10-Q 1 apd-10qx31mar2017.htm FORM 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 31 March 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 1-4534
AIR PRODUCTS AND CHEMICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
23-1274455
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
7201 Hamilton Boulevard, Allentown, Pennsylvania
 
18195-1501
(Address of Principal Executive Offices)
 
(Zip Code)
610-481-4911
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated
filer x
 
Accelerated
filer ¨
 
Non-accelerated
filer ¨
 
Smaller reporting
company ¨
 
Emerging
growth company ¨
 
 
(Do not check if a smaller reporting company)
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at 31 March 2017
Common Stock, $1 par value

217,724,491



AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX

2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
 
Three Months Ended
Six Months Ended
 
31 March
31 March
(Millions of dollars, except for share data)
2017
2016
2017
2016
Sales
$
1,980.1

$
1,777.4

$
3,862.6

$
3,643.7

Cost of sales
1,403.8

1,213.0

2,721.9

2,508.9

Selling and administrative
177.9

167.8

343.6

341.7

Research and development
14.8

18.2

29.9

35.1

Business separation costs
—

7.4

30.2

19.4

Cost reduction and asset actions
10.3

10.7

60.3

10.7

Pension settlement loss
4.1

2.0

4.1

2.0

Other income (expense), net
22.0

13.3

46.7

18.2

Operating Income
391.2

371.6

719.3

744.1

Equity affiliates’ income
34.2

32.3

72.2

65.6

Interest expense
30.5

25.7

60.0

47.9

Other non-operating income (expense), net
9.7

—

9.7

—

Income From Continuing Operations Before Taxes
404.6

378.2

741.2

761.8

Income tax provision
94.5

93.5

172.9

189.9

Income from Continuing Operations
310.1

284.7

568.3

571.9

Income (Loss) From Discontinued Operations, net of tax
1,825.6

(750.2
)
1,873.8

(665.4
)
Net Income (Loss)
2,135.7

(465.5
)
2,442.1

(93.5
)
Net Income Attributable to Noncontrolling Interests of Continuing Operations
5.7

5.8

12.3

12.1

Net Income Attributable to Noncontrolling Interests of Discontinued Operations
—

2.0

—

4.1

Net Income (Loss) Attributable to Air Products
$
2,130.0

$
(473.3
)
$
2,429.8

$
(109.7
)
Net Income Attributable to Air Products
 
 
 
 
Income from continuing operations
$
304.4

$
278.9

$
556.0

$
559.8

Income (Loss) from discontinued operations
1,825.6

(752.2
)
1,873.8

(669.5
)
Net Income (Loss) Attributable to Air Products
$
2,130.0

$
(473.3
)
$
2,429.8

$
(109.7
)
Basic Earnings Per Common Share Attributable to Air Products
 
 
 
 
Income from continuing operations
$
1.40

$
1.29

$
2.55

$
2.59

Income (Loss) from discontinued operations
8.38

(3.48
)
8.61

(3.10
)
Net Income (Loss) Attributable to Air Products
$
9.78

$
(2.19
)
$
11.16

$
(.51
)
Diluted Earnings Per Common Share Attributable to Air Products
 
 
 
 
Income from continuing operations
$
1.39

$
1.28

$
2.53

$
2.57

Income (Loss) from discontinued operations
8.31

(3.45
)
8.53

(3.08
)
Net Income (Loss) Attributable to Air Products
$
9.70

$
(2.17
)
$
11.06

$
(.51
)
Weighted Average Common Shares – Basic (in millions)
217.9

216.1

217.8

215.9

Weighted Average Common Shares – Diluted (in millions)
219.7

217.9

219.6

217.8

Dividends Declared Per Common Share – Cash
$
.95

$
.86

$
1.81

$
1.67

The accompanying notes are an integral part of these statements.

3


AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(Unaudited)
 
 
Three Months Ended
 
 
31 March
(Millions of dollars)
 
2017
 
2016
Net Income (Loss)
 
$
2,135.7

 
$
(465.5
)
Other Comprehensive Income, net of tax:
 
 
 
 
Translation adjustments, net of tax of ($8.0) and ($19.1)
 
149.6

 
139.9

Net gain (loss) on derivatives, net of tax of ($5.7) and $10.2
 
(15.4
)
 
12.8

Pension and postretirement benefits, net of tax of $1.2
 
3.8

 
—

Reclassification adjustments:
 
 
 
 
Currency translation adjustment
 
49.1

 
.4

Derivatives, net of tax of $2.7 and ($0.5)
 
5.8

 
(11.1
)
Pension and postretirement benefits, net of tax of $13.7 and $11.3
 
30.1

 
22.7

Total Other Comprehensive Income
 
223.0

 
164.7

Comprehensive Income (Loss)
 
2,358.7

 
(300.8
)
Net Income Attributable to Noncontrolling Interests
 
5.7

 
7.8

Other Comprehensive Income Attributable to Noncontrolling Interests
 
5.0

 
2.8

Comprehensive Income (Loss) Attributable to Air Products
 
$
2,348.0

 
$
(311.4
)
 
 
 
 
 
 
 
Six Months Ended
 
 
31 March
(Millions of dollars)
 
2017
 
2016
Net Income (Loss)
 
$
2,442.1

 
$
(93.5
)
Other Comprehensive Income (Loss), net of tax:
 
 
 
 
Translation adjustments, net of tax of $24.3 and ($25.8)
 
(131.6
)
 
37.0

Net gain (loss) on derivatives, net of tax of ($16.4) and $15.0
 
(25.2
)
 
28.8

Pension and postretirement benefits, net of tax of $1.2
 
3.8

 
—

Reclassification adjustments:
 
 
 
 
Currency translation adjustment
 
49.1

 
2.8

Derivatives, net of tax of $13.3 and ($8.5)
 
31.4

 
(30.4
)
Pension and postretirement benefits, net of tax of $26.6 and $21.4
 
57.5

 
43.8

Total Other Comprehensive Income (Loss)
 
(15.0
)
 
82.0

Comprehensive Income (Loss)
 
2,427.1

 
(11.5
)
Net Income Attributable to Noncontrolling Interests
 
12.3

 
16.2

Other Comprehensive Income Attributable to Noncontrolling Interests
 
1.9

 
2.8

Comprehensive Income (Loss) Attributable to Air Products
 
$
2,412.9

 
$
(30.5
)
The accompanying notes are an integral part of these statements.


4



AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
31 March
 
30 September
(Millions of dollars, except for share data)
 
2017
 
2016
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash items
 
$
1,869.3

 
$
1,293.2

Short-term investments
 
1,423.2

 
—

Trade receivables, net
 
1,176.3

 
1,146.2

Inventories
 
322.8

 
255.0

Contracts in progress, less progress billings
 
68.8

 
64.6

Prepaid expenses
 
61.9

 
93.9

Other receivables and current assets
 
362.0

 
538.2

Current assets of discontinued operations
 
9.8

 
926.2

Total Current Assets
 
5,294.1

 
4,317.3

Investment in net assets of and advances to equity affiliates
 
1,296.3

 
1,283.6

Plant and equipment, at cost
 
18,716.2

 
18,660.2

Less: accumulated depreciation
 
10,518.0

 
10,400.5

Plant and equipment, net
 
8,198.2

 
8,259.7

Goodwill, net
 
827.2

 
845.1

Intangible assets, net
 
377.6

 
387.9

Noncurrent capital lease receivables
 
1,147.9

 
1,221.7

Other noncurrent assets
 
730.2

 
671.0

Noncurrent assets of discontinued operations
 
—

 
1,042.3

Total Noncurrent Assets
 
12,577.4

 
13,711.3

Total Assets
 
$
17,871.5

 
$
18,028.6

Liabilities and Equity
 
 
 
 
Current Liabilities
 
 
 
 
Payables and accrued liabilities
 
$
1,490.6

 
$
1,652.2

Accrued income taxes
 
544.8

 
117.9

Short-term borrowings
 
122.3

 
935.8

Current portion of long-term debt
 
420.5

 
365.4

Current liabilities of discontinued operations
 
24.1

 
211.8

Total Current Liabilities
 
2,602.3

 
3,283.1

Long-term debt
 
3,300.4

 
3,909.7

Other noncurrent liabilities
 
1,897.9

 
1,816.5

Deferred income taxes
 
650.7

 
710.4

Noncurrent liabilities of discontinued operations
 
—

 
1,095.5

Total Noncurrent Liabilities
 
5,849.0

 
7,532.1

Total Liabilities
 
8,451.3

 
10,815.2

Commitments and Contingencies – See Note 11
 

 

Air Products Shareholders’ Equity
 
 
 
 
Common stock (par value $1 per share; issued 2017 and 2016 - 249,455,584 shares)
 
249.4

 
249.4

Capital in excess of par value
 
975.5

 
970.0

Retained earnings
 
12,692.5

 
10,475.5

Accumulated other comprehensive loss
 
(2,393.7
)
 
(2,388.3
)
Treasury stock, at cost (2017 - 31,731,093 shares; 2016 - 32,104,759 shares)
 
(2,206.3
)
 
(2,227.0
)
Total Air Products Shareholders’ Equity
 
9,317.4

 
7,079.6

Noncontrolling Interests
 
102.8

 
133.8

Total Equity
 
9,420.2

 
7,213.4

Total Liabilities and Equity
 
$
17,871.5

 
$
18,028.6

The accompanying notes are an integral part of these statements.

5


AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
31 March
(Millions of dollars)
2017
2016
Operating Activities
 
 
Net income (loss)
$
2,442.1

$
(93.5
)
Less: Net income attributable to noncontrolling interests of continuing operations
12.3

12.1

Less: Net income attributable to noncontrolling interests of discontinued operations
—

4.1

Net income (loss) attributable to Air Products
2,429.8

(109.7
)
(Income) Loss from discontinued operations
(1,873.8
)
669.5

Income from continuing operations attributable to Air Products
556.0

559.8

Adjustments to reconcile income to cash provided by operating activities:
 
 
Depreciation and amortization
417.9

428.6

Deferred income taxes
(68.6
)
80.0

Undistributed earnings of unconsolidated affiliates
(31.5
)
(7.4
)
Gain on sale of assets and investments
(6.5
)
(2.3
)
Share-based compensation
18.5

16.4

Noncurrent capital lease receivables
45.4

40.6

Write-down of long-lived assets associated with restructuring
45.7

—

Other adjustments
34.0

37.8

Working capital changes that provided (used) cash, excluding effects of acquisitions and divestitures:
 
 
Trade receivables
(53.8
)
46.1

Inventories
20.7

(1.1
)
Contracts in progress, less progress billings
(5.0
)
(38.3
)
Other receivables
118.4

(54.4
)
Payables and accrued liabilities
(178.6
)
(191.5
)
Other working capital
(51.4
)
(24.3
)
Cash Provided by Operating Activities
861.2

890.0

Investing Activities
 
 
Additions to plant and equipment
(532.2
)
(472.0
)
Investment in and advances to unconsolidated affiliates
(8.9
)
(1.5
)
Proceeds from sale of assets and investments
13.5

38.1

Purchases of investments
(1,823.2
)
—

Proceeds from investments
400.0

—

Other investing activities
(1.6
)
(1.0
)
Cash Used for Investing Activities
(1,952.4
)
(436.4
)
Financing Activities
 
 
Long-term debt proceeds
1.3

—

Payments on long-term debt
(469.7
)
(65.6
)
Net decrease in commercial paper and short-term borrowings
(816.6
)
(1.6
)
Dividends paid to shareholders
(374.0
)
(349.1
)
Proceeds from stock option exercises
19.9

35.5

Other financing activities
(22.7
)
(21.0
)
Cash Used for Financing Activities
(1,661.8
)
(401.8
)
Discontinued Operations
 
 
Cash (used for) provided by operating activities
(520.8
)
182.1

Cash provided by (used for) investing activities
3,750.6

(127.3
)
Cash provided by (used for) investing activities
69.5

(6.8
)
Cash Provided by Discontinued Operations
3,299.3

48.0

Effect of Exchange Rate Changes on Cash
(7.8
)
6.9

Increase in Cash and Cash Items
538.5

106.7

Cash and Cash Items – Beginning of Year
1,330.8

206.4

Cash and Cash Items – End of Period
$
1,869.3

$
313.1

Less: Cash and Cash Items – Discontinued Operations
—

26.4

Cash and Cash Items – Continuing Operations
$
1,869.3

$
286.7

The accompanying notes are an integral part of these statements.

6


AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars unless otherwise indicated, except for share data)

1.
BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES
Refer to our 2016 Form 10-K for a description of major accounting policies. There have been no significant changes to these accounting policies during the first six months of fiscal year 2017 other than those detailed in Note 2, New Accounting Guidance. Certain prior year information has been reclassified to conform to the fiscal year 2017 presentation.
The results of our previous Material Technologies segment, which contained the Electronic Materials Division (EMD) and Performance Materials Division (PMD), and the former Energy-from-Waste segment have been presented as discontinued operations. Refer to Note 3, Discontinued Operations, for additional details. The results of operations and cash flows of these businesses have been removed from the results of continuing operations and segment results for all periods presented. The assets and liabilities of the discontinued operations have been reclassified and are segregated in the consolidated balance sheets. The comprehensive income related to these businesses has not been segregated and is included in the consolidated comprehensive income statement for all periods presented. The notes to the interim consolidated financial statements, unless otherwise indicated, are on a continuing operations basis.
As further discussed in Note 3, Discontinued Operations, we completed the sale of PMD to Evonik Industries AG on 3 January 2017. A portion of the proceeds from the sale have been included in "Short-term investments" on the consolidated balance sheets. Associated interest income has been reflected on the consolidated income statements as “Other non-operating income (expense), net."
The consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries (“we,” “our,” “us,” the “Company,” “Air Products,” or “registrant”) included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (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 present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the notes. The interim results for the periods indicated herein, however, do not reflect certain adjustments, such as the valuation of inventories on the last-in, first-out (LIFO) cost basis, which are only finally determined on an annual basis. The consolidated financial statements and related notes included herein should be read in conjunction with the financial statements and notes thereto included in our latest Form 10-K in order to fully understand the basis of presentation. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

2.
NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented in 2017
Consolidation Analysis
In February 2015, the Financial Accounting Standards Board (FASB) issued an update to amend current consolidation guidance. The guidance impacts the analysis an entity must perform in determining if it should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures. We adopted this guidance in the first quarter of fiscal year 2017. This guidance did not have a significant impact on our consolidated financial statements upon adoption.

7


Debt Issuance Costs
In April 2015, the FASB issued guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt instead of as a separate deferred asset. In addition, guidance was issued to allow for a policy election on the presentation of debt issuance costs associated with a line-of-credit arrangement, regardless of whether there are any outstanding borrowings. We adopted the guidance during the first quarter of fiscal year 2017 on a retrospective basis. The guidance resulted in a reclassification adjustment that decreased other noncurrent assets by $17.0 with a corresponding decrease to long-term debt as of 30 September 2016. We will continue to present debt issuance costs associated with a line-of-credit arrangement as a deferred asset, regardless of whether there are any outstanding borrowings.
Adoption of this guidance also impacted the presentation of debt issuance costs related to our discontinued operations. As of 30 September 2016, noncurrent assets and noncurrent liabilities of discontinued operations were both reduced by $9.6.
Share-Based Compensation
In March 2016, the FASB issued an update to simplify the accounting for employee share-based payments, including the income tax impacts, the classification on the statement of cash flows, and forfeitures. We elected to early adopt this guidance in the first quarter of fiscal year 2017. The new guidance requires excess tax benefits and deficiencies to be recognized in the income statement rather than in additional paid-in capital on the balance sheet. As a result of applying this change, we recognized $2.7 and $9.7 of excess tax benefits in our provision for income taxes during the three and six months ended 31 March 2017, respectively. In addition, adoption of the new guidance resulted in a $8.8 cumulative-effect adjustment to retained earnings as of 1 October 2016 to recognize deferred taxes for U.S. state net operating loss and other carryforwards attributable to excess tax benefits. We retrospectively applied the guidance which requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Cash paid on employees’ behalf related to shares withheld for tax purposes continues to be classified as a financing activity. Forfeitures have not been significant historically. We have elected to account for forfeitures as they occur, rather than to estimate them.
Definition of a Business
In January 2017, the FASB issued guidance that clarifies the definition of a business in order to assist in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, fewer transactions are expected to be accounted for as business combinations. We elected to early adopt this guidance prospectively beginning in the first quarter of fiscal year 2017. This guidance did not have a significant impact on our consolidated financial statements upon adoption.
New Accounting Guidance to be Implemented
Revenue Recognition
In May 2014, the FASB issued guidance based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be entitled in exchange for the transfer of goods or services. We have the option to adopt the standard in either fiscal year 2018 or 2019 either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We intend to adopt this guidance in fiscal year 2019. We are currently evaluating the adoption alternatives allowed by the new standard and the impact the standard is expected to have on our consolidated financial statements. As the new standard will supersede substantially all existing revenue guidance affecting us under GAAP, it could impact the amount and timing of revenue that we recognize, in addition to our business processes and information technology systems. To date, we have focused on identifying potential impacts on our onsite gases and sales of equipment businesses and on efforts needed to meet the expanded disclosure requirements. Our evaluation of the effect of the new standard will extend over future periods.
Leases
In February 2016, the FASB issued guidance which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements. The guidance is effective in fiscal year 2020, with early adoption permitted, and must be applied using a modified retrospective approach. We are currently evaluating the impact of adopting this new guidance on the consolidated financial statements, and we have started the assessment process by evaluating the population of leases under the revised definition of what qualifies as a leased asset. The Company is the lessee under various agreements for real estate, distribution equipment, aircraft, and vehicles that are currently accounted for as operating leases. The new guidance will require the Company to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. The Company is considered the lessor under certain agreements associated with facilities that are built to provide product to a specific customer.

8


Derivative Contract Novations
In March 2016, the FASB issued guidance to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require re-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is effective in fiscal year 2018, with early adoption permitted. We do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.
Credit Losses on Financial Instruments
In June 2016, the FASB issued an update on the measurement of credit losses, which requires measurement and recognition of expected credit losses for financial assets, including trade receivables and capital lease receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The method to determine a loss is different from the existing guidance, which requires a credit loss to be recognized when it is probable. The guidance is effective beginning fiscal year 2021, with early adoption permitted beginning fiscal year 2020. We are currently evaluating the impact this update will have on our consolidated financial statements.
Cash Flow Statement Classification
In August 2016, the FASB issued guidance to reduce diversity in practice on how certain cash receipts and cash payments are classified in the statement of cash flows. The guidance is effective beginning fiscal year 2019, with early adoption permitted, and should be applied retrospectively. We are currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
Intra-Entity Asset Transfers
In October 2016, the FASB issued guidance on the accounting for the income tax effects of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party.  Under the new guidance, the income tax consequences of an intra-entity asset transfer are recognized when the transfer occurs. The guidance is effective beginning in fiscal year 2019, with early adoption permitted as of the beginning of an annual reporting period. The guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the date of adoption. We are currently evaluating the impact this guidance will have on our consolidated financial statements and plan to adopt the guidance in fiscal year 2019.
Simplifying Goodwill Impairment Test
In January 2017, the FASB issued guidance to simplify the test for goodwill impairment by eliminating Step 2, which measured the impairment loss based on the fair value of goodwill. Under the new guidance, an impairment loss will be recognized for the amount by which the carrying amount of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The guidance is effective for annual or interim goodwill impairments tests in fiscal year 2021 and should be applied prospectively. Early adoption is permitted for goodwill impairment tests performed on testing dates after 1 January 2017. We are currently evaluating the impact this update will have on our consolidated financial statements.
Derecognition of Nonfinancial Assets
In February 2017, the FASB issued an update to clarify the scope of guidance on gains and losses from the derecognition of nonfinancial assets and to add guidance for partial sales of nonfinancial assets. The update must be adopted at the same time as the new guidance on revenue recognition discussed above (i.e., intend to adopt fiscal year 2019). The guidance may be applied retrospectively or with a cumulative-effect adjustment to retained earnings at the date of adoption. We are currently evaluating the impact this update will have on our consolidated financial statements.
Presentation of Net Periodic Pension and Postretirement Benefit Cost
In March 2017, the FASB issued guidance on improving the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that the service cost component of the net periodic benefit cost be presented in the same line items as other compensation costs arising from services rendered by employees during the period. The other components of net periodic benefit cost (e.g., interest cost, expected return on plan assets, and amortization of actuarial gains/losses) should be presented in the income statement separately from the service cost component and outside of operating income. The amendments also allow only the service cost component to be eligible for capitalization when applicable. The guidance is effective beginning in fiscal year 2019, with early adoption permitted as of the beginning of fiscal year 2018. The amendments should be applied retrospectively for the presentation requirements and prospectively for the capitalization of the service cost component requirements. We are currently evaluating the impact this update will have on our consolidated financial statements.


9


3.
DISCONTINUED OPERATIONS
The divisions comprising the former Materials Technologies business and the Energy-from-Waste business have been accounted for as discontinued operations. The results of operations of these businesses have been removed from the results of continuing operations for all periods presented. The assets and liabilities of the discontinued operations have been reclassified and are segregated in the consolidated balance sheets.
Materials Technologies
On 16 September 2015, we announced plans to separate our Materials Technologies business, which contained two divisions, the Electronic Materials Division (EMD) and the Performance Materials Division (PMD). As further discussed below, we completed the separation of EMD through the spin-off of Versum Materials, Inc. (Versum) on 1 October 2016. In addition, we completed the sale of PMD to Evonik Industries AG (Evonik) on 3 January 2017. As a result, these divisions are reflected in our consolidated financial statements as discontinued operations for all periods presented.
Spin-off of Electronic Materials
On 1 October 2016 (the distribution date), Air Products completed the spin-off of Versum into a separate and independent public company by way of a distribution to Air Products’ stockholders of all of the then issued and outstanding shares of common stock of Versum on the basis of one share of Versum common stock for every two shares of Air Products’ common stock held as of the close of business on 21 September 2016 (the record date for the distribution). Fractional shares of Versum common stock were not distributed to Air Products' common stockholders. Air Products’ stockholders received cash in lieu of fractional shares. As a result of the distribution, Versum is now an independent public company and its common stock is listed under the symbol “VSM” on the New York Stock Exchange.
In connection with the spin-off, we entered into various agreements necessary to effect the spin-off and to govern the ongoing relationships between Air Products and Versum after the separation, including a transition services agreement by which we provide certain transition services to Versum, generally for no longer than 12 to 24 months. Balances due to/from Versum as of 31 March 2017 primarily related to the transition services agreement and were immaterial. In addition, Seifi Ghasemi, chairman, president and chief executive officer of Air Products, is serving as non-executive chairman of the Versum Board of Directors.
Sale of Performance Materials
On 3 January 2017, we completed the sale of PMD to Evonik for $3.8 billion in cash subject to customary post-closing adjustments, including working capital. A gain of $2,870 ($1,833 after-tax, or $8.34 per share) was recognized on the sale in the second quarter of fiscal year 2017. In connection with the sale, we entered into a transition services agreement by which we provide certain transition services to Evonik for no longer than 12 months.
Energy-from-Waste
On 29 March 2016, the Board of Directors approved the Company’s exit of its Energy-from-Waste (EfW) business. As a result, efforts to start up and operate the two EfW projects located in Tees Valley, United Kingdom, were discontinued. The decision to exit the business and stop development of the projects was based on continued difficulties encountered and the Company’s conclusion, based on testing and analysis completed during the second quarter of fiscal year 2016, that significant additional time and resources would be required to make the projects operational. Since that time, the EfW segment has been presented as a discontinued operation. During the second quarter of fiscal year 2016, a loss of $945.7 ($846.6 after-tax) was recorded to write down plant assets to their estimated net realizable value and record a liability for plant disposition and other costs. Income tax benefits related only to one of the projects, as the other did not qualify for a local tax deduction.
During the first quarter of fiscal year 2017, we determined that it is unlikely for a buyer to assume the remaining assets and contract obligations, including the related land lease. As a result, we recorded an additional loss of $59.3 ($47.1 after-tax), of which $53.0 was recorded primarily for land lease obligations and $6.3 was recorded to update our estimate of the net realizable value of the plant assets as of 31 December 2016. There have been no changes to our estimates during the second quarter of fiscal year 2017. We may incur additional exit costs in future periods related to other outstanding commitments.

10


The following table summarizes the carrying amount of the accrual for our actions to dispose of the EfW business at 31 March 2017:
 
 
Asset
Actions
 
Contract
Actions/Other
 
Total
Loss on disposal of business
 
$
913.5

 
$
32.2

 
$
945.7

Noncash expenses
 
(913.5
)
 
—

 
(913.5
)
Cash expenditures
 
—

 
(18.6
)
 
(18.6
)
Currency translation adjustment
 
—

 
(1.4
)
 
(1.4
)
30 September 2016
 
$
—

 
$
12.2

 
$
12.2

Loss on disposal of business
 
6.3

 
53.0

 
59.3

Noncash expenses
 
(6.3
)
 
—

 
(6.3
)
Cash expenditures
 
—

 
(1.4
)
 
(1.4
)
Currency translation adjustments
 
—

 
1.1

 
1.1

31 March 2017
 
$
—

 
$
64.9

 
$
64.9

The loss on disposal was recorded as a component of discontinued operations. Of the remaining accrual, approximately $60 is included in other noncurrent liabilities of continuing operations and primarily relates to land leases and $5 is included in current liabilities of discontinued operations.
The following tables detail the businesses and major line items that comprise income from discontinued operations, net of tax, on the consolidated income statements for the three and six months ended 31 March 2017:
 
Three Months Ended
 
31 March 2017
 
 
 
Total
 
Performance
Energy-
Discontinued
 
Materials
from-Waste(A)
Operations
Cost of sales
$
3.3

$
3.0

$
6.3

Selling and administrative
2.1

—

2.1

Other income (expense), net
.7

(.4
)
.3

Income (Loss) Before Taxes
(4.7
)
(3.4
)
(8.1
)
Income tax provision
(.3
)
(.9
)
(1.2
)
Income (Loss) From Operations of Discontinued Operations, net of tax
(4.4
)
(2.5
)
(6.9
)
Gain on Disposal, net of tax (C)
1,832.5

—

1,832.5

Income (Loss) from Discontinued Operations, net of tax
$
1,828.1

$
(2.5
)
$
1,825.6


11


 
Six Months Ended
 
31 March 2017
 
 
 
Total
 
Performance
Energy-
Discontinued
 
Materials
from-Waste(A)
Operations
Sales
$
254.8

$
—

$
254.8

Cost of sales
182.3

9.6

191.9

Selling and administrative
22.5

.2

22.7

Research and development
5.1

—

5.1

Other income (expense), net
.3

(.1
)
.2

Operating Income (Loss)
45.2

(9.9
)
35.3

Equity affiliates’ income
.3

—

.3

Income (Loss) Before Taxes
45.5

(9.9
)
35.6

Income tax provision(B)
(50.8
)
(2.0
)
(52.8
)
Income (Loss) From Operations of Discontinued Operations, net of tax
96.3

(7.9
)
88.4

Gain (Loss) on Disposal, net of tax(C)
1,832.5

(47.1
)
1,785.4

Income (Loss) from Discontinued Operations, net of tax
$
1,928.8

$
(55.0
)
$
1,873.8

(A) 
The loss from operations of discontinued operations for EfW primarily relates to land leases, administrative costs, and costs incurred for ongoing project exit activities.
(B) 
As a result of the expected gain on sale of PMD, we released valuation allowances related to capital loss and net operating loss carryforwards during the first quarter of 2017 that favorably impacted our income tax provision within discontinued operations by approximately $66.
(C) 
After-tax gain on sale of $1,832.5 includes expense for income tax reserves for uncertain tax positions of $26.1 gross ($19.1 net) in various jurisdictions.

The following tables detail the businesses and major line items that comprise income from discontinued operations, net of tax on the consolidated income statements for the three and six months ended 31 March 2016:
 
Three Months Ended
 
31 March 2016
 
 
 
 
Total

Electronic
Performance
Energy-
Discontinued
 
Materials
Materials
from-Waste(A)
Operations
Sales
$
230.7

$
263.1

$
—

$
493.8

Cost of sales
127.6

178.3

3.2

309.1

Selling and administrative
20.0

19.5

.9

40.4

Research and development
9.5

4.9

.3

14.7

Other income (expense), net
2.8

4.9

.6

8.3

Operating Income (Loss)
76.4

65.3

(3.8
)
137.9

Equity affiliates’ income
—

.2

—

.2

Income (Loss) Before Taxes(B)
76.4

65.5

(3.8
)
138.1

Income tax provision
16.7

22.3

2.7

41.7

Income (Loss) From Operations of Discontinued Operations
59.7

43.2

(6.5
)
96.4

Loss on Disposal, net of tax
—

—

(846.6
)
(846.6
)
Income (Loss) from Operations of Discontinued Operations, net of tax
59.7

43.2

(853.1
)
(750.2
)
Net Income Attributable to Noncontrolling Interests of Discontinued Operations
2.0

—

—

2.0

Net Income (Loss) From Discontinued Operations, net of tax
$
57.7

$
43.2

$
(853.1
)
$
(752.2
)

12


 
Six Months Ended
 
31 March 2016
 
 
 
 
Total
 
Electronic
Performance
Energy-
Discontinued
 
Materials
Materials
from-Waste(A)
Operations
Sales
$
473.3

$
510.0

$
—

$
983.3

Cost of sales
254.9

350.9

5.3

611.1

Selling and administrative
38.4

38.5

1.6

78.5

Research and development
19.6

9.9

.7

30.2

Other income (expense), net
5.0

3.7

(13.7
)
(5.0
)
Operating Income (Loss)
165.4

114.4

(21.3
)
258.5

Equity affiliates’ income
.2

.4

—

.6

Income (Loss) Before Taxes(B)
165.6

114.8

(21.3
)
259.1

Income tax provision
41.6

36.9

(.6
)
77.9

Income (Loss) From Operations of Discontinued Operations
124.0

77.9

(20.7
)
181.2

Loss on Disposal, net of tax
—

—

(846.6
)
(846.6
)
Income (Loss) from Operations of Discontinued Operations, net of tax
124.0

77.9

(867.3
)
(665.4
)
Net Income Attributable to Noncontrolling Interests of Discontinued Operations
4.1

—

—

4.1

Net Income (Loss) From Discontinued Operations, net of tax
$
119.9

$
77.9

$
(867.3
)
$
(669.5
)
(A) 
The loss from operations of discontinued operations for EfW primarily relates to project suspension costs, land leases, and administrative costs.
(B) 
For the three and six months ended 31 March 2016, income before taxes from operations of discontinued operations attributable to Air Products was $135.7 and $254.1, respectively.
The following table details the major line items that comprise total assets and total liabilities of discontinued operations on the consolidated balance sheets as of 31 March 2017:
 
31 March 2017
 
 
 
Total
 
Performance
Energy-
Discontinued
 
Materials
from-Waste
Operations
Assets
 
 
 
Current Assets
 
 
 
Plant and equipment, net
$
—

$
9.6

$
9.6

Other receivables and current assets
—

.2

.2

Total Current Assets
—

9.8

9.8

Total Assets
$
—

$
9.8

$
9.8

Liabilities
 


Current Liabilities
 
 
 
Payables and accrued liabilities (A)
$
17.4

$
6.7

$
24.1

Total Current Liabilities
17.4

6.7

24.1

Total Liabilities
$
17.4

$
6.7

$
24.1

(A) 
Includes reserves associated with disposition of businesses.

13


The following table details the major line items that comprise total assets and total liabilities of discontinued operations on the consolidated balance sheets as of 30 September 2016:
 
30 September 2016
 
 
 
 
Total
 
Electronic
Performance
Energy-
Discontinued
 
Materials
Materials
from-Waste
Operations
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash items
$
170.6

$
37.5

$
—

$
208.1

Trade receivables, net
134.7

159.0

—

293.7

Inventories
138.1

226.8

—

364.9

Plant and equipment, net
—

—

18.2

18.2

Other receivables and current assets
34.5

5.6

1.2

41.3

Total Current Assets
477.9

428.9

19.4

926.2

Plant and equipment, net
296.5

296.5

—

593.0

Goodwill, net
180.0

125.0

—

305.0

Intangible assets, net
75.1

25.0

—

100.1

Other noncurrent assets
37.5

6.7

—

44.2

Total Noncurrent Assets
589.1

453.2

—

1,042.3

Total Assets
$
1,067.0

$
882.1

$
19.4

$
1,968.5

Liabilities




Current Liabilities




Payables and accrued liabilities
$
85.8

$
72.5

$
19.0

$
177.3

Accrued income taxes
22.7

6.0

—

28.7

Current portion of long-term debt
5.8

—

—

5.8

Total Current Liabilities
114.3

78.5

19.0

211.8

Long-term debt
981.8

—

—

981.8

Deferred income taxes
50.3

6.4

—

56.7

Other noncurrent liabilities
47.4

9.6

—

57.0

Total Noncurrent Liabilities
1,079.5

16.0

—

1,095.5

Total Liabilities
$
1,193.8

$
94.5

$
19.0

$
1,307.3


4.
BUSINESS SEPARATION COSTS
In connection with the disposition of the two divisions comprising the former Materials Technologies segment, we incurred separation costs of $30.2 for the six months ended 31 March 2017. No business separation costs were incurred during the second quarter of fiscal 2017. For the three and six months ended 31 March 2016, we incurred separation costs of $7.4 and $19.4, respectively. These costs are reflected on the consolidated income statements as “Business separation costs” and include legal, advisory, and pension related costs. Refer to Note 3, Discontinued Operations, for additional information regarding the dispositions.


14


5.
COST REDUCTION AND ASSET ACTIONS
For the three months ended 31 March 2017, we recognized an expense of $10.3 for severance and other benefits related to cost reduction actions. For the six months ended 31 March 2017, we recognized a net expense of $60.3. The year-to-date net expense included a charge of $63.7 for actions taken during fiscal year 2017, partially offset by the favorable settlement of the remaining $3.4 accrued balance associated with business restructuring actions taken in 2015. Asset actions taken in the first quarter of 2017 of $45.7 resulted from the write-down of an air separation unit in the Industrial Gases – EMEA segment that was constructed mainly to provide oxygen to one of the Energy-from-Waste plants. During the first six months of fiscal year 2017, severance and other benefits totaled $18.0 and related to the elimination of approximately 140 positions primarily in the Industrial Gases – EMEA and Corporate and other segments.
During fiscal year 2016, we incurred an expense of $34.5 for severance and other benefits related to the elimination of approximately 610 positions. Expense of $10.7 was recognized for the three and six months ended 31 March 2016. The fiscal year 2016 expenses primarily related to the Industrial Gases – Americas and Industrial Gases – EMEA segments.
The charges we record for cost reduction and asset actions have been excluded from segment operating income.
The following table summarizes the carrying amount of the accrual for cost reduction and asset actions at 31 March 2017:


 
Severance and
Other Benefits
 
Asset
Actions/Other
 
Total
2016 Charge
 
$
34.5

 
$
—

 
$
34.5

Amount reflected in pension liability
 
(.9
)
 
—

 
(.9
)
Cash expenditures
 
(21.6
)
 
—

 
(21.6
)
Currency translation adjustment
 
.3

 
—

 
.3

30 September 2016
 
$
12.3

 
$
—

 
$
12.3

2017 Charge
 
18.0

 
45.7

 
63.7

Noncash expenses
 
—

 
(45.7
)
 
(45.7
)
Amount reflected in pension liability
 
(.2
)
 
—

 
(.2
)
Cash expenditures
 
(18.8
)
 
—

 
(18.8
)
Currency translation adjustment
 
(.5
)
 
—

 
(.5
)
31 March 2017
 
$
10.8

 
$
—

 
$
10.8


6.
INVENTORIES
The components of inventories are as follows:
 
 
31 March
 
30 September
 
 
2017
 
2016
Finished goods
 
$
131.1

 
$
131.3

Work in process
 
17.4

 
18.3

Raw materials, supplies and other
 
189.4

 
117.1

 
 
$
337.9

 
$
266.7

Less: Excess of FIFO cost over LIFO cost
 
(15.1
)
 
(11.7
)
Inventories
 
$
322.8

 
$
255.0

First-in, first-out (FIFO) cost approximates replacement cost.


15


7.
GOODWILL
Changes to the carrying amount of consolidated goodwill by segment for the six months ended 31 March 2017 are as follows:
 
 
Industrial
Gases–
Americas
 
Industrial
Gases–
EMEA
 
Industrial
Gases–
Asia
 
Industrial
Gases–
Global
 
Total
Goodwill, net at 30 September 2016
 
$
309.1

 
$
380.6

 
$
135.2

 
$
20.2

 
$
845.1

Currency translation
 
(.9
)
 
(17.0
)
 
.3

 
(.3
)
 
(17.9
)
Goodwill, net at 31 March 2017
 
$
308.2

 
$
363.6

 
$
135.5

 
$
19.9

 
$
827.2

 
 
31 March
 
30 September
 
 
2017
 
2016
Goodwill, gross
 
$
1,084.7

 
$
1,103.7

Accumulated impairment losses(A)
 
(257.5
)
 
(258.6
)
Goodwill, net
 
$
827.2

 
$
845.1

(A) 
Amount is attributable to the Industrial Gases – Americas segment and includes currency translation of $47.7 and $46.6 as of 31 March 2017 and 30 September 2016, respectively.
We conduct goodwill impairment testing in the fourth quarter of each fiscal year and whenever events and changes in circumstances indicate that the carrying value of goodwill might not be recoverable.

8.
FINANCIAL INSTRUMENTS
Currency Price Risk Management
Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency-denominated transactions and net investments in foreign operations. It is our policy to minimize our cash flow volatility from changes in currency exchange rates. This is accomplished by identifying and evaluating the risk that our cash flows will change in value due to changes in exchange rates and by executing the appropriate strategies necessary to manage such exposures. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.
Forward Exchange Contracts
We enter into forward exchange contracts to reduce the cash flow exposure to foreign currency fluctuations associated with highly anticipated cash flows and certain firm commitments, such as the purchase of plant and equipment. We also enter into forward exchange contracts to hedge the cash flow exposure on intercompany loans. This portfolio of forward exchange contracts consists primarily of Euros and U.S. dollars. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 31 March 2017 is 2.3 years.
Forward exchange contracts are also used to hedge the value of investments in certain foreign subsidiaries and affiliates by creating a liability in a currency in which we have a net equity position. The primary currency pair in this portfolio of forward exchange contracts is Euros and U.S. dollars.
In addition to the forward exchange contracts that are designated as hedges, we utilize forward exchange contracts that are not designated as hedges. These contracts are used to economically hedge foreign currency-denominated monetary assets and liabilities, primarily working capital. The primary objective of these forward exchange contracts is to protect the value of foreign currency-denominated monetary assets and liabilities from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement. This portfolio of forward exchange contracts comprises many different foreign currency pairs, with a profile that changes from time to time depending on business activity and sourcing decisions.

16


The table below summarizes our outstanding currency price risk management instruments:
 
 
31 March 2017
 
30 September 2016
 
 
US$
Notional
 
Years
Average
Maturity
 
US$
Notional
 
Years
Average
Maturity
Forward Exchange Contracts:
 
 
 
 
 
 
 
 
Cash flow hedges
 
$
3,472.9

 
.5

 
$
4,130.3

 
.5

Net investment hedges
 
664.4

 
3.2

 
968.2

 
2.7

Not designated
 
1,526.1

 
.3

 
2,648.3

 
.4

Total Forward Exchange Contracts
 
$
5,663.4

 
.7

 
$
7,746.8

 
.7

The notional value of forward exchange contracts not designated in the table above includes forward contracts which were hedging intercompany loans that were repaid prior to their original maturity dates in anticipation of the spin-off of Versum. The forward exchange contracts no longer qualified as cash flow hedges due to the early repayment of the loans. We entered into additional forward exchange contracts to offset these outstanding positions to eliminate any future earnings impact. The decrease in notional value from 30 September 2016 to 31 March 2017 is primarily due to the maturity of several of the aforementioned intercompany loan hedges and their offsetting positions.
In addition to the above, we use foreign currency-denominated debt to hedge the foreign currency exposures of our net investment in certain foreign subsidiaries. The designated foreign currency-denominated debt and related accrued interest included €919.1 million ($979.0) at 31 March 2017 and €920.7 million ($1,034.4) at 30 September 2016. The designated foreign currency-denominated debt is located on the balance sheet in the long-term debt line item.
Debt Portfolio Management
It is our policy to identify on a continuing basis the need for debt capital and evaluate the financial risks inherent in funding the Company with debt capital. Reflecting the result of this ongoing review, the debt portfolio and hedging program are managed with the objectives and intent to (1) reduce funding risk with respect to borrowings made by us to preserve our access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) manage the aggregate interest rate risk and the debt portfolio in accordance with certain debt management parameters.
Interest Rate Management Contracts
We enter into interest rate swaps to change the fixed/variable interest rate mix of our debt portfolio in order to maintain the percentage of fixed- and variable-rate debt within the parameters set by management. In accordance with these parameters, the agreements are used to manage interest rate risks and costs inherent in our debt portfolio. Our interest rate management portfolio generally consists of fixed-to-floating interest rate swaps (which are designated as fair value hedges), pre-issuance interest rate swaps and treasury locks (which hedge the interest rate risk associated with anticipated fixed-rate debt issuances and are designated as cash flow hedges), and floating-to-fixed interest rate swaps (which are designated as cash flow hedges). At 31 March 2017, the outstanding interest rate swaps were denominated in U.S. dollars. The notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. When interest rate swaps are used to hedge variable-rate debt, the indices of the swaps and the debt to which they are designated are the same. It is our policy not to enter into any interest rate management contracts which lever a move in interest rates on a greater than one-to-one basis.
Cross Currency Interest Rate Swap Contracts
We enter into cross currency interest rate swap contracts when our risk management function deems necessary. These contracts may entail both the exchange of fixed- and floating-rate interest payments periodically over the life of the agreement and the exchange of one currency for another currency at inception and at a specified future date. The contracts are used to hedge either certain net investments in foreign operations or 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 offshore Chinese Renminbi, U.S. dollars and Chilean Pesos, and U.S. dollars and British Pound Sterling.

17


The following table summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:
 
 
31 March 2017
 
30 September 2016
 
 
US$
Notional
 
Average
Pay %
 
Average
Receive
%
 
Years
Average
Maturity
 
US$
Notional
 
Average
Pay %
 
Average
Receive
%
 
Years
Average
Maturity
Interest rate swaps
(fair value hedge)
 
$
600.0

 
LIBOR

 
2.28
%
 
1.8
 
$
600.0

 
LIBOR

 
2.28
%
 
2.3
Cross currency interest rate swaps
(net investment hedge)
 
$
503.4

 
3.24
%
 
2.39
%
 
2.0
 
$
517.7

 
3.24
%
 
2.43
%
 
2.6
Cross currency interest rate swaps
(cash flow hedge)
 
$
1,088.9

 
4.77
%
 
2.72
%
 
2.8
 
$
1,088.9

 
4.77
%
 
2.72
%
 
3.3
Cross currency interest rate swaps
(not designated)
 
$
41.7

 
3.40
%
 
1.78
%
 
1.9
 
$
27.4

 
3.62
%
 
.81
%
 
1.8
The table below summarizes the fair value and balance sheet location of our outstanding derivatives:
 
Balance Sheet
Location
31 March 2017
30 September 2016
Balance Sheet
Location
31 March 2017
30 September 2016
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
Forward exchange contracts
Other receivables
$
36.3

$
72.3

Accrued liabilities
$
76.7

$
44.0

Interest rate management contracts
Other receivables
37.6

19.9

Accrued liabilities
.4

—

Forward exchange contracts
Other noncurrent
assets
72.6

44.4

Other noncurrent
liabilities
1.2

9.1

Interest rate management contracts
Other noncurrent
assets
155.0

160.0

Other noncurrent
liabilities
22.5

12.0

Total Derivatives Designated as Hedging Instruments
 
$
301.5

$
296.6

 
$
100.8

$
65.1

Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
Forward exchange contracts
Other receivables
$
20.3

$
77.1

Accrued liabilities
$
13.1

$
29.5

Interest rate management contracts
Other noncurrent
assets
3.7

—

Other noncurrent
liabilities
.8

.7

Total Derivatives Not Designated as Hedging Instruments
 
$
24.0

$
77.1

 
$
13.9

$
30.2

Total Derivatives
 
$
325.5

$
373.7

 
$
114.7

$
95.3

Refer to Note 9, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.

18


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:
 
Three Months Ended 31 March
 
Forward
Exchange Contracts
Foreign Currency
Debt
Other (A)
Total
 
2017
2016
2017
2016
2017
2016
2017
2016
Cash Flow Hedges, net of tax:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI (effective portion)
$
11.1

$
32.5

$
—

$
—

$
(26.5
)
$
(19.7
)
$
(15.4
)
$
12.8

Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)
1.2

.5

—

—

—

—

1.2

.5

Net (gain) loss reclassified from OCI to other income (expense), net (effective portion)
(10.8
)
(30.2
)
—

—

15.8

16.5

5.0

(13.7
)
Net (gain) loss reclassified from OCI to interest expense (effective portion)
(1.6
)
1.2

—

—

.7

.8

(.9
)
2.0

Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion)
.5

.1

—

—

—

—

.5

.1

Fair Value Hedges:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in interest expense(B) 
$
—

$
—

$
—

$
—

$
(2.8
)
$
7.2

$
(2.8
)
$
7.2

Net Investment Hedges, net of tax:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI
$
(.8
)
$
(9.4
)
$
(7.8
)
$
(17.9
)
$
(6.5
)
$
1.9

$
(15.1
)
$
(25.4
)
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in other income (expense), net(C)
$
(2.5
)
$
.2

$
—

$
—

$
(.6
)
$
(.6
)
$
(3.1
)
$
(.4
)
 
 
 
 
 
 
 
 
 
 
Six Months Ended 31 March
 
Forward
Exchange Contracts
Foreign Currency
Debt
Other (A)
Total
 
2017
2016
2017
2016
2017
2016
2017
2016
Cash Flow Hedges, net of tax:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI (effective portion)
$
(48.3
)
$
27.8

$
—

$
—

$
23.1

$
1.0

$
(25.2
)
$
28.8

Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)
5.8

1.4

—

—

—

—

5.8

1.4

Net (gain) loss reclassified from OCI to other income (expense), net (effective portion)
38.7

(32.0
)
—

—

(12.4
)
(3.7
)
26.3

(35.7
)
Net (gain) loss reclassified from OCI to interest expense (effective portion)
(2.4
)
2.6

—

—

1.4

1.6

(1.0
)
4.2

Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion)
.3

(.3
)
—

—

—

—

.3

(.3
)
Fair Value Hedges:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in interest expense(B) 
$
—

$
—

$
—

$
—

$
(11.9
)
$
(1.8
)
$
(11.9
)
$
(1.8
)
Net Investment Hedges, net of tax:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI
$
27.1

$
(6.4
)
$
34.0

$
(10.3
)
$
6.6

$
8.4

$
67.7

$
(8.3
)
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Net gain (loss) recognized in other income (expense), net(C)
$
(.4
)
$
(.2
)
$
—

$
—

$
.2

$
(.6
)
$
(.2
)
$
(.8
)
(A) 
Other includes the impact on other comprehensive income (OCI) and earnings primarily related to interest rate and cross currency interest rate swaps.
(B) 
The impact of fair value hedges noted above was largely offset by recognized gains and losses resulting from the impact of changes in related interest rates on outstanding debt.
(C) 
The impact of the non-designated hedges noted above was largely offset by recognized gains and losses resulting from the impact of changes in exchange rates on assets and liabilities denominated in non-functional currencies.

19



The amount of cash flow hedges’ unrealized gains and losses at 31 March 2017 that are expected to be reclassified to earnings in the next twelve months is not material.
The cash flows related to all derivative contracts are reported in the operating activities section of the consolidated statements of cash flows.
Credit Risk-Related Contingent Features
Certain derivative instruments are executed under agreements that require us to maintain a minimum credit rating with both Standard & Poor’s and Moody’s. If our credit rating falls below this threshold, the counterparty to the derivative instruments has the right to request full collateralization on the derivatives’ net liability position. The net liability position of derivatives with credit risk-related contingent features was $23.4 as of 31 March 2017 and $11.2 as of 30 September 2016. Because our current credit rating is above the various pre-established thresholds, no collateral has been posted on these liability positions.
Counterparty Credit Risk Management
We execute financial derivative transactions with counterparties that are highly rated financial institutions, all of which are investment grade at this time. Some of our underlying derivative agreements give us the right to require the institution to post collateral if its credit rating falls below the pre-established thresholds with Standard & Poor’s or Moody’s. The collateral that the counterparties would be required to post was $265.3 as of 31 March 2017 and $267.6 as of 30 September 2016. No financial institution is required to post collateral at this time, as all have credit ratings at or above threshold.

9.
FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
Level 1
— Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
— Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3
— Inputs that are unobservable for the asset or liability based on our own assumptions (about the assumptions market participants would use in pricing the asset or liability).
The methods and assumptions used to measure the fair value of financial instruments are as follows:
Short-term Investments
Short-term investments include time deposits, certificates of deposit, and repurchase agreement funds with original maturities greater than 90 days and less than one year. The estimated fair value of the short-term investments, which approximates carrying value as of 31 March 2017 and 30 September 2016, was determined using level 1 or level 2 inputs within the fair value hierarchy. Level 1 measurements were based on observed net asset values, and level 2 measurements were based on current interest rates for similar investments with comparable credit risk and time to maturity.
Derivatives
The fair value of our interest rate management contracts and forward exchange contracts are quantified using the income approach and are based on estimates using standard pricing models. These models take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. The computation of the fair values of these instruments is generally performed by the Company. These standard pricing models utilize inputs which are derived from or corroborated by observable market data such as interest rate yield curves and 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 8, Financial Instruments, for a description of derivative instruments, including details on the balance sheet line classifications.

20


Long-term Debt
The fair value of our debt is based on estimates using standard pricing models that take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. These standard valuation models utilize observable market data such as interest rate yield curves and currency spot rates. Therefore, the fair value of our debt is classified as a level 2 measurement. We generally perform the computation of the fair value of these instruments.
The carrying values and fair values of financial instruments were as follows:
 
 
31 March 2017
 
30 September 2016
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
Forward exchange contracts
 
$
129.2

 
$
129.2

 
$
193.8

 
$
193.8

Interest rate management contracts
 
196.3

 
196.3

 
179.9

 
179.9

Liabilities
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
Forward exchange contracts
 
$
91.0

 
$
91.0

 
$
82.6

 
$
82.6

Interest rate management contracts
 
23.7

 
23.7

 
12.7

 
12.7

Long-term debt, including current portion
 
3,720.9

 
3,823.0

 
4,275.1

 
4,450.5

The carrying amounts reported in the balance sheet for cash and cash items, short-term investments, trade receivables, payables and accrued liabilities, accrued income taxes, and short-term borrowings approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the above table.
The following table summarizes assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets:
 
31 March 2017
 
30 September 2016
 
Total
Level 1
Level 2
Level 3
 
Total
Level 1
Level 2
Level 3
Assets at Fair Value
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
Forward exchange contracts
$
129.2

$
—

$
129.2

$
—

 
$
193.8

$
—

$
193.8

$
—

Interest rate management contracts
196.3

—

196.3

—

 
179.9

—

179.9

—

Total Assets at Fair Value
$
325.5

$
—

$
325.5

$
—

 
$
373.7

$
—

$
373.7

$
—

Liabilities at Fair Value
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
Forward exchange contracts
$
91.0

$
—

$
91.0

$
—

 
$
82.6

$
—

$
82.6

$
—

Interest rate management contracts
23.7

—

23.7

—

 
12.7

—

12.7

—

Total Liabilities at Fair Value
$
114.7

$
—

$
114.7

$
—

 
$
95.3

$
—

$
95.3

$
—


21


The following is a tabular presentation of nonrecurring fair value measurements along with the level within the fair value hierarchy in which the fair value measurement in its entirety falls:
 
31 December 2016
2017 Loss
 
Total
 
Level 1
Level 2
Level 3
Plant and Equipment – Continuing operations(A)
$
1.4

 
$
—

$
—

$
1.4

$
45.7

Plant and Equipment – Discontinued operations(A)
$
11.0

 
$
—

$
—

$
11.0

$
6.3

(A) 
We assessed the recoverability of the carrying value of assets associated with the EfW discontinued operation, including the air separation unit within continuing operations of our Industrial Gases – EMEA segment. We based our estimates primarily on an orderly liquidation valuation which resulted in losses for the difference between the orderly liquidation value and net book value of the assets as of 31 December 2016. There have been no significant updates to our estimates as of 31 March 2017. For additional information, see Note 3, Discontinued Operations and Note 5, Cost Reduction and Asset Actions.


22


10.
RETIREMENT BENEFITS
The components of net periodic benefit cost for the defined benefit pension and other postretirement benefit plans for the three and six months ended 31 March 2017 and 2016 were as follows:
 
 
Pension Benefits
 
Other Benefits
 
 
2017
 
2016
 
2017
 
2016
Three Months Ended 31 March
 
U.S.
 
International
 
U.S.
 
International
 
 
 
 
Service cost
 
$
6.9

 
$
6.3

 
$
9.3

 
$
6.1

 
$
.2

 
$
.6

Interest cost
 
27.6

 
7.9

 
27.7

 
11.1

 
.4

 
.5

Expected return on plan assets
 
(51.7
)
 
(18.3
)
 
(50.5
)
 
(19.6
)
 
—

 
—

Prior service cost amortization
 
.6

 
(.1
)
 
.8

 
(.1
)
 
—

 
—

Actuarial loss amortization
 
20.9

 
13.2

 
21.5

 
9.1

 
—

 
.1

Settlements
 
4.1

 
4.0

 
2.6

 
—

 
—

 
—

Curtailment
 
.1

 
1.8

 
—

 
—

 
—

 
—

Special termination benefits
 
(.1
)
 
.1

 
.6

 
—

 
—

 
—

Other
 
—

 
(2.2
)
 
—

 
.5

 
—

 
—

Net periodic benefit cost (Total)
 
$
8.4

 
$
12.7

 
$
12.0

 
$
7.1

 
$
.6

 
$
1.2

Less: Discontinued Operations
 
(.1
)
 
(3.4
)
 
(2.1
)
 
(.2
)
 
—

 
—

Net periodic benefit cost (Continuing Operations)
 
$
8.3

 
$
9.3

 
$
9.9

 
$
6.9

 
$
.6

 
$
1.2