AIR PRODUCTS & CHEMICALS, INC. Business Overview 22 2020 in Summary 22 2021 Outlook 24 Results of Operations 24 Reconciliations of Non-GAAP Financial Measures 31 Liquidity and Capital Resources 35 Contractual Obligations 38 Pension Benefits 40 Environmental Matters 41 Off-Balance Sheet Arrangements 41 Related Party Transactions 41 Inflation 41 Critical Accounting Policies and Estimates 42 New Accounting Guidance 48 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 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 on Form 10-K. The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for fiscal years 2020 and 2019. For the discussion of changes from fiscal year 2018 to fiscal year 2019 and other financial information related to fiscal year 2018, refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations , of our Form 10-K for the fiscal year ended30 September 2019 . This document was filed with theSEC on26 November 2019 . 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 financial measures included in the discussion that follows are presented in accordance withU.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, and adjusted effective tax rate, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These reconciliations and explanations regarding the use of these measures are presented beginning on page 31. InMarch 2020 , theWorld Health Organization declared the novel strain of coronavirus, COVID-19, a global pandemic and recommended containment and mitigation measures worldwide. In response to COVID-19, we implemented certain health and safety policies to help keep our employees, contractors, customers, and communities safe while continuing to run our facilities, which generally have been considered "essential" by local governments and public health authorities. In compliance with government protocols, our non-essential employees were instructed to work from home until government mandated restrictions allow for a return to the workplace. Those working and visiting our sites are required to follow appropriate procedures, including completion of trainings and performance of self- and on-site screenings, as well as adhere to our personal protective equipment, social distancing, and personal hygiene protocols. 21 -------------------------------------------------------------------------------- Table of Contents BUSINESS OVERVIEWAir Products and Chemicals, Inc. is a world-leading industrial gases company that has been in operation for 80 years. 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, chemical, metals, electronics, manufacturing, and food and beverage. Air Products is also the global leader in the supply of 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. With operations in 50 countries, in fiscal year 2020 we had sales of$8.9 billion and assets of$25.2 billion . Approximately 19,275 passionate, talented and committed full- and part-time employees from diverse backgrounds are driven by Air Products' higher purpose to create innovative solutions that benefit the environment, enhance sustainability and address the challenges facing customers, communities, and the world. As of30 September 2020 , our operations were organized into five reportable business segments: •Industrial Gases -Americas ; •Industrial Gases - EMEA (Europe ,Middle East , andAfrica ); •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 25, Business Segment and Geographic Information, to the consolidated financial statements for additional details on our reportable business segments. 2020 IN SUMMARY In fiscal year 2020, our number one priority was the safety and well-being of our people. Since the beginning of the COVID-19 pandemic, we have kept our global plants running, supplied critical products, and supported our local communities during this time of need. We continued to win significant new growth projects around the world and serve our customers, delivering stable results despite the significant health crisis facing the world. We also remained focused on sustainability and our commitment to advancing diversity and inclusion. We set new goals that are aligned with Air Products' business strategy and higher purpose to create innovative solutions that benefit the environment, enhance sustainability, and address the challenges facing customers, communities, and the world. Fiscal year 2020 results and highlights are summarized below: •Sales of$8,856.3 decreased 1%, or$62.6 , as 3% higher pricing and 2% favorable volumes were more than offset by 4% lower energy and natural gas cost pass-through to customers, 1% unfavorable currency, and the 1% impact of a contract modification to a tolling arrangement inIndia . We estimate that COVID-19 negatively impacted our overall sales by approximately 4%, primarily driven by lower volumes in our merchant business in the regional industrial gas segments. •Operating income of$2,237.6 increased 4%, or$93.2 , and operating margin of 25.3% increased 130 bp. •Net income of$1,931.1 increased 7%, or$121.7 , and net income margin of 21.8% increased 150 bp. •Adjusted EBITDA of$3,619.8 increased 4%, or$151.8 , and adjusted EBITDA margin of 40.9% increased 200 bp. •Diluted EPS of$8.55 increased 8%, or$0.61 , and adjusted diluted EPS of$8.38 increased 2%, or$0.17 . We estimate that COVID-19 negatively impacted our fiscal year 2020 EPS by approximately$0.60-$0.65 per share. A summary table of changes in diluted EPS is presented below. 22 -------------------------------------------------------------------------------- Table of Contents Fiscal year 2020 results and highlights (continued): •We increased our quarterly dividend by over 15% from$1.16 to$1.34 per share, representing the largest dividend increase in our 80-year history. This is the 38th consecutive year that we have increased our quarterly dividend payment. •We successfully executed a debt offering of approximately$5 billion during the third quarter, supporting significant opportunities to invest in high-return industrial gas projects and the repayment of upcoming debt maturities. The issuance included bothU.S. Dollar- and Euro-denominated fixed-rate notes. 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 Year Ended 30 September 2020 2019 (Decrease) Diluted EPS Total Diluted EPS$8.49 $7.94 $0.55 Less: Diluted EPS from loss from discontinued operations (0.06) - (0.06) Diluted EPS From Continuing Operations$8.55 $7.94 $0.61 Operating Impacts Underlying business Volume ($0.19 ) Price, net of variable costs 0.77 Other costs (0.38) Currency (0.07) Facility closure 0.10 Company headquarters relocation income (expense) 0.12 Cost reduction actions 0.08 Gain on exchange of equity affiliate investments (0.13) Total Operating Impacts$0.30 Other Impacts Equity affiliates' income$0.06 Interest expense 0.10 Other non-operating income (expense), net (0.13) Change in effective tax rate, excluding discrete items below 0.04 India Finance Act 2020 0.06 Tax reform repatriation (0.06) Tax reform adjustment related to deemed foreign dividends 0.26 Noncontrolling interests 0.02 Weighted average diluted shares (0.03) Total Other Impacts$0.32 Total Change in Diluted EPS From Continuing Operations(A)$0.61
(A) Includes an estimated negative impact of
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Increase
Year Ended 30 September 2020 2019 (Decrease)
Diluted EPS From Continuing Operations $8.55 $7.94 $0.61
Facility closure - 0.10 (0.10)
Cost reduction actions - 0.08 (0.08)
Gain on exchange of equity affiliate investments - (0.13) 0.13
Company headquarters relocation (income) expense (0.12) - (0.12)
India Finance Act 2020 (0.06) - (0.06)
Pension settlement loss - 0.02 (0.02)
Tax reform repatriation - (0.06) 0.06
Tax reform adjustment related to deemed foreign dividends - 0.26 (0.26)
Adjusted Diluted EPS From Continuing Operations$8.38 $8.21 $0.17 2021 OUTLOOK As COVID-19 continues, we remain focused on the safety and well-being of our people. We are committed to safely maintaining plant operations and ensuring business continuity, including providing financial security for employees, reliably supplying critical products and services to our customers, and winning new opportunities for world-scale projects. We expect lower volumes from COVID-19 to continue into fiscal year 2021 with recovery in demand depending on the duration of COVID-19 and measures implemented by governments, public health authorities and businesses to mitigate its spread. Given the dynamic nature of these circumstances, the future impact on our ongoing business, results of operations, and overall financial performance cannot be reasonably estimated. Despite the uncertainty of the duration of COVID-19, we will continue to focus on pricing discipline in our merchant business and expect our onsite business model, which represents approximately half of our business, to continue generating stable cash flow. This will allow us to execute our strategic focus on our industrial gas business and the creation of long-term shareholder value, including the ongoing growth of our dividend, continued execution of projects in our backlog, and new investments in high-return industrial gas projects. A long-term onsite customer inAsia delayed restarting their plant following a planned major maintenance turnaround completed inSeptember 2020 . While we expect the plant to restart in fiscal year 2021, we are negotiating with the customer regarding contract terms that could impact sales in our Industrial Gases -Asia segment. The above guidance should be read in conjunction with the Forward-Looking Statements of this Annual Report on Form 10-K. RESULTS OF OPERATIONS Discussion of Consolidated Results 2020 2019 $ Change Change GAAP Measures Sales$8,856.3 $8,918.9 ($62.6 ) (1) % Operating income 2,237.6 2,144.4 93.2 4 % Operating margin 25.3 % 24.0 % 130 bp Equity affiliates' income$264.8 $215.4 49.4 23 % Net income 1,931.1 1,809.4 121.7 7 % Net income margin 21.8 % 20.3 % 150 bp Non-GAAP Measures Adjusted EBITDA$3,619.8 $3,468.0 151.8 4 % Adjusted EBITDA margin 40.9 % 38.9 % 200 bp 24
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Sales
Sales % Change from Prior Year
Volume 2 % Price 3 %
Energy and natural gas cost pass-through (4) % Currency
(1) %
Other(A) (1) %
Total Consolidated Sales Change (1) %
(A)Includes the impact from the modification of a hydrogen supply contract to a
tolling arrangement in India in December 2018 (the "India contract
modification").
Sales of $8,856.3 decreased 1%, or $62.6 , as higher pricing of 3% and favorable
volumes of 2% were more than offset by lower energy and natural gas cost
pass-through to customers of 4%, unfavorable currency of 1%, and the impact from
the India contract modification of 1%. The pricing improvement was attributable
to our merchant business across the regional segments. The volume growth
exceeded the negative impacts from COVID-19 and was primarily driven by
acquisitions, new plants, and higher sale of equipment project activity. We
estimate that COVID-19 negatively impacted overall sales by approximately 4%,
primarily driven by lower volumes in our merchant business across the regional
segments as our onsite business remained stable. Unfavorable currency impacts
were driven by the Chilean Peso, Chinese Renminbi, Euro, and South Korean Won.
Cost of Sales and Gross Margin
Cost of sales of $5,858.1 decreased 2%, or $146.4 , from total cost of sales of
$6,004.5 in the prior year, which included the facility closure further
discussed below. The decrease from the prior year was driven by lower energy and
natural gas cost pass-through to customers of $314 , positive currency impacts of
$73 , the favorable impact from the India contract modification of $41 , and the
prior year facility closure of $29 , partially offset by higher costs
attributable to sales volumes of $250 and higher other costs, including planned
maintenance, of $61 . Gross margin of 33.9% increased 120 bp from 32.7% in the
prior year, primarily due to positive pricing, lower energy and natural gas cost
pass-through to customers, and the prior year facility closure, partially offset
by unfavorable volume mix and net operating costs.
Facility Closure
In fiscal year 2019, one of our customers was subject to a government enforced
shutdown due to environmental reasons. As a result, we recognized a charge of
$29.0 ($22.1 after-tax, or $0.10 per share) primarily related to the write-off
of onsite assets. This charge was reflected as "Facility closure" on our
consolidated income statements for the fiscal year ended 30 September 2019 and
was not recorded in segment results.
Selling and Administrative
Selling and administrative expense of $775.9 increased 3%, or $25.9 , due to
higher business development costs to support our growth strategy and higher
incentive compensation, partially offset by currency impacts and lower travel
expenses. Selling and administrative expense, as a percentage of sales,
increased from 8.4% to 8.8%.
Research and Development
Research and development expense of $83.9 increased 15%, or $11.0 , primarily due
to higher product development costs. Research and development expense as a
percentage of sales increased from 0.8% to 0.9%.
Company Headquarters Relocation Income (Expense)
During the second quarter of fiscal year 2020, we sold property at our current
corporate headquarters located in Trexlertown, Pennsylvania , for net proceeds of
$44.1 . The sale was completed in anticipation of relocating our U.S.
headquarters and resulted in a gain of $33.8 ($25.6 after-tax, or $0.12 per
share). This gain is reflected on our consolidated income statements as "Company
headquarters relocation income (expense)" for the fiscal year ended 30 September
2020 and was not recorded in segment results.
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Cost Reduction Actions
In fiscal year 2019, we recognized an expense of $25.5 ($18.8 after-tax, or
$0.08 per share) for severance and other benefits associated with position
eliminations, primarily within the Industrial Gases - EMEA and the Industrial
Gases - Americas segments. This expense was reflected as "Cost reduction
actions" on our consolidated income statements for the fiscal year ended 30
September 2019 and was not recorded in segment results. Refer to Note 5, Cost
Reduction Actions, to the consolidated financial statements for additional
information.
Gain on Exchange of Equity Affiliate Investments
In fiscal year 2019, we recognized a net gain of $29.1 ($0.13 per share)
resulting from the exchange of two 50%-owned industrial gas joint ventures in
China . The net gain was reflected as "Gain on exchange of equity affiliate
investments" on our consolidated income statements for the fiscal year ended 30
September 2019 and was not recorded in segment results. Refer to Note 3,
Acquisitions, to the consolidated financial statements for additional
information.
Other Income (Expense), Net
Other income (expense), net of $65.4 increased 33%, or $16.1 , primarily due to
the adjustment of a benefit plan liability resulting from a change in plan
terms.
Operating Income and Margin
Operating income of $2,237.6 increased 4%, or $93.2 , due to positive pricing,
net of power and fuel costs, of $212 , income associated with the company
headquarters relocation of $34 , and prior year charges for a facility closure of
$29 and cost reduction actions of $26 , partially offset by higher net operating
costs of $104 , including planned maintenance, unfavorable volume mix of $55 , a
gain on the exchange of equity affiliates of $29 in the prior year, and
unfavorable currency of $20 .
Operating margin of 25.3% increased 130 bp, primarily due to positive pricing,
lower energy and natural gas cost pass-through to customers, the impact of
income associated with the company headquarters relocation, and prior year
charges for a facility closure and cost reduction actions, partially offset by
unfavorable volume mix, higher operating costs, and a gain on the exchange of
two equity affiliates in the prior year.
Equity Affiliates' Income
Equity affiliates' income of $264.8 increased 23%, or $49.4 , primarily due to a
current year benefit of $33.8 for the release of our share of accumulated
dividend distribution taxes related to an Indian affiliate as a result of the
enactment of a tax law in India . Refer to Note 22, Income Taxes, to the
consolidated financial statements for additional information. The current year
also includes higher income from affiliates in India , Italy , and Saudi Arabia ,
partially offset by negative impacts from COVID-19.
Interest Expense
2020 2019
Interest incurred $125.2 $150.5
Less: Capitalized interest 15.9 13.5
Interest expense $109.3 $137.0
Interest incurred decreased 17%, or $25.3 . The prior year included an expense of
$33.3 related to foreign currency forward points and currency swap basis
differences ("excluded components") of our cash flow hedges of intercompany
loans. As discussed in Note 2, New Accounting Guidance, to the consolidated
financial statements, we adopted new accounting guidance on hedging activities
that changed the presentation of these items from "Interest expense, net" to
"Other non-operating income (expense), net" in fiscal year 2020. In addition to
this presentation change, interest incurred decreased due to lower expenses
related to the Lu'An joint venture financing and a lower average interest rate
on the debt portfolio, partially offset by a higher debt balance due to the
issuance of debt during the third quarter of fiscal year 2020. Refer to Note 15,
Debt, to the consolidated financial statements for additional information. We
expect interest expense to be higher in future periods due to this issuance.
Capitalized interest increased 18%, or $2.4 , due to an increase in the carrying
value of projects under construction.
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Other Non-Operating Income (Expense), Net
Other non-operating income of $30.7 decreased 54%, or $36.0 , primarily due to an
expense of $33.5 for the excluded components of cash flow hedges of intercompany
loans. These components were historically recorded in "Interest expense" prior
to the adoption of the guidance discussed above. The current year also included
lower interest income on cash and cash items. These factors were partially
offset by higher non-service pension income due to lower interest cost and
higher expected asset returns, primarily for our U.S. pension plans. The prior
year includes a settlement loss of $5.0 ($3.8 after-tax, or $0.02 per share)
associated with the U.S. Supplementary Pension Plan.
Discontinued Operations
During the second quarter of fiscal year 2020, we recorded a pre-tax loss from
discontinued operations of $19.0 ($14.3 after-tax, or $0.06 per share) to
increase our liability for retained environmental obligations associated with
the sale of our former Amines business in September 2006 . Refer to the Pace
discussion within Note 17, Commitments and Contingencies, to the consolidated
financial statements for additional information.
Net Income and Net Income Margin
Net income of $1,931.1 increased 7%, or $121.7 , primarily due to higher pricing
and income from the sale of property at our current corporate headquarters. In
addition, the prior year was negatively impacted by a facility closure, cost
reduction actions, and the U.S. Tax Cuts and Jobs Act. These factors were
partially offset by higher costs, including the after-tax loss from discontinued
operations, unfavorable volume mix, and a gain on the exchange of two equity
affiliates in the prior year. Net income margin of 21.8% increased 150 bp,
primarily due to the factors noted above as well as lower energy and natural gas
cost pass-through to customers.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA of $3,619.8 increased 4%, or $151.8 , primarily due to higher
pricing, partially offset by higher operating costs. Adjusted EBITDA margin of
40.9% increased 200 bp, primarily due to the higher pricing and lower energy and
natural gas cost pass-through to customers, partially offset by unfavorable
volume mix and higher operating costs.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income from
continuing operations before taxes. The effective tax rate was 19.7% and 21.0%
for the fiscal years ended 30 September 2020 and 2019, respectively.
The 2019 tax rate reflected a discrete net income tax expense of $43.8 related
to impacts from the U.S. Tax Cuts and Jobs Act (the "Tax Act"). The net expense
included the reversal of a non-recurring $56.2 ($0.26 per share) benefit
recorded in 2018 related to the U.S. taxation of deemed foreign dividends. This
was partially offset by a benefit of $12.4 ($0.06 per share) to finalize our
estimates of the impacts of the Tax Act and reduce the total expected costs of
the deemed repatriation tax. In addition, the net expense from the Tax Act was
partially offset by benefits from changes in valuation allowance recorded at
various entities in 2019.
The lower current year rate reflects favorable impacts from higher benefits on
the revaluation of deferred tax accounts due to enacted changes in foreign tax
law, changes in the tax profile of U.S. entities in various state jurisdictions,
and higher excess tax benefits on share-based compensation. These items were
partially offset by the enactment of the India Finance Act 2020 (the "India
Finance Act"), which increased income tax expense by $20.3 . The enactment also
increased equity affiliates' income by $33.8 for changes in the future tax costs
of repatriated earnings. The overall impact to net income resulting from the
India Finance Act was a benefit of $13.5 ($0.06 per share).
The adjusted effective tax rate was 19.1% and 19.4% for the fiscal years ended
30 September 2020 and 2019, respectively. The lower current year rate reflects
favorable impacts from higher benefits on the revaluation of deferred tax
accounts due to enacted changes in foreign tax law, changes in the tax profile
of U.S. entities in various state jurisdictions, and higher excess tax benefits
on share-based compensation. These items were partially offset by benefits from
changes in valuation allowances recorded at various entities in 2019.
Refer to Note 22, Income Taxes, to the consolidated financial statements for
additional information.
27
--------------------------------------------------------------------------------Table of Contents Segment Analysis Industrial Gases -Americas Year Ended 30 September 2020 2019 $ Change Change Sales$3,630.7 $3,873.5 ($242.8 ) (6) % Operating income 1,012.4 997.7 14.7 1 % Operating margin 27.9 % 25.8 % 210 bp Equity affiliates' income$84.3 $84.8 ($0.5 ) (1) % Adjusted EBITDA 1,656.2 1,587.7 68.5 4 % Adjusted EBITDA margin 45.6 % 41.0 % 460 bp
Sales % Change from Prior Year
Volume (1) % Price 3 % Energy and natural gas cost pass-through (6) % Currency (2) %
Total Industrial Gases - Americas Sales Change (6) %
Sales of$3,630.7 decreased 6%, or$242.8 , as lower energy and natural gas cost pass-through to customers of 6%, a negative impact from currency of 2%, and lower volumes of 1% were partially offset by positive pricing of 3%. The pricing improvement was driven by our merchant business. Lower volumes, particularly in our merchant business, were primarily driven by COVID-19, which began impacting this segment at the end ofMarch 2020 and continued through the end of the fiscal year. The negative impact of COVID-19 was partially offset by positive contributions from the commencement of a long-term hydrogen supply agreement with PBF Energy Inc. from assets we acquired in April. The unfavorable currency impact was driven by the Chilean Peso. Operating income of$1,012.4 increased 1%, or$14.7 , due to higher pricing, net of power and fuel costs, of$95 , partially offset by higher net operating costs of$40 , lower volumes of$33 , and unfavorable currency impacts of$7 . Operating margin of 27.9% increased 210 bp, primarily due to positive pricing and lower energy and natural gas cost pass-through to customers, partially offset by lower volumes and unfavorable net operating costs. Equity affiliates' income of$84.3 decreased 1%, or$0.5 . 28 --------------------------------------------------------------------------------
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Industrial Gases - EMEA
2020 2019 $ Change Change
Sales $1,926.3 $2,002.5 ($76.2 ) (4) %
Operating income 473.3 472.4 0.9 - %
Operating margin 24.6 % 23.6 % 100 bp
Equity affiliates' income $74.8 $69.0 $5.8 8 %
Adjusted EBITDA 744.0 730.9 13.1 2 %
Adjusted EBITDA margin 38.6 % 36.5 % 210 bp
Sales % Change from Prior Year
Volume - % Price 3 %
Energy and natural gas cost pass-through (4) % Currency
(1) %
Other(A) (2) %
Total Industrial Gases - EMEA Sales Change (4) %
(A)Includes the impact from the modification of a hydrogen supply contract to a
tolling arrangement in
Sales of$1,926.3 decreased 4%, or$76.2 , as lower energy and natural gas cost pass-through to customers of 4%, the negative impact from theIndia contract modification of 2%, and unfavorable currency impacts of 1% were only partially offset by positive pricing of 3%. The pricing improvement was attributable to our merchant business. Volumes were flat versus the prior year as improvements from acquisitions and demand for hydrogen in ourRotterdam pipeline system were offset by lower volumes from COVID-19, particularly in our merchant business. COVID-19 began impacting this segment at the end ofMarch 2020 and continued through the end of the fiscal year. The negative currency impact was mainly driven by the Euro. Operating income of$473.3 was flat as higher pricing, net of power and fuel costs, of$71 was offset by higher costs of$41 , unfavorable volume mix of$27 , and unfavorable currency impacts of$3 . Operating margin of 24.6% increased 100 bp, primarily due to favorable pricing, lower energy and natural gas cost pass-through to customers, and theIndia contract modification, partially offset by higher costs and unfavorable volume mix. Equity affiliates' income of$74.8 increased 8%, or$5.8 , primarily due toJazan Gas Projects Company , which began to contribute in the second half of fiscal year 2019, and higher income from an affiliate inItaly . 29 --------------------------------------------------------------------------------
Table of Contents Industrial Gases -Asia 2020 2019 $ Change Change Sales$2,716.5 $2,663.6 $52.9 2 % Operating income 870.3 864.2 6.1 1 % Operating margin 32.0 % 32.4 % (40) bp Equity affiliates' income$61.0 $58.4 $2.6 4 % Adjusted EBITDA 1,330.7 1,284.1 46.6 4 % Adjusted EBITDA margin 49.0 % 48.2 % 80 bp Sales % Change from Prior Year Volume 1 % Price 2 % Energy and natural gas cost pass-through - % Currency (1) % Total Industrial Gases - Asia Sales Change 2 % Sales of$2,716.5 increased 2%, or$52.9 , as positive pricing of 2% and higher volumes of 1% were partially offset by unfavorable currency impacts of 1%. Volume improvements from new plants were partially offset by negative impacts from planned maintenance outages, completion of a short-term supply contract, and COVID-19, which began impacting this segment in the second quarter and continued through the end of the fiscal year. The negative impact from COVID-19 was primarily on our merchant volumes. Pricing improved acrossAsia , driven by our merchant business. The unfavorable currency impact was primarily attributable to the Chinese Renminbi and the South Korean Won. Energy and natural gas cost pass-through to customers was flat versus the prior year. Operating income of$870.3 increased 1%, or$6.1 , due to positive pricing, net of power and fuel costs, of$46 and favorable net operating costs of$4 , partially offset by unfavorable volume mix of$33 and currency impacts of$11 . Operating margin of 32.0% decreased 40 bp, as unfavorable volume mix more than offset positive pricing. Equity affiliates' income of$61.0 increased 4%, or$2.6 . 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. 2020 2019 $ Change Change Sales$364.9 $261.0 $103.9 40 % Operating loss (40.0) (11.7) (28.3) (242) % Adjusted EBITDA (19.5) 0.1 (19.6) N/M* * Not meaningful Sales of$364.9 increased 40%, or$103.9 , primarily due to higher sale of equipment activity. Operating loss of$40.0 increased 242%, or$28.3 , as higher project and product development costs were only partially offset by higher sale of equipment and other project activity. 30 -------------------------------------------------------------------------------- Table of Contents 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 our 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. 2020 2019 $ Change Change Sales$217.9 $118.3 $99.6 84 % Operating loss (112.2) (152.8) 40.6 27 % Adjusted EBITDA (91.6) (134.8) 43.2 32 % Sales of$217.9 increased 84%, or$99.6 , primarily due to higher LNG sale of equipment activity. Operating loss of$112.2 decreased 27%, or$40.6 , primarily due to the higher LNG sale of equipment activity, partially offset by higher business development costs to support our growth strategy. 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 withU.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, and adjusted effective tax rate. On a segment basis, these measures include adjusted EBITDA and adjusted EBITDA margin. In addition to these measures, we also include certain supplemental non-GAAP financial measures that are presented below to help the reader understand the impact that our non-GAAP adjustments have on the calculation of our adjusted diluted EPS. For each non-GAAP financial measure, we present below 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 certain disclosed items, or "non-GAAP adjustments," that we believe are not representative of 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. The tax impact on 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. 31 -------------------------------------------------------------------------------- Table of Contents 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. We believe it is important for the reader to understand the per share impact of our non-GAAP adjustments as 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 to Air Year Ended 30 September Operating Income Equity Affiliates' Income Income Tax Provision Products Diluted EPS 2020 GAAP$2,237.6 $264.8 $478.4 $1,901.0 $8.55 2019 GAAP 2,144.4 215.4 480.1 1,760.0 7.94 Change GAAP$141.0 $0.61 % Change GAAP 8 % 8 % 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 Measure ("Adjusted")$2,203.8 $231.0 $449.9 $1,861.9 $8.38 2019 GAAP$2,144.4 $215.4 $480.1 $1,760.0 $7.94 Facility closure 29.0 - 6.9 22.1 0.10 Cost reduction actions 25.5 - 6.7 18.8 0.08 Gain on exchange of equity affiliate investments (29.1) - - (29.1) (0.13) Pension settlement loss(A) - - 1.2 3.8 0.02 Tax reform repatriation - - 12.4 (12.4) (0.06) Tax reform adjustment related to deemed foreign dividends - - (56.2) 56.2
0.26
2019 Non-GAAP Measure ("Adjusted") $2,169.8 $215.4 $451.1 $1,819.4
Change Non-GAAP Measure ("Adjusted") $42.5
% Change Non-GAAP Measure ("Adjusted") 2 % 2 %
(A)Before-tax impact of $5.0 is reflected on the consolidated income statements
within "Other non-operating income (expense), net."
The table below provides a reconciliation of adjusted diluted EPS to GAAP
diluted EPS for each fiscal year noted:
Year Ended 30 September 2020 2019 2018 2017 2016
Diluted EPS $8.55 $7.94 $6.59 $5.16 $5.04
Change in inventory valuation method - - (0.08) - -
Facility closure - 0.10 - - -
Business separation costs - - - 0.12 0.21
Tax (benefit) costs associated with business
separation - - - (0.02) 0.24
Cost reduction and asset actions - 0.08 - 0.49 0.11
Goodwill and intangible asset impairment charge - - - 0.70 -
Gain on exchange of equity affiliate
investments - (0.13) - - -
Company headquarters relocation (income)
expense (0.12) - - - -
Gain on land sale - - - (0.03) -
India Finance Act 2020 (0.06) - - - -
Equity method investment impairment charge - - - 0.36 -
Pension settlement loss - 0.02 0.15 0.03 0.02
Loss on extinguishment of debt - - - - 0.02
Tax reform repatriation - (0.06) 2.16 - -
Tax reform adjustment related to deemed foreign
dividends - 0.26 (0.25) - -
Tax reform rate change and other - - (0.96) - -
Tax restructuring - - (0.16) - -
Tax election benefit - - - (0.50) -
Adjusted Diluted EPS $8.38 $8.21 $7.45 $6.31 $5.64
32-------------------------------------------------------------------------------- Table of Contents 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. Below is a presentation of 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: Year Ended 30 September 2020 2019 2018 2017 2016 Sales$8,856.3 $8,918.9 $8,930.2 $8,187.6 $7,503.7 $ Margin $ Margin $ Margin $ Margin $ Margin
Net income and net income margin
36.9 % $661.5 8.8 %
Less: (Loss) Income from
discontinued operations, net of
tax (14.3) (0.2) % - - % 42.2 0.5 % 1,866.0 22.8 % (460.5) (6.1) %
Add: Interest expense 109.3 1.2 % 137.0 1.5 % 130.5 1.5 % 120.6 1.5 % 115.2 1.5 %
Less: Other non-operating income
(expense), net 30.7 0.3 % 66.7 0.7 % 5.1 0.1 % 16.6 0.2 % (5.4) (0.1) %
Add: Income tax provision 478.4 5.4 % 480.1 5.4 % 524.3 5.9 % 260.9 3.2 % 432.6 5.8 %
Add: Depreciation and
amortization 1,185.0 13.4 % 1,082.8 12.1 % 970.7 10.9 % 865.8 10.6 % 854.6 11.4 %
Less: Change in inventory
valuation method - - % - - % 24.1 0.3 % - - % - - %
Add: Facility closure - - % 29.0 0.3 % - - % - - % - - %
Add: Business separation costs - - % - - % - - % 32.5 0.4 % 50.6 0.7 %
Add: Cost reduction and asset
actions - - % 25.5 0.3 % - - % 151.4 1.8 % 34.5 0.4 %
Add: Goodwill and intangible
asset impairment charge - - % - - % - - % 162.1 2.0 % - - %
Less: Gain on exchange of equity
affiliate investments - - % 29.1 0.3 % - - % - - % - - %
Less: Company headquarters
relocation income (expense) 33.8 0.4 % - - % - - % - - % - - %
Less: Gain on land sale - - % - - % - - % 12.2 0.2 % - - %
Less: India Finance Act 2020 33.8 0.4 % - - % - - % - - % - - %
Add: Equity method investment
impairment charge - - % - - % - - % 79.5 1.0 % - - %
Add: Loss on extinguishment of
debt - - % - - % - - % - - % 6.9 0.1 %
Add: Tax reform repatriation -
equity method investment - - % - - % 28.5 0.3 % - - % - - %
Adjusted EBITDA and adjusted
EBITDA margin $3,619.8 40.9 % 34.2 %
Year Ended 30 September 2020 vs. 2019 2019 vs. 2018 2018 vs. 2017 2017 vs. 2016 Change GAAP Net income $ change$121.7 $276.5 ($1,488.3 )$2,359.7 Net income % change 7% 18% (49)% 357% Net income margin change 150 bp 310 bp (1,970) bp 2,810 bp Change Non-GAAP Adjusted EBITDA $ change$151.8 $352.5 $316.3 $177.4 Adjusted EBITDA % change 4% 11% 11% 7% Adjusted EBITDA margin change 200 bp 400 bp 70 bp (70) bp 33
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Table of Contents Below is reconciliation of operating income and operating margin by segment to adjusted EBITDA and adjusted EBITDA margin by segment:
Industrial Industrial Industrial Industrial
Gases- Gases- Gases- Gases- Corporate
Year Ended 30 September Americas EMEA Asia Global and other Total
2020 GAAP Measures
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 %
2019 GAAP Measures
Operating income (loss) $997.7 $472.4 $864.2 ($11.7 ) ($152.8 ) $2,169.8 (A)
Operating margin 25.8 % 23.6 % 32.4 %
2020 vs. 2019
Operating income/loss change $14.7 $0.9 $6.1 ($28.3 ) $40.6
Operating income/loss % change 1 % - % 1 % (242) % 27 %
Operating margin change 210 bp 100 bp (40) bp
2020 Non-GAAP Measures
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 (B)
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 %
2019 Non-GAAP Measures
Operating income (loss) $997.7 $472.4 $864.2 ($11.7 ) ($152.8 ) $2,169.8 (A)
Add: Depreciation and
amortization 505.2 189.5 361.5 8.6 18.0 1,082.8
Add: Equity affiliates' income 84.8 69.0 58.4 3.2 - 215.4 (B)
Adjusted EBITDA $1,587.7 $730.9 $1,284.1 $0.1 ($134.8 ) $3,468.0
Adjusted EBITDA margin 41.0 % 36.5 % 48.2 %
2020 vs. 2019
Adjusted EBITDA change $68.5 $13.1 $46.6 ($19.6 ) $43.2
Adjusted EBITDA % change 4 % 2 % 4 % N/M* 32 %
Adjusted EBITDA margin change 460 bp 210 bp 80 bp
* Not meaningful (A)The table below reconciles consolidated operating income as reflected on our consolidated income statements to total operating income disclosed in the table above for the years ended 30 September: Operating Income 2020
2019
Consolidated operating income$2,237.6 $2,144.4 Facility closure - 29.0 Cost reduction actions - 25.5 Gain on exchange of equity affiliate investments -
(29.1)
Company headquarters relocation (income) expense (33.8) - Total$2,203.8 $2,169.8
(B)The table below reconciles consolidated equity affiliates' income as reflected on our consolidated income statements to total equity affiliates' income disclosed in the table above for the years ended 30 September:
Equity Affiliates' Income 2020 2019 Consolidated equity affiliates' income$264.8 $215.4 India Finance Act 2020 (33.8) - Total$231.0 $215.4 34
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ADJUSTED EFFECTIVE TAX RATE
The tax impact of our pre-tax non-GAAP adjustments reflects the expected current
and deferred income tax expense associated with each adjustment and is primarily
dependent upon the statutory tax rate of the various relevant jurisdictions and
the taxability of the adjustments in those jurisdictions.
Effective Tax Rate
Year Ended 30 September 2020 2019
Income Tax Provision $478.4 $480.1
Income From Continuing Operations Before Taxes $2,423.8 $2,289.5
Effective Tax Rate 19.7 % 21.0 %
Income Tax Provision $478.4 $480.1
Facility closure - 6.9
Cost reduction actions - 6.7
Company headquarters relocation (8.2) -
India Finance Act 2020 (20.3) -
Pension settlement loss - 1.2
Tax reform repatriation - 12.4
Tax reform adjustment related to deemed foreign dividends - (56.2)
Adjusted Income Tax Provision $449.9 $451.1
Income From Continuing Operations Before Taxes $2,423.8 $2,289.5
Facility closure - 29.0
Cost reduction actions - 25.5
Gain on exchange of equity affiliate investments - (29.1)
Company headquarters relocation (income) expense (33.8) -
India Finance Act 2020 - equity affiliate income impact (33.8) -
Pension settlement loss - 5.0
Adjusted Income From Continuing Operations Before Taxes $2,356.2 $2,319.9
Adjusted Effective Tax Rate 19.1 % 19.4 %
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. During the
third quarter of fiscal year 2020, we issued U.S. Dollar- and Euro-denominated
fixed-rate notes with aggregate principal amounts of $3.8 billion and
€1.0 billion ($1.2 billion as of 30 September 2020 ), respectively. We intend to
use the majority of the proceeds to fund growth projects and repay debt
maturities through 2021, including a €350.0 million Eurobond due in June 2021 .
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 2020 , we had $1,376.6 of foreign cash and cash items compared
to total cash and cash items of $5,253.0 . Since the enactment of the Tax Act, 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.
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The table below summarizes our cash flows from operating, investing, and
financing activities as reflected on the consolidated statements of cash flows
for the years ended 30 September:
Cash Provided by (Used for) 2020 2019
Operating activities $3,264.7 $2,969.9
Investing activities (3,560.0) (2,113.4)
Financing activities 3,284.7 (1,370.5)
Operating Activities
For the fiscal year ended 30 September 2020 , cash provided by operating
activities was $3,264.7 . Income from continuing operations of $1,901.0 was
adjusted for items including depreciation and amortization, deferred income
taxes, undistributed earnings of unconsolidated affiliates, gain on sale of
assets and investments, share-based compensation, noncurrent capital lease
receivables, and certain other adjustments. 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 22, 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 23, 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.
For the fiscal year ended 30 September 2019 , cash provided by operating
activities was $2,969.9 , including income from continuing operations of
$1,760.0 . The gain on sale of assets and investments included a gain of $14.1
recognized on the disposition of our interest in High-Tech Gases (Beijing) Co.,
Ltd. , a previously held equity investment in our Industrial Gases - Asia
segment. Refer to Note 3, Acquisitions, to the consolidated financial statements
for additional information. The working capital accounts were a use of cash of
$25.3 , primarily driven by $69.0 from trade receivables and $41.8 from payables
and accrued liabilities, partially offset by $79.8 from other receivables. The
use of cash within "Payables and accrued liabilities" was primarily driven by a
$48.9 decrease in accrued utilities and a $30.3 decrease in accrued interest,
partially offset by a $51.6 increase in customer advances primarily related to
sale of equipment activity. The decrease in accrued utilities was primarily
driven by a contract modification to a tolling arrangement in India and lower
utility costs in the Industrial Gases - Americas segment. The source of cash
from other receivables of $79.8 was primarily due to the maturities of forward
exchange contracts that hedged foreign currency exposures and the collection of
value added taxes.
Investing Activities
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 during the third quarter. 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
relate 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 includes net
proceeds of $44.1 related to the sale of property at our current corporate
headquarters in the second quarter.
For the fiscal year ended 30 September 2019 , cash used for investing activities
was $2,113.4 . Payments for additions to plant and equipment totaled $1,989.7 .
Cash paid for acquisitions, net of cash acquired, was $123.2 . Refer to Note 3,
Acquisitions, to the consolidated financial statements for further details.
Proceeds from investments of $190.5 resulting from maturities of short-term
instruments with original maturities greater than three months and less than one
year exceeded purchases of $172.1 .
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Capital Expenditures
Capital expenditures is a non-GAAP measure that we define 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:
2020 2019
Cash used for investing activities $3,560.0 $2,113.4
Proceeds from sale of assets and investments 80.3 11.1
Purchases of investments (2,865.5) (172.1)
Proceeds from investments 1,938.0 190.5
Other investing activities 3.9 (14.3)
Capital Expenditures $2,716.7 $2,128.6 The components of our capital expenditures are detailed in the table below:
2020 2019
Additions to plant and equipment$2,509.0
Acquisitions, less cash acquired 183.3
123.2
Investments in and advances to unconsolidated affiliates 24.4
15.7 Capital Expenditures$2,716.7 $2,128.6 Capital expenditures in fiscal year 2020 totaled$2,716.7 compared to$2,128.6 in fiscal year 2019. The increase of$588.1 was primarily due to the acquisition of the hydrogen production plants from PBF Energy Inc., as noted above. Additions to plant and equipment also included support capital of a routine, ongoing nature, including expenditures for distribution equipment and facility improvements. 2021 Outlook for Investing Activities Due to the significant uncertainty that remains regarding the duration of COVID-19, the pace of recovery, and its negative impact on the global economy, we are not providing capital expenditure guidance for fiscal year 2021. We are monitoring our projects to determine whether capital spending and project onstream timing may be delayed for those currently under construction. 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. Financing Activities In fiscal year 2020, cash provided by financing activities was$3,284.7 as we successfully accessed the debt markets inApril 2020 to support opportunities for growth projects and repay upcoming debt maturities. Long-term debt proceeds of$4,895.8 , as further discussed below under "Financing and Capital Structure," 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 on7 August 2020 . Other financing activities were a use of cash of$80.1 and included financing charges associated with the third quarter debt issuance. For the fiscal year ended 2019, cash used for financing activities was$1,370.5 . This use of cash was largely attributable to dividend payments to shareholders of$994.0 and payments on long-term debt of$428.6 . Payments on long-term debt primarily related to the repayment of a 4.375%U.S. Senior Note of$400.0 that matured on21 August 2019 . 37 -------------------------------------------------------------------------------- Table of Contents Financing and Capital Structure Capital needs in fiscal year 2020 were satisfied primarily with cash from operations. Total debt increased from$3,326.0 at30 September 2019 to$7,907.8 at30 September 2020 due to the issuance ofU.S. Dollar- and Euro-denominated fixed-rate notes in the third quarter, partially offset by the repayment of a 2.0% Eurobond. For additional information, refer to Note 15, Debt, to the consolidated financial statements. Similarly, cash and cash items and short-term investments increased from$2,248.7 and$166.0 , respectively, at the end of 2019 to$5,253.0 and$1,104.9 , respectively, at the end of 2020, primarily due to the issuance of the notes. The current year total debt balance includes$338.5 of related party debt associated with the Lu'An joint venture. We have a$2,300.0 five-year revolving credit agreement with a syndicate of banks (the "Credit Agreement") maturing31 March 2022 . Under the Credit Agreement, senior unsecured debt is available to us and certain of our subsidiaries. The Credit Agreement provides us a source of liquidity and supports our commercial paper program. Our only financial covenant under the Credit Agreement is a maximum ratio of total debt to total capitalization, or total debt plus total equity, no greater than 70%. Total debt as of30 September 2020 and30 September 2019 , expressed as a percentage of total capitalization was 38.9% and 22.6%, respectively. No borrowings were outstanding under the Credit Agreement as of30 September 2020 . There were no commitments maintained by our foreign subsidiaries at30 September 2020 . As of30 September 2020 , we are in compliance with all of the financial and other covenants under our debt agreements. On15 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 during fiscal years 2020 or 2019. As of30 September 2020 ,$485.3 in share repurchase authorization remains. Dividends Dividends are declared by the Board of Directors and are usually paid during the sixth week after the close of the fiscal quarter. In 2020, the Board of Directors increased our quarterly dividend by over 15% from$1.16 to$1.34 per share, representing the largest dividend increase in our 80-year history. This is the 38th consecutive year that we have increased our quarterly dividend payment. On19 November 2020 , the Board of Directors declared the first quarter 2021 dividend of$1.34 per share. The dividend is payable on8 February 2021 to shareholders of record as of4 January 2021 . CONTRACTUAL OBLIGATIONS We are obligated to make future payments under various contracts, such as debt agreements, lease agreements, unconditional purchase obligations, and other long-term obligations. The following table summarizes our obligations on a continuing operations basis as of30 September 2020 : Total 2021 2022 2023 2024 2025 Thereafter Debt maturities$7,950 $470 $442 $456 $456 $416 $5,710 Contractual interest on debt 1,772 155 141 129 121 102 1,124 Operating leases 475 79 56 47 37 30 226 Pension obligations 598 51 45 42 42 28 390 Unconditional purchase obligations 9,556 1,460 460 450 455 454 6,277 Deemed repatriation tax related to 211 21 21 21 39 50 59 the Tax Act Obligation for future contribution 100 100 - - - - -
to an equity affiliate
Total Contractual Obligations
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Debt Obligations
Our debt obligations include the maturity payments of the principal amount of
long-term debt, including the current portion and amounts owed to related
parties, and the related contractual interest obligations. Refer to Note 15,
Debt, to the consolidated financial statements for additional information on our
debt obligations.
Contractual interest is the interest we are contracted to pay on our debt
obligations without taking into account the interest impact of interest rate
swaps related to any of this debt, which at current interest rates would
slightly decrease contractual interest. We had approximately $632 of long-term
debt subject to variable interest rates at 30 September 2020 , excluding
fixed-rate debt that has been swapped to variable-rate debt. The rate assumed
for the variable interest component of the contractual interest obligation was
the rate in effect at 30 September 2020 . Variable interest rates are primarily
determined by U.S. short-term tax-exempt interest rates and by interbank offer
rates.
Leases
We are the lessee under various agreements for real estate, vehicles, aircraft,
and other equipment. Refer to Note 12, Leases, to the consolidated financial
statements for additional information.
Pension Obligations
The amounts in the table above represent the current estimated cash payments to
be made by us that, in total, equal the recognized pension liabilities for our
U.S. and international pension plans. For additional information, refer to Note
16, Retirement Benefits, to the consolidated financial statements. These
payments are based upon the current valuation assumptions and regulatory
environment.
The total accrued liability for pension benefits may be impacted by interest
rates, plan demographics, actual return on plan assets, continuation or
modification of benefits, and other factors. Such factors can significantly
impact the amount of the liability and related contributions.
Unconditional Purchase Obligations
We are obligated to make future payments under unconditional purchase
obligations, which primarily relate to helium and rare gases as well as
commitments for purchases of plant and equipment. For additional information,
refer to Note 17, Commitments and Contingencies, to the consolidated financial
statements.
Income Tax Liabilities
Tax liabilities related to unrecognized tax benefits as of 30 September 2020
were $237.0 . These tax liabilities are not included in the table above as it is
impractical to determine a cash impact by year given that payments will vary
according to changes in tax laws, tax rates, and our operating results. In
addition, there are uncertainties in timing of the effective settlement of our
uncertain tax positions with respective taxing authorities. However, the table
above includes our accrued liability of approximately $211 for deemed
repatriation tax that is payable through 2026 related to the Tax Act. Refer to
Note 22, Income Taxes, to the consolidated financial statements for additional
information.
Obligation for Future Contribution to an Equity Affiliate
On 19 April 2015 , a joint venture between Air Products and ACWA Holding entered
into a 20-year oxygen and nitrogen supply agreement to supply Saudi Aramco's oil
refinery and power plant being built in Jazan, Saudi Arabia . We guaranteed the
repayment of our 25% share of an equity bridge loan that has been provided to
fund equity commitments to the joint venture. In total, we expect to invest
approximately $100 in this joint venture. As of 30 September 2020 , our
consolidated balance sheets included $94.4 reflected within "Payables and
accrued liabilities" for our obligation to make future equity contributions in
2021 based on our proportionate share of the advances received by the joint
venture under the loan.
Future Investment in Jazan Gas and Power Project
On 12 August 2018 , Air Products entered an agreement to form a
gasification/power joint venture ("JV") with Saudi Aramco and ACWA in Jazan,
Saudi Arabia . Air Products expects to own 51% of the JV, with Saudi Aramco and
ACWA Power owning the balance. In July 2020 , we commenced the process to secure
project financing with our partners for the JV, which will purchase the
gasification assets, power block, and the associated utilities from Saudi Aramco
for approximately $12 billion . Our future investment is not considered a
contractual obligation until definitive agreements have been signed; therefore,
it is not included in the contractual obligations table above.
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PENSION BENEFITS
We and certain of our subsidiaries sponsor defined benefit pension plans and
defined contribution plans that cover a substantial portion of its 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 2020 measurement date increased to $4,775.1 from $4,504.8 at
the end of fiscal year 2019. The projected benefit obligation for these plans
was $5,373.5 and $5,145.6 at the end of fiscal years 2020 and 2019,
respectively. The net unfunded liability decreased $42.4 from $640.8 to $598.4 ,
primarily due to favorable asset experience. Refer to Note 16, Retirement
Benefits, to the consolidated financial statements for additional disclosures on
our postretirement benefits.
Pension Expense
2020 2019
Pension expense, including special items noted below $7.0 $27.6 Settlements, termination benefits, and curtailments ("special items")
5.2 7.2
Weighted average discount rate - Service cost 2.4 % 3.4 %
Weighted average discount rate - Interest cost 2.3 % 3.4 %
Weighted average expected rate of return on plan assets 6.3 % 6.4 %
Weighted average expected rate of compensation increase 3.4 % 3.5 %
Pension expense decreased from the prior year due to lower interest cost and
higher total assets, partially offset by higher actuarial loss amortization due
to the impact of lower discount rates. Special items (settlements, termination
benefits, and curtailments) decreased from the prior year primarily due to lower
pension settlement losses. In fiscal year 2020, special items of $5.2 included
pension settlement losses of $5.0 related to lump sum payouts from the U.S.
Supplementary Pension Plan. These amounts are reflected within "Other
non-operating income (expense), net" on the consolidated income statements. In
fiscal year 2019, special items of $7.2 included pension settlement losses of
$6.4 related to lump sum payouts from the U.S. Supplementary Pension Plan and
$0.8 of termination benefits.
U.K. Lloyds Equalization Ruling
On 26 October 2018 , the United Kingdom High Court issued a ruling related to the
equalization of pension plan participants' benefits for the gender effects of
Guaranteed Minimum Pensions. As a result of this ruling, we estimated the impact
of retroactively increasing benefits in our U.K. plan in accordance with the
High Court ruling. We treated the additional benefits as a prior service cost,
which resulted in an increase to our projected benefit obligation and
accumulated other comprehensive loss of $4.7 during the first quarter of fiscal
year 2019. We are amortizing this cost over the average remaining life
expectancy of the U.K. participants.
2021 Outlook
In fiscal year 2021, we expect pension income of approximately $25 to $35 , which
includes expected pension settlement losses of $0 to $5 , depending on the timing
of retirements. The expected income range reflects lower expected interest cost
and higher total assets. In fiscal year 2021, we expect our net pension income
to include approximately $100 for amortization of actuarial losses.
In fiscal year 2020, pension expense included amortization of actuarial losses
of $103.2 . Net actuarial losses of $83.5 were recognized in accumulated other
comprehensive income in fiscal year 2020. Actuarial (gains) 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 different from expected returns would impact the
actuarial (gains) losses and resulting amortization in years beyond fiscal year
2021.
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.
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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 2020 and 2019, our cash contributions to funded plans and
benefit payments for unfunded plans were $37.5 and $40.2 , respectively.
For fiscal year 2021, cash contributions to defined benefit plans are estimated
to be $45 to $55 . 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 2021. Refer to the Contractual Obligations
discussion on page 38 for a projection of future contributions.
ENVIRONMENTAL MATTERS
As discussed above in Item 1, "Business-Environmental Regulation", we are
subject to various environmental laws and regulations in the countries in which
we have operations, which results in higher capital expenditures and costs. The
amounts charged to income from continuing operations related to environmental
matters totaled $18.3 and $14.2 in fiscal years 2020 and 2019, respectively.
These amounts represent an estimate of expenses for compliance with
environmental laws and activities undertaken to meet our internal standards. We
estimate that we spent approximately $4 and $5 , in fiscal years 2020 and 2019,
respectively, on capital projects reflected in continuing operations to control
pollution. We expect that our capital expenditures to control pollution will be
approximately $6 in both fiscal years 2021 and 2022.
Our accounting policy for environmental expenditures is discussed in Note 1,
Major Accounting Policies, to the consolidated financial statements, and
environmental loss contingencies are discussed in Note 17, Commitments and
Contingencies, to the consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
We have entered into certain guarantee agreements as discussed in Note 17,
Commitments and Contingencies, to the consolidated financial statements. In
addition, we are not a primary beneficiary in any material variable interest
entity. Our off-balance sheet arrangements are not reasonably likely to have a
material impact on financial condition, changes in financial condition, results
of operations, or liquidity.
RELATED PARTY TRANSACTIONS
See Note 23, Supplemental Information, to the consolidated financial statements
for information concerning activity with our related parties.
INFLATION
We operate in many countries that experience volatility in inflation and foreign
exchange rates. The ability to pass on inflationary cost increases is an
uncertainty due to general economic conditions and competitive situations. It is
estimated that the cost of replacing our plant and equipment today is greater
than its historical cost. Accordingly, depreciation expense would be greater if
the expense were stated on a current cost basis.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 1, Major Accounting Policies, to the consolidated financial statements
describes our major accounting policies. Judgments and estimates of
uncertainties are required in applying our accounting policies in many areas.
However, application of the critical accounting policies discussed below
requires management's significant judgments, often as the result of the need to
make estimates of matters that are inherently uncertain. If actual results were
to differ materially from the estimates made, the reported results could be
materially affected. Our management has reviewed these critical accounting
policies and estimates and related disclosures with our audit committee.
Depreciable Lives of Plant and Equipment
Net plant and equipment at 30 September 2020 totaled $11,964.7 , and depreciation
expense totaled $1,150.5 during fiscal year 2020. 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 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
While our results of operations have been negatively affected by COVID-19 as of
and for the fiscal year ended 30 September 2020 , there have been no triggering
events that would require impairment testing for any of our asset groups,
reporting units that contain goodwill, indefinite-lived intangible assets, or
equity method investments. As further discussed below, we completed our annual
impairment tests and concluded there were no indications of impairment. We will
continue to evaluate the nature and extent of COVID-19 impacts on our business
and any impact they may have on management's estimates, particularly those for
our Latin America business. The duration and severity of the COVID-19 outbreak
and its long-term impact on our business is uncertain.
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 a significant decrease in the
market value of a long-lived asset grouping, a significant adverse change in the
manner in which the asset grouping is being used or in its physical condition,
an accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the long-lived asset, a history
of operating or cash flow losses associated with the use of the asset grouping,
or 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 2020, 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 the 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 $891.5 as of 30 September 2020 . Disclosures related to
goodwill are included in Note 10, 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 25, 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.
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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.
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 2020, we conducted our annual goodwill
impairment test. We determined that the fair value of all our reporting units
substantially exceeded their carrying value except for our Latin America
reporting unit (LASA), which is further discussed below. Substantially all of
the remaining goodwill balance related to reporting units in which the fair
value exceeded the carrying value by at least 100%.
The fair value of LASA exceeded its carrying value by 10%. Revenue growth and
adjusted EBITDA margin assumptions are two primary drivers of the fair value. We
determined that, with other assumptions held constant, a decrease in revenue
growth rates of approximately 320 basis points or a decrease in adjusted EBITDA
margin of approximately 290 basis points would result in the fair value of the
reporting unit being equal to its carrying value. As of 30 September 2020 , the
carrying value of LASA goodwill was $56.1 , or less than 1% of consolidated total
assets. The carrying value of LASA's other material assets at 30 September 2020
included: Plant and equipment, net of $309.2 ; customer relationships of $112.1 ;
and trade names and trademarks of $38.2 . The trade names and trademarks are
classified as indefinite-lived intangible assets.
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.
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Impairment of Assets - Intangible Assets
Intangible assets, net with determinable lives at 30 September 2020 totaled
$394.8 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 2020 totaled $41.0 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 11, Intangible Assets, to the consolidated financial statements.
In the fourth quarter of 2020, we conducted our annual impairment test of
indefinite-lived intangibles which resulted in no impairment.
Impairment of Assets - Equity Method Investments
Investments in and advances to equity affiliates totaled $1,432.2 at 30
September 2020 . 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 8, 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 2020, 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 estimate
of revenues and costs. Our estimates are impacted by factors such as the
potential for incentives or penalties on performance, schedule and 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.
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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, including the Jazan project, favorably impacted operating income by
approximately $7 and $37 in fiscal years 2020 and 2019, respectively. 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.
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
2020 , accrued income taxes, including the amount recorded as noncurrent, was
$296.7 , and net deferred tax liabilities were $847.5 . Tax liabilities related to
uncertain tax positions as of 30 September 2020 were $237.0 , excluding interest
and penalties. Income tax expense for the fiscal year ended 30 September 2020
was $478.4 . Disclosures related to income taxes are included in Note 22, 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 $24 .
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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 and expense 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 16, 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 $26 per year.
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 $22 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. For equities, this is a calculated value that recognizes
investment gains and losses in fair value related to 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 $12 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.
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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 17, 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.
NEW ACCOUNTING GUIDANCE
See Note 2, New Accounting Guidance, and Note 12, Leases, to the consolidated
financial statements for information concerning the implementation and impact of
new accounting guidance.
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 13, 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 14, Fair Value Measurements, to the consolidated financial statements. Our
net financial instrument position increased from a liability of $3,239.1 at 30
September 2019 to a liability of $8,220.7 at 30 September 2020 due to the
issuance of the $3.8 billion U.S. Dollar-denominated notes and €1.0 billion
Eurobonds in the third quarter of fiscal year 2020. See Note 15, Debt, for
additional information.
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 2020 , including the effect of currency and
interest rate swap agreements, was composed of 89% fixed-rate debt and 11%
variable-rate debt. Our debt portfolio as of 30 September 2019 , including the
effect of currency and interest rate swap agreements, was composed of 74%
fixed-rate debt and 26% variable-rate debt. The increase in fixed rate debt is
the result of the U.S. Dollar- and Euro-denominated notes issued during the
third quarter of fiscal year 2020.
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 2020 , with all other variables held
constant. A 100 bp increase in market interest rates would result in a decrease
of $711 and $75 in the net liability position of financial instruments at 30
September 2020 and 2019, respectively. A 100 bp decrease in market interest
rates would result in an increase of $846 and $80 in the net liability position
of financial instruments at 30
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September 2020 and 2019, respectively. The longer maturities and increased
principal associated with the U.S. Dollar- and Euro-denominated notes issued
during the third quarter of fiscal year 2020 created a higher sensitivity to
market interest rates.
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 2020 and 2019.
A 100 bp decline in interest rates would lower interest incurred by $8 per year
at 30 September 2020 and 2019.
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 2020 and 2019, 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
$360 and $326 in the net liability position of financial instruments at 30
September 2020 and 2019, 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 $40 and $25 ,
respectively.
COVID-19 Risks and Uncertainties
Refer to Item 1A. Risk Factors within this Annual Report on Form 10-K for
additional discussion of current and potential risks of COVID-19 on our business
and financial performance.
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