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OFFON

AIR PRODUCTS AND CHEMICALS, INC.

(APD)
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AIR PRODUCTS & CHEMICALS INC /DE/ Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

11/18/2021 | 02:08pm EST
Business Overview                                       22
  2021 in Summary                                         23
  2022 Outlook                                            25
  Results of Operations                                   25
  Reconciliations of Non-GAAP Financial Measures          31
  Liquidity and Capital Resources                         36

  Pension Benefits                                        39

  Critical Accounting Policies and Estimates              41


This Management's Discussion and Analysis contains "forward-looking statements"
within the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995, including statements about business outlook. These forward-looking
statements are based on management's expectations and assumptions as of the date
of this Annual Report on Form 10-K and are not guarantees of future performance.
Actual performance and financial results may differ materially from projections
and estimates expressed in the forward-looking statements because of many
factors not anticipated by management, including, without limitation, those
described in Forward-Looking Statements and Item 1A, Risk Factors, of this
Annual Report.
The following discussion should be read in conjunction with the consolidated
financial statements and the accompanying notes contained in this Annual Report.
Unless otherwise stated, financial information is presented in millions of
dollars, except for per share data. Except for net income, which includes the
results of discontinued operations, financial information is presented on a
continuing operations basis.
The content of our Management's Discussion and Analysis has been updated
pursuant to SEC disclosure modernization rules that are effective as of the date
of this Annual Report. Comparisons of our results of operations and liquidity
and capital resources are for fiscal years 2021 and 2020. For a discussion of
changes from fiscal year 2019 to fiscal year 2020 and other financial
information related to fiscal year 2019, refer to Part II,   Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations  , of our Annual Report on Form 10-K for the fiscal year ended 30
September 2020. This document was filed with the SEC on 19 November 2020.
The financial measures discussed below are presented in accordance with U.S.
generally accepted accounting principles ("GAAP"), except as noted. We present
certain financial measures on an "adjusted," or "non-GAAP," basis because we
believe such measures, when viewed together with financial results computed in
accordance with GAAP, provide a more complete understanding of the factors and
trends affecting our historical financial performance. For each non-GAAP
financial measure, including adjusted diluted earnings per share ("EPS"),
adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate, and
capital expenditures, we present a reconciliation to the most directly
comparable financial measure calculated in accordance with GAAP. These
reconciliations and explanations regarding the use of non-GAAP measures are
presented under "Reconciliations of Non-GAAP Financial Measures" beginning on
page 31.
For information concerning activity with our related parties, refer to
Note 22, Supplemental Information, to the consolidated financial statements.
BUSINESS OVERVIEW
Air Products and Chemicals, Inc., a Delaware corporation originally founded in
1940, serves customers globally with a unique portfolio of products, services,
and solutions that include atmospheric gases, process and specialty gases,
equipment, and services. Focused on serving energy, environment and emerging
markets, we provide essential industrial gases, related equipment, and
applications expertise to customers in dozens of industries, including refining,
chemicals, metals, electronics, manufacturing, and food and beverage. We are the
world's largest supplier of hydrogen and have built leading positions in growth
markets such as helium and liquefied natural gas ("LNG") process technology and
equipment. We develop, engineer, build, own, and operate some of the world's
largest industrial gas projects, including gasification projects that
sustainably convert abundant natural resources into syngas for the production of
high-value power, fuels, and chemicals and are developing carbon capture
projects and world-scale low carbon and carbon-free hydrogen projects that will
support global transportation and the energy transition away from fossil fuels.
                                       22
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With operations in over 50 countries, in fiscal year 2021 we had sales of $10.3
billion and assets of $26.9 billion. Approximately 20,875 passionate, talented,
and committed employees from diverse backgrounds are driven by our higher
purpose to create innovative solutions that benefit the environment, enhance
sustainability, and address the challenges facing customers, communities, and
the world.
As of 30 September 2021, our operations were organized into five reportable
business segments under which we managed our operations, assessed performance,
and reported earnings:
•Industrial Gases - Americas;
•Industrial Gases - EMEA (Europe, Middle East, and Africa);
•Industrial Gases - Asia;
•Industrial Gases - Global; and
•Corporate and other
This Management's Discussion and Analysis discusses our results based on these
operations. Refer to Note 23, Business Segment and Geographic Information, to
the consolidated financial statements for additional details on our reportable
business segments.
On 4 November 2021, we announced the reorganization of our industrial gases
segments effective 1 October 2021. Refer to Note 24, Subsequent Events, for
additional information.
2021 IN SUMMARY
In fiscal year 2021, we continued to execute our growth strategy, including
announcement of several new gasification, carbon capture, and hydrogen projects
that will drive the world's energy transition from fossil fuels. At the same
time, we remained focused on our base business, delivering consistent results
despite external challenges globally and absorbing costs for additional
resources needed to support growth. In the second half of the year, demand for
most merchant products returned to pre-pandemic levels. Additionally, we
continued to create shareholder value by increasing the quarterly dividend on
our common stock to $1.50 per share, representing a 12% increase from the
previous dividend. This is the 39th consecutive year that we have increased our
quarterly dividend payment.
Fiscal year 2021 results are summarized below:
•Sales of $10.3 billion increased 17%, or $1.5 billion, due to higher energy and
natural gas cost pass-through to customers, higher volumes, favorable currency
impacts, and positive pricing that more than offset power cost increases in the
second half of the year.
•Operating income of $2,281.4 increased 2%, or $43.8, and operating margin of
22.1% decreased 320 basis points ("bp").
•Net income of $2,114.9 increased 10%, or $183.8, and net income margin
of 20.5% decreased 130 bp.
•Adjusted EBITDA of $3,883.2 increased 7%, or $263.4, and adjusted EBITDA margin
of 37.6% decreased 330 bp.
•Diluted EPS of $9.12 increased 7%, or $0.57 per share, and adjusted diluted EPS
of $9.02 increased 8%, or $0.64 per share. A summary table of changes in diluted
EPS is presented below.
                                       23
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Changes in Diluted EPS Attributable to Air Products
The per share impacts presented in the table below were calculated independently
and may not sum to the total change in diluted EPS due to rounding.
                                                                                                     Increase
Fiscal Year Ended 30 September                                        2021            2020         (Decrease)
Total Diluted EPS                                                 $9.43           $8.49            $0.94

Less: Diluted EPS from income (loss) from discontinued operations

                                                         0.32           (0.06)            0.38
Diluted EPS From Continuing Operations                            $9.12           $8.55            $0.57
Operating Impacts
Underlying business
Volume(A)                                                                                             $-
Price, net of variable costs                                                                        0.34
Other costs                                                                                        (0.46)
Currency                                                                                            0.35
Facility closure                                                                                   (0.08)
Company headquarters relocation income                                                             (0.12)

Gain on exchange with joint venture partner                                                         0.12

Total Operating Impacts                                                                            $0.15
Other Impacts
Equity affiliates' income                                                                          $0.23

Interest expense                                                                                   (0.12)

Other non-operating income (expense), net                                                           0.16

Change in effective tax rate, excluding discrete items below

                                                                                               0.02
India Finance Act 2020                                                                             (0.06)

Tax election benefit and other                                                                      0.05
Noncontrolling interests(A)                                                                         0.13
Weighted average diluted shares                                                                    (0.01)
Total Other Impacts                                                                                $0.40
Total Change in Diluted EPS From Continuing Operations                                             $0.57


(A)Despite higher sales volumes, the volume impact on diluted EPS was flat due
to reduced contributions from our 60%-owned joint venture with Lu'An Clean
Energy Company that we consolidate within our Industrial Gases - Asia segment.
Refer to the sales discussion below for additional detail. The volume impact
from the Lu'An facility is partially offset by the positive impact of lower net
income being attributed to our joint venture partner within "Noncontrolling
interests."
                                                                            

Increase

    Fiscal Year Ended 30 September                        2021     2020    

(Decrease)

    Diluted EPS From Continuing Operations             $9.12    $8.55      

$0.57

    Facility closure                                    0.08        -      

0.08

Gain on exchange with joint venture partner (0.12) - (0.12)

    Company headquarters relocation income                 -    (0.12)     
0.12

    India Finance Act 2020                                 -    (0.06)      0.06

    Tax election benefit and other                     (0.05)       -      

(0.05)

Adjusted Diluted EPS From Continuing Operations $9.02 $8.38 $0.64




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2022 OUTLOOK
The guidance below should be read in conjunction with the Forward-Looking
Statements of this Annual Report on Form 10-K.
We believe our achievements in 2021 are just the beginning of our journey
providing gasification, carbon capture, and hydrogen for mobility solutions to
address the world's most significant energy and environmental sustainability
challenges. For example, we expect our world-scale Jazan gasification project
with Aramco, ACWA Power, and Air Products Qudra to begin contributing to our
results in the first quarter of fiscal year 2022. We expect to continue to
pursue new, high-return opportunities that are aligned with our growth strategy
and to add the resources necessary for project development and execution. We
remain committed to creating shareholder value through capital deployment and
delivering increased dividends, as we have done for the past 39 consecutive
years.
The duration and extent of ongoing global challenges, such as rising energy
costs, energy consumption curtailment, and supply chain disruptions, remain
uncertain. For our merchant business, we plan to continue pricing actions to
recover higher energy costs. We expect to add new projects to our onsite
business model, which has contractual protection from energy cost fluctuations
and generates stable cash flow. We expect higher costs from planned maintenance
activities on our facilities in fiscal year 2022 and higher pension expense
resulting from lower expected returns on assets.
Additionally, we expect the Lu'An facility to continue operating under the
interim agreement discussed below through fiscal year 2022.
In fiscal year 2022, we will also continue to focus on our other sustainability
goals, including our commitment to reduce our carbon dioxide emissions intensity
and advance diversity and inclusion.
On 4 November 2021, we announced the reorganization of our industrial gases
segments, including the separation of our Industrial Gases - EMEA segment into
two separate reporting segments: Industrial Gases - Europe and Industrial Gases
- Middle East. The results of an affiliate formerly reflected in the Industrial
Gases - Asia segment will now be reported in the Industrial Gases - Middle East
segment. Additionally, the results of our Industrial Gases - Global operating
segment will be reflected in the Corporate and other segment. Beginning with our
Quarterly Report on Form 10-Q for the first quarter of fiscal year 2022, segment
results will be presented on a retrospective basis to reflect the
reorganization.
RESULTS OF OPERATIONS
Discussion of Consolidated Results
Fiscal Year Ended 30 September              2021          2020        $ Change      Change
GAAP Measures
Sales                                  $10,323.0      $8,856.3   $1,466.7          17  %
Operating income                         2,281.4       2,237.6       43.8           2  %
Operating margin                         22.1  %       25.3  %                    (320) bp
Equity affiliates' income                 $294.1        $264.8       29.3          11  %
Net income                               2,114.9       1,931.1      183.8          10  %
Net income margin                        20.5  %       21.8  %                   (130)  bp

Non-GAAP Measures

Adjusted EBITDA                         $3,883.2      $3,619.8      263.4           7  %
Adjusted EBITDA margin                   37.6  %       40.9  %                    (330) bp

Sales % Change from Prior Year


Volume                                         5  %
Price                                          2  %

Energy and natural gas cost pass-through 6 % Currency

                                       4  %
Total Consolidated Sales Change               17  %


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Sales of $10,323.0 increased 17%, or $1,466.7, due to higher energy and natural
gas cost pass-through to customers of 6%, higher volumes of 5%, favorable
currency impacts of 4%, and positive pricing of 2%. We experienced significantly
higher energy and natural gas costs in the second half of fiscal year 2021,
particularly in North America and Europe. Contractual provisions associated with
our on-site business, which represents approximately half our total company
sales, allow us to pass these costs to our customers. Positive volumes from new
assets, our sale of equipment businesses, and merchant demand recovery from
COVID-19 were partially offset by reduced contributions from the Lu'An
gasification project discussed below. Favorable currency was primarily driven by
the appreciation of the British Pound Sterling, Chinese Renminbi, Euro, and
South Korean Won against the U.S. Dollar. Continued focus on pricing actions,
including energy cost recovery, in our merchant businesses resulted in price
improvement in each of our three regional segments.
Lu'An Clean Energy Company ("Lu'An"), a long-term onsite customer in Asia with
which we have a consolidated joint venture, restarted its facility in the third
quarter of fiscal year 2021 following successful completion of major maintenance
work in September 2020. Our facility resumed operations, and the joint venture
is supplying product at reduced charges as agreed upon with Lu'An under a
short-term agreement reached in the first quarter of fiscal year 2021. As a
result of this agreement, we recognized lower revenue in our Industrial Gases -
Asia segment in each quarter of fiscal year 2021. We expect this short-term
reduction in charges to extend through fiscal year 2022.
Cost of Sales and Gross Margin
Total cost of sales of $7,209.3, including the facility closure discussed below,
increased 23%, or $1,351.2. The increase from the prior year was primarily due
to higher energy and natural gas cost pass-through to customers of $479, higher
costs associated with sales volumes of $433, unfavorable currency impacts of
$233, and higher costs, including power and other cost inflation, of $183. Gross
margin of 30.2% decreased 370 bp from 33.9% in the prior year, primarily due to
higher energy and natural gas cost pass-through to customers, higher costs, and
the reduced Lu'An contribution, partially offset by the positive impact of our
pricing actions.
Facility Closure
In the second quarter of fiscal year 2021, we recorded a charge of $23.2 ($17.4
after-tax, or $0.08 per share) primarily for a noncash write-down of assets
associated with a contract termination in the Industrial Gases - Americas
segment. This charge is reflected as "Facility closure" on our consolidated
income statements for the fiscal year ended 30 September 2021 and was not
recorded in segment results.
Selling and Administrative
Selling and administrative expense of $828.4 increased 7%, or $52.5, primarily
driven by higher spending for business development resources to support our
growth strategy and unfavorable currency impacts. Selling and administrative
expense as a percentage of sales decreased to 8.0% from 8.8% in the prior year.
Research and Development
Research and development expense of $93.5 increased 11%, or $9.6, primarily due
to higher product development costs in our Industrial Gases - Global segment.
Research and development expense as a percentage of sales of 0.9% was flat
versus the prior year.
Gain on Exchange with Joint Venture Partner
In the second quarter of fiscal year 2021, we recognized a gain of $36.8 ($27.3
after-tax, or $0.12 per share) on an exchange with the Tyczka Group, a former
joint venture partner in our Industrial Gases - EMEA segment. As part of the
exchange, we separated our 50/50 joint venture in Germany into two separate
businesses so each party could acquire a portion of the business on a 100%
basis. The gain included $12.7 from the revaluation of our previously held
equity interest in the portion of the business that we retained and $24.1 from
the sale of our equity interest in the remaining business. The gain is reflected
as "Gain on exchange with joint venture partner" on our consolidated income
statements for the fiscal year ended 30 September 2021 and was not recorded in
segment results. Refer to Note 3, Acquisitions, to the consolidated financial
statements for additional information.
Company Headquarters Relocation Income (Expense)
In anticipation of relocating our U.S. headquarters, we sold property at our
corporate headquarters located in Trexlertown, Pennsylvania, in the second
quarter of fiscal year 2020. We received net proceeds of $44.1 and recorded a
gain of $33.8 ($25.6 after-tax, or $0.12 per share), which is reflected on our
consolidated income statements as "Company headquarters relocation income
(expense)" for the fiscal year ended 30 September 2020. The gain was not
recorded in the results of the Corporate and other segment.
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Other Income (Expense), Net
Other income of $52.8 decreased 19%, or $12.6. The prior year was favorably
impacted by an adjustment for a benefit plan liability due to a change in plan
terms. This impact was partially offset by the settlement of a supply contract
in the current year.
Operating Income and Margin
Operating income of $2,281.4 increased 2%, or $43.8, as favorable currency of
$96, positive pricing, net of power and fuel costs, of $95, and a gain on an
exchange with a joint venture partner of $37 were partially offset by higher
operating costs of $127, prior year income associated with the company
headquarters relocation of $34, and a facility closure of $23. Despite higher
sales volumes, the volume impact on operating income was minimal due to reduced
contributions from Lu'An. Unfavorable operating costs were driven by the
addition of resources to support our growth strategy and higher planned
maintenance activities.
Operating margin of 22.1% decreased 320 bp from 25.3% in the prior year,
primarily due to the higher operating costs, higher energy and natural gas cost
pass-through to customers, which contributed to sales but not operating income,
and reduced contributions from Lu'An, partially offset by positive pricing. The
positive impact from a gain on an exchange with a joint venture partner in the
current year was offset by prior year income associated with the company
headquarters relocation.
Equity Affiliates' Income
Equity affiliates' income of $294.1 increased 11%, or $29.3. Higher income from
affiliates in the regional segments was partially offset by a prior year benefit
of $33.8 from the enactment of the India Finance Act 2020. Refer to Note 21,
Income Taxes, to the consolidated financial statements for additional
information.
We expect our equity affiliates' income to grow in future periods due to our
investment in the Jazan Integrated Gasification and Power Company joint venture.
Interest Expense
Fiscal Year Ended 30 September                  2021       2020
Interest incurred                           $170.1     $125.2
Less: Capitalized interest                    28.3       15.9
Interest expense                            $141.8     $109.3



Interest incurred increased 36%, or $44.9, primarily driven by a higher debt
balance due to the issuance of U.S. Dollar- and Euro-denominated fixed-rate
notes in the third quarter of fiscal year 2020. Capitalized interest increased
$12.4 due to a higher carrying value of projects under construction.
Other Non-Operating Income (Expense), Net
Other non-operating income of $73.7 increased $43.0. We recorded higher
non-service pension income in 2021 due to lower interest costs and higher total
assets, primarily for our U.S. pension plans. The current year also included
favorable currency impacts. These factors were partially offset by lower
interest income on cash and cash items due to lower interest rates.
Discontinued Operations
Income from discontinued operations, net of tax, was $70.3 ($0.32 per share) for
the fiscal year ended 30 September 2021. This included net tax benefits of $60.0
recorded for the release of tax reserves for uncertain tax positions, of which
$51.8 ($0.23 per share) was recorded in the fourth quarter for liabilities
associated with the 2017 sale of our former Performance Materials Division
("PMD") and $8.2 was recorded in the third quarter for liabilities associated
with our former Energy-from-Waste business. Additionally, we recorded a tax
benefit from discontinued operations of $10.3 in the first quarter, primarily
from the settlement of a state tax appeal related to the gain on the sale of
PMD.
In fiscal year 2020, loss from discontinued operations, net of tax, was $14.3
($0.06 per share). This resulted from a pre-tax loss of $19.0 recorded in the
second quarter to increase our existing liability for retained environmental
obligations associated with the sale of our former Amines business in September
2006. Refer to the Pace discussion within Note 16, Commitments and
Contingencies, for additional information.
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Net Income and Net Income Margin
Net income of $2,114.9, including income from discontinued operations discussed
above, increased 10%, or $183.8. On a continuing operations basis, the increase
was primarily driven by positive pricing, net of power and fuel costs, favorable
currency impacts, higher equity affiliates' income, and a gain on an exchange
with a joint venture partner, partially offset by unfavorable operating costs
and a loss from a facility closure. In addition, less net income was
attributable to noncontrolling interests, including our Lu'An joint venture
partner, in the current year. The prior year included income associated with the
company headquarters relocation and a net benefit from the India Finance Act
2020.
Net income margin of 20.5% decreased 130 bp from 21.8% in the prior year,
primarily due to higher energy and natural gas cost pass-through to customers,
which decreased margin by approximately 100 bp, and unfavorable net operating
costs, partially offset by the impact from our pricing actions.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA of $3,883.2 increased 7%, or $263.4, primarily due to favorable
currency impacts, positive pricing, net of power and fuel costs, and higher
equity affiliates' income, partially offset by unfavorable operating costs.
Adjusted EBITDA margin of 37.6% decreased 330 bp from 40.9% in the prior year,
primarily due to higher energy and natural gas cost pass-through to customers,
which decreased margin by approximately 200 bp, and the unfavorable net
operating costs.
Effective Tax Rate
Our effective tax rate was 18.5% and 19.7% for the fiscal years ended 30
September 2021 and 2020, respectively. The current year rate was lower primarily
due to income tax benefits of $21.5 recorded upon expiration of the statute of
limitations for tax reserves previously established for uncertain tax positions
taken in prior years. This included a benefit of $12.2 ($0.05 per share) for
release of reserves established in 2017 for a tax election related to a non-U.S.
subsidiary and other previously disclosed items ("tax election benefit and
other"). Refer to Note 21 Income Taxes, to the consolidated financial statements
for additional information.
Additionally, the fiscal year 2020 effective tax rate reflected the unfavorable
impact of India Finance Act 2020, which resulted in additional net income of
$13.5 ($0.06 per share). This included an increase to equity affiliates' income
of $33.8, partially offset by an increase to our income tax provision of $20.3
for changes in the future tax costs of repatriated earnings.
The adjusted effective tax rate was 18.9% and 19.1% for the fiscal years ended
30 September 2021 and 2020, respectively.
Segment Analysis
Industrial Gases - Americas
Fiscal Year Ended 30 September            2021          2020     $ Change     Change
Sales                                 $4,167.6      $3,630.7  $536.9           15  %
Operating income                       1,065.5       1,012.4    53.1            5  %
Operating margin                       25.6  %       27.9  %                (230) bp
Equity affiliates' income               $112.5         $84.3    28.2           33  %
Adjusted EBITDA                        1,789.9       1,656.2   133.7            8  %
Adjusted EBITDA margin                 42.9  %       45.6  %                (270) bp


Sales % Change from Prior Year


Volume                                             -  %
Price                                              4  %

Energy and natural gas cost pass-through 11 % Currency

                                           -  %

Total Industrial Gases - Americas Sales Change 15 %

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Sales of $4,167.6 increased 15%, or $536.9, due to higher energy and natural gas
cost pass-through to customers of 11% and positive pricing of 4%, as volumes and
currency were flat versus the prior year. Energy and natural gas cost pass
through to customers was higher in fiscal year 2021 primarily due to natural gas
prices, which rose significantly in the second quarter and remained elevated
throughout the year. The pricing improvement was attributable to continued focus
on pricing actions in our merchant business. Volumes were flat as positive
contributions from new assets, including hydrogen assets we acquired in April
2020, were offset by lower hydrogen and merchant demand. Demand for most
merchant products returned to pre-pandemic levels in the second half of 2021.
Operating income of $1,065.5 increased 5%, or $53.1, due to higher pricing, net
of power and fuel costs, of $79 and favorable currency of $10, partially offset
by higher operating costs, including planned maintenance, of $36. Operating
margin of 25.6% decreased 230 bp from 27.9% in the prior year primarily due to
higher energy and natural gas cost pass-through to customers, which negatively
impacted margin by approximately 250 bp, and higher operating costs, partially
offset by the impact of our pricing actions.
Equity affiliates' income of $112.5 increased 33%, or $28.2, primarily driven by
higher income from affiliates in Mexico.
Industrial Gases - EMEA
Fiscal Year Ended 30 September            2021          2020     $ Change     Change
Sales                                 $2,444.9      $1,926.3  $518.6           27  %
Operating income                         557.4         473.3    84.1           18  %
Operating margin                       22.8  %       24.6  %                (180) bp
Equity affiliates' income                $93.7         $74.8    18.9           25  %
Adjusted EBITDA                          880.9         744.0   136.9           18  %
Adjusted EBITDA margin                 36.0  %       38.6  %                (260) bp


Sales % Change from Prior Year


Volume                                         12  %
Price                                           3  %

Energy and natural gas cost pass-through 5 % Currency

                                        7  %

Total Industrial Gases - EMEA Sales Change 27 %




Sales of $2,444.9 increased 27%, or $518.6, due to higher volumes of 12%,
favorable currency impacts of 7%, higher energy and natural gas cost
pass-through to customers of 5%, and positive pricing of 3%. The volume
improvement was primarily driven by our base merchant business and new assets,
including those from a business in Israel that we acquired in the fourth quarter
of 2020. While our liquid bulk business has largely recovered from COVID-19,
demand for packaged gases and hydrogen continues to be lower than pre-pandemic
levels. Favorable currency impacts were primarily driven by the appreciation of
the British Pound Sterling and Euro against the U.S. Dollar. Energy and natural
gas cost pass-through to customers was higher primarily in the second half of
the year as we experienced significantly higher natural gas and electricity
costs in Europe. The pricing improvement was primarily attributable to our
merchant business.
Operating income of $557.4 increased 18%, or $84.1, due to higher volumes of
$59, favorable currency impacts of $31, and positive pricing, net of power and
fuel costs, of $11, partially offset by unfavorable costs of $17. Operating
margin of 22.8% decreased 180 bp from 24.6% in the prior year, primarily due to
impacts from higher energy and natural gas cost pass-through to customers, which
negatively impacted margin by approximately 100 bp, and unfavorable operating
costs.
Equity affiliates' income of $93.7 increased 25%, or $18.9, primarily due to
higher income from affiliates in Italy, Saudi Arabia, and South Africa.

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Industrial Gases - Asia
Fiscal Year Ended 30 September            2021          2020     $ Change     Change
Sales                                 $2,920.8      $2,716.5  $204.3           8  %
Operating income                         838.3         870.3   (32.0)         (4  %)
Operating margin                       28.7  %       32.0  %                (330) bp
Equity affiliates' income                $81.4         $61.0    20.4          33  %
Adjusted EBITDA                        1,364.1       1,330.7    33.4           3  %
Adjusted EBITDA margin                 46.7  %       49.0  %                (230) bp



                 Sales % Change from Prior Year

                 Volume                                        -  %
                 Price                                         1  %
                 Energy and natural gas cost pass-through      -  %
                 Currency                                      7  %
                 Total Industrial Gases - Asia Sales Change    8  %



Sales of $2,920.8 increased 8%, or $204.3, due to favorable currency of 7% and
positive pricing of 1%, as both volumes and energy and natural gas cost
pass-through to customers were flat. Positive volume contributions from our base
merchant business and new plants were offset by reduced contributions from
Lu'An. The favorable currency impact was primarily attributable to the
appreciation of the Chinese Renminbi and South Korean Won against the U.S.
Dollar.
Operating income of $838.3 decreased 4%, or $32.0, primarily due to unfavorable
volume mix of $62 and higher operating costs, including inflation and product
sourcing costs, of $32, partially offset by favorable currency of $59. Operating
margin of 28.7% decreased 330 bp from 32.0% in the prior year primarily due to
reduced contributions from Lu'An.
Equity affiliates' income of $81.4 increased 33%, or $20.4, primarily due to
higher income from an affiliate in India.
Industrial Gases - Global
The Industrial Gases - Global segment includes sales of cryogenic and gas
processing equipment for air separation and centralized global costs associated
with management of all the Industrial Gases segments.
Fiscal Year Ended 30 September         2021       2020     $ Change   % Change
Sales                              $511.0     $364.9    $146.1          40  %
Operating loss                      (60.6)     (40.0)    (20.6)        (52  %)
Adjusted EBITDA                     (43.2)     (19.5)    (23.7)       (122  %)


Sales of $511.0 increased 40%, or $146.1, due to higher sale of equipment project activity. Despite higher sales, operating loss of $60.6 increased 52%, or $20.6, as higher project costs and product development spending were partially offset by income from the settlement of a supply contract.

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Corporate and other
The Corporate and other segment includes our LNG, turbo machinery equipment and
services, and distribution sale of equipment businesses as well as corporate
support functions that benefit all segments. The results of the Corporate and
other segment also include income and expense that is not directly associated
with the other segments, such as foreign exchange gains and losses.
Fiscal Year Ended 30 September         2021       2020    $ Change   % Change
Sales                              $278.7     $217.9    $60.8          28  %
Operating loss                     (132.8)    (112.2)   (20.6)        (18  %)
Adjusted EBITDA                    (108.5)     (91.6)   (16.9)        (18  %)



Sales of $278.7 increased 28%, or $60.8, primarily due to higher project
activity in our distribution sale of equipment and turbo machinery equipment and
services businesses. Despite higher sales, operating loss of $132.8 increased
18%, or $20.6, as higher business development and corporate support costs were
only partially offset by higher sale of equipment activity.
RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES
(Millions of dollars unless otherwise indicated, except for per share data)
We present certain financial measures, other than in accordance with U.S.
generally accepted accounting principles ("GAAP"), on an "adjusted" or
"non-GAAP" basis. On a consolidated basis, these measures include adjusted
diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin,
adjusted effective tax rate, and capital expenditures. On a segment basis, these
measures include adjusted EBITDA and adjusted EBITDA margin. In addition to
these measures, we also present certain supplemental non-GAAP financial measures
to help the reader understand the impact that certain disclosed items, or
"non-GAAP adjustments," have on the calculation of our adjusted diluted EPS. For
each non-GAAP financial measure, we present a reconciliation to the most
directly comparable financial measure calculated in accordance with GAAP.
Our non-GAAP financial measures are not meant to be considered in isolation or
as a substitute for the most directly comparable measure calculated in
accordance with GAAP. We believe these non-GAAP financial measures provide
investors, potential investors, securities analysts, and others with useful
information to evaluate the performance of our business because such measures,
when viewed together with financial results computed in accordance with GAAP,
provide a more complete understanding of the factors and trends affecting our
historical financial performance and projected future results.
In many cases, non-GAAP financial measures are determined by adjusting the most
directly comparable GAAP measure to exclude non-GAAP adjustments that we believe
are not representative of our underlying business performance. For example, we
previously excluded certain expenses associated with cost reduction actions,
impairment charges, and gains on disclosed transactions. The reader should be
aware that we may recognize similar losses or gains in the future. Readers
should also consider the limitations associated with these non-GAAP financial
measures, including the potential lack of comparability of these measures from
one company to another.
When applicable, the tax impact of our pre-tax non-GAAP adjustments reflects the
expected current and deferred income tax impact of our non-GAAP adjustments.
These tax impacts are primarily driven by the statutory tax rate of the various
relevant jurisdictions and the taxability of the adjustments in those
jurisdictions.

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Adjusted Diluted EPS
The table below provides a reconciliation to the most directly comparable GAAP
measure for each of the major components used to calculate adjusted diluted EPS
from continuing operations, which we view as a key performance metric. In
periods that we have non-GAAP adjustments, we believe it is important for the
reader to understand the per share impact of each such adjustment because
management does not consider these impacts when evaluating underlying business
performance. The per share impact for each non-GAAP adjustment was calculated
independently and may not sum to total adjusted diluted EPS due to rounding.
                                                                                                                              Net Income Attributable
Fiscal Year Ended 30 September                     Operating Income        Equity Affiliates' Income    Income Tax Provision          to Air Products          Diluted EPS
2021 GAAP                                          $2,281.4                        $294.1                    $462.8                    $2,028.8                   $9.12
2020 GAAP                                           2,237.6                         264.8                     478.4                     1,901.0                    8.55
Change GAAP                                                                                                                                                       $0.57
% Change GAAP                                                                                                                                                         7  %

2021 GAAP                                          $2,281.4                        $294.1                    $462.8                    $2,028.8                   $9.12

Facility closure                                       23.2                             -                       5.8                        17.4                    0.08

Gain on exchange with joint venture partner           (36.8)                            -                      (9.5)                      (27.3)        

(0.12)


Tax election benefit and other                            -                             -                      12.2                       (12.2)                  (0.05)

2021 Non-GAAP ("Adjusted")                         $2,267.8                        $294.1                    $471.3                    $2,006.7                   $9.02

2020 GAAP                                          $2,237.6                        $264.8                    $478.4                    $1,901.0                   $8.55

Company headquarters relocation (income)
expense                                               (33.8)                            -                      (8.2)                      (25.6)                  (0.12)

India Finance Act 2020                                    -                         (33.8)                    (20.3)                      (13.5)                  (0.06)

2020 Non-GAAP ("Adjusted")                         $2,203.8                        $231.0                    $449.9                    $1,861.9                   $8.38
Change Non-GAAP ("Adjusted")                                                                                                                                      $0.64
% Change Non-GAAP ("Adjusted")                                                                                                                                        8  %






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Adjusted EBITDA and Adjusted EBITDA Margin
We define adjusted EBITDA as net income less income (loss) from discontinued
operations, net of tax, and excluding non-GAAP adjustments, which we do not
believe to be indicative of underlying business trends, before interest expense,
other non-operating income (expense), net, income tax provision, and
depreciation and amortization expense. Adjusted EBITDA and adjusted EBITDA
margin provide useful metrics for management to assess operating performance.
Margins are calculated independently for each period by dividing each line item
by consolidated sales for the respective period and may not sum to total margin
due to rounding.
The tables below present consolidated sales and a reconciliation of net income
on a GAAP basis to adjusted EBITDA and net income margin on a GAAP basis to
adjusted EBITDA margin:

Fiscal Year Ended 30 September                                     2021                                       2020

                                                            $               Margin                     $               Margin
Sales                                                      $10,323.0                                  $8,856.3

Net income and net income margin                            $2,114.9            20.5  %               $1,931.1            21.8  %
Less: Income (Loss) from discontinued operations,
net of tax                                                      70.3             0.7  %                  (14.3)           (0.2  %)
Add: Interest expense                                          141.8             1.4  %                  109.3             1.2  %
Less: Other non-operating income (expense), net                 73.7             0.7  %                   30.7             0.3  %
Add: Income tax provision                                      462.8             4.5  %                  478.4             5.4  %
Add: Depreciation and amortization                           1,321.3            12.8  %                1,185.0            13.4  %

Add: Facility closure                                           23.2             0.2  %                      -               -  %

Less: Gain on exchange with joint venture partner               36.8             0.4  %                      -               -  %
Less: Company headquarters relocation income
(expense)                                                          -               -  %                   33.8             0.4  %

Less: India Finance Act 2020 - equity affiliate
income impact                                                      -               -  %                   33.8             0.4  %

Adjusted EBITDA and adjusted EBITDA margin                  $3,883.2            37.6  %               $3,619.8            40.9  %

Fiscal Year Ended 30 September                                2021 vs. 2020

Change GAAP
Net income $ change                                               $183.8
Net income % change                                                10%
Net income margin change                                         (130) bp
Change Non-GAAP
Adjusted EBITDA $ change                                          $263.4
Adjusted EBITDA % change                                            7%
Adjusted EBITDA margin change                                    (330) bp


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The tables below present sales and a reconciliation of operating income and
operating margin to adjusted EBITDA and adjusted EBITDA margin for each of our
reporting segments for the fiscal years ended 30 September:
              Industrial      Industrial      Industrial     Industrial
                  Gases-          Gases-          Gases-         Gases-    Corporate
Sales           Americas            EMEA            Asia         Global    and other          Total
2021      $4,167.6        $2,444.9        $2,920.8         $511.0        $278.7       $10,323.0
2020       3,630.7         1,926.3         2,716.5          364.9         217.9         8,856.3


                                               Industrial          Industrial          Industrial          Industrial
                                                   Gases-              Gases-              Gases-              Gases-           Corporate
                                                 Americas                EMEA                Asia              Global           and other            Total
2021 GAAP
Operating income (loss)                     $1,065.5              $557.4              $838.3               ($60.6)            ($132.8)        $2,267.8     (A)
Operating margin                                25.6  %             22.8  %             28.7  %
2020 GAAP
Operating income (loss)                     $1,012.4              $473.3              $870.3               ($40.0)            ($112.2)        $2,203.8     (A)
Operating margin                                27.9  %             24.6  %             32.0  %
2021 vs. 2020 Change GAAP
Operating income/loss $ change                 $53.1               $84.1              ($32.0)              ($20.6)             ($20.6)
Operating income/loss % change                     5  %               18  %               (4  %)              (52  %)             (18  %)
Operating margin change                         (230)  bp           (180)  bp           (330)  bp


2021 Non-GAAP
Operating income (loss)             $1,065.5           $557.4            $838.3           ($60.6)        ($132.8)        $2,267.8    (A)
Add: Depreciation and
amortization                           611.9            229.8             444.4             10.9            24.3          1,321.3
Add: Equity affiliates' income         112.5             93.7              81.4              6.5               -            294.1    (A)
Adjusted EBITDA                     $1,789.9           $880.9          $1,364.1           ($43.2)        ($108.5)        $3,883.2
Adjusted EBITDA margin                  42.9  %          36.0  %           46.7  %
2020 Non-GAAP
Operating income (loss)             $1,012.4           $473.3            $870.3           ($40.0)        ($112.2)        $2,203.8    (A)
Add: Depreciation and
amortization                           559.5            195.9             399.4              9.6            20.6          1,185.0
Add: Equity affiliates' income          84.3             74.8              61.0             10.9               -            231.0    (A)
Adjusted EBITDA                     $1,656.2           $744.0          $1,330.7           ($19.5)         ($91.6)        $3,619.8
Adjusted EBITDA margin                  45.6  %          38.6  %           49.0  %
2021 vs. 2020 Change Non-GAAP
Adjusted EBITDA $ change              $133.7           $136.9             $33.4           ($23.7)         ($16.9)
Adjusted EBITDA % change                   8  %            18  %              3  %          (122  %)         (18  %)
Adjusted EBITDA margin change           (270)  bp        (260)  bp         

(230) bp

(A)Refer to the Reconciliations to Consolidated Results section below.

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Reconciliations to Consolidated Results
The table below reconciles consolidated operating income as reflected on our
consolidated income statements to total operating income in the table above for
the fiscal years ended 30 September:
Operating Income                                           2021         2020
Consolidated operating income                        $2,281.4     $2,237.6

Facility closure                                         23.2            -

Gain on exchange with joint venture partner             (36.8)           -
Company headquarters relocation (income) expense            -        (33.8)

Total                                                $2,267.8     $2,203.8


The table below reconciles consolidated equity affiliates' income as reflected
on our consolidated income statements to total equity affiliates' income in the
table above for the fiscal years ended 30 September:
Equity Affiliates' Income                       2021       2020
Consolidated equity affiliates' income      $294.1     $264.8
India Finance Act 2020                           -      (33.8)

Total                                       $294.1     $231.0



Adjusted Effective Tax Rate
The effective tax rate equals the income tax provision divided by income from
continuing operations before taxes.
When applicable, the tax impact of our pre-tax non-GAAP adjustments reflects the
expected current and deferred income tax impact of our non-GAAP adjustments.
These tax impacts are primarily driven by the statutory tax rate of the various
relevant jurisdictions and the taxability of the adjustments in those
jurisdictions.
Fiscal Year Ended 30 September                                      2021    

2020

Income tax provision                                           $462.8       

$478.4

Income from continuing operations before taxes               $2,507.4     $2,423.8
Effective tax rate                                               18.5  %      19.7  %

Income tax provision                                           $462.8       $478.4

Facility closure                                                  5.8            -

Gain on exchange with joint venture partner                      (9.5)      

-

Company headquarters relocation                                     -         (8.2)

India Finance Act 2020                                              -        (20.3)

Tax election benefit and other                                   12.2       

-

Adjusted income tax provision                                  $471.3       

$449.9


Income from continuing operations before taxes               $2,507.4     $2,423.8

Facility closure                                                 23.2            -

Gain on exchange with joint venture partner                     (36.8)      

-

Company headquarters relocation (income) expense                    -       

(33.8)


India Finance Act 2020 - equity affiliate income impact             -       

(33.8)


Adjusted income from continuing operations before taxes      $2,493.8     $2,356.2
Adjusted effective tax rate                                      18.9  %      19.1  %



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Capital Expenditures
We define capital expenditures as cash flows for additions to plant and
equipment, acquisitions (less cash acquired), and investment in and advances to
unconsolidated affiliates. A reconciliation of cash used for investing
activities to our reported capital expenditures is provided below:
Fiscal Year Ended 30 September                             2021         

2020

Cash used for investing activities                   $2,732.9     $3,560.0
Proceeds from sale of assets and investments             37.5         80.3
Purchases of investments                             (2,100.7)    (2,865.5)
Proceeds from investments                             1,875.2      1,938.0
Other investing activities                                5.8          3.9
Capital expenditures                                 $2,550.7     $2,716.7


LIQUIDITY AND CAPITAL RESOURCES
Our cash balance and cash flows from operations are our primary sources of
liquidity and are generally sufficient to meet our liquidity needs. In addition,
we have the flexibility to access capital through a variety of financing
activities, including accessing the capital markets, drawing upon our credit
facility, or alternatively, accessing the commercial paper markets. At this
time, we have not utilized, nor do we expect to access, our credit facility for
additional liquidity. In addition, we have considered the impacts of COVID-19 on
our liquidity and capital resources and do not expect it to impact our ability
to meet future liquidity needs.
As of 30 September 2021, we had $1,590.4 of foreign cash and cash items compared
to total cash and cash items of $4,468.9. We do not expect that a significant
portion of the earnings of our foreign subsidiaries and affiliates will be
subject to U.S. income tax upon repatriation to the U.S. Depending on the
country in which the subsidiaries and affiliates reside, the repatriation of
these earnings may be subject to foreign withholding and other taxes. However,
since we have significant current investment plans outside the U.S., it is our
intent to permanently reinvest the majority of our foreign cash and cash items
that would be subject to additional taxes outside the U.S.
Cash Flows From Operations
Fiscal Year Ended 30 September                                                      2021           2020

Income from continuing operations attributable to Air Products               $2,028.8       $1,901.0
Adjustments to reconcile income to cash provided by operating activities:
Depreciation and amortization                                                 1,321.3        1,185.0
Deferred income taxes                                                            94.0          165.0

Facility closure                                                                 23.2              -
Undistributed earnings of equity method investments                            (138.2)        (161.9)
Gain on sale of assets and investments                                          (37.2)         (45.8)
Share-based compensation                                                         44.5           53.5
Noncurrent lease receivables                                                     98.8           91.6

Other adjustments                                                              (116.7)         116.4

Changes in working capital accounts                                         

16.7 (40.1)


Cash Provided by Operating Activities                                       

$3,335.2 $3,264.7



For the fiscal year ended 30 September 2021, cash provided by operating
activities was $3,335.2. Other adjustments of $116.7 included pension plan
contributions of $44.6 and pension income of $38.9 that did not have a cash
impact. The working capital accounts were a source of cash of $16.7, primarily
driven by a $187.9 source of cash from payables and accrued liabilities,
partially offset by a $130.5 use of cash from trade receivables, less
allowances. The source of cash within payables and accrued liabilities primarily
resulted from higher natural gas costs, which also drove the use of cash within
trade receivables as we contractually passed through these higher costs to
customers.
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For the fiscal year ended 30 September 2020, cash provided by operating
activities was $3,264.7. We recorded a net benefit of $13.5 on our consolidated
income statements related to a recently enacted tax law in India during the
second quarter. This net benefit, which is further discussed in Note 21, Income
Taxes, to the consolidated financial statements, increased "Undistributed
earnings of unconsolidated affiliates" by $33.8 and increased "Deferred income
taxes" by $20.3. The "Gain on sale of assets and investments" of $45.8 includes
a gain of $33.8 related to the sale of property at our current corporate
headquarters. Refer to Note 22, Supplemental Information, to the consolidated
financial statements for additional information. The working capital accounts
were a use of cash of $40.1, primarily driven by other working capital uses of
$130.6, partially offset by a source of $84.4 from other receivables. The use of
cash within "Other working capital" was primarily due to timing of tax payments
and a tax benefit as a result of the assets acquired in April 2020 from PBF
Energy Inc. The source of cash within "Other receivables" was primarily driven
by maturities of forward exchange contracts.
Cash Flows From Investing Activities
Fiscal Year Ended 30 September                                                       2021           2020
Additions to plant and equipment, including long-term deposits               ($2,464.2)     ($2,509.0)
Acquisitions, less cash acquired                                                 (10.5)        (183.3)
Investment in and advances to unconsolidated affiliates                          (76.0)         (24.4)
Proceeds from sale of assets and investments                                      37.5           80.3
Purchases of investments                                                      (2,100.7)      (2,865.5)
Proceeds from investments                                                      1,875.2        1,938.0
Other investing activities                                                         5.8            3.9
Cash Used for Investing Activities                                          

($2,732.9) ($3,560.0)



For the fiscal year ended 30 September 2021, cash used for investing activities
was $2,732.9. Capital expenditures for plant and equipment, including long-term
deposits, were $2,464.2. Purchases of investments with terms greater than three
months but less than one year of $2,100.7 exceeded proceeds from investments of
$1,875.2, which resulted from maturities of time deposits and treasury
securities.
For the fiscal year ended 30 September 2020, cash used for investing activities
was $3,560.0. Payments for additions to plant and equipment, including long-term
deposits, were $2,509.0. This includes the acquisition of five operating
hydrogen production plants from PBF Energy Inc. in Delaware and California for
approximately $580. Additionally, acquisitions, less cash acquired, includes
$183.3 for three businesses we acquired on 1 July 2020, the largest of which was
a business in Israel that primarily offers merchant gas products. Refer to Note
3, Acquisitions, to the consolidated financial statements for additional
information. Purchases of investments of $2,865.5 related to time deposits and
treasury securities with terms greater than three months and less than one year
and exceeded proceeds from investments of $1,938.0. Proceeds from sale of assets
and investments of $80.3 included net proceeds of $44.1 related to the sale of
property at our current corporate headquarters.
Capital Expenditures
Capital expenditures is a non-GAAP financial measure that we define as cash
flows for additions to plant and equipment, including long-term deposits,
acquisitions (less cash acquired), and investment in and advances to
unconsolidated affiliates. The components of our capital expenditures are
detailed in the table below. We present a reconciliation of our capital
expenditures to cash used for investing activities on page 36.
Fiscal Year Ended 30 September                                                     2021             2020
Additions to plant and equipment, including long-term deposits              $2,464.2         $2,509.0
Acquisitions, less cash acquired                                                10.5            183.3
Investment in and advances to unconsolidated affiliates                         76.0             24.4
Capital Expenditures                                                        $2,550.7         $2,716.7



Capital expenditures in fiscal year 2021 totaled $2,550.7 compared to $2,716.7
in fiscal year 2020. The decrease of $166.0 was primarily driven by the prior
year acquisition of five operating hydrogen production plants from PBF,
partially offset by lower spending for acquisitions. Additions to plant and
equipment also included support capital of a routine, ongoing nature, including
expenditures for distribution equipment and facility improvements.
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Outlook for Investing Activities
We expect capital expenditures for fiscal year 2022 to be approximately $4.5 to
$5 billion. In the first quarter of fiscal year 2022, we paid $1.6 billion,
including approximately $130 from a non-controlling partner in one of our
subsidiaries, for the initial investment in the Jazan gasification and power
project. We expect to make an additional investment of approximately $1 billion,
which includes contribution from our non-controlling partner, for phase II of
the project in 2023. Refer to Note 24, Subsequent Events, to the consolidated
financial statements for additional information.
It is not possible, without unreasonable efforts, to reconcile our forecasted
capital expenditures to future cash used for investing activities because we are
unable to identify the timing or occurrence of our future investment activity,
which is driven by our assessment of competing opportunities at the time we
enter into transactions. These decisions, either individually or in the
aggregate, could have a significant effect on our cash used for investing
activities.
We anticipate capital expenditures to be funded principally with our current
cash balance and cash generated from continuing operations. In addition, we
intend to continue to evaluate (1) acquisitions of small- and medium-sized
industrial gas companies or assets from other industrial gas companies; (2)
purchases of existing industrial gas facilities from our customers to create
long-term contracts under which we own and operate the plant and sell industrial
gases to the customer based on a fixed fee; and (3) investment in large
industrial gas projects driven by demand for more energy, cleaner energy, and
emerging market growth.
Cash Flows From Financing Activities
Fiscal Year Ended 30 September                                                       2021           2020
Long-term debt proceeds                                                         $178.9       $4,895.8
Payments on long-term debt                                                      (462.9)        (406.6)
Net increase (decrease) in commercial paper and short-term borrowings              1.0          (54.9)
Dividends paid to shareholders                                                (1,256.7)      (1,103.6)
Proceeds from stock option exercises                                              10.6           34.1
Investments by noncontrolling interests                                          136.6           17.1
Other financing activities                                                       (28.4)         (97.2)
Cash (Used for) Provided by Financing Activities                            

($1,420.9) $3,284.7



In fiscal year 2021, cash used for financing activities was $1,420.9 and
primarily included dividend payments to shareholders of $1,256.7 and payments on
long-term debt of $462.9, partially offset by long-term debt proceeds of $178.9
and investments by noncontrolling interests of $136.6. The payments on long-term
debt included the repayment of a €350.0 million Eurobond ($428) in June 2021.
In November 2021, we repaid our 3.0% Senior Note of $400, plus interest, on its
maturity date.
In fiscal year 2020, cash provided by financing activities was $3,284.7 as we
successfully accessed the debt markets in April 2020 to support opportunities
for growth projects and repay upcoming debt maturities. Long-term debt proceeds
of $4,895.8 were partially offset by dividend payments to shareholders of
$1,103.6 and payments on long-term debt of $406.6 primarily related to the
repayment of a 2.0% Eurobond of €300.0 million ($353.9) that matured on 7 August
2020. Other financing activities were a use of cash of $97.2 and included
financing charges associated with the third quarter debt issuance.
Financing and Capital Structure
Capital needs in fiscal year 2021 were satisfied with cash from operations.
Total debt decreased from $7,907.8 as of 30 September 2020 to $7,637.2 as of 30
September 2021, primarily due to repayment of the €350 million Eurobond,
partially offset by proceeds from long-term borrowings on our foreign
commitments. Total debt includes related party debt of $358.4 and $338.5 as of
30 September 2021 and 30 September 2020, respectively, primarily associated with
the Lu'An joint venture. For additional detail, refer to Note 14, Debt, to the
consolidated financial statements.
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On 31 March 2021, we entered into a five-year $2,500 revolving credit agreement
with a syndicate of banks (the "2021 Credit Agreement"), under which senior
unsecured debt is available to us and certain of our subsidiaries. The 2021
Credit Agreement provides a source of liquidity and supports our commercial
paper program. The only financial covenant in the 2021 Credit Agreement is a
maximum ratio of total debt to capitalization (equal to total debt plus total
equity) not to exceed 70%. Total debt as of 30 September 2021 and 30 September
2020, expressed as a percentage of total capitalization, was 35.2% and 38.9%,
respectively. No borrowings were outstanding under the 2021 Credit Agreement as
of 30 September 2021.
The 2021 Credit Agreement replaced our previous five-year $2,300.0 revolving
credit agreement, which was to have matured on 31 March 2022. No borrowings were
outstanding under the previous agreement as of 30 September 2020 or at the time
of its termination. No early termination penalties were incurred.
Commitments of $296.7 are maintained by our foreign subsidiaries, $176.2 of
which was borrowed and outstanding as of 30 September 2021.
As of 30 September 2021, we are in compliance with all of the financial and
other covenants under our debt agreements.
On 15 September 2011, the Board of Directors authorized the repurchase of up to
$1,000 of our outstanding common stock. We did not purchase any of our
outstanding shares in fiscal years 2021 or 2020. As of 30 September 2021, $485.3
in share repurchase authorization remains.
Dividends
Cash dividends on our common stock are paid quarterly, usually during the sixth
week after the close of the fiscal quarter. We expect to continue to pay cash
dividends in the future at comparable or increased levels.
The Board of Directors determines whether to declare dividends and the timing
and amount based on financial condition and other factors it deems relevant. In
2021, the Board of Directors increased the quarterly dividend on our common
stock to $1.50 per share, representing a 12% increase from the previous dividend
of $1.34 per share. This is the 39th consecutive year that we have increased our
quarterly dividend payment.
On 18 November 2021, the Board of Directors declared the first quarter 2022
dividend of $1.50 per share. The dividend is payable on 14 February 2022 to
shareholders of record as of 3 January 2022.
Discontinued Operations
In fiscal year 2021, cash provided by operating activities of discontinued
operations of $6.7 resulted from cash received as part of a state tax settlement
related to the sale of PMD in fiscal year 2017.
PENSION BENEFITS
We and certain of our subsidiaries sponsor defined benefit pension plans and
defined contribution plans that cover a substantial portion of our worldwide
employees. The principal defined benefit pension plans are the U.S. salaried
pension plan and the U.K. pension plan. These plans were closed to new
participants in 2005, after which defined contribution plans were offered to new
employees. The shift to defined contribution plans is expected to continue to
reduce volatility of both plan expense and contributions.
The fair market value of plan assets for our defined benefit pension plans as of
the 30 September 2021 measurement date increased to $5,248.7 from $4,775.1 at
the end of fiscal year 2020. The projected benefit obligation for these plans
was $5,304.9 and $5,373.5 at the end of fiscal years 2021 and 2020,
respectively. The net unfunded liability decreased $542.2 from $598.4 to $56.2,
primarily due to favorable asset experience. Refer to Note 15, Retirement
Benefits, to the consolidated financial statements for additional disclosures on
our postretirement benefits.
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Pension Expense
                                                                                       2021              2020
Pension (income)/expense, including special items noted below                     ($37.3)             $7.0

Settlements, termination benefits, and curtailments ("special items")

          1.8               5.2
Weighted average discount rate - Service cost                                        2.3  %            2.4  %
Weighted average discount rate - Interest cost                                       1.8  %            2.3  %
Weighted average expected rate of return on plan assets                              6.0  %            6.3  %
Weighted average expected rate of compensation increase                              3.4  %            3.4  %


We recognized pension income of $37.3 in fiscal year 2021 versus expense of $7.0
in fiscal year 2020, primarily due to lower interest cost and higher total
assets. Special items decreased from the prior year primarily due to lower
pension settlement losses.
2022 Outlook
In fiscal year 2022, we expect pension impacts to range from $5 million of
income to $5 million of expense, which includes potential settlement losses of
$5 to $10 million, depending on the timing of retirements. This forecast
reflects a lower expected estimated return on assets due to the increased
percentage of fixed income investments within the plan asset portfolios and
higher interest cost, partially offset by lower forecasted actuarial loss
amortization. In fiscal year 2022, our expected range of pension impacts
includes approximately $80 for amortization of actuarial losses.
In fiscal year 2021, pension expense included amortization of actuarial losses
of $97.8. Net actuarial gains of $360.8 were recognized in accumulated other
comprehensive income in fiscal year 2021. Actuarial gains and losses are
amortized into pension expense over prospective periods to the extent they are
not offset by future gains or losses. Future changes in the discount rate and
actual returns on plan assets could impact the actuarial gain or loss and
resulting amortization in years beyond fiscal year 2022.
Pension Funding
Pension funding includes both contributions to funded plans and benefit payments
for unfunded plans, which are primarily non-qualified plans. With respect to
funded plans, our funding policy is that contributions, combined with
appreciation and earnings, will be sufficient to pay benefits without creating
unnecessary surpluses.
In addition, we make contributions to satisfy all legal funding requirements
while managing our capacity to benefit from tax deductions attributable to plan
contributions. With the assistance of third-party actuaries, we analyze the
liabilities and demographics of each plan, which help guide the level of
contributions. During 2021 and 2020, our cash contributions to funded plans and
benefit payments for unfunded plans were $44.6 and $37.5, respectively.
For fiscal year 2022, cash contributions to defined benefit plans are estimated
to be $40 to $50. The estimate is based on expected contributions to certain
international plans and anticipated benefit payments for unfunded plans, which
are dependent upon the timing of retirements. Actual future contributions will
depend on future funding legislation, discount rates, investment performance,
plan design, and various other factors. We do not expect COVID-19 to impact our
contribution forecast for fiscal year 2022.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Refer to Note 1, Major Accounting Policies, and Note 2, New Accounting Guidance,
to the consolidated financial statements for a description of our major
accounting policies and information concerning implementation and impact of new
accounting guidance.
The accounting policies discussed below are those policies that we consider to
be the most critical to understanding our financial statements because they
require management's most difficult, subjective, or complex judgments, often as
the result of the need to make estimates about the effects of matters that are
inherently uncertain. These estimates reflect our best judgment about current
and/or future economic and market conditions and their effect based on
information available as of the date of our consolidated financial statements.
If conditions change, actual results may differ materially from these estimates.
Our management has reviewed these critical accounting policies and estimates and
related disclosures with the Audit and Finance Committee of our Board of
Directors.
Depreciable Lives of Plant and Equipment
Plant and equipment, net at 30 September 2021 totaled $13,254.6, and
depreciation expense totaled $1,284.1 during fiscal year 2021. Plant and
equipment is recorded at cost and depreciated using the straight-line method,
which deducts equal amounts of the cost of each asset from earnings every year
over its estimated economic useful life.
Economic useful life is the duration of time an asset is expected to be
productively employed by us, which may be less than its physical life.
Assumptions on the following factors, among others, affect the determination of
estimated economic useful life: wear and tear, obsolescence, technical
standards, contract life, market demand, competitive position, raw material
availability, and geographic location.
The estimated economic useful life of an asset is monitored to determine its
appropriateness, especially when business circumstances change. For example,
changes in technology, changes in the estimated future demand for products,
excessive wear and tear, or unanticipated government actions may result in a
shorter estimated useful life than originally anticipated. In these cases, we
would depreciate the remaining net book value over the new estimated remaining
life, thereby increasing depreciation expense per year on a prospective basis.
Likewise, if the estimated useful life is increased, the adjustment to the
useful life decreases depreciation expense per year on a prospective basis.
The regional Industrial Gases segments have numerous long-term customer supply
contracts for which we construct an on-site plant adjacent to or near the
customer's facility. These contracts typically have initial contract terms of 10
to 20 years. Depreciable lives of the production assets related to long-term
supply contracts are generally matched to the contract lives. Extensions to the
contract term of supply frequently occur prior to the expiration of the initial
term. As contract terms are extended, the depreciable life of the associated
production assets is adjusted to match the new contract term, as long as it does
not exceed the remaining physical life of the asset.
Our regional Industrial Gases segments also have contracts for liquid or gaseous
bulk supply and, for smaller customers, packaged gases. The depreciable lives of
production facilities associated with these contracts are generally 15 years.
These depreciable lives have been determined based on historical experience
combined with judgment on future assumptions such as technological advances,
potential obsolescence, competitors' actions, etc.
In addition, we may purchase assets through transactions accounted for as either
an asset acquisition or a business combination. Depreciable lives are assigned
to acquired assets based on the age and condition of the assets, the remaining
duration of long-term supply contracts served by the assets, and our historical
experience with similar assets. Management monitors its assumptions and may
potentially need to adjust depreciable life as circumstances change.
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Impairment of Assets
As discussed below, there were no triggering events in fiscal year 2021 that
would require impairment testing for any of our asset groups, reporting units
that contain goodwill, indefinite-lived intangibles assets, or equity method
investments. We completed our annual impairment tests for goodwill and other
indefinite-lived intangible assets and concluded there were no indications of
impairment.
Impairment of Assets - Plant and Equipment
Plant and equipment meeting the held for sale criteria are reported at the lower
of carrying amount or fair value less cost to sell. Plant and equipment to be
disposed of other than by sale may be reviewed for impairment upon the
occurrence of certain triggering events, such as unexpected contract
terminations or unexpected foreign government-imposed restrictions or
expropriations. Plant and equipment held for use is grouped for impairment
testing at the lowest level for which there is identifiable cash flows.
Impairment testing of the asset group occurs whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Such circumstances would include: (1) a significant decrease in the
market value of a long-lived asset grouping; (2) a significant adverse change in
the manner in which the asset grouping is being used or in its physical
condition; (3) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of the long-lived asset;
(4) a reduction in revenues that is other than temporary; (5) a history of
operating or cash flow losses associated with the use of the asset grouping; or
(6) changes in the expected useful life of the long-lived assets.
If such circumstances are determined to exist, an estimate of undiscounted
future cash flows produced by that asset group is compared to the carrying value
to determine whether impairment exists. If an asset group is determined to be
impaired, the loss is measured based on the difference between the asset group's
fair value and its carrying value. An estimate of the asset group's fair value
is based on the discounted value of its estimated cash flows.
The assumptions underlying the undiscounted future cash flow projections require
significant management judgment. Factors that management must estimate include
industry and market conditions, sales volume and prices, costs to produce,
inflation, etc. The assumptions underlying the cash flow projections represent
management's best estimates at the time of the impairment review and could
include probability weighting of cash flow projections associated with multiple
potential future scenarios. Changes in key assumptions or actual conditions that
differ from estimates could result in an impairment charge. We use reasonable
and supportable assumptions when performing impairment reviews and cannot
predict the occurrence of future events and circumstances that could result in
impairment charges.
In fiscal year 2021, there was no need to test for impairment on any of our
asset groupings as no events or changes in circumstances indicated that the
carrying amount of our asset groupings may not be recoverable.
Impairment of Assets - Goodwill
The acquisition method of accounting for business combinations requires us to
make use of estimates and judgments to allocate the purchase price paid for
acquisitions to the fair value of the net tangible and identifiable intangible
assets. Goodwill represents the excess of the aggregate purchase price (plus the
fair value of any noncontrolling interest and previously held equity interest in
the acquiree) over the fair value of identifiable net assets of an acquired
entity. Goodwill was $911.5 as of 30 September 2021. Disclosures related to
goodwill are included in Note 9, Goodwill, to the consolidated financial
statements.
We review goodwill for impairment annually in the fourth quarter of the fiscal
year and whenever events or changes in circumstances indicate that the carrying
value of goodwill might not be recoverable. The tests are done at the reporting
unit level, which is defined as being equal to or one level below the operating
segment for which discrete financial information is available and whose
operating results are reviewed by segment managers regularly. We have five
reportable business segments, seven operating segments and ten reporting units,
seven of which include a goodwill balance. Refer to Note 23, Business Segment
and Geographic Information, for additional information. Reporting units are
primarily based on products and subregions within each reportable segment. The
majority of our goodwill is assigned to reporting units within our regional
Industrial Gases segments.
As part of the goodwill impairment testing, we have the option to first assess
qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying value. However, we
choose to bypass the qualitative assessment and conduct quantitative testing to
determine if the carrying value of the reporting unit exceeds its fair value. An
impairment loss will be recognized for the amount by which the carrying value of
the reporting unit exceeds its fair value, not to exceed the total amount of
goodwill allocated to that reporting unit.
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To determine the fair value of a reporting unit, we initially use an income
approach valuation model, representing the present value of estimated future
cash flows. Our valuation model uses a discrete growth period and an estimated
exit trading multiple. The income approach is an appropriate valuation method
due to our capital-intensive nature, the long-term contractual nature of our
business, and the relatively consistent cash flows generated by our reporting
units. The principal assumptions utilized in our income approach valuation model
include revenue growth rates, operating profit and/or adjusted EBITDA margins,
discount rate, and exit multiple. Projected revenue growth rates and operating
profit and/or adjusted EBITDA assumptions are consistent with those utilized in
our operating plan and/or revised forecasts and long-term financial planning
process. The discount rate assumption is calculated based on an estimated
market-participant risk-adjusted weighted-average cost of capital, which
includes factors such as the risk-free rate of return, cost of debt, and
expected equity premiums. The exit multiple is determined from comparable
industry transactions and where appropriate, reflects expected long-term growth
rates.
If our initial review under the income approach indicates there may be
impairment, we incorporate results under the market approach to further evaluate
the existence of impairment. When the market approach is utilized, fair value is
estimated based on market multiples of revenue and earnings derived from
comparable publicly-traded industrial gases companies and/or regional
manufacturing companies engaged in the same or similar lines of business as the
reporting unit, adjusted to reflect differences in size and growth prospects.
When both the income and market approach are utilized, we review relevant facts
and circumstances and make a qualitative assessment to determine the proper
weighting. Management judgment is required in the determination of each
assumption utilized in the valuation model, and actual results could differ from
the estimates.
During the fourth quarter of fiscal year 2021, we conducted our annual goodwill
impairment test, noting no indications of impairment. The fair value of all of
our reporting units substantially exceeded their carrying value.
Due to the reorganization of our business effective as of 1 October 2021, we
conducted an additional impairment test on our existing reporting units as of 30
September 2021. The fair value of all of our reporting units substantially
exceeded their carrying value at 30 September 2021.
Future events that could have a negative impact on the level of excess fair
value over carrying value of the reporting units include, but are not limited
to: long-term economic weakness, decline in market share, pricing pressures,
inability to successfully implement cost improvement measures, increases to our
cost of capital, changes in the strategy of the reporting unit, and changes to
the structure of our business as a result of future reorganizations or
divestitures of assets or businesses. Negative changes in one or more of these
factors, among others, could result in impairment charges.
Impairment of Assets - Intangible Assets
Intangible assets, net with determinable lives at 30 September 2021 totaled
$380.4 and consisted primarily of customer relationships, purchased patents and
technology, and land use rights. These intangible assets are tested for
impairment as part of the long-lived asset grouping impairment tests. Impairment
testing of the asset group occurs whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable. See the
impairment discussion above under "Impairment of Assets - Plant and Equipment"
for a description of how impairment losses are determined.
Indefinite-lived intangible assets at 30 September 2021 totaled $40.3 and
consisted of trade names and trademarks. Indefinite-lived intangibles are
subject to impairment testing at least annually or more frequently if events or
changes in circumstances indicate that potential impairment exists. The
impairment test for indefinite-lived intangible assets involves calculating the
fair value of the indefinite-lived intangible assets and comparing the fair
value to their carrying value. If the fair value is less than the carrying
value, the difference is recorded as an impairment loss. To determine fair
value, we utilize the royalty savings method, a form of the income approach.
This method values an intangible asset by estimating the royalties avoided
through ownership of the asset.
Disclosures related to intangible assets other than goodwill are included in
Note 10, Intangible Assets, to the consolidated financial statements.
In the fourth quarter of 2021, we conducted our annual impairment test of
indefinite-lived intangibles which resulted in no impairment.
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Impairment of Assets - Equity Method Investments
Investments in and advances to equity affiliates totaled $1,649.3 at 30
September 2021. The majority of our investments are non-publicly traded ventures
with other companies in the industrial gas business. Summarized financial
information of equity affiliates is included in Note 7, Summarized Financial
Information of Equity Affiliates, to the consolidated financial statements.
Equity investments are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the investment may not be
recoverable.
An impairment loss is recognized in the event that an other-than-temporary
decline in fair value below the carrying value of an investment occurs.
Management's estimate of fair value of an investment is based on the income
approach and/or market approach. We utilize estimated discounted future cash
flows expected to be generated by the investee under the income approach. For
the market approach, we utilize market multiples of revenue and earnings derived
from comparable publicly-traded industrial gases companies. Changes in key
assumptions about the financial condition of an investee or actual conditions
that differ from estimates could result in an impairment charge.
In fiscal year 2021, there was no need to test any of our equity affiliate
investments for impairment, as no events or changes in circumstances indicated
that the carrying amount of the investments may not be recoverable.
Revenue Recognition - Cost Incurred Input Method
Revenue from equipment sale contracts is generally recognized over time as we
have an enforceable right to payment for performance completed to date and our
performance under the contract terms does not create an asset with alternative
use. We use a cost incurred input method to recognize revenue by which costs
incurred to date relative to total estimated costs at completion are used to
measure progress toward satisfying performance obligations. Costs incurred
include material, labor, and overhead costs and represent work contributing and
proportionate to the transfer of control to the customer.
Accounting for contracts using the cost incurred input method requires
management judgment relative to assessing risks and their impact on the
estimates of revenues and costs. Our estimates are impacted by factors such as
the potential for incentives or penalties on performance, schedule delays,
technical issues, labor productivity, the complexity of work performed, the cost
and availability of materials, and performance of subcontractors. When
adjustments in estimated total contract revenues or estimated total costs are
required, any changes in the estimated profit from prior estimates are
recognized in the current period for the inception-to-date effect of such
change. When estimates of total costs to be incurred on a contract exceed
estimates of total revenues to be earned, a provision for the entire estimated
loss on the contract is recorded in the period in which the loss is determined.
In addition to the typical risks associated with underlying performance of
project procurement and construction activities, our sale of equipment projects
within our Industrial Gases - Global segment require monitoring of risks
associated with schedule, geography, and other aspects of the contract and their
effects on our estimates of total revenues and total costs to complete the
contract.
Changes in estimates on projects accounted for under the cost incurred input
method unfavorably impacted operating income by approximately $19 in fiscal year
2021 as compared to a favorable impact of $7 in fiscal year 2020. Our changes in
estimates would not have significantly impacted amounts recorded in prior years.
We assess the performance of our sale of equipment projects as they progress.
Our earnings could be positively or negatively impacted by changes to our
forecast of revenues and costs on these projects.
Revenue Recognition - On-site Customer Contracts
For customers who require large volumes of gases on a long-term basis, we
produce and supply gases under long-term contracts from large facilities that we
build, own and operate on or near the customer's facilities. Certain of these
on-site contracts contain complex terms and provisions such as tolling
arrangements, minimum payment requirements, variable components and pricing
provisions that require significant judgment to determine the amount and timing
of revenue recognition.
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Income Taxes
We account for income taxes under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the tax effects
of temporary differences between the financial reporting and tax bases of assets
and liabilities measured using enacted tax rates in effect for the year in which
the differences are expected to be recovered or settled. As of 30 September
2021, accrued income taxes, including the amount recorded as noncurrent, was
$251.0, and net deferred tax liabilities were $1,080.7. Tax liabilities related
to uncertain tax positions as of 30 September 2021 were $140.3, excluding
interest and penalties. Income tax expense for the fiscal year ended 30
September 2021 was $462.8. Disclosures related to income taxes are included in
Note 21, Income Taxes, to the consolidated financial statements.
Management judgment is required concerning the ultimate outcome of tax
contingencies and the realization of deferred tax assets.
Actual income taxes paid may vary from estimates, depending upon changes in
income tax laws, actual results of operations, and the final audit of tax
returns by taxing authorities. Tax assessments may arise several years after tax
returns have been filed. We believe that our recorded tax liabilities adequately
provide for these assessments.
Deferred tax assets are recorded for operating losses and tax credit
carryforwards. However, when we do not expect sufficient sources of future
taxable income to realize the benefit of the operating losses or tax credit
carryforwards, these deferred tax assets are reduced by a valuation allowance. A
valuation allowance is recognized if, based on the weight of available evidence,
it is considered more likely than not that some portion or all of the deferred
tax asset will not be realized. The factors used to assess the likelihood of
realization include forecasted future taxable income and available tax planning
strategies that could be implemented to realize or renew net deferred tax assets
in order to avoid the potential loss of future tax benefits. The effect of a
change in the valuation allowance is reported in the income tax expense.
A 1% increase or decrease in our effective tax rate may result in a decrease or
increase to net income, respectively, of approximately $25.
Pension and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements for pension and
other postretirement benefits are determined on an actuarial basis utilizing
numerous assumptions. The discussion that follows provides information on the
significant assumptions, expense, and obligations associated with the defined
benefit plans.
Actuarial models are used in calculating the expense and liability related to
the various defined benefit plans. These models have an underlying assumption
that the employees render service over their service lives on a relatively
consistent basis; therefore, the expense of benefits earned should follow a
similar pattern.
Several assumptions and statistical variables are used in the models to
calculate the expense and liability related to the plans. We determine
assumptions about the discount rate, the expected rate of return on plan assets,
and the rate of compensation increase. Note 15, Retirement Benefits, to the
consolidated financial statements includes disclosure of these rates on a
weighted-average basis for both the U.S. and international plans. The actuarial
models also use assumptions about demographic factors such as retirement age,
mortality, and turnover rates. Mortality rates are based on the most recent U.S.
and international mortality tables. We believe the actuarial assumptions are
reasonable. However, actual results could vary materially from these actuarial
assumptions due to economic events and differences in rates of retirement,
mortality, and turnover.
One of the assumptions used in the actuarial models is the discount rate used to
measure benefit obligations. This rate reflects the prevailing market rate for
high-quality, fixed-income debt instruments with maturities corresponding to the
expected timing of benefit payments as of the annual measurement date for each
of the various plans. We measure the service cost and interest cost components
of pension expense by applying spot rates along the yield curve to the relevant
projected cash flows. The rates along the yield curve are used to discount the
future cash flows of benefit obligations back to the measurement date. These
rates change from year to year based on market conditions that affect corporate
bond yields. A higher discount rate decreases the present value of the benefit
obligations and results in lower pension expense. A 50 bp increase or decrease
in the discount rate may result in a decrease or increase to pension expense,
respectively, of approximately $20 per year.
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The expected rate of return on plan assets represents an estimate of the
long-term average rate of return to be earned by plan assets reflecting current
asset allocations. In determining estimated asset class returns, we take into
account historical and future expected long-term returns and the value of active
management, as well as the interest rate environment. Asset allocation is
determined based on long-term return, volatility and correlation characteristics
of the asset classes, the profiles of the plans' liabilities, and acceptable
levels of risk. Lower returns on the plan assets result in higher pension
expense. A 50 bp increase or decrease in the estimated rate of return on plan
assets may result in a decrease or increase to pension expense, respectively, of
approximately $23 per year.
We use a market-related valuation method for recognizing certain investment
gains or losses for our significant pension plans. Investment gains or losses
are the difference between the expected return and actual return on plan assets.
The expected return on plan assets is determined based on a market-related value
of plan assets. This is a calculated value that recognizes investment gains and
losses on equities over a five-year period from the year in which they occur and
reduces year-to-year volatility. The market-related value for non-equity
investments equals the actual fair value. Expense in future periods will be
impacted as gains or losses are recognized in the market-related value of
assets.
The expected rate of compensation increase is another key assumption. We
determine this rate based on review of the underlying long-term salary increase
trend characteristic of labor markets and historical experience, as well as
comparison to peer companies. A 50 bp increase or decrease in the expected rate
of compensation may result in an increase or decrease to pension expense,
respectively, of approximately $7 per year.
Loss Contingencies
In the normal course of business, we encounter contingencies, or situations
involving varying degrees of uncertainty as to the outcome and effect on our
company. We accrue a liability for loss contingencies when it is considered
probable that a liability has been incurred and the amount of loss can be
reasonably estimated. When only a range of possible loss can be established, the
most probable amount in the range is accrued. If no amount within this range is
a better estimate than any other amount within the range, the minimum amount in
the range is accrued.
Contingencies include those associated with litigation and environmental
matters, for which our accounting policy is discussed in Note 1, Major
Accounting Policies, to the consolidated financial statements, and details are
provided in Note 16, Commitments and Contingencies, to the consolidated
financial statements. Significant judgment is required to determine both the
probability and whether the amount of loss associated with a contingency can be
reasonably estimated. These determinations are made based on the best available
information at the time. As additional information becomes available, we
reassess probability and estimates of loss contingencies. Revisions to the
estimates associated with loss contingencies could have a significant impact on
our results of operations in the period in which an accrual for loss
contingencies is recorded or adjusted. For example, due to the inherent
uncertainties related to environmental exposures, a significant increase to
environmental liabilities could occur if a new site is designated, the scope of
remediation is increased, a different remediation alternative is identified, or
our proportionate share of the liability increases. Similarly, a future charge
for regulatory fines or damage awards associated with litigation could have a
significant impact on our net income in the period in which it is recorded.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our earnings, cash flows, and financial position are exposed to market risks
arising from fluctuations in interest rates and foreign currency exchange rates.
It is our policy to minimize our cash flow exposure to adverse changes in
currency exchange rates and to manage the financial risks inherent in funding
with debt capital.
We address these financial exposures through a controlled program of risk
management that includes the use of derivative financial instruments. We have
established counterparty credit guidelines and generally enter into transactions
with financial institutions of investment grade or better, thereby minimizing
the risk of credit loss. All instruments are entered into for other than trading
purposes. For details on the types and use of these derivative instruments and
related major accounting policies, refer to Note 1, Major Accounting Policies,
and Note 12, Financial Instruments, to the consolidated financial statements.
Additionally, we mitigate adverse energy price impacts through our cost
pass-through contracts with customers and price increases.
Our derivative and other financial instruments consist of long-term debt,
including the current portion and amounts owed to related parties; interest rate
swaps; cross currency interest rate swaps; and foreign exchange-forward
contracts. The net market value of these financial instruments combined is
referred to below as the "net financial instrument position" and is disclosed in
Note 13, Fair Value Measurements, to the consolidated financial statements.
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Our net financial instrument position decreased from a liability of $8,220.7 at
30 September 2020 to a liability of $7,850.3 at 30 September 2021. The decrease
was primarily due to the repayment of a €350.0 million Eurobond ($428) on its
maturity date in June 2021.
The analysis below presents the sensitivity of the market value of our financial
instruments to selected changes in market rates and prices. Market values are
the present values of projected future cash flows based on the market rates and
prices chosen. The market values for interest rate risk and foreign currency
risk are calculated by us using a third-party software model that utilizes
standard pricing models to determine the present value of the instruments based
on market conditions as of the valuation date, such as interest rates, spot and
forward exchange rates, and implied volatilities.
Interest Rate Risk
Our debt portfolio as of 30 September 2021 and 2020, including the effect of
currency and interest rate swap agreements, was composed of 89% fixed-rate debt
and 11% variable-rate debt.
The sensitivity analysis related to the interest rate risk on the fixed portion
of our debt portfolio assumes an instantaneous 100 bp parallel move in interest
rates from the level at 30 September 2021, with all other variables held
constant. A 100 bp increase in market interest rates would result in a decrease
of $587 and $711 in the net liability position of financial instruments at 30
September 2021 and 2020, respectively. A 100 bp decrease in market interest
rates would result in an increase of $692 and $846 in the net liability position
of financial instruments at 30 September 2021 and 2020, respectively.
Based on the variable-rate debt included in our debt portfolio, including the
interest rate swap agreements, a 100 bp increase in interest rates would result
in an additional $8 of interest incurred per year at 30 September 2021 and 2020.
A 100 bp decline in interest rates would lower interest incurred by $8 per year
at 30 September 2021 and 2020.
Foreign Currency Exchange Rate Risk
The sensitivity analysis related to foreign currency exchange rates assumes an
instantaneous 10% change in the foreign currency exchange rates from their
levels at 30 September 2021 and 2020, with all other variables held constant. A
10% strengthening or weakening of the functional currency of an entity versus
all other currencies would result in a decrease or increase, respectively, of
$343 and $360 in the net liability position of financial instruments at 30
September 2021 and 2020, respectively.
The primary currency pairs for which we have exchange rate exposure are the Euro
and U.S. Dollar and Chinese Renminbi and U.S. Dollar. Foreign currency debt,
cross currency interest rate swaps, and foreign exchange-forward contracts are
used in countries where we do business, thereby reducing our net asset exposure.
Foreign exchange-forward contracts and cross currency interest rate swaps are
also used to hedge our firm and highly anticipated foreign currency cash flows.
Thus, there is either an asset or liability or cash flow exposure related to all
of the financial instruments in the above sensitivity analysis for which the
impact of a movement in exchange rates would be in the opposite direction and
materially equal to the impact on the instruments in the analysis.
The majority of our sales are denominated in foreign currencies as they are
derived outside the United States. Therefore, financial results will be affected
by changes in foreign currency rates. The Chinese Renminbi and the Euro
represent the largest exposures in terms of our foreign earnings. We estimate
that a 10% reduction in either the Chinese Renminbi or the Euro versus the U.S.
Dollar would lower our annual operating income by approximately $45 and $25,
respectively.

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2021ONE OF THE LARGEST GREEN HYDROGEN PR : thyssenkrupp Signs Contract to Install Over 2GW Ele..
AQ
2021Air Products Awards Thyssenkrupp Contract to Supply Plant For Green Hydrogen Project in..
MT
2021ONE OF THE LARGEST GREEN HYDROGEN PR : thyssenkrupp Signs Contract to Install Over 2GW Ele..
PR
2021Air Products' Investor Relations, Corporate Relations and Sustainability VP to Speak at..
PR
2021AIR PRODUCTS AND CHEMICALS : Segment Reorganization and Unaudited Historical Financial Inf..
PU
2021Wolfe Research Downgrades Air Products and Chemicals to Peer Perform From Outperform; P..
MT
2021AIR PRODUCTS & CHEMICALS INC /DE/ : Other Events (form 8-K)
AQ
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