UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended 31 December 2019
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 001-04534
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||
(Address of Principal Executive Offices and Zip Code)
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | Emerging growth 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 ☒
The number of shares of common stock, $1 par value per share, outstanding at 31 December 2019 was 220,678,482 .
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX
FORWARD-LOOKING STATEMENTS
This quarterly report contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “outlook,” “plan,” “positioned,” “possible,” “potential,” “project,” “should,” “target,” “will,” “would,” and similar expressions or variations thereof, or the negative thereof, but these terms are not the exclusive means of identifying such statements. Forward-looking statements are based on management’s expectations and assumptions as of the date of this report and are not guarantees of future performance. You are cautioned not to place undue reliance on our forward-looking statements.
Forward-looking statements may relate to a number of matters, including expectations regarding revenue, margins, expenses, earnings, tax provisions, cash flows, pension obligations, share repurchases or other statements regarding economic conditions or our business outlook; statements regarding plans, projects, strategies and objectives for our future operations, including our ability to win new projects and execute the projects in our backlog; and statements regarding our expectations with respect to pending legal claims or disputes. While forward-looking statements are made in good faith and based on assumptions, expectations and projections that management believes are reasonable based on currently available information, actual performance and financial results may differ materially from projections and estimates expressed in the forward-looking statements because of many factors, including, without limitation:
• | changes in global or regional economic conditions, supply and demand dynamics in the market segments we serve, or in the financial markets; |
• | risks associated with having extensive international operations, including political risks, risks associated with unanticipated government actions and risks of investing in developing markets; |
• | project delays, contract terminations, customer cancellations, or postponement of projects and sales; |
• | our ability to develop and operate large scale and technically complex projects, including gasification projects; |
• | the future financial and operating performance of major customers and joint venture partners; |
2
• | our ability to develop, implement, and operate new technologies, or to execute the projects in our backlog; |
• | tariffs, economic sanctions and regulatory activities in jurisdictions in which we and our affiliates and joint ventures operate; |
• | the impact of environmental, tax or other legislation, as well as regulations affecting our business and related compliance requirements, including legislation or regulations related to global climate change; |
• | changes in tax rates and other changes in tax law; |
• | the timing, impact, and other uncertainties relating to acquisitions and divestitures, including our ability to integrate acquisitions and separate divested businesses, respectively; |
• | risks relating to cybersecurity incidents, including risks from the interruption, failure or compromise of our information systems; |
• | catastrophic events, such as natural disasters, acts of war, or terrorism; |
• | the impact of price fluctuations in oil and natural gas and disruptions in markets and the economy due to oil and natural gas price volatility; |
• | costs and outcomes of legal or regulatory proceedings and investigations; |
• | asset impairments due to economic conditions or specific events; |
• | significant fluctuations in interest rates and foreign currency exchange rates from those currently anticipated; |
• | damage to facilities, pipelines or delivery systems, including those we own or operate for third parties; |
• | availability and cost of raw materials; and |
• | the success of productivity and operational improvement programs. |
In addition to the foregoing factors, forward-looking statements contained herein are qualified with respect to the risks disclosed elsewhere in this document, including in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 3, Quantitative and Qualitative Disclosures About Market Risk, as well as with respect to the risks described in Item 1A, Risk Factors, to our Annual Report on Form 10-K for the year ended 30 September 2019. Any of these factors, as well as those not currently anticipated by management, could cause our results of operations, financial condition or liquidity to differ materially from what is expressed or implied by any forward-looking statement. Except as required by law, we disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein to reflect any change in assumptions, beliefs, or expectations or any change in events, conditions, or circumstances upon which any such forward-looking statements are based.
3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three Months Ended | ||||||
31 December | ||||||
(Millions of dollars, except for share and per share data) | 2019 | 2018 | ||||
Sales | $ | $ | ||||
Cost of sales | ||||||
Facility closure | ||||||
Selling and administrative | ||||||
Research and development | ||||||
Other income (expense), net | ||||||
Operating Income | ||||||
Equity affiliates' income | ||||||
Interest expense | ||||||
Other non-operating income (expense), net | ||||||
Income Before Taxes | ||||||
Income tax provision | ||||||
Net Income | ||||||
Net income attributable to noncontrolling interests | ||||||
Net Income Attributable to Air Products | $ | $ | ||||
Basic Earnings Per Common Share Attributable to Air Products | $ | $ | ||||
Diluted Earnings Per Common Share Attributable to Air Products | $ | $ | ||||
Weighted Average Common Shares – Basic (in millions) | ||||||
Weighted Average Common Shares – Diluted (in millions) | ||||||
The accompanying notes are an integral part of these statements.
4
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(Unaudited)
Three Months Ended | |||||||
31 December | |||||||
(Millions of dollars) | 2019 | 2018 | |||||
Net Income | $ | $ | |||||
Other Comprehensive Income (Loss), net of tax: | |||||||
Translation adjustments, net of tax of ($10.8) and $4.9 | ( | ) | |||||
Net gain (loss) on derivatives, net of tax of $2.6 and ($0.7) | ( | ) | |||||
Pension and postretirement benefits, net of tax of $– and ($0.8) | ( | ) | |||||
Reclassification adjustments: | |||||||
Derivatives, net of tax of ($0.8) and ($0.8) | ( | ) | ( | ) | |||
Pension and postretirement benefits, net of tax of $6.5 and $5.0 | |||||||
Total Other Comprehensive Income (Loss) | ( | ) | |||||
Comprehensive Income | |||||||
Net Income Attributable to Noncontrolling Interests | |||||||
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interests | ( | ) | |||||
Comprehensive Income Attributable to Air Products | $ | $ | |||||
The accompanying notes are an integral part of these statements.
5
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
31 December | 30 September | ||||||
(Millions of dollars, except for share and per share data) | 2019 | 2019 | |||||
Assets | |||||||
Current Assets | |||||||
Cash and cash items | $ | $ | |||||
Short-term investments | |||||||
Trade receivables, net | |||||||
Inventories | |||||||
Prepaid expenses | |||||||
Other receivables and current assets | |||||||
Total Current Assets | |||||||
Investment in net assets of and advances to equity affiliates | |||||||
Plant and equipment, at cost | |||||||
Less: accumulated depreciation | |||||||
Plant and equipment, net | |||||||
Goodwill, net | |||||||
Intangible assets, net | |||||||
Noncurrent lease receivables | |||||||
Other noncurrent assets | |||||||
Total Noncurrent Assets | |||||||
Total Assets | $ | $ | |||||
Liabilities and Equity | |||||||
Current Liabilities | |||||||
Payables and accrued liabilities | $ | $ | |||||
Accrued income taxes | |||||||
Short-term borrowings | |||||||
Current portion of long-term debt | |||||||
Total Current Liabilities | |||||||
Long-term debt | |||||||
Long-term debt – related party | |||||||
Other noncurrent liabilities | |||||||
Deferred income taxes | |||||||
Total Noncurrent Liabilities | |||||||
Total Liabilities | |||||||
Commitments and Contingencies - See Note 11 | |||||||
Air Products Shareholders’ Equity | |||||||
Common stock (par value $1 per share; issued 2020 and 2019 - 249,455,584 shares) | |||||||
Capital in excess of par value | |||||||
Retained earnings | |||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Treasury stock, at cost (2020 - 28,777,102 shares; 2019 - 29,040,322 shares) | ( | ) | ( | ) | |||
Total Air Products Shareholders’ Equity | |||||||
Noncontrolling Interests | |||||||
Total Equity | |||||||
Total Liabilities and Equity | $ | $ | |||||
6
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended | ||||||
31 December | ||||||
(Millions of dollars) | 2019 | 2018 | ||||
Operating Activities | ||||||
Net income | $ | $ | ||||
Less: Net income attributable to noncontrolling interests | ||||||
Net income attributable to Air Products | ||||||
Adjustments to reconcile income to cash provided by operating activities: | ||||||
Depreciation and amortization | ||||||
Deferred income taxes | ( | ) | ||||
Tax reform repatriation | ||||||
Facility closure | ||||||
Undistributed (earnings) losses of unconsolidated affiliates | ( | ) | ||||
Gain on sale of assets and investments | ( | ) | ( | ) | ||
Share-based compensation | ||||||
Noncurrent lease receivables | ||||||
Other adjustments | ||||||
Working capital changes that provided (used) cash, excluding effects of acquisitions: | ||||||
Trade receivables | ( | ) | ||||
Inventories | ( | ) | ( | ) | ||
Other receivables | ||||||
Payables and accrued liabilities | ( | ) | ( | ) | ||
Other working capital | ( | ) | ||||
Cash Provided by Operating Activities | ||||||
Investing Activities | ||||||
Additions to plant and equipment | ( | ) | ( | ) | ||
Investment in and advances to unconsolidated affiliates | ( | ) | ||||
Proceeds from sale of assets and investments | ||||||
Purchases of investments | ( | ) | ||||
Proceeds from investments | ||||||
Other investing activities | ||||||
Cash Used for Investing Activities | ( | ) | ( | ) | ||
Financing Activities | ||||||
Payments on long-term debt | ( | ) | ( | ) | ||
Net decrease in commercial paper and short-term borrowings | ( | ) | ( | ) | ||
Dividends paid to shareholders | ( | ) | ( | ) | ||
Proceeds from stock option exercises | ||||||
Other financing activities | ( | ) | ( | ) | ||
Cash Used for Financing Activities | ( | ) | ( | ) | ||
Effect of Exchange Rate Changes on Cash | ( | ) | ||||
Increase in cash and cash items | ||||||
Cash and Cash items – Beginning of Year | ||||||
Cash and Cash Items – End of Period | $ | $ | ||||
7
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
Three Months Ended | ||||||||||||||||||||||||
31 December 2019 | ||||||||||||||||||||||||
(Millions of 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 2019 | $ | $ | $ | ($ | ) | ($ | ) | $ | $ | $ | ||||||||||||||
Net income | — | — | — | — | ||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | ||||||||||||||||||||
Dividends on common stock (per share $1.16) | — | — | ( | ) | — | — | ( | ) | — | ( | ) | |||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Share-based compensation | — | — | — | — | — | |||||||||||||||||||
Issuance of treasury shares for stock option and award plans | — | ( | ) | — | — | ( | ) | — | ( | ) | ||||||||||||||
Investments by noncontrolling interests | — | — | — | — | — | — | ||||||||||||||||||
Other equity transactions | — | ( | ) | ( | ) | — | — | ( | ) | — | ( | ) | ||||||||||||
Balance at 31 December 2019 | $ | $ | $ | ($ | ) | ($ | ) | $ | $ | $ | ||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
31 December 2018 | ||||||||||||||||||||||||
(Millions of 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 2018 | $ | $ | $ | ($ | ) | ($ | ) | $ | $ | $ | ||||||||||||||
Net income | — | — | — | — | ||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | ( | ) | — | ( | ) | ( | ) | ( | ) | ||||||||||||
Dividends on common stock (per share $1.10) | — | — | ( | ) | — | — | ( | ) | — | ( | ) | |||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||
Share-based compensation | — | — | — | — | — | |||||||||||||||||||
Issuance of treasury shares for stock option and award plans | — | ( | ) | — | — | ( | ) | — | ( | ) | ||||||||||||||
Cumulative change in accounting principle | — | — | ( | ) | — | — | ( | ) | — | ( | ) | |||||||||||||
Other equity transactions | — | ( | ) | ( | ) | — | — | ( | ) | — | ( | ) | ||||||||||||
Balance at 31 December 2018 | $ | $ | $ | ($ | ) | ($ | ) | $ | $ | $ | ||||||||||||||
8
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars unless otherwise indicated, except for share and per share data)
1 | . | ||
2 | . | ||
3 | . | ||
4 | . | ||
5 | . | ||
6 | . | ||
7 | . | ||
8 | . | ||
9 | . | ||
10 | . | ||
11 | . | ||
12 | . | ||
13 | . | ||
14 | . | ||
15 | . | ||
16 | . | ||
17 | . | ||
1. BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES
The interim 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 (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 present fairly 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 fully understand the basis of presentation, the 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 year ended 30 September 2019 ( the "2019 Form 10-K"). Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.
Refer to our 2019 Form 10-K for a description of major accounting policies. In fiscal year 2020, these policies were impacted by the implementation of certain new accounting guidance, including the adoption of Accounting Standards Codification ("ASC") Topic 842, Leases, and all related amendments (the "new lease standard”). We adopted the new lease standard as of 1 October 2019 under the modified retrospective approach. Comparative prior year information has not been restated and continues to be reported under the accounting standards in effect for those periods. Our updated lease policy is discussed below.
Other than the adoption of new accounting guidance as discussed in Note 2, New Accounting Guidance, and presentation changes discussed below, there were no notable changes to our accounting policies during the first three months of fiscal year 2020.
9
Leases
As lessee, we recognize a right-of-use ("ROU") asset and lease liability on the balance sheet for all leases with a term in excess of 12 months. We determine if an arrangement contains a lease at inception. The arrangement contains a lease when there is an identifiable asset, we obtain substantially all of the economic benefits from that asset, and we direct how and for what purpose the asset is used during the term of the arrangement. If the initial term of an arrangement is 12 months or less, we have made an accounting election to not assess if these arrangements contain a lease for inclusion on our balance sheet.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since our leases generally do not provide an implicit discount rate, we use our incremental borrowing rates based on the information available at the commencement date in determining the present value of lease payments. To determine the incremental borrowing rate, we consider our unsecured borrowings and published market rates, and then adjust those rates to assume full collateralization and to factor in the individual lease term, geography, and payment structure.
Our lease term includes periods covered by options to extend or terminate the lease when it is reasonably certain that we will exercise an option to extend or not exercise an option to terminate. Lease payments consider our practical expedient to combine amounts for lease and related nonlease components for all classes of underlying assets in which we are lessee. Fixed payments and those associated with escalation clauses based on an index are included in the ROU asset and lease liability at commencement. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our variable lease payments primarily include the impact from escalation clauses that are not fixed. Prepaid lease payments are included in the recognition of ROU assets. Our lease agreements do not contain any material lease incentives, residual value guarantees or restrictions or covenants.
Foreign Currency
As further discussed in Note 2, New Accounting Guidance, we adopted new accounting guidance on hedging activities in fiscal year 2020 that changed the income statement presentation of excluded components (foreign currency forward points and currency swap basis differences) of our cash flow hedges of intercompany loans. This activity is now amortized on a straight-line basis within “Other non-operating income (expense), net" instead of being recognized in "Interest expense." In addition, gains and losses from the foreign currency remeasurement of intercompany and third-party financing transactions as well as income tax assets and liabilities and the impact of related hedges are now also reflected within “Other non-operating income (expense), net.” All other gains and losses from foreign currency transactions continue to be reflected within "Other income (expense), net" on our consolidated income statements. Comparative prior year information has not been restated.
2. NEW ACCOUNTING GUIDANCE
Accounting Guidance Implemented in Fiscal Year 2020
Leases
In February 2016, the FASB issued lease guidance (the "new lease guidance") that requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements.
The Company is the lessee under various agreements for real estate, vehicles, aircraft, and other equipment that are accounted for as operating leases.
We adopted this guidance in fiscal year 2020 using a modified retrospective approach with the election to apply the guidance as of 1 October 2019, "the adoption date," instead of the earliest comparative period presented in the consolidated financial statements.
10
We elected the following practical expedients provided by this guidance:
• | The package of practical expedients, which allows us to carry forward the lease population and classification existing as of the adoption date, among other things; |
• | The land easements practical expedient, which allows us to carry forward our accounting treatment for land easements on agreements existing before the adoption date; |
• | The hindsight practical expedient, which is used to determine the reasonably certain lease term for existing leases as of the adoption date; |
• | The component combination practical expedient, which allows us to account for lease and non-lease components associated with that lease as a single component, if certain criteria are met; and |
• | The short-term leases practical expedient, which allows us to not record the related lease liabilities and right-of-use assets for operating leases in which we are the lessee with a term of 12 months or less. |
Adoption of the standard resulted in recognition of lease liabilities and right-of-use assets on our consolidated balance sheets of $375.3 and $332.3 , respectively. The standard did not materially affect our retained earnings, results of operations or liquidity. Refer to Note 7, Leases, for additional information.
Hedging Activities
In August 2017, the FASB issued guidance on hedging activities to expand the related presentation and disclosure requirements, change how companies assess effectiveness, and eliminate the separate measurement and reporting of hedge ineffectiveness. The guidance also enables more hedging strategies to become eligible for hedge accounting.
We adopted the new guidance on 1 October 2019 on a modified retrospective basis. The primary impact of adoption was the presentation in the consolidated income statement of foreign currency forward points and currency swap basis differences ("excluded components"), since these are excluded from the assessment of hedge effectiveness for our hedges of intercompany loans. Historically, the impacts from changes in value of these components were recorded in "Interest expense." Beginning in fiscal year 2020, the excluded components were recognized in "Other non-operating income (expense), net" consistent with the remeasurement of the intercompany loans. In the first quarter of 2020, we recognized $8.9 in "Other non-operating income (expense), net.” In the first quarter of 2019, $8.3 was recognized in “Interest expense.”
In accordance with the transition provisions of the guidance, the separate measurement of ineffectiveness for our cash flow hedging instruments existing as of the date of adoption should be eliminated through a cumulative-effect adjustment within equity. Ineffectiveness recognized for our cash flow hedging instruments existing as of the date of adoption was not material to the consolidated financial statements.
New Accounting Guidance to be Implemented
Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance on the measurement of credit losses, which requires measurement and recognition of expected credit losses for financial assets, including trade receivables and capital lease receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The method to determine a loss is different from the existing guidance, which requires a credit loss to be recognized when it is probable. The guidance is effective beginning in fiscal year 2021, with early adoption permitted beginning in fiscal year 2020. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
Fair Value Measurement Disclosures
In August 2018, the FASB issued guidance which modifies the disclosure requirements for fair value measurements. The guidance is effective in fiscal year 2021, with early adoption permitted. Certain amendments must be applied prospectively and other amendments retrospectively. We are currently evaluating the impact this guidance will have on the disclosures in the notes to our consolidated financial statements.
Retirement Benefit Disclosures
In August 2018, the FASB issued guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance is effective in fiscal year 2021, with early adoption permitted, and must be applied on a retrospective basis. We are currently evaluating the impact this guidance will have on the disclosures in the notes to our consolidated financial statements.
11
Cloud Computing Implementation Costs
In August 2018, the FASB issued guidance which aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software. The guidance is effective in fiscal year 2021, with early adoption permitted, and may be applied either prospectively or retrospectively. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
Related Party Guidance for Variable Interest Entities
In October 2018, the FASB issued an update which amends the guidance for determining whether a decision-making fee is a variable interest. The amendments require consideration of indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety as currently required. The guidance is effective in fiscal year 2021, with early adoption permitted. The amendments must be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued an update to simplify the accounting for income taxes and improve consistent application by clarifying or amending existing guidance. This guidance is effective in fiscal year 2022, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements. Depending on the provision, application can be made on a prospective, retrospective, or on a modified retrospective basis.
3. REVENUE RECOGNITION
The majority of the Company's revenue is generated from its sale of gas customers within its Industrial Gases regional 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. The Industrial Gases – Global and the Corporate and other segments serve our sale of equipment customers.
Disaggregation of Revenue
The tables below present our consolidated sales disaggregated by supply mode for each of our reporting segments for the three months ended 31 December 2019 and 2018. We believe this presentation best depicts the nature, timing, type of customer, and contract terms for our sales.
Industrial Gases– Americas | Industrial Gases– EMEA | Industrial Gases– Asia | Industrial Gases– Global | Corporate and other | Total | % | ||||||||||||||
Three Months Ended 31 December 2019 | ||||||||||||||||||||
On-site | $ | $ | $ | $ | $ | $ | % | |||||||||||||
Merchant | % | |||||||||||||||||||
Sale of Equipment | % | |||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | % | |||||||||||||
Industrial Gases– Americas | Industrial Gases– EMEA | Industrial Gases– Asia | Industrial Gases– Global | Corporate and other | Total | % | ||||||||||||||
Three Months Ended 31 December 2018 | ||||||||||||||||||||
On-site | $ | $ | $ | $ | $ | $ | % | |||||||||||||
Merchant | % | |||||||||||||||||||
Sale of Equipment | % | |||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | % | |||||||||||||
12
Remaining Performance Obligations
As of 31 December 2019, the transaction price allocated to remaining performance obligations is estimated to be approximately $19 billion. This amount includes fixed-charge contract provisions associated with our on-site and sale of equipment supply modes. We estimate that approximately half of this revenue will be recognized over approximately the next five years and the balance thereafter.
Expected revenue associated with new on-site plants that are not yet onstream is excluded from this amount. In addition, this amount excludes consideration associated with contracts having an expected duration of less than one year and variable consideration for which we recognize revenue at the amount to which we have the right to invoice, including pass-through costs related to energy and natural gas.
In the future, actual amounts will differ due to events outside of our control, including but not limited to inflationary price escalations, currency exchange rates, and terminated or renewed contracts.
Contract Balances
The table below details balances arising from contracts with customers:
Balance Sheet Location | 31 December 2019 | 30 September 2019 | |||||
Assets | |||||||
Contract assets – current | Other receivables and current assets | $ | $ | ||||
Contract fulfillment costs – current | Other receivables and current assets | ||||||
Liabilities | |||||||
Contract liabilities – current | Payables and accrued liabilities | ||||||
Contract liabilities – noncurrent | Other noncurrent liabilities | ||||||
Changes to our contract balances primarily relate to our sale of equipment contracts. During the three months ended 31 December 2019, we recognized approximately $60 in revenue associated with sale of equipment contracts that was included within our contract liabilities as of 30 September 2019.
4. COST REDUCTION ACTIONS
In fiscal year 2019, we recognized an expense of $25.5 for severance and other benefits associated with the elimination or planned elimination of approximately 300 positions. These actions were taken to drive cost synergies primarily within the Industrial Gases – EMEA and the Industrial Gases – Americas segments. The charge was not recorded in segment results.
Liabilities associated with these actions are reflected on our consolidated balance sheets within "Payables and accrued liabilities." The table below summarizes the carrying amount of the accrual as of 31 December 2019:
2019 Charge | $ | ||
Cash expenditures | ( | ) | |
Amount reflected in pension liability | ( | ) | |
Currency translation adjustment | ( | ) | |
30 September 2019 | $ | ||
Cash expenditures | ( | ) | |
Currency translation adjustment | |||
31 December 2019 | $ | ||
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5. INVENTORIES
The components of inventories are as follows:
31 December | 30 September | |||||||
2019 | 2019 | |||||||
Finished goods | $ | $ | ||||||
Work in process | ||||||||
Raw materials, supplies and other | ||||||||
Inventories | $ | $ | ||||||
6. GOODWILL
Changes to the carrying amount of consolidated goodwill by segment for the three months ended 31 December 2019 are as follows:
Industrial Gases– Americas | Industrial Gases– EMEA | Industrial Gases– Asia | Industrial Gases– Global | Corporate and other | Total | |||||||||||||||||||
Goodwill, net at 30 September 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Currency translation and other | ( | ) | ||||||||||||||||||||||
Goodwill, net at 31 December 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
31 December | 30 September | |||||||
2019 | 2019 | |||||||
Goodwill, gross | $ | $ | ||||||
Accumulated impairment losses(A) | ( | ) | ( | ) | ||||
Goodwill, net | $ | $ | ||||||
(A) | Accumulated impairment losses include the impacts of currency translation. These losses are attributable to our Latin America reporting unit ("LASA") within the Industrial Gases – Americas segment. |
We review goodwill for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying value of goodwill might not be recoverable.
7. LEASES
As discussed in Note 2, New Accounting Guidance, we adopted the new lease guidance in fiscal year 2020 using a modified retrospective approach with the election to apply the guidance as of 1 October 2019. For adoption, we elected the package of practical expedients permitted under the transition guidance to carry forward the historical lease populations as well as their classifications existing as of the adoption date (i.e. contracts having a lease commencement date prior to 1 October 2019). Refer to Note 1, Basis of Presentation and Major Accounting Policies, and Note 2, New Accounting Guidance, for additional information on our adoption and related policies under the new lease standard.
Lessee Accounting
The Company is the lessee under various agreements for real estate, vehicles, aircraft, and other equipment that are accounted for as operating leases. Our finance leases principally relate to the right to use machinery and equipment and are not material.
The operating lease expense for the three months ended 31 December 2019, which exclude short-term and variable lease expenses, as those expenses are immaterial, was $19.4 .
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Amounts associated with operating leases, including their presentation on our consolidated balance sheets, as of our most recent balance sheet date and our adoption date are as follows:
31 December 2019 | 1 October 2019 | ||||||
Operating lease ROU asset | |||||||
Other noncurrent assets | $ | $ | |||||
Operating lease liabilities | |||||||
Payables and accrued liabilities | |||||||
Other noncurrent liabilities | |||||||
Total Operating Lease Liabilities | $ | $ | |||||
The difference between the ROU assets and lease liabilities recorded upon adoption primarily relate to the land lease associated with our former Energy-from-Waste business in which a ROU asset was not recognized.
31 December 2019 | ||
Weighted-average remaining lease term (in years)(A) | ||
Weighted-average discount rate(B) | % | |
(A) | Calculated on the basis of the remaining lease term and the lease liability balance for each lease as of the reporting date. |
(B) |
At 31 December 2019, the maturity analysis of lease liabilities, showing the undiscounted cash flows, is as follows:
Operating Leases | ||||
2020 (excluding the three months ended 31 December 2019) | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
Thereafter | ||||
Total Undiscounted Lease Payments | $ | |||
Imputed interest | ( | ) | ||
Present Value of Lease Liability Recognized on the Balance Sheet | $ | |||
As previously disclosed in our 2019 Form 10-K, at 30 September 2019, prior to our adoption of the new lease guidance, minimum payments due under leases were as follows:
Operating Leases | ||||
2020 | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
Thereafter | ||||
Total Undiscounted Lease Payments | $ | |||
The impacts associated with our operating leases on the consolidated statements of cash flows are reflected within "Other adjustments" within operating activities. This includes the non-cash impact from operating lease costs of $19.4 as well as a use of cash of $19.0 for payments on amounts included in the measurement of the lease liability. The net impact to operating cash flows from these activities is not material.
Other than the ROU assets established upon adoption, there were no significant non-cash additions during the three months ended 31 December 2019.
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We have additional operating leases that have not yet commenced as of 31 December 2019, the largest of which commences in the second quarter of 2020 having annual fixed payments in excess of $1 for almost 40 years.
Lessor Accounting
Historically, certain contracts associated with facilities that are built to provide product to a specific customer were accounted for as leases. As noted above, we elected the package of practical expedients permitted under the transition guidance to carry forward these lease determinations as of 30 September 2019.
In cases where operating lease treatment is appropriate, there is no difference in revenue recognition over the life of the contract as compared to accounting for the contract under a sale of gas agreement. Under the new lease standard, these contracts qualify for a practical expedient available to lessors to combine the lease and non-lease components and account for the combined component in accordance with the accounting treatment for the predominant component. We elected to apply this practical expedient and have accounted for the combined component as product sales under the revenue standard as we control the operations and maintenance of the assets that provide the supply of gas to our customers.
In cases where sales-type lease treatment is appropriate, revenue and expense are recognized up front for the sale of equipment component of the contract as compared to revenue recognition over the life of the arrangement under contracts not qualifying as sales-type leases. Additionally, a portion of the revenue representing interest income from the financing component of the lease receivable is reflected as sales over the life of the contract. During the three months ended 31 December 2019, we recognized interest income of $18.5 on our lease receivables. As we control the operations and maintenance of the assets that provide the supply of gas to our customers, we do not expect new arrangements to qualify as leases.
Our contracts generally do not have the option to extend or terminate the lease, or provide the customer the right to purchase the asset at the end of the contract term. Instead, renewal of such contracts requires negotiation of mutually agreed upon terms by both parties. Unless the customer terminates within the required notice period, the contract will go into evergreen. Given the long-term duration of our contracts, there is no assumed residual value for the assets at the end of the lease term.
Lease receivables, net, primarily relate to sales-type leases and are mostly included within "Noncurrent lease receivables" on our consolidated balance sheets, with the remaining balance in "Other receivables and current assets."
Lease payments collected during the three months ended 31 December 2019 were $42.0 . These payments reduced the lease receivable balance by $23.5 in fiscal year 2020.
At 31 December 2019, minimum lease payments expected to be collected, which reconciles to the total undiscounted minimum lease payments reflected in the table below, were as follows:
2020 (excluding the three months ended 31 December 2019) | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
Total | $ | ||
Unearned interest income | ( | ) | |
Lease Receivables, net | $ | ||
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As previously disclosed in our 2019 Form 10-K, at 30 September 2019, prior to our adoption of the new lease guidance, minimum lease payments expected to be collected were as follows:
2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
Total | $ | ||
Unearned interest income | ( | ) | |
Lease Receivables, net | $ | ||
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 seek to minimize our cash flow volatility from changes in currency exchange rates. This is accomplished by identifying and evaluating the risk that our cash flows will change in value due to changes in exchange rates and by executing strategies necessary to manage such exposures. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.
Forward Exchange Contracts
We enter into forward exchange contracts to reduce the cash flow exposure to foreign currency fluctuations associated with highly anticipated cash flows and certain firm commitments, such as the purchase of plant and equipment. We also enter into forward exchange contracts to hedge the cash flow exposure on intercompany loans. This portfolio of forward exchange contracts consists primarily of Euros and U.S. Dollars. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 31 December 2019 is 1.9 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 many different foreign currency pairs, with a profile that changes from time to time depending on business activity and sourcing decisions.
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The table below summarizes our outstanding currency price risk management instruments:
31 December 2019 | 30 September 2019 | |||||||||||
US$ Notional | Years Average Maturity | US$ Notional | Years Average Maturity | |||||||||
Forward Exchange Contracts: | ||||||||||||
Cash flow hedges | $ | $ | ||||||||||
Net investment hedges | ||||||||||||
Not designated | ||||||||||||
Total Forward Exchange Contracts | $ | $ | ||||||||||
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 €953.2 million ($1,068.8 ) at 31 December 2019 and €951.3 million ($1,036.9 ) at 30 September 2019. 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, our debt portfolio and hedging program are managed with the intent to (1) reduce funding risk with respect to borrowings made by us to preserve our access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) manage the aggregate interest rate risk and the debt portfolio in accordance with certain debt management parameters.
Interest Rate Management Contracts
We enter into interest rate swaps to change the fixed/variable interest rate mix of our debt portfolio in order to maintain the percentage of fixed- and variable-rate debt within the parameters set by management. In accordance with these parameters, the agreements are used to manage interest rate risks and costs inherent in our debt portfolio. Our interest rate management portfolio generally consists of fixed-to-floating interest rate swaps (which are designated as fair value hedges), pre-issuance interest rate swaps and treasury locks (which hedge the interest rate risk associated with anticipated fixed-rate debt issuances and are designated as cash flow hedges), and floating-to-fixed interest rate swaps (which are designated as cash flow hedges). As of 31 December 2019, the outstanding interest rate swaps were denominated in U.S. Dollars. The notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. When interest rate swaps are used to hedge variable-rate debt, the indices of the swaps and the debt to which they are designated are the same. It is our policy not to enter into any interest rate management contracts which lever a move in interest rates on a greater than one-to-one basis.
Cross Currency Interest Rate Swap Contracts
We enter into cross currency interest rate swap contracts when our risk management function deems necessary. These contracts may entail both the exchange of fixed- and floating-rate interest payments periodically over the life of the agreement and the exchange of one currency for another currency at inception and at a specified future date. The contracts are used to hedge either certain net investments in foreign operations or non-functional currency cash flows related to intercompany loans. The current cross currency interest rate swap portfolio consists of fixed-to-fixed swaps primarily between U.S. Dollars and Chinese Renminbi, U.S. Dollars and Indian Rupee, and U.S. Dollars and Chilean Pesos.
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The following table summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:
31 December 2019 | 30 September 2019 | |||||||||||||||||||||||
US$ Notional | Average Pay % | Average Receive % | Years Average Maturity | US$ Notional | Average Pay % | Average Receive % | Years Average Maturity | |||||||||||||||||
Interest rate swaps (fair value hedge) | $ | % | $ | % | ||||||||||||||||||||
Cross currency interest rate swaps (net investment hedge) | $ | % | % | $ | % | % | ||||||||||||||||||
Cross currency interest rate swaps (cash flow hedge) | $ | % | % | |||||||||||||||||||||