002.5 |
(A)Includes balances associated with a consolidated variable interest entity ("VIE"), including amounts reflected in "Total Assets" that can only be used to settle obligations of the VIE of $2,751.8 and $2,256.8 as of 31 December 2023 and 30 September 2023, respectively, as well as liabilities of the VIE reflected within "Total Liabilities" for which creditors do not have recourse to the general credit of Air Products of $2,166.1 and $1,461.1 as of 31 December 2023 and 30 September 2023, respectively. Refer to Note 3, Variable Interest Entities, for additional information regarding the NEOM Green Hydrogen Company joint venture.
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended | ||||||||
| 31 December | ||||||||
| (Millions of U.S. Dollars) | 2023 | 2022 | ||||||
| Operating Activities | ||||||||
| Net income | $621.6 | $583.8 | ||||||
| Less: Net income attributable to noncontrolling interests | 12.3 | 11.6 | ||||||
| Net income attributable to Air Products | $609.3 | $572.2 | ||||||
| Adjustments to reconcile income to cash provided by operating activities: | ||||||||
| Depreciation and amortization | 349.2 | 321.5 | ||||||
| Deferred income taxes | 13.5 | 13.8 | ||||||
| (Undistributed) distributed earnings of equity method investments | (41.5) | 17.2 | ||||||
| Gain on sale of assets and investments | (1.4) | (2.3) | ||||||
| Share-based compensation | 13.8 | 16.1 | ||||||
| Noncurrent lease receivables | 20.0 | 19.4 | ||||||
| Other adjustments | 33.3 | 99.0 | ||||||
| Working capital changes that provided (used) cash, excluding effects of acquisitions: | ||||||||
| Trade receivables | 11.8 | 40.4 | ||||||
| Inventories | (48.6) | (102.8) | ||||||
| Other receivables | (64.5) | (6.7) | ||||||
| Payables and accrued liabilities | (268.5) | (257.6) | ||||||
| Other working capital | 0.2 | (10.9) | ||||||
| Cash Provided by Operating Activities | $626.6 | $719.3 | ||||||
| Investing Activities | ||||||||
| Additions to plant and equipment, including long-term deposits | (1,445.5) | (834.2) | ||||||
| Investment in financing receivables | (301.8) | — | ||||||
| Proceeds from sale of assets and investments | 4.2 | 4.0 | ||||||
| Purchases of investments | (55.5) | (19.2) | ||||||
| Proceeds from investments | 120.1 | 591.5 | ||||||
| Other investing activities | 12.9 | 1.7 | ||||||
| Cash Used For Investing Activities | ($1,665.6) | ($256.2) | ||||||
| Financing Activities | ||||||||
| Long-term debt proceeds | 810.4 | 476.3 | ||||||
| Payments on long-term debt | (54.8) | (195.9) | ||||||
| Net increase (decrease) in commercial paper and short-term borrowings | 1,020.9 | (4.1) | ||||||
| Dividends paid to shareholders | (388.9) | (359.4) | ||||||
| Proceeds from stock option exercises | 5.3 | 14.0 | ||||||
| Investments by noncontrolling interests | 34.5 | — | ||||||
| Other financing activities | (64.6) | (16.5) | ||||||
| Cash Provided by (Used for) Financing Activities | $1,362.8 | ($85.6) | ||||||
| Effect of Exchange Rate Changes on Cash | 21.8 | 42.5 | ||||||
| Increase in cash and cash items | 345.6 | 420.0 | ||||||
| Cash and cash items – Beginning of year | 1,617.0 | 2,711.0 | ||||||
| Cash and Cash Items – End of Period | $1,962.6 | $3,131.0 | ||||||
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| Three Months Ended 31 December 2023 | ||||||||||||||||||||||||||
| (Millions of U.S. Dollars, except for per share data) | 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 at 30 September 2023 | $249.4 | $1,190.5 | $17,289.7 | ($2,449.4) | ($1,967.3) | $14,312.9 | $1,347.4 | $15,660.3 | ||||||||||||||||||
| Net income | — | — | 609.3 | — | — | 609.3 | 12.3 | 621.6 | ||||||||||||||||||
| Other comprehensive income | — | — | — | 329.1 | — | 329.1 | (138.1) | 191.0 | ||||||||||||||||||
| Dividends on common stock (per share $1.75) | — | — | (389.0) | — | — | (389.0) | — | (389.0) | ||||||||||||||||||
| Share-based compensation | — | 13.8 | — | — | — | 13.8 | — | 13.8 | ||||||||||||||||||
| Issuance of treasury shares for stock option and award plans | — | (4.4) | — | — | 1.2 | (3.2) | — | (3.2) | ||||||||||||||||||
| Investments by noncontrolling interests | — | — | — | — | — | — | 34.5 | 34.5 | ||||||||||||||||||
| Other equity transactions | — | 0.1 | — | — | — | 0.1 | — | 0.1 | ||||||||||||||||||
| Balance at 31 December 2023 | $249.4 | $1,200.0 | $17,510.0 | ($2,120.3) | ($1,966.1) | $14,873.0 | $1,256.1 | $16,129.1 |
| Three Months Ended 31 December 2022 | ||||||||||||||||||||||||||
| (Millions of U.S. Dollars, except for per share data) | 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 at 30 September 2022 | $249.4 | $1,141.4 | $16,520.3 | ($2,786.1) | ($1,981.0) | $13,144.0 | $558.4 | $13,702.4 | ||||||||||||||||||
| Net income | — | — | 572.2 | — | — | 572.2 | 11.6 | 583.8 | ||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | 567.8 | — | 567.8 | 12.7 | 580.5 | ||||||||||||||||||
| Dividends on common stock (per share $1.62) | — | — | (359.8) | — | — | (359.8) | — | (359.8) | ||||||||||||||||||
| Dividends to noncontrolling interests | — | — | — | — | — | — | (0.8) | (0.8) | ||||||||||||||||||
| Share-based compensation | — | 14.2 | — | — | — | 14.2 | — | 14.2 | ||||||||||||||||||
| Issuance of treasury shares for stock option and award plans | — | (7.4) | — | — | 5.8 | (1.6) | — | (1.6) | ||||||||||||||||||
| Other equity transactions | — | 0.2 | (1.3) | — | — | (1.1) | (0.2) | (1.3) | ||||||||||||||||||
| Balance at 31 December 2022 | $249.4 | $1,148.4 | $16,731.4 | ($2,218.3) | ($1,975.2) | $13,935.7 | $581.7 | $14,517.4 | ||||||||||||||||||
The accompanying notes are an integral part of these statements.
Air Products and Chemicals, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Millions of U.S. Dollars, unless otherwise indicated
1. BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES
As used in this report, unless the context indicates otherwise, the terms “we,” “our,” “us,” the “Company,” "Air Products," or “registrant” include our controlled subsidiaries and affiliates.
Basis of Presentation
The interim consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such rules and regulations. In our opinion, the accompanying statements reflect adjustments necessary to fairly present the financial position, results of operations, and cash flows for those periods indicated and contain adequate disclosures to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the notes to the interim consolidated financial statements.
To fully understand the basis of presentation, the interim consolidated financial statements and related notes included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended 30 September 2023 (the "2023 Form 10-K"), which was filed with the SEC on 16 November 2023. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.
Major Accounting Policies
Refer to our 2023 Form 10-K for a description of major accounting policies. There have been no significant changes to these accounting policies during the first three months of fiscal year 2024.
2. NEW ACCOUNTING GUIDANCE
New Accounting Guidance to be Implemented
Reportable Segment Disclosures
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures". The update includes enhanced disclosures about significant segment expenses and identification of the chief operating decision maker. The update will be effective in our Annual Report on Form 10-K for the fiscal year ending 30 September 2025 as well as interim periods thereafter, although early adoption is permitted. The amendments must be applied retrospectively to all prior periods presented. We are evaluating the impact this update will have on our disclosures.
Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740)—Improvements to Income Tax Disclosures” to expand income tax disclosures, primarily through disaggregation requirements for the rate reconciliation and income taxes paid. The update will be effective in our Annual Report on Form 10-K for the fiscal year ending 30 September 2026, although early adoption is permitted. The amendments should be applied on a prospective basis with a retrospective option. We are evaluating the impact this update will have on our disclosures.
3. VARIABLE INTEREST ENTITIES
We are the primary beneficiary of the NEOM Green Hydrogen Company joint venture ("NGHC"), which is a variable interest entity ("VIE") that is consolidated in our Middle East and India segment. We are not the primary beneficiary of any other material VIEs. We account for a VIE for which we have an equity interest and exercise significant influence but are not the primary beneficiary, such as the Jazan Integrated Gasification and Power Company joint venture ("JIGPC"), as an equity method investment. During the first quarter of fiscal year 2024, we determined that World Energy, LLC ("World Energy") is a VIE for which we have no equity interest and are not the primary beneficiary. Our variable interests in NGHC, JIGPC, and World Energy are further discussed below.
NGHC Joint Venture
The NEOM Green Hydrogen Project (the "NEOM project”) is a multi-billion dollar green hydrogen-based ammonia production facility that is being constructed in NEOM City, Saudi Arabia. Owned and operated by NGHC, the facility will be powered by renewable energy to produce green ammonia for Air Products as the exclusive offtaker under a long-term take-if-tendered agreement. We intend to transport the green ammonia around the world to be dissociated to produce green hydrogen for transportation and industrial markets.
In May 2023, NGHC finalized the $6.7 billion engineering, procurement, and construction ("EPC") agreement with Air Products named as the main contractor and system integrator for the facility. NGHC secured non-recourse project financing of approximately $6.1 billion, which is expected to fund about 73% of the project and will be drawn over the construction period. At the same time, NGHC secured additional non-recourse credit facilities totaling approximately $500 primarily for working capital needs. Under the financing, the assets of NGHC can only be used to settle obligations of the joint venture, and creditors of NGHC do not have recourse to the general credit of Air Products. Borrowings under the financing are reflected net of unamortized discounts and debt issuance costs within "Long-term debt" on our consolidated balance sheets. Principal borrowings totaled $2,129.4 and $1,364.8 as of 31 December 2023 and 30 September 2023, respectively. The increase from 30 September 2023 primarily relates to principal borrowings of approximately $620 as of 31 December 2023 on a 2.00% fixed-rate Saudi Riyal loan facility that matures in November 2040.
Air Products is an equal owner in NGHC with our joint venture partners, ACWA Power and NEOM Company. While we only hold one-third of the voting interests in the joint venture, substantially all the activities of the joint venture involve or are conducted on behalf of Air Products. Since we have disproportionately few voting rights relative to our economic interests in the joint venture, we determined that NGHC is a VIE. In addition, we determined that we are the primary beneficiary of NGHC since we have the power to unilaterally direct certain significant activities, including key design and construction decisions, and we share power with our joint venture partners related to other activities that are significant to the economic performance of NGHC. Therefore, we consolidate NGHC within the Middle East and India segment.
The table below summarizes balances associated with NGHC as reflected on our consolidated balance sheets:
| 31 December | 30 September | |||||||||||||
| 2023 | 2023 | |||||||||||||
| Assets | ||||||||||||||
| Cash and cash items | $402.3 | $78.2 | ||||||||||||
| Trade receivables, net | 14.6 | — | ||||||||||||
| Prepaid expenses | 30.5 | 21.4 | ||||||||||||
| Other receivables and current assets | 183.3 | 181.6 | ||||||||||||
| Total current assets | $630.7 | $281.2 | ||||||||||||
| Plant and equipment, net | 1,831.6 | 1,396.1 | ||||||||||||
| Operating lease right-of-use assets, net | 227.7 | 228.9 | ||||||||||||
| Other noncurrent assets | 61.8 | 350.6 | ||||||||||||
| Total noncurrent assets | $2,121.1 | $1,975.6 | ||||||||||||
| Total assets | $2,751.8 | $2,256.8 | ||||||||||||
| Liabilities | ||||||||||||||
| Payables and accrued liabilities | $207.0 | $141.0 | ||||||||||||
| Accrued income taxes | 2.2 | 0.6 | ||||||||||||
| Total current liabilities | $209.2 | $141.6 | ||||||||||||
| Long-term debt | 1,930.4 | 1,274.4 | ||||||||||||
| Noncurrent operating lease liabilities | 19.2 | 18.9 | ||||||||||||
| Other noncurrent liabilities | 3.3 | 2.1 | ||||||||||||
| Deferred income taxes | 4.0 | 24.1 | ||||||||||||
| Total noncurrent liabilities | $1,956.9 | $1,319.5 | ||||||||||||
| Total liabilities | $2,166.1 | $1,461.1 | ||||||||||||
| Equity | ||||||||||||||
| Accumulated other comprehensive income | $15.8 | $77.7 | ||||||||||||
| Noncontrolling interests | 580.1 | 723.6 |
JIGPC Joint Venture
JIGPC is a joint venture with Saudi Aramco Power Company (a subsidiary of Aramco), ACWA Power, and Air Products Qudra (“APQ”). JIGPC entered into project financing to purchase power blocks, gasifiers, air separation units, syngas cleanup assets, and utilities to supply electricity, steam, hydrogen, and utilities to Aramco’s refinery and terminal complex under a 25-year agreement, which commenced in the first quarter of fiscal year 2022. JIGPC recorded financing receivables upon acquisition of the assets and recognizes financing income over the supply term.
We determined JIGPC is a VIE for which we exercise significant influence but are not the primary beneficiary as we do not have the power to direct the activities that are most significant to its economic performance. Instead, these activities, including plant dispatch, operating and maintenance decisions, budgeting, capital expenditures, and financing, require unanimous approval of the owners or are controlled by the customer. Accordingly, we account for our 55% investment, which includes 4% that is attributable to the noncontrolling partner of APQ, under the equity method within the Middle East and India segment. The carrying value of our investment, including amounts attributable to noncontrolling interests, totaled $2,828.3 and $2,862.2 as of 31 December 2023 and 30 September 2023, respectively. Our loss exposure is limited to our investment in the joint venture.
Our investment primarily consists of shareholder loans that qualify as in-substance common stock in the joint venture. Certain shareholders receive a preferred cash distribution pursuant to the joint venture agreement, which specifies each shareholder’s share of income after considering the amount of cash available for distribution. As such, the earnings attributable to Air Products may not be proportionate to our ownership interest in the venture.
World Energy
In November 2023, we finalized an agreement to purchase a sustainable aviation fuel (“SAF”) facility in Paramount, California from World Energy. We determined the acquisition contains an embedded sales-type lease. As a result, we are accounting for the transaction as a financing arrangement and recorded a financing receivable of $210 as of 31 December 2023. We provided the remaining $90 million of financing available under this arrangement to World Energy in January 2024.
At the time of acquisition, we entered into a Master Project Agreement (“MPA”) containing terms for operation of the acquired facility as well as amended terms for the construction and operation of an SAF expansion project subject to construction at the same location. The MPA includes a tolling arrangement whereby we will receive feedstock from and produce renewable fuels for World Energy over a term that will conclude 15 years after onstream of the expansion project with the option to renew for two five-year terms.
During the first quarter of fiscal year 2024, we determined that World Energy is a VIE and our financing receivable represents a variable interest in World Energy. We are not the primary beneficiary as we do not have control over their key operating decisions, including feedstock supply, production of renewable fuels, and negotiating and executing supply agreements with customers. As of 31 December 2023, our maximum exposure to loss is approximately $1.9 billion. This includes project-related spending of $1.3 billion that is primarily capitalized within “Plant and equipment, net” and approximately $350 for open purchase commitments, both of which relate to the SAF expansion project, as well as $300 for our investment in the financing receivables discussed above.
4. REVENUE RECOGNITION
The majority of our revenue is generated from our sale of gas customers within the regional industrial gases segments. We distribute gases through either our on-site or merchant supply mode depending on various factors, including the customer's volume requirements and location. We also design and manufacture equipment for air separation, hydrocarbon recovery and purification, natural gas liquefaction, and liquid helium and liquid hydrogen transport and storage. The Corporate and other segment serves our sale of equipment customers.
Disaggregation of Revenue
The tables below present our consolidated sales disaggregated by supply mode for each of our reportable segments for the first three months of fiscal years 2024 and 2023. We believe this presentation best depicts the nature, timing, type of customer, and contract terms for our sales.
| Three Months Ended 31 December 2023 | |||||||||||||||||||||||
| Americas | Asia | Europe | Middle East and India | Corporate and other | Total | % | |||||||||||||||||
| On-site | $714.1 | $503.2 | $259.2 | $17.5 | $— | $1,494.0 | 50 | % | |||||||||||||||
| Merchant | 538.0 | 290.6 | 472.0 | 17.9 | — | 1,318.5 | 44 | % | |||||||||||||||
| Sale of equipment | — | — | — | — | 184.9 | 184.9 | 6 | % | |||||||||||||||
| Total | $1,252.1 | $793.8 | $731.2 | $35.4 | $184.9 | $2,997.4 | 100 | % | |||||||||||||||
| Three Months Ended 31 December 2022 | |||||||||||||||||||||||
| Americas | Asia | Europe | Middle East and India | Corporate and other | Total | % | |||||||||||||||||
| On-site | $845.8 | $457.7 | $328.1 | $18.8 | $— | $1,650.4 | 52 | % | |||||||||||||||
| Merchant | 538.4 | 320.1 | 463.8 | 22.6 | — | 1,344.9 | 42 | % | |||||||||||||||
| Sale of equipment | — | — | — | — | 179.4 | 179.4 | 6 | % | |||||||||||||||
| Total | $1,384.2 | $777.8 | $791.9 | $41.4 | $179.4 | $3,174.7 | 100 | % |
Interest income associated with financing and lease arrangements accounted for approximately 1% of our total consolidated sales during the three months ended 31 December 2023.
Remaining Performance Obligations
As of 31 December 2023, the transaction price allocated to remaining performance obligations is estimated to be approximately $27 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 the next five years and the balance thereafter.
Our remaining performance obligations do not include (1) expected revenue associated with new on-site plants that are not yet on-stream; (2) consideration associated with contracts that have an expected duration of less than one year; and (3) variable consideration for which we recognize revenue at the amount to which we have the right to invoice, including energy cost pass-through to customers.
In the future, actual amounts will differ due to events outside of our control, including, but not limited to, inflationary price escalations; currency exchange rates; and amended, terminated, or renewed contracts.
Contract Balances
The table below details balances arising from contracts with customers:
| 31 December | 30 September | |||||||||||||
| Balance Sheet Location | 2023 | 2023 | ||||||||||||
| Assets | ||||||||||||||
| Contract assets – current | Other receivables and current assets | $119.3 | $124.7 | |||||||||||
| Contract fulfillment costs – current | Other receivables and current assets | 96.2 | 89.0 | |||||||||||
| Liabilities | ||||||||||||||
| Contract liabilities – current | Payables and accrued liabilities | $386.0 | $413.0 | |||||||||||
| Contract liabilities – noncurrent | Other noncurrent liabilities | 130.7 | 136.9 |
During the first three months of fiscal year 2024, we recognized sales of approximately $115 associated with sale of equipment contracts that were included within our current contract liabilities as of 30 September 2023.
5. INVENTORIES
The components of inventories are as follows:
| 31 December | 30 September | |||||||||||||
| 2023 | 2023 | |||||||||||||
| Finished goods | $229.4 | $211.6 | ||||||||||||
| Work in process | 32.3 | 28.4 | ||||||||||||
| Raw materials, supplies, and other | 447.6 | 411.8 | ||||||||||||
| Inventories | $709.3 | $651.8 | ||||||||||||
6. GOODWILL
Changes to the carrying amount of consolidated goodwill by segment for the three months ended 31 December 2023 are as follows:
| Americas | Asia | Europe | Middle East and India | Corporate and other | Total | ||||||||||||||||||||||||||||||
| Goodwill, net as of 30 September 2023 | $146.6 | $171.9 | $493.5 | $15.8 | $33.9 | $861.7 | |||||||||||||||||||||||||||||
| Currency translation | 0.6 | 3.4 | 33.5 | — | 0.2 | 37.7 | |||||||||||||||||||||||||||||
| Goodwill, net as of 31 December 2023 | $147.2 | $175.3 | $527.0 | $15.8 | $34.1 | $899.4 |
| 31 December | 30 September | |||||||||||||
| 2023 | 2023 | |||||||||||||
| Goodwill, gross | $1,200.2 | $1,158.4 | ||||||||||||
| Accumulated impairment losses(A) | (300.8) | (296.7) | ||||||||||||
| Goodwill, net | $899.4 | $861.7 |
(A)We recorded impairment charges related to the Latin America reporting unit ("LASA") in the Americas segment in fiscal years 2017 and 2014. The balance of accumulated impairment losses fluctuates over time due to currency translation.
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.
7. FINANCIAL INSTRUMENTS
Currency Price Risk Management
Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency-denominated transactions and net investments in foreign operations. It is our policy to seek to minimize our cash flow volatility from changes in currency exchange rates. This is accomplished by identifying and evaluating the risk that our cash flows will change in value due to changes in exchange rates and by executing strategies necessary to manage such exposures. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.
Forward Exchange Contracts
We enter into forward exchange contracts to reduce the cash flow exposure to foreign currency fluctuations associated with highly anticipated cash flows and certain firm commitments, such as the purchase of plant and equipment. We also enter into forward exchange contracts to hedge the cash flow exposure on intercompany loans and third-party debt. This portfolio of forward exchange contracts consists primarily of Euros and U.S. Dollars. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 31 December 2023 is 2.9 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 multiple foreign currency pairs, with a profile that changes from time to time depending on our business activity and sourcing decisions.
The table below summarizes our outstanding currency price risk management instruments:
| 31 December 2023 | 30 September 2023 | |||||||||||||||||||||||||
| US$ Notional | Years Average Maturity | US$ Notional | Years Average Maturity | |||||||||||||||||||||||
| Forward Exchange Contracts: | ||||||||||||||||||||||||||
| Cash flow hedges | $4,658.6 | 0.6 | $4,463.2 | 0.7 | ||||||||||||||||||||||
| Net investment hedges | 898.5 | 2.3 | 864.0 | 2.5 | ||||||||||||||||||||||
| Not designated | 585.1 | 0.3 | 709.4 | 0.3 | ||||||||||||||||||||||
| Total Forward Exchange Contracts | $6,142.2 | 0.8 | $6,036.6 | 0.9 |
We also use foreign currency-denominated debt to hedge the foreign currency exposures of our net investment in certain foreign subsidiaries. The designated foreign currency-denominated debt and related accrued interest was €1,930.7 million ($2,131.3) at 31 December 2023 and €1,938.6 million ($2,049.7) at 30 September 2023. The designated foreign currency-denominated debt is presented within "Long-term debt" on the consolidated balance sheets.
Debt Portfolio Management
It is our policy to identify, on a continuing basis, the need for debt capital and to evaluate the financial risks inherent in funding the Company with debt capital. Reflecting the result of this ongoing review, we manage our debt portfolio and hedging program with the intent to (1) reduce funding risk with respect to borrowings made by us to preserve our access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) manage the aggregate interest rate risk and the debt portfolio in accordance with certain debt management parameters.
Interest Rate Management Contracts
We enter into interest rate swaps to change the fixed/variable interest rate mix of our debt portfolio in order to maintain the percentage of fixed- and variable-rate debt within the parameters set by management. In accordance with these parameters, the agreements are used to manage interest rate risks and costs inherent in our debt portfolio. Our interest rate management portfolio generally consists of fixed-to-floating interest rate swaps (which are designated as fair value hedges), pre-issuance interest rate swaps and treasury locks (which hedge the interest rate risk associated with anticipated fixed-rate debt issuances and are designated as cash flow hedges), and floating-to-fixed interest rate swaps (which are designated as cash flow hedges). As of 31 December 2023, the outstanding interest rate swaps were denominated in U.S. Dollars. The notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. When interest rate swaps are used to hedge variable-rate debt, the indices of the swaps and the debt to which they are designated are the same. It is our policy not to enter into any interest rate management contracts which lever a move in interest rates on a greater than one-to-one basis.
Cross Currency Interest Rate Swap Contracts
We enter into cross currency interest rate swap contracts when our risk management function deems necessary. These contracts may entail both the exchange of fixed- and floating-rate interest payments periodically over the life of the agreement and the exchange of one currency for another currency at inception and at a specified future date. The contracts are used to hedge either certain net investments in foreign operations or non-functional currency cash flows related to intercompany loans. The current cross currency interest rate swap portfolio consists of fixed-to-fixed swaps primarily between the U.S. Dollar and each of the Chinese Renminbi, Indian Rupee, and Chilean Peso.
The table below summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:
| 31 December 2023 | 30 September 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||
| US$ Notional | Average Pay % | Average Receive % | Years Average Maturity | US$ Notional | Average Pay % | Average Receive % | Years Average Maturity | |||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps (fair value hedge) | $800.0 | SOFR | 1.64 | % | 3.7 | $800.0 | SOFR | 1.64 | % | 4.0 | ||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps (cash flow hedge) | $1,371.4 | 2.82 | % | SOFR | 21.9 | $1,182.5 | 2.82 | % | SOFR | 22.1 | ||||||||||||||||||||||||||||||||||||||||
| Cross currency interest rate swaps (net investment hedge) | $37.3 | 3.67 | % | 3.69 | % | 0.5 | $80.8 | 4.60 | % | 3.65 | % | 0.9 | ||||||||||||||||||||||||||||||||||||||
| Cross currency interest rate swaps (cash flow hedge) | $569.2 | 4.95 | % | 3.23 | % | 2.0 | $598.2 | 4.89 | % | 3.22 | % | 2.2 | ||||||||||||||||||||||||||||||||||||||
| Cross currency interest rate swaps (not designated) | $36.6 | 5.39 | % | 3.64 | % | 1.0 | $44.5 | 5.39 | % | 3.54 | % | 0.2 |
The table below provides the amounts recorded on the consolidated balance sheet related to cumulative basis adjustments for fair value hedges:
| Carrying amounts of hedged item | Cumulative hedging adjustment, included in carrying amount | ||||||||||||||||
| 31 December | 30 September | 31 December | 30 September | ||||||||||||||
| Balance Sheet Location | 2023 | 2023 | 2023 | 2023 | |||||||||||||
| Long-term debt | $2,037.9 | $2,011.4 | ($54.4) | ($80.5) |
The table below summarizes the fair value and balance sheet location of our outstanding derivatives:
| Balance Sheet | 31 December | 30 September | Balance Sheet | 31 December | 30 September | |||||||||||||||
| Location | 2023 | 2023 | Location | 2023 | 2023 | |||||||||||||||
| Derivatives Designated as Hedging Instruments: | ||||||||||||||||||||
| Forward exchange contracts | Other receivables and current assets | $61.1 | $50.2 | Payables and accrued liabilities | $37.2 | $94.1 | ||||||||||||||
| Interest rate management contracts | Other receivables and current assets | 7.9 | 13.0 | Payables and accrued liabilities | 0.2 | — | ||||||||||||||
| Forward exchange contracts | Other noncurrent assets | 13.9 | 19.8 | Other noncurrent liabilities | 19.2 | 25.7 | ||||||||||||||
| Interest rate management contracts | Other noncurrent assets | 65.3 | 300.8 | Other noncurrent liabilities | 60.1 | 87.0 | ||||||||||||||
| Total Derivatives Designated as Hedging Instruments | $148.2 | $383.8 | $116.7 | $206.8 | ||||||||||||||||
| Derivatives Not Designated as Hedging Instruments: | ||||||||||||||||||||
| Forward exchange contracts | Other receivables and current assets | $3.7 | $6.4 | Payables and accrued liabilities | $5.5 | $4.6 | ||||||||||||||
| Interest rate management contracts | Other receivables and current assets | 1.2 | 3.9 | Payables and accrued liabilities | — | — | ||||||||||||||
| Forward exchange contracts | Other noncurrent assets | 0.1 | — | Other noncurrent liabilities | 0.1 | — | ||||||||||||||
| Total Derivatives Not Designated as Hedging Instruments | $5.0 | $10.3 | $5.6 | $4.6 | ||||||||||||||||
| Total Derivatives | $153.2 | $394.1 | $122.3 | $211.4 |
Refer to Note 8, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.
The tables below summarize gains (losses) recognized in other comprehensive income during the period related to our net investment and cash flow hedging relationships:
| Three Months Ended | |||||||||||||||||
| 31 December | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Net Investment Hedging Relationships | |||||||||||||||||
| Forward exchange contracts | ($31.8) | ($47.1) | |||||||||||||||
| Foreign currency debt | (89.9) | (115.3) | |||||||||||||||
| Cross currency interest rate swaps | (1.9) | (10.6) | |||||||||||||||
| Total Amount Recognized in OCI | (123.6) | (173.0) | |||||||||||||||
| Tax effects | 30.1 | 42.5 | |||||||||||||||
| Net Amount Recognized in OCI | ($93.5) | ($130.5) |
| Three Months Ended | |||||||||||||||||
| 31 December | |||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | |||||||||||||||||
| Forward exchange contracts | $115.1 | $188.8 | |||||||||||||||
| Forward exchange contracts, excluded components | (9.0) | (5.6) | |||||||||||||||
| Other(A) | (261.7) | (24.0) | |||||||||||||||
| Total Amount Recognized in OCI | (155.6) | 159.2 | |||||||||||||||
| Tax effects | (5.5) | (38.2) | |||||||||||||||
| Net Amount Recognized in OCI | ($161.1) | $121.0 |
(A)Other primarily includes interest rate and cross currency interest rate swaps for which excluded components are recognized in “Payables and accrued liabilities” and “Other receivables and current assets” as a component of accrued interest payable and accrued interest receivable, respectively. These excluded components are recorded in “Other non-operating income (expense), net” over the life of the cross currency interest rate swap. Other also includes the recognition of our share of gains and losses, net of tax, related to interest rate swaps held by our equity affiliates.
The table below summarizes the location and amounts recognized in income related to our cash flow and fair value hedging relationships by contract type:
| Three Months Ended 31 December | ||||||||||||||||||||||||||||||||||||||||||||
| Sales | Cost of Sales | Interest Expense | Other Non-Operating Income (Expense), Net | |||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| Total presented in consolidated income statements that includes effects of hedging below | $2,997.4 | $3,174.7 | $2,067.2 | $2,272.3 | $53.5 | $41.2 | ($14.8) | ($0.6) | ||||||||||||||||||||||||||||||||||||
| (Gain) Loss Effects of Cash Flow Hedging: | ||||||||||||||||||||||||||||||||||||||||||||
| Forward Exchange Contracts: | ||||||||||||||||||||||||||||||||||||||||||||
| Amount reclassified from OCI into income | $0.3 | $— | $1.3 | $1.2 | $— | $— | ($74.9) | ($117.8) | ||||||||||||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings based on amortization approach | — | — | — | — | — | — | 5.7 | 2.0 | ||||||||||||||||||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||||||||||||||||||
| Amount reclassified from OCI into income | — | — | — | — | 1.3 | 1.5 | 11.3 | 22.7 | ||||||||||||||||||||||||||||||||||||
| Total (Gain) Loss Reclassified from OCI to Income | 0.3 | — | 1.3 | 1.2 | 1.3 | 1.5 | (57.9) | (93.1) | ||||||||||||||||||||||||||||||||||||
| Tax effects | (0.1) | — | (0.3) | (0.2) | (0.5) | (0.5) | 13.7 | 22.4 | ||||||||||||||||||||||||||||||||||||
| Net (Gain) Loss Reclassified from OCI to Income | $0.2 | $— | $1.0 | $1.0 | $0.8 | $1.0 | ($44.2) | ($70.7) | ||||||||||||||||||||||||||||||||||||
| (Gain) Loss Effects of Fair Value Hedging: | ||||||||||||||||||||||||||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||||||||||||||||||
| Hedged items | $— | $— | $— | $— | $26.1 | $4.4 | $— | $— | ||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | — | — | — | — | (26.1) | (4.4) | — | — | ||||||||||||||||||||||||||||||||||||
| Total (Gain) Loss Recognized in Income | $— | $— | $— | $— | $— | $— | $— | $— |
The tables below summarize the location and amounts recognized in income related to our derivatives not designated as hedging instruments by contract type:
| Three Months Ended 31 December | |||||||||||||||||||||||
| Other Income (Expense), Net | Other Non-Operating Income (Expense), Net | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| The Effects of Derivatives Not Designated as Hedging Instruments: | |||||||||||||||||||||||
| Forward Exchange Contracts | $3.2 | $0.6 | ($1.2) | ($1.6) | |||||||||||||||||||
| Other | — | — | 0.8 | 1.1 | |||||||||||||||||||
| Total (Gain) Loss Recognized in Income | $3.2 | $0.6 | ($0.4) | ($0.5) |
The amount of unrealized gains and losses related to cash flow hedges as of 31 December 2023 that are expected to be reclassified to earnings in the next twelve months is not material.
The cash flows related to derivative contracts are generally 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 $69.6 and $94.2 as of 31 December 2023 and 30 September 2023, 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, Moody’s, or Fitch. The collateral that the counterparties would be required to post was $107.5 and $345.0 as of 31 December 2023 and 30 September 2023, respectively. No financial institution is required to post collateral at this time, as all have credit ratings at or above threshold.
8. FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, or the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 — Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3 — Inputs that are unobservable for the asset or liability based on our own assumptions about the assumptions market participants would use in pricing the asset or liability.
The methods and assumptions used to measure the fair value of financial instruments are as follows:
Short-term Investments
Short-term investments primarily include time deposits with original maturities greater than three months and less than one year. We estimated the fair value of our short-term investments, which approximates carrying value as of the balance sheet date, using Level 2 inputs within the fair value hierarchy. Level 2 measurements were based on current interest rates for similar investments with comparable credit risk and time to maturity.
Derivatives
The fair value of our interest rate management contracts and forward exchange contracts are quantified using the income approach and are based on estimates using standard pricing models. These models consider the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. These standard pricing models utilize inputs that are derived from or corroborated by observable market data such as interest rate yield curves as well as currency spot and forward rates; therefore, the fair value of our derivatives is classified as a Level 2 measurement. On an ongoing basis, we randomly test a subset of our valuations against valuations received from the transaction’s counterparty to validate the accuracy of our standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions.
Refer to Note 7, 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.
The carrying values and fair values of financial instruments were as follows:
| 31 December 2023 | 30 September 2023 | |||||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||
| Forward exchange contracts | $78.8 | $78.8 | $76.4 | $76.4 | ||||||||||||||||||||||
| Interest rate management contracts | 74.4 | 74.4 | 317.7 | 317.7 | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||
| Forward exchange contracts | $62.0 | $62.0 | $124.4 | $124.4 | ||||||||||||||||||||||
| Interest rate management contracts | 60.3 | 60.3 | 87.0 | 87.0 | ||||||||||||||||||||||
| Long-term debt, including current portion and related party | 12,091.3 | 11,692.9 | 10,046.3 | 9,173.5 |
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 table below summarizes assets and liabilities on the consolidated balance sheets that are measured at fair value on a recurring basis:
| 31 December 2023 | 30 September 2023 | ||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Assets at Fair Value | |||||||||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||||||||
| Forward exchange contracts | $78.8 | $— | $78.8 | $— | $76.4 | $— | $76.4 | $— | |||||||||||||||||||||
| Interest rate management contracts | 74.4 | — | 74.4 | — | 317.7 | — | 317.7 | — | |||||||||||||||||||||
| Total Assets at Fair Value | $153.2 | $— | $153.2 | $— | $394.1 | $— | $394.1 | $— | |||||||||||||||||||||
| Liabilities at Fair Value | |||||||||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||||||||
| Forward exchange contracts | $62.0 | $— | $62.0 | $— | $124.4 | $— | $124.4 | $— | |||||||||||||||||||||
| Interest rate management contracts | 60.3 | — | 60.3 | — | 87.0 | — | 87.0 | — | |||||||||||||||||||||
| Total Liabilities at Fair Value | $122.3 | $— | $122.3 | $— | $211.4 | $— | $211.4 | $— |
9. RETIREMENT BENEFITS
The components of net periodic cost for our defined benefit pension plans for the three months ended 31 December 2023 and 2022 were as follows:
| Pension Benefits | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| Three Months Ended 31 December | U.S. | International | Total | U.S. | International | Total | |||||||||||||||||||||||||||||
| Service cost | $2.4 | $2.8 | $5.2 | $2.7 | $3.3 | $6.0 | |||||||||||||||||||||||||||||
| Non-service cost: | |||||||||||||||||||||||||||||||||||
| Interest cost | 33.7 | 14.8 | 48.5 | 32.5 | 14.4 | 46.9 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (30.0) | (11.6) | (41.6) | (31.8) | (11.8) | (43.6) | |||||||||||||||||||||||||||||
| Prior service cost amortization | 0.3 | 0.2 | 0.5 | 0.3 | — | 0.3 | |||||||||||||||||||||||||||||
| Actuarial loss amortization | 14.3 | 3.2 | 17.5 | 14.8 | 3.0 | 17.8 | |||||||||||||||||||||||||||||
| Curtailments | — | — | — | — | (1.9) | (1.9) | |||||||||||||||||||||||||||||
| Other | — | 0.1 | 0.1 | — | 0.3 | 0.3 | |||||||||||||||||||||||||||||
| Net Periodic Cost | $20.7 | $9.5 | $30.2 | $18.5 | $7.3 | $25.8 | |||||||||||||||||||||||||||||
Our service costs are primarily included within "Cost of sales" and "Selling and administrative expense" on our consolidated income statements. The amount of service costs capitalized in the first three months of fiscal years 2024 and 2023 were not material. The non-service related impacts are presented outside operating income within "Other non-operating income (expense), net."
For the three months ended 31 December 2023 and 2022, our cash contributions to funded pension plans and benefit payments under unfunded pension plans were $12.0 and $8.0, respectively. Total contributions for fiscal year 2024 are expected to be approximately $35 to $45. During fiscal year 2023, total contributions were $32.6.
During the three months ended 31 December 2023 and 2022, we recognized actuarial gain amortization of $0.1 and $0.6, respectively, for our other postretirement benefits plan.
10. COMMITMENTS AND CONTINGENCIES
Litigation
We are involved in various legal proceedings, including commercial, competition, environmental, intellectual property, regulatory, product liability, and insurance matters. We do not currently believe there are any legal proceedings for which it is reasonably possible, individually or in the aggregate, to have a material impact on our financial condition, results of operations, or cash flows.
In September 2010, the Brazilian Administrative Council for Economic Defense ("CADE") issued a decision against our Brazilian subsidiary, Air Products Brasil Ltda., and several other Brazilian industrial gas companies for alleged anticompetitive activities. CADE imposed a civil fine of R$179.2 million (approximately $37 at 31 December 2023) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, following an investigation beginning in 2003, which alleged violation of competition laws with respect to the sale of industrial and medical gases. The fines are based on a percentage of our total revenue in Brazil in 2003.
We have denied the allegations made by the authorities and filed an appeal in October 2010 with the Brazilian courts. On 6 May 2014, our appeal was granted and the fine against Air Products Brasil Ltda. was dismissed. CADE has appealed that ruling and the matter remains pending. We, with advice of our outside legal counsel, have assessed the status of this matter and have concluded that, although an adverse final judgment after exhausting all appeals is possible, such a judgment is not probable. As a result, no provision has been made in the consolidated financial statements. In the event of an adverse final judgment, we estimate the maximum possible loss to be the full amount of the fine of R$179.2 million (approximately $37 at 31 December 2023) plus interest accrued thereon until final disposition of the proceedings.
Additionally, in April 2023, we received a favorable ruling from a Texas state court in litigation involving disputed energy management charges related to Winter Storm Uri, a severe winter weather storm that impacted the U.S. Gulf Coast in February 2021. The ruling is subject to appeal and had no impact on our consolidated financial statements for the three months ended 31 December 2023.
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 environmental laws relating to the designation of certain sites for investigation or remediation. Presently, there are 27 sites on which a final settlement or remediation has not been achieved where we, usually along with others, have been designated a potentially responsible party by environmental authorities or are otherwise engaged in investigation or remediation, including cleanup activity at certain of our current and former manufacturing sites. We continually monitor these sites for which we have environmental exposure.
Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The consolidated balance sheets at 31 December 2023 and 30 September 2023 included an accrual of $63.3 and $64.5, respectively, primarily as part of other noncurrent liabilities. The environmental liabilities will be paid over a period of up to 27 years. We estimate the exposure for environmental loss contingencies to range from $63 to a reasonably possible upper exposure of $77 as of 31 December 2023.
Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Using reasonably possible alternative assumptions of the exposure level could result in an increase to the environmental accrual. Due to the inherent uncertainties related to environmental exposures, a significant increase to the reasonably possible upper exposure level could occur if a new site is designated, the scope of remediation is increased, a different remediation alternative is identified, or a significant increase in our proportionate share occurs. We do not expect that any sum we may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse impact on our financial position or results of operations in any one year.
Pace
At 31 December 2023, $36.7 of the environmental accrual was related to our facility in Pace, Florida.
In 2006, we sold our Amines business, which included operations at the Pace facility and recognized a liability for retained environmental obligations associated with remediation activities at the facility. We are required by the Florida Department of Environmental Protection ("FDEP") and the United States Environmental Protection Agency ("USEPA") to continue our remediation efforts. We recognized a before-tax expense of $42 in fiscal year 2006 in results from discontinued operations and recorded an environmental accrual of $42 in continuing operations on the consolidated balance sheets.
In the first quarter of 2015, we entered into a consent order with the FDEP requiring us to continue our remediation efforts at the Pace facility and complete a cost review every five years. In fiscal year 2020, we completed an updated cost review of the environmental remediation status at the Pace facility. The review was completed in conjunction with requirements to maintain financial assurance per the consent order issued by the FDEP discussed below. Based on our review, we expect ongoing activities to continue for 27 years. As a result of these changes, we increased our environmental accrual for this site by $19 in continuing operations on the consolidated balance sheets and recognized a before-tax expense of $19 in results from discontinued operations in fiscal year 2020. There have been no significant changes to the estimated exposure range related to the Pace facility since fiscal year 2020.
We have implemented many of the remedial corrective measures at the Pace facility required under the 1995 consent orders issued by the FDEP and the USEPA. Contaminated soils have been bioremediated, and the treated soils have been secured in a lined on-site corrective action management unit. Several groundwater recovery systems have been installed to contain and remove contamination from groundwater. We completed an extensive assessment of the site to determine the efficacy of existing measures, what additional corrective measures may be needed, and whether newer remediation technologies that were not available in the 1990s might be suitable to more quickly and effectively remediate groundwater. Based on assessment results, we completed a focused feasibility study that has identified alternative approaches that may more effectively remove contaminants. We continue to review alternative remedial approaches with the FDEP and completed additional field work during 2021 to support the design of an improved groundwater recovery network with the objective of targeting areas of higher contaminant concentration and avoiding areas of high groundwater iron which has proven to be a significant operability issue for the project. The design of the optimized recovery system was initiated in fiscal year 2023 with construction expected to begin in fiscal year 2025. In fiscal year 2025, we expect to connect groundwater recovery wells and ancillary equipment to the existing groundwater recovery system. Further, we expect additional future capital expenditures to consider the extended time horizon for remediation at the site.
Piedmont
At 31 December 2023, $4.1 of the environmental accrual was related to a production facility site in Piedmont, South Carolina.
On 30 June 2008, we sold our Elkton, Maryland, and Piedmont, South Carolina, production facilities and the related North American atmospheric emulsions and global pressure sensitive adhesives businesses. In connection with the sale, we recognized a liability for retained environmental obligations associated with remediation activities at the Piedmont site. This site is under active remediation for contamination caused by an insolvent prior owner.
We are required by the South Carolina Department of Health and Environmental Control ("SCDHEC") to address both contaminated soil and groundwater. Numerous areas of soil contamination have been addressed, and contaminated groundwater is being recovered and treated. The SCDHEC issued its final approval to the site-wide feasibility study on 13 June 2017 and the Record of Decision for the site on 27 June 2018, after which we signed a Consent Agreement Amendment memorializing our obligations to complete the cleanup of the site. Remediation has started in accordance with the design, which includes in-situ chemical oxidation treatment, as well as soil vapor extraction to remove volatile organic compounds from the unsaturated soils beneath the impacted areas of the plant. We estimate that source area remediation and groundwater recovery and treatment will continue through 2029. Thereafter, we expect this site to go into a state of monitored natural attenuation through 2047.
We recognized a before-tax expense of $24 in 2008 as a component of income from discontinued operations and recorded an environmental liability of $24 in continuing operations on the consolidated balance sheets. There have been no significant changes to the estimated exposure.
Pasadena
At 31 December 2023, $10.4 of the environmental accrual was related to a production facility site in Pasadena, Texas.
During fiscal year 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 continue 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, continuing post closure care for two closed RCRA surface impoundment units, and maintaining engineering controls. Additionally, we have conducted an interim corrective action to treat impacted soils as recommended in the TCEQ 2019 Annual Report. In 2012, we estimated the total exposure at this site to be $13. There have been no significant changes to the estimated exposure.
11. SHARE-BASED COMPENSATION
Our outstanding share-based compensation programs include deferred stock units and stock options. During the three months ended 31 December 2023, we granted market-based and time-based deferred stock units. Under all programs, the terms of the awards are fixed at the grant date. We issue shares from treasury stock upon the payout of deferred stock units and the exercise of stock options. As of 31 December 2023, there were 1.0 million shares available for future grant under our Long-Term Incentive Plan ("LTIP"), which is shareholder approved.
Share-based compensation cost recognized on the consolidated income statements is summarized below:
| Three Months Ended | ||||||||||||||||||||||||||
| 31 December | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| Before-tax share-based compensation cost | $13.6 | $16.9 | ||||||||||||||||||||||||
| Income tax benefit | (3.3) | (4.1) | ||||||||||||||||||||||||
| After-tax share-based compensation cost | $10.3 | $12.8 |
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 the first three months of fiscal years 2024 and 2023 was not material.
Deferred Stock Units
During the three months ended 31 December 2023, we granted 102,120 market-based deferred stock units. The market-based deferred stock units are earned over the performance period beginning 1 October 2023 and ending 30 September 2026, conditioned on the level of our total shareholder return in relation to the S&P 500 Index over the three-year performance period.
The market-based deferred stock units had an estimated grant-date fair value of $302.10 per unit, which was estimated using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards. We generally expense the grant-date fair value of these awards on a straight-line basis over the vesting period. The calculation of the fair value of market-based deferred stock units used the following assumptions:
| Expected volatility | 25.0 | % | ||||||
| Risk-free interest rate | 4.3 | % | ||||||
| Expected dividend yield | 2.6 | % |
In addition, during the three months ended 31 December 2023, we granted 132,317 time-based deferred stock units at a weighted average grant-date fair value of $273.02.
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The table below summarizes changes in accumulated other comprehensive loss ("AOCL"), net of tax, attributable to Air Products for the three months ended 31 December 2023:
| Derivatives qualifying as hedges | Foreign currency translation adjustments | Pension and postretirement benefits | Total | |||||||||||
| Balance at 30 September 2023 | $61.1 | ($1,913.3) | ($597.2) | ($2,449.4) | ||||||||||
| Other comprehensive (loss) income before reclassifications | (161.1) | 380.6 | — | 219.5 | ||||||||||
| Amounts reclassified from AOCL | (42.2) | — | 13.7 | (28.5) | ||||||||||
| Net current period other comprehensive (loss) income | (203.3) | 380.6 | 13.7 | 191.0 | ||||||||||
| Amount attributable to noncontrolling interests | (154.1) | 16.0 | — | (138.1) | ||||||||||
| Balance at 31 December 2023 | $11.9 | ($1,548.7) | ($583.5) | ($2,120.3) |
The table below summarizes the reclassifications out of AOCL and the affected line item on the consolidated income statements:
| Three Months Ended | ||||||||||||||
| 31 December | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Gain on Cash Flow Hedges, net of tax | ||||||||||||||
| Sales | $0.2 | $— | ||||||||||||
| Cost of sales | 1.0 | 1.0 | ||||||||||||
| Interest expense | 0.8 | 1.0 | ||||||||||||
| Other non-operating income (expense), net | (44.2) | (70.7) | ||||||||||||
| Total Gain on Cash Flow Hedges, net of tax | ($42.2) | ($68.7) | ||||||||||||
| Pension and Postretirement Benefits, net of tax(A) | $13.7 | $11.9 |
(A)The components of net periodic benefit/cost reclassified out of AOCL include items such as prior service cost amortization, actuarial loss amortization, settlements, and curtailments and are included in “Other non-operating income (expense), net” on the consolidated income statements. Refer to Note 9, Retirement Benefits, for additional information.
13. EARNINGS PER SHARE
The table below details the computation of basic and diluted earnings per share ("EPS"):
| Three Months Ended | |||||||||||||||||||||||
| 31 December | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net income attributable to Air Products | $609.3 | $572.2 | |||||||||||||||||||||
| Denominator (in millions) | |||||||||||||||||||||||
| Weighted average common shares — Basic | 222.5 | 222.2 | |||||||||||||||||||||
| Effect of dilutive securities | |||||||||||||||||||||||
| Employee stock option and other award plans | 0.3 | 0.4 | |||||||||||||||||||||
| Weighted average common shares — Diluted | 222.8 | 222.6 | |||||||||||||||||||||
| Per Share Data (U.S. Dollars per share) | |||||||||||||||||||||||
| Basic EPS attributable to Air Products | $2.74 | $2.58 | |||||||||||||||||||||
| Diluted EPS attributable to Air Products | $2.73 | $2.57 |
Antidilutive outstanding share-based awards were not material for the three months ended 31 December 2023 and 2022.
14. SUPPLEMENTAL INFORMATION
Related Party Transactions
We have related party sales to some of our equity affiliates and joint venture partners as well as other income primarily from fees charged for use of Air Products' patents and technology. Sales to and other income from related parties totaled approximately $95 and $80 for the three months ended 31 December 2023 and 2022, respectively. Sales agreements with related parties include terms that are consistent with those that we believe would have been negotiated at an arm’s length with an independent party. As of 31 December 2023 and 30 September 2023, our consolidated balance sheets included related party trade receivables of approximately $90 and $80, respectively.
Total debt owed to related parties was $294.8 and $328.3 as of 31 December 2023 and 30 September 2023, respectively, of which $136.9 and $177.6, respectively, was reflected within "Current portion of long-term debt" on our consolidated balance sheets. Our related party debt primarily includes a loan with our joint venture partner, Lu’An Clean Energy Company.
Uzbekistan Asset Purchase
On 25 May 2023, we entered into an investment agreement with the Government of the Republic of Uzbekistan and Uzbekneftegaz JSC (“UNG”) to purchase a natural gas-to-syngas processing facility in Qashqadaryo Province, Uzbekistan, for $1 billion. Under the agreement, Air Products will acquire, own, and operate the facility and supply all offtake products to UNG under a 15-year on-site contract, with UNG supplying the feedstock natural gas and utilities. We are accounting for the transaction as a financing arrangement because UNG has the right to reacquire the facility at the end of the contract term. Accordingly, progress payments of approximately $910, of which $100 was paid during the first quarter of fiscal year 2024, are reflected within "Financing receivables" on our consolidated balance sheet as of 31 December 2023.
Accrual for Business and Asset Actions
In fiscal year 2023, we recognized an expense of $27.0 for severance and other benefits associated with position eliminations and restructuring of certain organizations globally. The charge was not recorded in segment results. The table below reconciles the charge to the carrying amount of the accrual included within "Payables and accrued liabilities" on our consolidated balance sheets as of 31 December 2023:
| Fiscal year 2023 charge | $27.0 | ||||
| Cash payments | (6.8) | ||||
| Currency translation adjustment | (0.4) | ||||
| Accrual as of 30 September 2023 | $19.8 | ||||
| Cash payments | (3.4) | ||||
| Currency translation adjustment | 0.4 | ||||
| Accrual as of 31 December 2023 | $16.8 |
Debt
Third-party long-term debt was $11,715.4 and $9,280.6 as of 31 December 2023 and 30 September 2023, respectively. The increase from 30 September 2023 was primarily due to the issuance of commercial paper as well as additional borrowings under the project financing associated with the NEOM Green Hydrogen Project as discussed in Note 3, Variable Interest Entities. As of 31 December 2023, we classified the outstanding commercial paper, which totaled approximately $1.3 billion, as well as our 3.35% Senior Note of $400 maturing in July 2024 as long-term debt as we have the ability to refinance the debt under our $2.75 billion revolving credit agreement (the “2021 Credit Agreement”) maturing in 2026. Our current intent is to refinance this debt via the U.S. public debt market.
Changes in Estimates
Changes in estimates on sale of equipment projects accounted for under the cost incurred input method are recognized as a cumulative adjustment for the inception-to-date effect of such change. We recorded changes to project estimates that unfavorably impacted operating income by approximately $30 and $25 for the three months ended 31 December 2023 and 2022, respectively.
Income Taxes
Our effective tax rate was 17.9% and 18.9% for the three months ended 31 December 2023 and 2022, respectively.
Income tax payments, net of refunds, were $90.1 and $88.5 for the three months ended 31 December 2023 and 2022, respectively.
15. BUSINESS SEGMENT INFORMATION
Our reportable segments reflect the manner in which our chief operating decision maker reviews results and allocates resources. Our reportable segments are as follows:
-
Americas;
-
Asia;
-
Europe;
-
Middle East and India; and
-
Corporate and other
Except for the Corporate and other segment, each reportable segment meets the definition of an operating segment and does not include the aggregation of multiple operating segments. Our Corporate and other segment includes the aggregation of three operating segments that meet the aggregation criteria under GAAP.
Summary by Business Segment
| Americas | Asia | Europe | Middle East and India | Corporate and other | Total | ||||||||||||||||||
| Three Months Ended 31 December 2023 | |||||||||||||||||||||||
| Sales | $1,252.1 | $793.8 | $731.2 | $35.4 | $184.9 | $2,997.4 | (A) | ||||||||||||||||
| Operating income (loss) | 354.4 | 211.2 | 197.6 | 3.9 | (100.2) | 666.9 | |||||||||||||||||
| Depreciation and amortization | 169.7 | 111.8 | 48.2 | 6.6 | 12.9 | 349.2 | |||||||||||||||||
| Equity affiliates' income | 37.1 | 4.2 | 20.7 | 92.9 | 3.5 | 158.4 | |||||||||||||||||
| Three Months Ended 31 December 2022 | |||||||||||||||||||||||
| Sales | $1,384.2 | $777.8 | $791.9 | $41.4 | $179.4 | $3,174.7 | (A) | ||||||||||||||||
| Operating income (loss) | 343.0 | 235.9 | 145.8 | 6.7 | (79.4) | 652.0 | |||||||||||||||||
| Depreciation and amortization | 156.0 | 101.9 | 44.3 | 6.6 | 12.7 | 321.5 | |||||||||||||||||
| Equity affiliates' income | 16.4 | 7.4 | 17.7 | 64.1 | 4.4 | 110.0 | |||||||||||||||||
| Total Assets | |||||||||||||||||||||||
| 31 December 2023 | $10,666.2 | $7,318.0 | $5,120.9 | $6,214.1 | $4,799.0 | $34,118.2 | |||||||||||||||||
| 30 September 2023 | 9,927.5 | 7,009.6 | 4,649.8 | 5,708.4 | 4,707.2 | 32,002.5 |
(A)Sales relate to external customers only. All intersegment sales are eliminated in consolidation.
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