10-Q 1 d220379d10q.htm FORM 10-Q Form 10-Q

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 30 June 2016

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   ü   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   ü   No       

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ü     Accelerated filer          Non-accelerated filer          Smaller reporting company       
  (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES       

NO   ü  

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 30 June 2016

Common Stock, $1 par value      216,549,704


AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

INDEX

 

            Page No.  
PART I.     

FINANCIAL INFORMATION

  

Item 1.

    

Financial Statements

  

Consolidated Income Statements – Three and Nine Months Ended 30 June 2016 and 2015

     3   

Consolidated Comprehensive Income Statements – Three and Nine Months Ended 30  June 2016 and 2015

     4   

Consolidated Balance Sheets – 30 June 2016 and 30 September 2015

     5   

Consolidated Statements of Cash Flows – Nine Months Ended 30 June 2016 and 2015

     6   

Notes to Consolidated Financial Statements

     7   

Item 2.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     28   

Item 3.

    

Quantitative and Qualitative Disclosures About Market Risk

     52   

Item 4.

    

Controls and Procedures

     53   
PART II.     

OTHER INFORMATION

  

Item 5.

    

Other Information

     53   

Item 6.

    

Exhibits

     54   

Signatures

     55   

Exhibit Index

     56   

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED INCOME STATEMENTS

(Unaudited)

 

       Three Months Ended
30 June
   Nine Months Ended
30 June
(Millions of dollars, except for share data)      2016    2015    2016    2015

Sales

       $ 2,434.4        $ 2,470.2        $ 7,061.4        $ 7,445.5  

Cost of sales

         1,639.3          1,715.2          4,754.0          5,243.1  

Selling and administrative

         212.0          241.5          630.5          739.4  

Research and development

         34.1          33.4          98.8          104.2  

Business separation costs

         9.5          —            28.9          —    

Business restructuring and cost reduction actions

         14.2          58.2          22.8          146.0  

Pension settlement loss

         1.0          1.6          3.6          14.2  

Gain on previously held equity interest

         —            —            —            17.9  

Other income (expense), net

         10.8          4.5          36.2          17.5  

Operating Income

         535.1          424.8          1,559.0          1,234.0  

Equity affiliates’ income

         42.4          42.4          108.6          118.5  

Interest expense

         35.0          28.2          82.9          80.7  

Income From Continuing Operations Before Taxes

         542.5          439.0          1,584.7          1,271.8  

Income tax provision

         179.5          104.1          447.9          298.9  

Income from Continuing Operations

         363.0          334.9          1,136.8          972.9  

Loss From Discontinued Operations, net of tax

         (8.9 )        (1.7 )        (876.2 )        (5.3 )

Net Income

         354.1          333.2          260.6          967.6  

Less: Net Income Attributable to Noncontrolling Interests

         7.3          14.4          23.5          34.2  

Net Income Attributable to Air Products

       $ 346.8        $ 318.8        $ 237.1        $ 933.4  

Net Income Attributable to Air Products

                     

Income from continuing operations

       $ 355.7        $ 320.5        $ 1,113.3        $ 938.7  

Loss from discontinued operations

         (8.9 )        (1.7 )        (876.2 )        (5.3 )

Net Income Attributable to Air Products

       $ 346.8        $ 318.8        $ 237.1        $ 933.4  

Basic Earnings Per Common Share Attributable to Air Products

                     

Income from continuing operations

       $ 1.64        $ 1.49        $ 5.15        $ 4.37  

Loss from discontinued operations

         (.04 )        (.01 )        (4.05 )        (.02 )

Net Income Attributable to Air Products

       $ 1.60        $ 1.48        $ 1.10        $ 4.35  

Diluted Earnings Per Common Share Attributable to Air Products

                     

Income from continuing operations

       $ 1.63        $ 1.48        $ 5.11        $ 4.32  

Loss from discontinued operations

         (.04 )        (.01 )        (4.02 )        (.02 )

Net Income Attributable to Air Products

       $ 1.59        $ 1.47        $ 1.09        $ 4.30  

Weighted Average Common Shares – Basic (in millions)

         216.6          215.2          216.1          214.8  

Weighted Average Common Shares – Diluted (in millions)

         218.5          217.4          218.0          217.2  

Dividends Declared Per Common Share – Cash

       $ .86        $ .81        $ 2.53        $ 2.39  

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
30 June
(Millions of dollars)      2016    2015

Net Income

       $ 354.1        $ 333.2  

Other Comprehensive Income (Loss), net of tax:

           

Translation adjustments, net of tax of $11.5 and ($30.8)

         (89.0 )        73.0  

Net loss on derivatives, net of tax of ($7.1) and ($4.5)

         (22.2 )        (13.6 )

Pension and postretirement benefits, net of tax of $1.2

         —            2.0  

Reclassification adjustments:

           

Currency translation adjustment

         (.1 )        —    

Derivatives, net of tax of $4.0 and $.5

         10.0          1.6  

Pension and postretirement benefits, net of tax of $10.5 and $10.7

         21.6          22.2  

Total Other Comprehensive Income (Loss)

         (79.7 )        85.2  

Comprehensive Income

         274.4          418.4  

Net Income Attributable to Noncontrolling Interests

         7.3          14.4  

Other Comprehensive Income (Loss) Attributable to Noncontrolling Interests

         (.7 )        1.5  

Comprehensive Income Attributable to Air Products

       $ 267.8        $ 402.5  
       Nine Months Ended
30 June
(Millions of dollars)      2016    2015

Net Income

       $ 260.6        $ 967.6  

Other Comprehensive Income (Loss), net of tax:

           

Translation adjustments, net of tax of ($14.3) and $46.7

         (52.0 )        (403.5 )

Net gain (loss) on derivatives, net of tax of $7.9 and ($17.3)

         6.6          (37.8 )

Pension and postretirement benefits, net of tax of ($1.5)

         —            (2.6 )

Reclassification adjustments:

           

Currency translation adjustment

         2.7          —    

Derivatives, net of tax of ($4.5) and $12.1

         (20.4 )        32.7  

Pension and postretirement benefits, net of tax of $31.9 and $35.5

         65.4          71.7  

Total Other Comprehensive Income (Loss)

         2.3          (339.5 )

Comprehensive Income

         262.9          628.1  

Net Income Attributable to Noncontrolling Interests

         23.5          34.2  

Other Comprehensive Income (Loss) Attributable to Noncontrolling Interests

         2.1          (3.0 )

Comprehensive Income Attributable to Air Products

       $ 237.3        $ 596.9  

The accompanying notes are an integral part of these statements.

 

4


AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Millions of dollars, except for share data)      30 June
2016
   30 September
2015

Assets

                       

Current Assets

           

Cash and cash items

       $ 514.8        $ 206.4  

Trade receivables, net

         1,563.2          1,406.2  

Inventories

         611.1          657.8  

Contracts in progress, less progress billings

         110.9          110.8  

Prepaid expenses

         80.3          67.0  

Other receivables and current assets

         479.7          343.5  

Current assets of discontinued operations

         18.8          1.8  

Total Current Assets

         3,378.8          2,793.5  

Investment in net assets of and advances to equity affiliates

         1,270.4          1,265.7  

Plant and equipment, at cost

         19,967.1          19,462.8  

Less: accumulated depreciation

         11,168.5          10,717.7  

Plant and equipment, net

         8,798.6          8,745.1  

Goodwill, net

         1,135.2          1,131.3  

Intangible assets, net

         491.2          508.3  

Noncurrent capital lease receivables

         1,245.6          1,350.2  

Other noncurrent assets

         763.7          648.6  

Noncurrent assets of discontinued operations

         —            891.8  

Total Noncurrent Assets

         13,704.7          14,541.0  

Total Assets

       $ 17,083.5        $ 17,334.5  

Liabilities and Equity

                       

Current Liabilities

           

Payables and accrued liabilities

       $ 1,778.0        $ 1,641.7  

Accrued income taxes

         101.4          55.8  

Short-term borrowings

         1,043.0          1,494.3  

Current portion of long-term debt

         715.1          435.6  

Current liabilities of discontinued operations

         21.4          17.0  

Total Current Liabilities

         3,658.9          3,644.4  

Long-term debt

         3,925.6          3,949.1  

Other noncurrent liabilities

         1,414.2          1,554.0  

Deferred income taxes

         904.6          803.4  

Noncurrent liabilities of discontinued operations

         —            2.5  

Total Noncurrent Liabilities

         6,244.4          6,309.0  

Total Liabilities

         9,903.3          9,953.4  

Commitments and Contingencies – See Note 13

           

Air Products Shareholders’ Equity

           

Common stock (par value $1 per share; issued 2016 and 2015 – 249,455,584 shares)

         249.4          249.4  

Capital in excess of par value

         935.4          904.7  

Retained earnings

         10,268.7          10,580.4  

Accumulated other comprehensive loss

         (2,125.7 )        (2,125.9 )

Treasury stock, at cost (2016 – 32,905,880 shares; 2015 – 34,096,471 shares)

         (2,282.4 )        (2,359.6 )

Total Air Products Shareholders’ Equity

         7,045.4          7,249.0  

Noncontrolling Interests

         134.8          132.1  

Total Equity

         7,180.2          7,381.1  

Total Liabilities and Equity

       $ 17,083.5        $ 17,334.5  

The accompanying notes are an integral part of these statements.

 

5


AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

       Nine Months Ended
30 June
(Millions of dollars)      2016    2015

Operating Activities

           

Net income

       $ 260.6        $ 967.6  

Less: Net income attributable to noncontrolling interests

         23.5          34.2  

Net income attributable to Air Products

         237.1          933.4  

Loss from discontinued operations

         876.2          5.3  

Income from continuing operations attributable to Air Products

         1,113.3          938.7  

Adjustments to reconcile income to cash provided by operating activities:

           

Depreciation and amortization

         695.4          701.8  

Deferred income taxes

         80.4          18.5  

Gain on previously held equity interest

         —            (17.9 )

Undistributed earnings of unconsolidated affiliates

         (34.9 )        (74.6 )

Share-based compensation

         28.6          37.3  

Noncurrent capital lease receivables

         61.5          (3.9 )

Write-down of long-lived assets associated with restructuring

         —            27.8  

Other adjustments

         83.6          (63.9 )

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

           

Trade receivables

         (188.4 )        (23.2 )

Inventories

         39.8          2.4  

Contracts in progress, less progress billings

         (7.4 )        (.1 )

Other receivables

         (74.1 )        (52.3 )

Payables and accrued liabilities

         32.6          189.7  

Other working capital

         3.9          (5.8 )

Cash Provided by Operating Activities

         1,834.3          1,674.5  

Investing Activities

           

Additions to plant and equipment

         (797.3 )        (948.6 )

Acquisitions, less cash acquired

         —            (34.5 )

Proceeds from sale of assets and investments

         76.6          15.1  

Other investing activities

         (1.7 )        (4.9 )

Cash Used for Investing Activities

         (722.4 )        (972.9 )

Financing Activities

           

Long-term debt proceeds

         386.9          338.0  

Payments on long-term debt

         (126.3 )        (559.2 )

Net increase (decrease) in commercial paper and short-term borrowings

         (434.8 )        122.0  

Dividends paid to shareholders

         (534.9 )        (503.4 )

Proceeds from stock option exercises

         76.2          92.5  

Excess tax benefit from share-based compensation

         16.5          26.7  

Other financing activities

         (34.4 )        (45.3 )

Cash Used for Financing Activities

         (650.8 )        (528.7 )

Discontinued Operations

           

Cash used for operating activities

         (59.4 )        (16.6 )

Cash used for investing activities

         (97.0 )        (266.1 )

Cash provided by financing activities

         —            —    

Cash Used for Discontinued Operations

         (156.4 )        (282.7 )

Effect of Exchange Rate Changes on Cash

         3.7          (11.5 )

Increase (Decrease) in Cash and Cash Items

         308.4          (121.3 )

Cash and Cash Items – Beginning of Year

         206.4          336.6  

Cash and Cash Items – End of Period

       $ 514.8        $ 215.3  

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 2015 Form 10-K for a description of major accounting policies. There have been no significant changes to these accounting policies during the first nine months of fiscal year 2016 other than those detailed in Note 3, New Accounting Guidance. Certain prior year information has been reclassified to conform to the fiscal year 2016 presentation.

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 (U.S. 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. DISCONTINUED OPERATIONS

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, have been 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. The EfW segment is presented as a discontinued operation. Accordingly, prior year EfW business segment information has been reclassified to conform to current year presentation. During the second quarter of fiscal year 2016, we recorded a loss of $945.7 ($846.6 after-tax) for the disposal of the business. Income tax benefits related only to one of the projects, as the other did not qualify for a local tax deduction. This loss included $913.5 to write down plant assets, previously recorded as construction in progress, to their estimated net realizable value of $20.0 and $32.2 to record a liability for plant disposition and other costs. We estimated the net realizable value of the projects as of 31 March 2016 assuming an orderly liquidation of assets capable of being marketed on a secondary equipment market based on market quotes and our experience with selling similar equipment. An asset’s orderly liquidation value is the amount that could be realized from a liquidation sale, given a reasonable period of time to find a buyer, selling the asset in the existing condition where it is located, and assuming the highest and best use of the asset by market participants. There have been no significant changes in the estimated net realizable value as of 30 June 2016. A valuation allowance of $58.0 and unrecognized tax benefits of $7.9 were recorded relating to deferred tax assets on capital assets generated from the loss.

The following table summarizes the carrying amount of the accrual for our actions to dispose of the EfW business at 30 June 2016, which is included in current liabilities of discontinued operations:

 

        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

         —            (16.0 )        (16.0 )

Currency translation adjustment

         —            (1.1 )        (1.1 )

30 June 2016

       $ —          $ 15.1        $ 15.1  

 

7


The results of discontinued operations are summarized below:

 

       Three Months Ended
30 June
   Nine Months Ended
30 June
        2016    2015    2016    2015

Loss before taxes

       $ (10.2 )      $ (2.3 )      $ (31.5 )      $ (7.1 )

Income tax provision

         1.3          .6          1.9          1.8  

Loss from operations of discontinued operations

         (8.9 )        (1.7 )        (29.6 )        (5.3 )

Loss on disposal, net of tax

         —            —            (846.6 )        —    

Loss from Discontinued Operations, net of tax

       $ (8.9 )      $ (1.7 )      $ (876.2 )      $ (5.3 )

The loss from operations of discontinued operations primarily relates to land leases, commercial and administrative costs, and costs incurred for ongoing project exit activities.

Assets and liabilities of discontinued operations consist of the following:

 

        30 June
2016
     30 September
2015

Plant and equipment

       $ 18.7          $ —    

Other current assets

         .1            1.8  

Total Current Assets

       $ 18.8          $ 1.8  

Plant and equipment

       $ —            $ 891.8  

Total Noncurrent Assets

       $ —            $ 891.8  

Payables and accrued liabilities

       $ 18.6          $ 17.0  

Other current liabilities

         2.8            —    

Total Current Liabilities

       $ 21.4          $ 17.0  

Other noncurrent liabilities

       $ —            $ 2.5  

Total Noncurrent Liabilities

       $ —            $ 2.5  

 

3. NEW ACCOUNTING GUIDANCE

Accounting Guidance Implemented in 2016

Balance Sheet Classification of Deferred Taxes

In November 2015, the Financial Accounting Standards Board (FASB) issued guidance to simplify the presentation of deferred income taxes by requiring that all deferred tax liabilities and assets be classified as noncurrent on the balance sheet. As of the first quarter of fiscal year 2016, we adopted this guidance on a retrospective basis. Accordingly, prior year amounts have been reclassified to conform to the current year presentation. The guidance, which did not change the existing requirement to net deferred tax assets and liabilities within a jurisdiction, resulted in a reclassification adjustment that increased noncurrent deferred tax assets by $13.7 and decreased noncurrent deferred tax liabilities by $99.9 as of 30 September 2015.

Discontinued Operations

In April 2014, the FASB issued an update to change the criteria for determining which disposals qualify as a discontinued operation and to expand related disclosure requirements. Under the new guidance, a disposal is required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on operations and financial results. We adopted this guidance prospectively for new disposals and new disposal groups classified as held for sale beginning in the first quarter of fiscal year 2016. This guidance had no impact on our consolidated financial statements upon adoption. As a result of actions taken during the second quarter of 2016, our Energy-from-Waste segment has been reported as a discontinued operation. Refer to Note 2, Discontinued Operations, for additional information.

 

8


New Accounting Guidance to be Implemented

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 leases receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This is different from the current guidance, which requires a credit loss to not be recognized until the loss 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.

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. As originally issued, this guidance was effective for us beginning in fiscal year 2018. In August 2015, the FASB deferred the effective date by one year, while providing the option to early adopt the standard on the original effective date. Accordingly, we will have the option to adopt the standard in either fiscal year 2018 or 2019. The guidance can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the adoption alternatives and impact that this update will have on our consolidated financial statements.

Consolidation Analysis

In February 2015, the FASB issued an update to amend current consolidation guidance. The guidance impacts the analysis an entity must perform in determining if it should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures. The guidance is effective beginning fiscal year 2017, with early adoption permitted. The guidance may be applied retrospectively or using a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. We are currently evaluating the impact this update will have on our consolidated financial statements.

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 August 2015, the FASB issued an update to incorporate the U.S. Securities and Exchange Commission (SEC) Staff guidance which allows debt issuance costs associated with a line-of-credit arrangement to be presented as a deferred asset that is subsequently amortized over the term of the arrangement, regardless of whether there are any outstanding borrowings. This change in accounting principle will be effective beginning in fiscal year 2017 with early adoption permitted and must be applied retrospectively. This guidance will not have a significant impact on our consolidated financial statements.

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.

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. The amendments are effective for fiscal year 2018, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

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 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.

 

9


4. MATERIALS TECHNOLOGIES SEPARATION

On 16 September 2015, the Company announced plans to separate its Materials Technologies business, which contains two divisions, Electronic Materials (EMD) and Performance Materials (PMD), into an independent publicly traded company and distribute to Air Products shareholders all of the shares of the new public company in a tax free distribution (a “spin-off”). Versum Materials, LLC, or Versum, was formed as the new company to hold the Materials Technologies business in November 2015 and is currently a wholly owned subsidiary of the Company.

On 6 May 2016, the Company entered into a definitive agreement to sell certain subsidiaries and assets comprising the Performance Materials division to Evonik Industries AG for $3.8 billion in cash and the assumption of certain liabilities. As a result, the Company now intends to include only the Electronic Materials division in the Versum spin-off. The Company is targeting to complete the spin-off in calendar year 2016. Versum will be converted from a limited liability company to a Delaware corporation (Versum Materials, Inc.) prior to spin-off. We expect the proceeds for each of the transactions to exceed the carrying value.

The results of operations, financial condition, and cash flows of EMD and PMD continue to be presented within our consolidated financial statements as continuing operations as of 30 June 2016. When the Board of Directors approves the final spin-off and the spin-off occurs, the financial presentation of the historical results of the EMD business will be reflected as a discontinued operation. The financial presentation of the historical results of the PMD business will be reflected as a discontinued operation when it becomes probable for the sale to occur and actions required to meet the plan of sale indicate that it is unlikely that significant changes will occur. The PMD business is not classified as held for sale due to certain conditions of the sale, including regulatory and anti-trust requirements. We continue to evaluate the progress of these transactions to determine when the businesses will be presented as discontinued operations.

For the three and nine months ended 30 June 2016, we incurred separation costs of $9.5 and $28.9, respectively, primarily related to legal and other advisory fees. These fees are reflected on the consolidated income statements as “Business separation costs.”

Due to our intended separation of the Electronic Materials business from the Industrial Gas business in South Korea, we declared a dividend in June 2016 to repatriate $443.8 from a subsidiary in South Korea to the U.S. in July 2016. Previously, most of these foreign earnings were considered to be indefinitely reinvested. Since we intended to repatriate the earnings as of 30 June 2016, our income tax provision includes an expense of $45.7 during the three months ended 30 June 2016. Except for the repatriation described above, we have not changed our position on other foreign earnings considered to be indefinitely reinvested.

 

5. BUSINESS RESTRUCTURING AND COST REDUCTION ACTIONS

The charges we record for business restructuring and cost reduction actions have been excluded from segment operating income.

Cost Reduction Actions

For the three and nine months ended 30 June 2016, we recognized an expense of $14.2 ($9.3 after-tax, or $.04 per share) and $22.8 ($16.4 after-tax, or $.08 per share), respectively, for severance and other benefits related to cost reduction actions. During the first nine months of fiscal year 2016, the cost reduction actions resulted in the elimination of approximately 500 positions. The expenses related primarily to the Industrial Gases – Americas and the Industrial Gases – EMEA segments.

The following table summarizes the carrying amount of the accrual for cost reduction actions at 30 June 2016:

 

        Severance and
Other Benefits

2016 Charge

       $ 22.8  

Amount reflected in pension liability

         (2.0 )

Cash expenditures

         (14.5 )

Currency translation adjustment

         .2  

30 June 2016

       $ 6.5  

 

10


Business Realignment and Reorganization

On 18 September 2014, we announced plans to reorganize the Company, including realignment of our businesses in new reporting segments and other organizational changes, effective as of 1 October 2014. As a result of this reorganization, we incurred an expense of $207.7 throughout fiscal year 2015 for severance and other benefits related to the elimination of approximately 2,000 positions and asset and associated contract actions. Of this charge, an expense of $58.2 ($38.8 after-tax, or $.18 per share) and $146.0 ($98.7 after-tax, or $.45 per share) was recognized during the three and nine months ended 30 June 2015, respectively.

The following table summarizes the carrying amount of the accrual for the business realignment and reorganization at 30 June 2016:

 

        Severance and
Other Benefits
   Asset
Actions/Other
   Total

30 September 2014

       $ 10.5        $ —          $ 10.5  

2015 Charge

         151.9          55.8          207.7  

Amount reflected in pension liability

         (14.0 )        —            (14.0 )

Noncash expenses

         —            (47.4 )        (47.4 )

Cash expenditures

         (113.5 )        (1.2 )        (114.7 )

Currency translation adjustment

         (.4 )        —            (.4 )

30 September 2015

       $ 34.5        $ 7.2        $ 41.7  

Cash expenditures

         (30.1 )        (3.8 )        (33.9 )

Currency translation adjustment

         (.4 )        —            (.4 )

30 June 2016

       $ 4.0        $ 3.4        $ 7.4  

 

6. BUSINESS COMBINATION

On 30 December 2014, we acquired our partner’s equity ownership interest in a liquefied atmospheric industrial gases production joint venture in North America for $22.6, which increased our ownership from 50% to 100%. The transaction was accounted for as a business combination, and subsequent to the acquisition, the results are consolidated within our Industrial Gases – Americas segment. The assets acquired, primarily plant and equipment, were recorded at their fair market values as of the acquisition date.

The acquisition date fair value of the previously held equity interest was determined using a discounted cash flow analysis under the income approach. The nine months ended 30 June 2015 include a gain of $17.9 ($11.2 after-tax, or $.05 per share) as a result of revaluing our previously held equity interest to fair value as of the acquisition date. This gain is reflected on the consolidated income statements as “Gain on previously held equity interest.”

 

7. INVENTORIES

The components of inventories are as follows:

 

        30 June
2016
   30 September
2015

Finished goods

       $ 447.9        $ 494.9  

Work in process

         35.8          34.4  

Raw materials, supplies and other

         219.9          229.3  
       $ 703.6        $ 758.6  

Less: Excess of FIFO cost over LIFO cost

         (92.5 )        (100.8 )

Inventories

       $ 611.1        $ 657.8  

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

 

11


8. EQUITY AFFILIATES

On 19 April 2015, a joint venture between Air Products and ACWA Holding entered into a 20-year oxygen and nitrogen supply agreement to supply Saudi Aramco’s oil refinery and power plant being built in Jazan, Saudi Arabia. Air Products owns 25% of the joint venture and guarantees the repayment of its share of an equity bridge loan. ACWA also guarantees their share of the loan. As of 30 June 2016, we have a noncurrent liability of $94.4 for our obligation to make future equity contributions based on our proportionate share of the advances received by the joint venture under the loan. In the first nine months of fiscal 2016, we recorded a noncash transaction which resulted in an increase of $26.9 to our investment in net assets of and advances to equity affiliates, which has been excluded from the consolidated statements of cash flows. In total, we expect to invest approximately $100 in this joint venture. We determined that the joint venture is a variable interest entity, for which we are not the primary beneficiary. Air Products has also entered into a long-term sale of equipment contract with the joint venture to engineer, procure, and construct the industrial gas facilities that will supply the gases to Saudi Aramco.

In December 2015, we sold our investment in Daido Air Products Electronics, Inc. for $15.9, which resulted in a gain of $.7. The carrying value at time of sale included a $12.8 investment in net assets of and advances to equity affiliates and a $2.4 foreign currency translation loss that had been deferred in accumulated other comprehensive loss.

In January 2016, we sold our investment in SembCorp Air Products (HyCo) Pte. Ltd. The transaction did not have a material impact on the financial statements.

 

9. GOODWILL

Changes to the carrying amount of consolidated goodwill by segment for the nine months ended 30 June 2016 are as follows:

 

        Industrial
Gases–
Americas
     Industrial
Gases–
EMEA
   Industrial
Gases–
Asia
     Industrial
Gases–
Global
     Materials
Technologies
     Total

Goodwill, net at 30 September 2015

       $ 297.6          $ 386.5        $ 133.1          $ 19.9          $ 294.2          $ 1,131.3  

Currency translation

         9.7            (11.5 )        .7            .1            4.9            3.9  

Goodwill, net at 30 June 2016

       $ 307.3          $ 375.0        $ 133.8          $ 20.0          $ 299.1          $ 1,135.2  

 

        30 June
2016
   30 September
2015

Goodwill, gross

       $ 1,391.5        $ 1,375.0  

Accumulated impairment losses(A)

         (256.3 )        (243.7 )

Goodwill, net

       $ 1,135.2        $ 1,131.3  

 

(A) 

Amount is attributable to the Industrial Gases – Americas segment and includes currency translation of $48.9 and $61.5 as of 30 June 2016 and 30 September 2015, 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.

 

12


10. 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 as well as Euros and British Pound Sterling. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 30 June 2016 is 3.0 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 pairs in this portfolio of forward exchange contracts are Euros and U.S. dollars and British Pound Sterling 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.

The table below summarizes our outstanding currency price risk management instruments:

 

       30 June 2016      30 September 2015
        US$
Notional
     Years
Average
Maturity
     US$
Notional
     Years
Average
Maturity

Forward Exchange Contracts:

                           

Cash flow hedges

       $ 5,123.5            .4          $ 4,543.8            .5  

Net investment hedges

         1,354.4            2.1            491.3            4.0  

Not designated

         1,309.2            .3            863.3            .7  

Total Forward Exchange Contracts

       $ 7,787.1            .7          $ 5,898.4            .9  

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 €849.3 million ($942.7) at 30 June 2016 and €687.7 million ($768.4) at 30 September 2015. The designated foreign currency-denominated debt is located on the balance sheet in the long-term debt and current portion of long-term debt line items.

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.

 

13


Interest Rate Management Contracts

We enter into interest rate swaps to change the fixed/variable interest rate mix of our debt portfolio in order to maintain the percentage of fixed- and variable-rate debt within the parameters set by management. In accordance with these parameters, the agreements are used to manage interest rate risks and costs inherent in our debt portfolio. Our interest rate management portfolio generally consists of fixed-to-floating interest rate swaps (which are designated as fair value hedges), pre-issuance interest rate swaps and treasury locks (which hedge the interest rate risk associated with anticipated fixed-rate debt issuances and are designated as cash flow hedges), and floating-to-fixed interest rate swaps (which are designated as cash flow hedges). At 30 June 2016, 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. These contracts effectively convert the currency denomination of a debt instrument into another currency in which we have a net equity position while changing the interest rate characteristics of the instrument. 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.

The following table summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:

 

       30 June 2016      30 September 2015
        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 %        2.5          $ 600.0            LIBOR          2.77 %        3.3  

Cross currency interest rate swaps
(net investment hedge)

       $ 600.3            3.29 %        2.10 %        2.5          $ 609.9            4.06 %        2.61 %        3.2  

Cross currency interest rate swaps
(cash flow hedge)

       $ 1,135.9            4.72 %        2.71 %        3.5          $ 1,055.2            4.29 %        2.63 %        3.9  

Cross currency interest rate swaps
(not designated)

       $ 12.2            3.62 %        .81 %        2.1          $ 12.9            3.12 %        3.08 %        4.1  

 

14


The table below summarizes the fair value and balance sheet location of our outstanding derivatives:

 

     

Balance Sheet

Location

  

30 June

2016

  

30 September

2015

  

Balance Sheet

Location

  

30 June

2016

  

30 September

2015

Derivatives Designated as Hedging Instruments:

                             

Forward exchange contracts

       Other receivables        $ 107.1        $ 52.1          Accrued liabilities        $ 95.2        $ 110.7  

Interest rate management contracts

       Other receivables          17.1          17.6          Accrued liabilities          —            —    

Forward exchange contracts

      
 
Other noncurrent
assets
 
 
    

 

55.4

 

    

 

68.5

 

      

 

Other noncurrent

liabilities

 

 

    

 

8.7

 

    

 

9.2

 

Interest rate management contracts

      

 

Other noncurrent

assets

 

 

    

 

197.4

 

    

 

153.4

 

      

 

Other noncurrent

liabilities

 

 

    

 

4.6

 

    

 

.8

 

Total Derivatives Designated as Hedging Instruments

               

$

377.0

 

    

$

291.6

 

               

$

108.5

 

    

$

120.7

 

Derivatives Not Designated as Hedging Instruments:

                             

Forward exchange contracts

       Other receivables        $ 74.6        $ 3.2          Accrued liabilities        $ 24.8        $ 3.9  

Forward exchange contracts

      

 

Other noncurrent

assets

 

 

    

 

—  

 

    

 

23.3

 

      

 

Other noncurrent

liabilities

 

 

    

 

—  

 

    

 

.6

 

Interest rate management contracts

      

 

Other noncurrent

assets

 

 

    

 

—  

 

    

 

.8

 

      

 

Other noncurrent

liabilities

 

 

    

 

.1

 

    

 

—  

 

Total Derivatives Not Designated as Hedging Instruments

                $ 74.6        $ 27.3                   $ 24.9        $ 4.5  

Total Derivatives

                $ 451.6        $ 318.9                   $ 133.4        $ 125.2  

Refer to Note 11, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.

 

15


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 30 June
      

Forward

Exchange Contracts

  

Foreign Currency

Debt

  

Other (A)

  

Total

        2016    2015    2016    2015    2016    2015    2016    2015

Cash Flow Hedges, net of tax:

                                         

Net gain (loss) recognized in OCI (effective portion)

       $ (33.7 )      $ 1.8        $ —          $ —          $ 11.5        $ (15.4 )      $ (22.2 )      $ (13.6 )

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

         1.0          —            —            —            —            —            1.0          —    

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

         24.2          (2.0 )        —            —            (18.8 )        2.2          5.4          .2  

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

         2.6          .3          —            —            .9          1.1          3.5              1.4  

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

         .1          —            —            —            —            —            .1          —    

Fair Value Hedges:

                                         

Net gain (loss) recognized in interest expense (B)

       $ —          $ —          $ —          $ —          $ (.2 )      $ (4.5 )      $ (.2 )      $ (4.5 )

Net Investment Hedges, net of tax:

                                         

Net gain (loss) recognized in OCI

       $ 28.2        $ (13.6 )      $  8.4        $ (20.0 )      $ 25.1        $ (20.3 )      $ 61.7        $ (53.9 )

Derivatives Not Designated as Hedging Instruments:

                                         

Net gain (loss) recognized in other income (expense), net(C)

       $ (3.8 )      $ (4.3 )      $ —          $ —          $ (.2 )      $ —          $ (4.0 )      $ (4.3 )

 

16


       Nine Months Ended 30 June
       Forward
Exchange Contracts
   Foreign Currency
Debt
   Other (A)    Total
        2016    2015    2016    2015    2016    2015    2016    2015

Cash Flow Hedges, net of tax:

                                         

Net gain (loss) recognized in OCI (effective portion)

       $ (5.9 )      $ (44.2 )      $ —          $ —          $ 12.5        $ 6.4        $ 6.6        $ (37.8 )

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

         2.4          .3          —            —            —            —            2.4          .3  

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

         (7.8 )        40.7          —            —            (22.5 )        (11.0 )        (30.3 )        29.7  

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

         5.2          .1          —            —            2.5          2.0          7.7          2.1  

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

         (.2 )        .6          —            —            —            —            (.2 )        .6  

Fair Value Hedges:

                                         

Net gain (loss) recognized in interest expense(B)

       $ —          $ —          $ —          $ —          $ (2.0 )      $ 3.5        $ (2.0 )      $ 3.5  

Net Investment Hedges, net of tax:

                                         

Net gain (loss) recognized in OCI

       $  21.8        $ 56.5        $ (1.9 )      $  87.8        $ 33.5        $ 17.1        $ 53.4        $ 161.4  

Derivatives Not Designated as Hedging Instruments:

                                         

Net gain (loss) recognized in other income (expense), net(C)

       $ (1.4 )      $ (11.5 )      $ —          $ —          $ (.8 )      $ —          $ (2.2 )      $ (11.5 )

 

(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 gains and losses resulting from the impact of changes in related interest rates on recognized outstanding debt.

(C)

The impact of the non-designated hedges noted above was largely offset by gains and losses resulting from the impact of changes in exchange rates on recognized assets and liabilities denominated in non-functional currencies.

The amount of cash flow hedges’ unrealized gains and losses at 30 June 2016 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 $15.2 as of 30 June 2016 and $.2 as of 30 September 2015. 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 $310.0 as of 30 June 2016 and $226.9 as of 30 September 2015. No financial institution is required to post collateral at this time, as all have credit ratings at or above threshold.

 

17


11. 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:

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 10, Financial Instruments, for a description of derivative instruments, including details on the balance sheet line classifications.

Long-term Debt

The fair value of our debt is based on estimates using standard pricing models that take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. These standard valuation models utilize observable market data such as interest rate yield curves and currency spot rates. Therefore, the fair value of our debt is classified as a level 2 measurement. We generally perform the computation of the fair value of these instruments.

The carrying values and fair values of financial instruments were as follows:

 

       30 June 2016      30 September 2015
        Carrying Value      Fair Value      Carrying Value      Fair Value

Assets

                           

Derivatives

                           

Forward exchange contracts

       $ 237.1          $ 237.1          $ 147.1          $ 147.1  

Interest rate management contracts

         214.5            214.5            171.8            171.8  

Liabilities

                           

Derivatives

                           

Forward exchange contracts

       $ 128.7          $ 128.7          $ 124.4          $ 124.4  

Interest rate management contracts

         4.7            4.7            .8            .8  

Long-term debt, including current portion

               4,640.7            4,953.7                  4,384.7            4,645.7  

The carrying amounts reported in the balance sheet for cash and cash items, 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.

 

18


The following table summarizes assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets:    

 

       30 June 2016      30 September 2015
        Total      Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3

Assets at Fair Value

                                                       

Derivatives

                                                       

Forward exchange contracts

       $ 237.1          $ —            $ 237.1          $ —            $ 147.1          $ —            $ 147.1          $ —    

Interest rate management contracts

         214.5            —              214.5            —              171.8            —              171.8            —    

Total Assets at Fair Value

       $ 451.6          $ —            $ 451.6          $ —            $ 318.9          $ —            $ 318.9          $ —    

Liabilities at Fair Value

                                                       

Derivatives

                                                       

Forward exchange contracts

       $ 128.7          $ —            $ 128.7          $ —            $ 124.4          $ —            $ 124.4          $ —    

Interest rate management contracts

         4.7            —              4.7            —              .8            —              .8            —    

Total Liabilities at Fair Value

       $ 133.4          $ —            $ 133.4          $ —            $ 125.2          $ —            $ 125.2          $ —    

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 March 2016     

2016

Loss

        Total      Level 1      Level 2      Level 3     

Plant and Equipment—Discontinued operations (A)

       $ 20.0          $ —            $ —            $ 20.0          $ 913.5  

 

(A) 

As a result of our exit from the Energy-from-Waste business, we assessed the recoverability of assets capable of being marketed on a secondary equipment market using an orderly liquidation valuation resulting in an impairment loss for the difference between the orderly liquidation value and net book value of the assets as of 31 March 2016. There have been no significant changes in the estimated net realizable value as of 30 June 2016. For additional information, see Note 2, Discontinued Operations.

 

12. RETIREMENT BENEFITS

The components of net periodic benefit cost for the defined benefit pension and other postretirement benefit plans for the three and nine months ended 30 June 2016 and 2015 were as follows:

 

       Pension Benefits    Other Benefits
       2016    2015    2016      2015
Three Months Ended 30 June      U.S.    International    U.S.    International              

Service cost

       $ 9.1        $ 6.1        $ 10.6        $ 7.8        $ .5          $ .7  

Interest cost

            27.7          11.2             31.1          14.2          .5            .6  

Expected return on plan assets

         (50.5 )        (19.8 )        (50.5 )        (20.0 )        —              —    

Prior service cost amortization

         .7          —            .7          (.1 )        —              —    

Actuarial loss amortization

         21.3          8.9          19.9          10.6          .2            .2  

Settlements

         1.0          —            1.6          —            —              —    

Curtailments

         —            —            1.7          —            —              —    

Special termination benefits

         1.4          —            .8          —            —              —    

Other

         —            .6          .2          .4          —              —    

Net periodic benefit cost

       $ 10.7        $ 7.0        $ 16.1        $ 12.9        $ 1.2          $ 1.5  

 

19


       Pension Benefits    Other Benefits
       2016    2015    2016      2015
Nine Months Ended 30 June      U.S.    International    U.S.    International              

Service cost

       $ 27.4        $ 18.4        $ 31.8        $ 23.9        $ 1.6          $ 2.1  

Interest cost

         83.1          33.9          93.6          43.4          1.5            1.7  

Expected return on plan assets

         (151.5 )        (60.1 )        (151.5 )        (60.2 )        —              —    

Prior service cost amortization

         2.2          (.1 )        2.1          —            —              —    

Actuarial loss amortization

         63.9          27.2          59.3          31.2          .5            .6  

Settlements

         3.6          —            14.1          (.1 )        —              —    

Curtailments

         —            —            4.8          —            —              —    

Special termination benefits

         2.0          —            5.6          .9          —              —    

Other

         —            1.6          1.3          1.4          —              —    

Net periodic benefit cost

       $ 30.7        $ 20.9        $ 61.1        $ 40.5        $ 3.6          $ 4.4  

Net periodic benefit cost is primarily included in cost of sales and selling and administrative expense on our consolidated income statements. The amount of net periodic benefit cost capitalized in 2016 and 2015 was not material.

Certain of our pension plans provide for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after their retirement date. A participant’s vested benefit is considered settled upon cash payment of the lump sum. We recognize pension settlement losses when cash payments exceed the sum of the service and interest cost components of net periodic pension cost of the plan for the fiscal year. For the nine months ended 30 June 2016 and 2015, we recognized $3.6 and $14.2 of pension settlement losses, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss primarily associated with the U.S. supplemental pension plan.

Special termination benefits for the nine months ended 30 June 2016 and 2015 are $2.0 and $6.5, respectively, primarily related to the business restructuring and cost reduction actions initiated.

In fiscal 2016, we changed our method to estimate the service cost and interest cost components of net periodic benefit costs for our major defined benefit pension plans. Historically, we estimated the service cost and interest cost components using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We have elected to use a spot rate approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve to the relevant projected cash flows, as we believe this provides a better estimate of service and interest costs. We consider this change in rate assumption to be a change in estimate and, accordingly, are accounting for it prospectively starting in 2016. The adoption of the spot rate approach will reduce our fiscal 2016 net periodic benefit cost by approximately $30. This change does not affect the measurement of our total benefit obligation.

The decrease in pension expense primarily resulted from the adoption of the spot rate approach to estimate service cost and interest cost and reduced plan participation due to severance actions, partially offset by the adoption of new mortality tables for our major plans.

For the nine months ended 30 June 2016 and 2015, our cash contributions to funded pension plans and benefit payments under unfunded pension plans were $68.6 and $119.2, respectively. Total contributions for fiscal 2016 are expected to be approximately $80 to $100. During fiscal 2015, total cash contributions were $137.5, including benefit payments for unfunded pension plans.

 

20


13. COMMITMENTS AND CONTINGENCIES

Litigation

We are involved in various legal proceedings, including commercial, competition, environmental, health, safety, product liability, and insurance matters. In September 2010, the Brazilian Administrative Council for Economic Defense (CADE) issued a decision against our Brazilian subsidiary, Air Products Brasil Ltda., and several other Brazilian industrial gas companies for alleged anticompetitive activities. CADE imposed a civil fine of R$179.2 million (approximately $56 at 30 June 2016) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, whose investigation began in 2003, alleging violation of competition laws with respect to the sale of industrial and medical gases. The fines are based on a percentage of our total revenue in Brazil in 2003.

We have denied the allegations made by the authorities and filed an appeal in October 2010 with the Brazilian courts. On 6 May 2014, our appeal was granted and the fine against Air Products Brasil Ltda. was dismissed. CADE has appealed that ruling and the matter remains pending. We, with advice of our outside legal counsel, have assessed the status of this matter and have concluded that, although an adverse final judgment after exhausting all appeals is possible, such a judgment is not probable. As a result, no provision has been made in the consolidated financial statements. We estimate the maximum possible loss to be the full amount of the fine of R$179.2 million (approximately $56 at 30 June 2016) plus interest accrued thereon until final disposition of the proceedings.

While we do not expect that any sums we may have to pay in connection with this or any other legal proceeding would have a material adverse effect on our consolidated financial position or net cash flows, a future charge for regulatory fines or damage awards could have a significant impact on our net income in the period in which it is recorded.

Environmental

In the normal course of business, we are involved in legal proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA: the federal Superfund law); Resource Conservation and Recovery Act (RCRA); and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Presently, there are approximately 36 sites on which a final settlement has not been reached where we, along with others, have been designated a potentially responsible party by the Environmental Protection Agency or are otherwise engaged in investigation or remediation, including cleanup activity at certain of our current and former manufacturing sites. We continually monitor these sites for which we have environmental exposure.

Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The consolidated balance sheets at 30 June 2016 and 30 September 2015 included an accrual of $82.7 and $80.6, respectively, primarily as part of other noncurrent liabilities. The environmental liabilities will be paid over a period of up to 30 years. We estimate the exposure for environmental loss contingencies to range from $82 to a reasonably possible upper exposure of $96 as of 30 June 2016.

Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Using reasonably possible alternative assumptions of the exposure level could result in an increase to the environmental accrual. Due to the inherent uncertainties related to environmental exposures, a significant increase to the reasonably possible upper exposure level could occur if a new site is designated, the scope of remediation is increased, a different remediation alternative is identified, or a significant increase in our proportionate share occurs. We do not expect that any sum we may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse impact on our financial position or results of operations in any one year.

PACE

At 30 June 2016, $30.4 of the environmental accrual was related to the Pace facility.

In 2006, we sold our Amines business, which included operations at Pace, Florida, and recognized a liability for retained environmental obligations associated with remediation activities at Pace. We are required by the Florida Department of Environmental Protection (FDEP) and the United States Environmental Protection Agency (USEPA) to continue our remediation efforts. We estimated that it would take 20 years to complete the groundwater remediation, and the costs through completion were estimated to range from $42 to $52. As no amount within the range was a better estimate than another, we recognized a pretax expense in fiscal 2006 of $42 as a component of income from discontinued operations and recorded an environmental accrual of $42 in continuing operations on the consolidated balance sheets. There has been no change to the estimated exposure range related to the Pace facility.

 

21


We have implemented many of the remedial corrective measures at the Pace facility required under 1995 Consent Orders issued by the FDEP and the USEPA. Contaminated soils have been bioremediated, and the treated soils have been secured in a lined on-site disposal cell. Several groundwater recovery systems have been installed to contain and remove contamination from groundwater. We completed an extensive assessment of the site to determine how well existing measures are working, what additional corrective measures may be needed, and whether newer remediation technologies that were not available in the 1990s might be suitable to more quickly and effectively remove groundwater contaminants. Based on assessment results, we completed a focused feasibility study that has identified alternative approaches that may more effectively remove contaminants. We continue to review alternative remedial approaches with the FDEP. In the first quarter of 2015, we entered into a new Consent Order with the FDEP requiring us to continue our remediation efforts at the Pace facility. We expect the costs we will incur under the new Consent Order to be consistent with our previous estimates.

PIEDMONT

At 30 June 2016, $17.8 of the environmental accrual was related to the Piedmont site.

On 30 June 2008, we sold our Elkton, Maryland, and Piedmont, South Carolina, production facilities and the related North American atmospheric emulsions and global pressure sensitive adhesives businesses. In connection with the sale, we recognized a liability for retained environmental obligations associated with remediation activities at the Piedmont site. This site is under active remediation for contamination caused by an insolvent prior owner. We are required by the South Carolina Department of Health and Environmental Control to address both contaminated soil and groundwater. Numerous areas of soil contamination have been addressed, and contaminated groundwater is being recovered and treated. We estimate that it will take until 2019 to complete source area remediation with groundwater recovery and treatment, continuing through 2029. Thereafter, we are expecting this site to go into a state of monitored natural attenuation through 2047. We recognized a pretax expense in 2008 of $24 as a component of income from discontinued operations and recorded an environmental liability of $24 in continuing operations on the consolidated balance sheets. There have been no significant changes to the estimated exposure.

PASADENA

At 30 June 2016, $10.4 of the environmental accrual was related to the Pasadena site.

During the fourth quarter of 2012, management committed to permanently shutting down our polyurethane intermediates (PUI) production facility in Pasadena, Texas. In shutting down and dismantling the facility, we have undertaken certain obligations related to soil and groundwater contaminants. We have been pumping and treating groundwater to control off-site contaminant migration in compliance with regulatory requirements and under the approval of the Texas Commission on Environmental Quality (TCEQ). We estimate that the pump and treat system will continue to operate until 2042. We plan to perform additional work to address other environmental obligations at the site. This additional work includes remediating, as required, impacted soils, investigating groundwater west of the former PUI facility, performing post closure care for two closed RCRA surface impoundment units, and establishing engineering controls. In 2012, we estimated the total exposure at this site to be $13. There has been no change to the estimated exposure.

 

22


14. SHARE-BASED COMPENSATION

We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. During the nine months ended 30 June 2016, we granted deferred stock units and restricted stock. Under all programs, the terms of the awards are fixed at the grant date. We issue shares from treasury stock upon the payout of deferred stock units, the exercise of stock options, and the issuance of restricted stock awards. As of 30 June 2016, there were 4,805,858 shares available for future grant under our Long-Term Incentive Plan, which is shareholder approved.

Share-based compensation cost recognized in the consolidated income statements is summarized below:

 

       Three Months Ended
30 June
   Nine Months Ended
30 June
        2016    2015    2016    2015

Before-Tax Share-Based Compensation Cost

       $ 9.1        $ 12.5        $ 28.6        $ 37.3  

Income Tax Benefit

         (3.2 )        (4.4 )        (10.0 )        (13.1 )

After-Tax Share-Based Compensation Cost

       $ 5.9        $ 8.1        $ 18.6        $ 24.2  

Before-tax share-based compensation cost is primarily included in selling and administrative expense on our consolidated income statements. The amount of share-based compensation cost capitalized in 2016 and 2015 was not material.

Deferred Stock Units

During the nine months ended 30 June 2016, we granted 128,200 market-based deferred stock units. The market-based deferred stock units are earned out at the end of a performance period beginning 1 October 2015 and ending 30 September 2018, conditioned on the level of the Company’s total shareholder return in relation to a defined peer group over the three year performance period.

The market-based deferred stock units had an estimated grant-date fair value of $134.58 per unit, which was estimated using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards. We generally expense the grant-date fair value of these awards on a straight line basis over the vesting period. The calculation of the fair value of market-based deferred stock units used the following assumptions:

 

Expected volatility

         20.5 %

Risk-free interest rate

         1.2 %

Expected dividend yield

         2.2 %

In addition, during the nine months ended 30 June 2016, we granted 150,108 time-based deferred stock units at a weighted average grant-date fair value of $136.99.

Restricted Stock

During the nine months ended 30 June 2016, we issued 32,920 restricted stock units at a grant-date fair value of $138.00.

 

23


15. EQUITY

The following is a summary of the changes in total equity:

 

       Three Months Ended 30 June
       2016    2015
        Air
Products
   Non-
controlling
Interests
   Total
Equity
   Air
Products
   Non-
controlling
Interests
   Total
Equity

Balance at 31 March

       $ 6,916.6        $ 136.5        $ 7,053.1        $ 7,332.5        $ 143.8        $ 7,476.3  

Net income(A)

         346.8          7.3          354.1          318.8          8.3          327.1  

Other comprehensive income (loss)

         (79.0 )        (.7 )        (79.7 )        83.7          1.5          85.2  

Dividends on common stock (per share $.86, $.81)

         (186.2 )        —            (186.2 )        (174.2 )        —            (174.2 )

Dividends to noncontrolling interests

         —            (8.4 )        (8.4 )        —            (8.8 )        (8.8 )

Share-based compensation

         9.1          —            9.1          10.5          —            10.5  

Treasury shares for stock option and award plans

         32.0          —            32.0          11.6          —            11.6  

Tax benefit of stock option and award plans

         6.8          —            6.8          3.9          —            3.9  

Other equity transactions

         (.7 )        .1          (.6 )        (.8 )        .5          (.3 )

Balance at 30 June

       $ 7,045.4        $ 134.8        $ 7,180.2        $ 7,586.0        $ 145.3        $ 7,731.3  

 

       Nine Months Ended 30 June
       2016    2015
        Air
Products
   Non-
controlling
Interests
   Total
Equity
   Air
Products
   Non-
controlling
Interests
   Total
Equity

Balance at 30 September

       $ 7,249.0        $ 132.1        $ 7,381.1        $ 7,365.8        $ 155.6        $ 7,521.4  

Net income(A)

         237.1          23.5          260.6          933.4          22.7          956.1  

Other comprehensive income (loss)

         .2          2.1          2.3          (336.5 )        (3.0 )        (339.5 )

Dividends on common stock (per share $2.53, $2.39)

         (546.7 )        —            (546.7 )        (513.5 )        —            (513.5 )

Dividends to noncontrolling interests

         —            (23.2 )        (23.2 )        —            (28.1 )        (28.1 )

Share-based compensation

         28.6          —            28.6          35.3          —            35.3  

Treasury shares for stock option and award plans

         62.8          —            62.8          74.5          —            74.5  

Tax benefit of stock option and award plans

         16.5          —            16.5          26.8          —            26.8  

Other equity transactions

         (2.1 )        .3          (1.8 )        .2          (1.9 )        (1.7 )

Balance at 30 June

       $ 7,045.4        $ 134.8        $ 7,180.2        $ 7,586.0        $ 145.3        $ 7,731.3  

 

(A) 

Net income attributable to noncontrolling interests for the three and nine months ended 30 June 2015 excludes net income of $6.1 and $11.5, respectively, related to redeemable noncontrolling interests, which were not part of total equity. There was no net income related to redeemable noncontrolling interests for the three and nine months ended 30 June 2016.

 

24


16. ACCUMULATED OTHER COMPREHENSIVE LOSS

The table below summarizes changes in accumulated other comprehensive loss (AOCL), net of tax, attributable to Air Products for the three and nine months ended 30 June 2016:

 

        Net loss on
derivatives
qualifying as
hedges
   Foreign
currency
translation
adjustments
   Pension and
postretirement
benefits
   Total

Balance at 31 March 2016

       $ (44.4 )      $ (919.6 )      $ (1,082.7 )      $ (2,046.7 )

Other comprehensive loss before reclassifications

         (22.2 )        (89.0 )        —            (111.2 )

Amounts reclassified from AOCL

         10.0          (.1 )        21.6          31.5  

Net current period other comprehensive income (loss)

       $ (12.2 )      $ (89.1 )      $ 21.6        $ (79.7 )

Amount attributable to noncontrolling interests

         —            (.7 )        —            (.7 )

Balance at 30 June 2016

       $ (56.6 )      $ (1,008.0 )      $ (1,061.1 )      $ (2,125.7 )

 

        Net loss on
derivatives
qualifying
as hedges
   Foreign
currency
translation
adjustments
   Pension and
postretirement
benefits
   Total

Balance at 30 September 2015

       $ (42.9 )      $ (956.5 )      $ (1,126.5 )      $ (2,125.9 )

Other comprehensive income (loss) before reclassifications

         6.6          (52.0 )        —            (45.4 )

Amounts reclassified from AOCL

         (20.4 )        2.7          65.4          47.7  

Net current period other comprehensive income (loss)

       $ (13.8 )      $ (49.3 )      $ 65.4        $ 2.3  

Amount attributable to noncontrolling interests

         (.1 )        2.2          —            2.1  

Balance at 30 June 2016

       $ (56.6 )      $ (1,008.0 )      $ (1,061.1 )      $ (2,125.7 )

The table below summarizes the reclassifications out of accumulated other comprehensive loss and the affected line item on the consolidated income statements:

 

       Three Months Ended
30 June
     Nine Months Ended
30 June
        2016            2015      2016            2015

(Gain) Loss on Cash Flow Hedges, net of tax

                                     

Sales/Cost of sales

       $ 1.0               $ —            $ 2.4               $ .3  

Other income (expense), net

         5.5                 .2            (30.5 )               30.3  

Interest expense

         3.5                       1.4            7.7                       2.1  

Total (Gain) Loss on Cash Flow Hedges, net of tax

       $ 10.0                     $ 1.6          $ (20.4 )                   $ 32.7  

Currency Translation Adjustment(A)

       $ (.1 )                   $ —            $ 2.7                     $ —    

Pension and Postretirement Benefits, net of tax(B)

       $ 21.6                     $ 22.2          $ 65.4                     $ 71.7  

 

(A) 

The impact is reflected in Other income (expense), net and primarily relates to the sale of an equity affiliate in the first quarter of 2016. Refer to Note 8, Equity Affiliates.

(B) 

The components include items such as prior service cost amortization, actuarial loss amortization, and settlements and are reflected in net periodic benefit cost. Refer to Note 12, Retirement Benefits.

 

25


17. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

 

       Three Months Ended
30 June
   Nine Months Ended
30 June
        2016    2015    2016    2015

Numerator

                     

Income from continuing operations

       $ 355.7        $ 320.5        $ 1,113.3        $ 938.7  

Loss from discontinued operations

         (8.9 )        (1.7 )        (876.2 )        (5.3 )

Net Income Attributable to Air Products

       $ 346.8        $ 318.8        $ 237.1        $ 933.4  

Denominator (in millions)

                     

Weighted average number of common shares — Basic

         216.6          215.2          216.1          214.8  

Effect of dilutive securities

                     

Employee stock option and other award plans

         1.9          2.2          1.9          2.4  

Weighted average number of common shares — Diluted

         218.5          217.4          218.0          217.2  

Basic Earnings Per Common Share Attributable to Air Products

                     

Income from continuing operations

       $ 1.64        $ 1.49        $ 5.15        $ 4.37  

Loss from discontinued operations

         (.04 )        (.01 )        (4.05 )        (.02 )

Net Income Attributable to Air Products

       $ 1.60        $ 1.48        $ 1.10        $ 4.35  

Diluted Earnings Per Common Share Attributable to Air Products

                     

Income from continuing operations

       $ 1.63        $ 1.48        $ 5.11        $ 4.32  

Loss from discontinued operations

         (.04 )        (.01 )        (4.02 )        (.02 )

Net Income Attributable to Air Products

       $ 1.59        $ 1.47        $ 1.09        $ 4.30  

Outstanding share-based awards of .2 million shares were antidilutive and therefore excluded from the computation of diluted earnings per share for the three and nine months ended 30 June 2016 and 30 June 2015, respectively.

 

18. SUPPLEMENTAL INFORMATION

Debt

On 1 June 2016, we issued a .375% Eurobond for €350 million ($386.9) that matures on 1 June 2021.

Cash Paid for Taxes (Net of Cash Refunds)

Income tax payments, net of refunds, were $330.1 and $261.9 for the nine months ended 30 June 2016 and 30 June 2015, respectively.

Subsequent Event

On 21 July 2016, the Board of Directors declared the fourth quarter dividend of $.86. The dividend is payable on 14 November 2016 to shareholders of record at the close of business on 3 October 2016.

 

26


19. BUSINESS SEGMENT INFORMATION

Our reporting segments reflect the manner in which our chief operating decision maker reviews results and allocates resources. Except in the Corporate and other segment, each reporting segment meets the definition of an operating segment and does not include the aggregation of multiple operating segments. Our liquefied natural gas (LNG) and helium storage and distribution sale of equipment businesses are aggregated within the Corporate and other segment.

Our reporting segments are:

 

   

Industrial Gases – Americas

 

   

Industrial Gases – EMEA (Europe, Middle East, and Africa)

 

   

Industrial Gases – Asia

 

   

Industrial Gases – Global

 

   

Materials Technologies

 

   

Corporate and other

Business Segment

 

      Industrial
Gases–
Americas
   Industrial
Gases–
EMEA
   Industrial
Gases–
Asia
     Industrial
Gases–
Global
  Materials
Technologies
   Corporate
and other
  Segment
Total

Three Months Ended 30 June 2016

                                  

Sales

     $ 832.2        $ 427.4        $ 447.6          $ 150.8       $ 520.0        $ 56.4       $ 2,434.4  

Operating income (loss)

       234.5          103.4          118.1            (13.9 )       135.2          (17.5 )       559.8  

Depreciation and amortization

       111.9          45.1          49.2            2.0         18.6          3.8         230.6  

Equity affiliates’ income (loss)

       15.9          11.3          14.8            (.1 )       .5          —           42.4  

Three Months Ended 30 June 2015

                                  

Sales

     $ 898.2        $ 455.2        $ 417.6          $ 71.3       $ 539.8        $ 88.1       $ 2,470.2  

Operating income (loss)

       206.5          87.6          100.9            (24.1 )       131.5          (17.8 )       484.6  

Depreciation and amortization

       103.9          47.0          51.9            4.2         22.7          3.3         233.0  

Equity affiliates’ income

       17.3          12.1          12.7            —           .3          —           42.4  

Nine Months Ended 30 June 2016

                                  

Sales

     $ 2,466.2        $ 1,286.0        $ 1,267.2          $ 341.7       $ 1,504.3        $ 196.0       $ 7,061.4  

Operating income (loss)

       670.5          284.5          339.2            (44.1 )       391.7          (27.5 )       1,614.3  

Depreciation and amortization

       330.1          140.1          149.4            5.9         58.2          11.7         695.4  

Equity affiliates’ income (loss)

       38.1          26.1          43.9            (.6 )       1.1          —           108.6  

Nine Months Ended 30 June 2015

                                  

Sales

     $ 2,791.6        $ 1,404.8        $ 1,209.3          $ 197.4       $ 1,597.1        $ 245.3       $ 7,445.5  

Operating income (loss)

       599.7          239.9          276.1            (49.9 )       360.3          (49.8 )       1,376.3  

Depreciation and amortization

       310.8          145.7          151.8            14.0         70.0          9.5         701.8  

Equity affiliates’ income

       49.6          30.4          36.7            .2         1.6          —           118.5  

Total Assets

                                  

30 June 2016

     $ 5,932.0        $ 3,213.9        $ 4,194.2          $ 394.6       $ 1,732.6        $ 1,597.4       $ 17,064.7  

30 September 2015

       5,774.9          3,323.9          4,154.0            370.5         1,741.9          1,075.7         16,440.9  

The sales information noted above relates to external customers only. All intersegment sales are eliminated in consolidation. For the three and nine months ended 30 June 2016, the Industrial Gases – Global segment had intersegment sales of $63.0 and $174.2, respectively. For the three and nine months ended 30 June 2015, the Industrial Gases – Global segment had intersegment sales of $66.3 and $180.0, respectively. These sales are generally transacted at market pricing. For all other segments, intersegment sales are not material for all periods presented. Equipment manufactured for our industrial gases segments is generally transferred at cost and not reflected as an intersegment sale.

 

27


Below is a reconciliation of segment total operating income to consolidated operating income:

 

       Three Months Ended
30 June
   Nine Months Ended
30 June
Operating Income      2016    2015    2016    2015

Segment total

       $ 559.8        $ 484.6        $ 1,614.3        $ 1,376.3  

Business separation costs

         (9.5 )        —            (28.9 )        —    

Business restructuring and cost reduction actions

         (14.2 )        (58.2 )        (22.8 )        (146.0 )

Pension settlement loss

         (1.0 )        (1.6 )        (3.6 )        (14.2 )

Gain on previously held equity interest

         —            —            —            17.9  

Consolidated Total

       $ 535.1        $ 424.8        $ 1,559.0        $ 1,234.0  

Below is a reconciliation of segment total assets to consolidated total assets:

 

       30 June      30 September
Total Assets      2016      2015

Segment total

       $ 17,064.7          $ 16,440.9  

Discontinued operations

         18.8            893.6  

Consolidated Total

       $ 17,083.5          $ 17,334.5  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Millions of dollars, except for share data)

The disclosures in this quarterly report are complementary to those made in our 2015 Form 10-K. An analysis of results for the third quarter and first nine months of 2016 is provided in the Management’s Discussion and Analysis to follow.

On 29 March 2016, the Board of Directors approved the Company’s exit of its Energy-from-Waste (EfW) business and efforts to start up and operate the two EfW projects located in Tees Valley, United Kingdom, have been discontinued. As a result, the EfW segment has been presented as a discontinued operation. Prior year EfW business segment information has been reclassified to conform to current year presentation.

The discussion that follows, unless otherwise indicated, is on a continuing operations basis. All comparisons in the discussion are to the corresponding prior year unless otherwise stated. All amounts presented are in accordance with U.S. generally accepted accounting principles (GAAP), except as noted.

Captions such as income from continuing operations attributable to Air Products, net income attributable to Air Products and diluted earnings per share attributable to Air Products are simply referred to as “income from continuing operations,” “net income,” and “diluted earnings per share” throughout this Management’s Discussion and Analysis, unless otherwise stated.

The discussion of results that follows includes comparisons of non-GAAP financial measures. Included in these non-GAAP measures is Adjusted EBITDA, which we believe to be a useful metric to assess operating performance. The presentation of non-GAAP measures is intended to enhance the usefulness of financial information by providing measures that our management uses internally to evaluate our performance. The reconciliation of reported GAAP results to non-GAAP measures is presented on pages 44-48. Descriptions of the excluded items appear on pages 31 and 39.

 

28


THIRD QUARTER 2016 VS. THIRD QUARTER 2015

THIRD QUARTER 2016 IN SUMMARY

 

   

Sales of $2,434.4 decreased 1%, or $35.8, as lower energy contractual pass-through to customers of 3% and an unfavorable currency impact of 2% were partially offset by higher volumes of 4%.

 

   

Operating income of $535.1 increased 26%, or $110.3, and operating margin of 22.0% increased 480 basis points (bp). On a non-GAAP basis, operating income of $559.8 increased 16%, or $75.2, and operating margin of 23.0% increased 340 bp. The increase in operating margin is primarily due to favorable cost performance from operational improvements.

 

   

Adjusted EBITDA of $832.8 increased 10%, or $72.8, primarily due to favorable cost performance. Adjusted EBITDA margin of 34.2% increased 340 bp.

 

   

Income from continuing operations of $355.7 increased 11%, or $35.2, and diluted earnings per share of $1.63 increased 10%, or $.15. On a non-GAAP basis, income from continuing operations of $419.8 increased 17%, or $59.5, and diluted earnings per share of $1.92 increased 16%, or $.26. A summary table of changes in diluted earnings per share is presented below.

 

   

We entered into a definitive sales agreement to sell the Performance Materials division of our Materials Technologies segment to Evonik, which is subject to regulatory approval and other closing conditions. We intend to proceed with a spin-off of the remaining Materials Technologies business, the Electronic Materials division, as Versum Materials.

Changes in Diluted Earnings per Share Attributable to Air Products – Non-GAAP Basis

 

       Three Months Ended
30 June
   Increase
        2016    2015    (Decrease)

Diluted Earnings per Share

                

Net Income

       $ 1.59        $ 1.47        $ .12  

Loss from Discontinued Operations

         (.04 )        (.01 )        (.03 )

Income from Continuing Operations – GAAP Basis

       $ 1.63        $ 1.48        $ .15  

Business separation costs

         .25               .25  

Business restructuring and cost reduction actions

         .04          .18          (.14 )

Income from Continuing Operations – Non-GAAP Basis

       $ 1.92        $ 1.66        $ .26  

Operating Income Impact (after-tax)

                

Underlying business

                

Volume

                 $ .01  

Price/raw materials

                   .04  

Costs

                   .25  

Currency

                               (.05 )

Operating Income

                 $ .25  

Other (after-tax)

                

Interest expense

                   (.02 )

Income tax

                   .01  

Noncontrolling interests

                   .03  

Weighted average diluted shares

                               (.01 )

Other

                             $ .01  

Total Change in Diluted Earnings per Share
from Continuing Operations – Non-GAAP Basis

                             $ .26  

 

29


RESULTS OF OPERATIONS

Discussion of Consolidated Results

 

      

Three Months

Ended 30 June

         
        2016    2015    $ Change    Change

Sales

       $ 2,434.4        $ 2,470.2        $ (35.8 )    (1)%

Operating income

         535.1          424.8          110.3      26%

Operating margin

         22.0 %        17.2 %         480bp

Equity affiliates’ income

         42.4          42.4          —        —  

Non-GAAP Basis

                   

Adjusted EBITDA

       $ 832.8        $ 760.0        $ 72.8      10%

Adjusted EBITDA margin

         34.2 %        30.8 %         340bp

Operating income

         559.8          484.6          75.2      16%

Operating margin

         23.0 %        19.6 %               340bp

Sales

 

        % Change from
Prior Year

Underlying business

      

Volume

         4 %

Price

         —   %

Currency

         (2 )%

Energy and raw material cost pass-through

         (3 )%

Total Consolidated Change