Edgar Filing: AIR PRODUCTS & CHEMICALS INC /DE/

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended 31 December 2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-04534

AIR PRODUCTS AND CHEMICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		23-1274455
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

7201 Hamilton Boulevard, Allentown, Pennsylvania		18195-1501
(Address of Principal Executive Offices)		(Zip Code)

610-481-4911

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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



Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨	Emerging growth company ¨
	(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		Outstanding at 31 December 2017
Common Stock, $1 par value		218,939,303

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

INDEX




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Income Statements – Three Months Ended 31 December 2017 and 2016	3
Consolidated Comprehensive Income Statements – Three Months Ended 31 December 2017 and 2016	4
Consolidated Balance Sheets – 31 December 2017 and 30 September 2017	5
Consolidated Statements of Cash Flows – Three Months Ended 31 December 2017 and 2016	6
Notes to Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk	43
Item 4. Controls and Procedures	44

PART II. OTHER INFORMATION

Item 5. Other Information	44
Item 6. Exhibits	45
Signature	46

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED INCOME STATEMENTS

(Unaudited)



	Three Months Ended
	31 December
(Millions of dollars, except for share and per share data)	2017			2016
Sales	$	2,216.6		$	1,882.5
Cost of sales	1,571.8			1,316.7
Selling and administrative	191.6			164.7
Research and development	14.6			15.0
Business separation costs	—			32.5
Cost reduction and asset actions	—			50.0
Other income (expense), net	22.1			24.7
Operating Income	460.7			328.3
Equity affiliates' income	13.8			38.0
Interest expense	29.8			29.5
Other non-operating income (expense), net	9.8			(.2		)
Income From Continuing Operations Before Taxes	454.5			336.6
Income tax provision	291.8			78.4
Income From Continuing Operations	162.7			258.2
Income (Loss) From Discontinued Operations, net of tax	(1.0		)	48.2
Net Income	161.7			306.4
Net Income Attributable to Noncontrolling Interests of Continuing Operations	7.1			6.6
Net Income Attributable to Air Products	$	154.6		$	299.8
Net Income Attributable to Air Products
Income from continuing operations	$	155.6		$	251.6
Income (Loss) from discontinued operations	(1.0		)	48.2
Net Income Attributable to Air Products	$	154.6		$	299.8
Basic Earnings Per Common Share Attributable to Air Products
Income from continuing operations	$	.71		$	1.16
Income from discontinued operations	—			.22
Net Income Attributable to Air Products	$	.71		$	1.38
Diluted Earnings Per Common Share Attributable to Air Products
Income from continuing operations	$	.70		$	1.15
Income from discontinued operations	—			.22
Net Income Attributable to Air Products	$	.70		$	1.37
Weighted Average Common Shares – Basic (in millions)	218.9			217.7
Weighted Average Common Shares – Diluted (in millions)	220.4			219.7
Dividends Declared Per Common Share – Cash	$	.95		$	.86

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

(Unaudited)



	Three Months Ended
	31 December
(Millions of dollars)	2017			2016
Net Income	$	161.7		$	306.4
Other Comprehensive Income (Loss), net of tax:
Translation adjustments, net of tax of ($6.6) and $32.3	136.4			(281.2		)
Net loss on derivatives, net of tax of ($5.3) and ($10.7)	(9.5		)	(9.8		)
Reclassification adjustments:
Currency translation adjustment	3.1			—
Derivatives, net of tax of $1.7 and $10.6	.8			25.6
Pension and postretirement benefits, net of tax of $11.0 and $12.9	22.9			27.4
Total Other Comprehensive Income (Loss)	153.7			(238.0		)
Comprehensive Income	315.4			68.4
Net Income Attributable to Noncontrolling Interests	7.1			6.6
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interests	1.9			(3.1		)
Comprehensive Income Attributable to Air Products	$	306.4		$	64.9

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Unaudited)



	31 December			30 September
(Millions of dollars, except for share data)	2017			2017
Assets
Current Assets
Cash and cash items	$	2,722.6		$	3,273.6
Short-term investments	407.1			404.0
Trade receivables, net	1,233.4			1,174.0
Inventories	347.4			335.4
Contracts in progress, less progress billings	85.4			84.8
Prepaid expenses	177.7			191.4
Other receivables and current assets	371.7			403.3
Current assets of discontinued operations	10.2			10.2
Total Current Assets	5,355.5			5,876.7
Investment in net assets of and advances to equity affiliates	1,258.0			1,286.9
Plant and equipment, at cost	20,040.0			19,547.8
Less: accumulated depreciation	11,408.1			11,107.6
Plant and equipment, net	8,631.9			8,440.2
Goodwill, net	790.8			721.5
Intangible assets, net	429.1			368.3
Noncurrent capital lease receivables	1,126.0			1,131.8
Other noncurrent assets	617.5			641.8
Total Noncurrent Assets	12,853.3			12,590.5
Total Assets	$	18,208.8		$	18,467.2
Liabilities and Equity
Current Liabilities
Payables and accrued liabilities	$	1,609.5		$	1,814.3
Accrued income taxes	110.1			98.6
Short-term borrowings	87.1			144.0
Current portion of long-term debt	11.3			416.4
Current liabilities of discontinued operations	13.6			15.7
Total Current Liabilities	1,831.6			2,489.0
Long-term debt	3,414.9			3,402.4
Other noncurrent liabilities	1,921.9			1,611.9
Deferred income taxes	719.2			778.4
Total Noncurrent Liabilities	6,056.0			5,792.7
Total Liabilities	7,887.6			8,281.7
Commitments and Contingencies - See Note 12
Air Products Shareholders’ Equity
Common stock (par value $1 per share; issued 2018 and 2017 - 249,455,584 shares)	249.4			249.4
Capital in excess of par value	998.1			1,001.1
Retained earnings	12,792.3			12,846.6
Accumulated other comprehensive loss	(1,695.6		)	(1,847.4		)
Treasury stock, at cost (2018 - 30,516,281 shares; 2017 - 31,109,510 shares)	(2,128.9		)	(2,163.5		)
Total Air Products Shareholders’ Equity	10,215.3			10,086.2
Noncontrolling Interests	105.9			99.3
Total Equity	10,321.2			10,185.5
Total Liabilities and Equity	$	18,208.8		$	18,467.2

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three Months Ended
	31 December
(Millions of dollars)	2017			2016
Operating Activities
Net income	$	161.7		$	306.4
Less: Net income attributable to noncontrolling interests of continuing operations	7.1			6.6
Net income attributable to Air Products	154.6			299.8
(Income) Loss from discontinued operations	1.0			(48.2		)
Income from continuing operations attributable to Air Products	155.6			251.6
Adjustments to reconcile income to cash provided by operating activities:
Depreciation and amortization	227.9			206.1
Deferred income taxes	(76.7		)	(23.6		)
Tax reform repatriation	310.3			—
Undistributed earnings of unconsolidated affiliates	34.0			(6.9		)
Gain on sale of assets and investments	(.6		)	(5.0		)
Share-based compensation	11.8			9.0
Noncurrent capital lease receivables	23.3			22.3
Write-down of long-lived assets associated with restructuring	—			45.7
Other adjustments	5.3			10.7
Working capital changes that provided (used) cash, excluding effects of acquisitions and divestitures:
Trade receivables	(34.2		)	42.3
Inventories	(8.4		)	9.9
Contracts in progress, less progress billings	—			(22.6		)
Other receivables	23.8			(7.2		)
Payables and accrued liabilities	(113.5		)	10.4
Other working capital	5.5			31.6
Cash Provided by Operating Activities	564.1			574.3
Investing Activities
Additions to plant and equipment	(256.6		)	(239.2		)
Acquisitions, less cash acquired	(237.1		)	—
Investment in and advances to unconsolidated affiliates	—			(8.8		)
Proceeds from sale of assets and investments	10.6			11.4
Purchases of investments	(212.2		)	—
Proceeds from investments	208.9			—
Other investing activities	1.5			(1.5		)
Cash Used for Investing Activities	(484.9		)	(238.1		)
Financing Activities
Long-term debt proceeds	—			1.2
Payments on long-term debt	(408.6		)	(14.4		)
Net decrease in commercial paper and short-term borrowings	(40.7		)	(772.2		)
Dividends paid to shareholders	(207.5		)	(186.9		)
Proceeds from stock option exercises	34.4			10.7
Other financing activities	(18.7		)	(12.9		)
Cash Used for Financing Activities	(641.1		)	(974.5		)
Discontinued Operations
Cash used for operating activities	(3.1		)	(59.6		)
Cash used for investing activities	—			(19.4		)
Cash provided by financing activities	—			69.5
Cash Used for Discontinued Operations	(3.1		)	(9.5		)
Effect of Exchange Rate Changes on Cash	14.0			(16.2		)
Decrease in cash and cash items	(551.0		)	(664.0		)
Cash and Cash items – Beginning of Year	3,273.6			1,330.8
Cash and Cash Items – End of Period	$	2,722.6		$	666.8
Less: Cash and Cash Items – Discontinued Operations	—			11.3
Cash and Cash Items – Continuing Operations	$	2,722.6		$	655.5

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Millions of dollars unless otherwise indicated, except for share and per share data)

1. BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES

Refer to our 2017 Form 10-K for a description of major accounting policies. There have been no significant changes to these accounting policies during the first three months of fiscal year 2018 other than those detailed in Note 2, New Accounting Guidance, under Accounting Guidance Implemented in 2018. Certain prior year information has been reclassified to conform to the fiscal year 2018 presentation. The notes to the interim consolidated financial statements, unless otherwise indicated, are on a continuing operations basis.

The consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries (“we,” “our,” “us,” the “Company,” “Air Products,” or “registrant”) included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In our opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the notes. The interim results for the periods indicated herein, however, do not reflect certain adjustments, such as the valuation of inventories on the last-in, first-out (LIFO) cost basis, which are only finally determined on an annual basis. In order to fully understand the basis of presentation, the consolidated financial statements and related notes included herein should be read in conjunction with the financial statements and notes thereto included in our 2017 Form 10-K. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

2. NEW ACCOUNTING GUIDANCE

Accounting Guidance Implemented in 2018

Presentation of Net Periodic Pension and Postretirement Benefit Cost

In March 2017, the Financial Accounting Standards Board (FASB) issued guidance for improving the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that the service cost component of the net periodic benefit cost be presented in the same operating income line items as other compensation costs arising from services rendered by employees during the period. The non-service costs (e.g., interest cost, expected return on plan assets, amortization of actuarial gains/losses, settlements) should be presented in the income statement outside of operating income. The amendments also allow only the service cost component to be eligible for capitalization when applicable. We early adopted this guidance during the first quarter of fiscal year 2018. The amendments have been applied retrospectively for the income statement presentation requirements and prospectively for the limit on costs eligible for capitalization. The Company applied the practical expedient to use the amounts disclosed in its retirement benefits note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements.

Prior to adoption of the guidance, we classified all net periodic benefit costs within operating costs, primarily within "Cost of sales" and "Selling and administrative" on the consolidated income statements. The line item classification changes required by the new guidance did not impact the Company's pre‑tax earnings or net income; however, "Operating income" and "Other non-operating income (expense), net" changed by immaterial offsetting amounts.

Derivative Contract Novations

In March 2016, the FASB issued guidance to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require re-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. We adopted this guidance in the first quarter of fiscal year 2018. This guidance did not have an impact on our consolidated financial statements upon adoption.

New Accounting Guidance to be Implemented

Revenue Recognition

In May 2014, the FASB issued guidance based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be entitled in exchange for the transfer of goods or services. We will adopt this guidance in fiscal year 2019 under the modified retrospective approach, which will result in a cumulative-effect adjustment as of 1 October 2018. We are in the process of evaluating and implementing necessary changes to accounting policies, processes, controls and systems to enable compliance with this new standard. We continue to evaluate the impact the adoption of this standard will have on our consolidated financial statements and related disclosures.

Leases

In February 2016, the FASB issued guidance which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements. The guidance is effective in fiscal year 2020, with early adoption permitted, and must be applied using a modified retrospective approach. We are currently evaluating the impact of adopting this new guidance on the consolidated financial statements, including the assessment of our current lease population under the revised definition of what qualifies as a leased asset.

The Company is the lessee under various agreements for real estate, distribution equipment, aircraft, and vehicles that are currently accounted for as operating leases. The new guidance will require the Company to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations.

Credit Losses on Financial Instruments

In June 2016, the FASB issued guidance on the measurement of credit losses, which requires measurement and recognition of expected credit losses for financial assets, including trade receivables and capital lease receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The method to determine a loss is different from the existing guidance, which requires a credit loss to be recognized when it is probable. The guidance is effective beginning in fiscal year 2021, with early adoption permitted beginning in fiscal year 2020. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

Cash Flow Statement Classification

In August 2016, the FASB issued guidance to reduce diversity in practice on how certain cash receipts and cash payments are classified in the statement of cash flows. The guidance is effective beginning fiscal year 2019, with early adoption permitted, and should be applied retrospectively. We are currently evaluating the impact of adopting this new guidance on the consolidated financial statements.

Intra-Entity Asset Transfers

In October 2016, the FASB issued guidance on the accounting for the income tax effects of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. Under the new guidance, the income tax consequences of an intra-entity asset transfer are recognized when the transfer occurs. The guidance is effective beginning in fiscal year 2019, with early adoption permitted as of the beginning of an annual reporting period. The guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the date of adoption. We are currently evaluating the impact this guidance will have on our consolidated financial statements and plan to adopt the guidance in fiscal year 2019.

Derecognition of Nonfinancial Assets

In February 2017, the FASB issued an update to clarify the scope of guidance on gains and losses from the derecognition of nonfinancial assets and to add guidance for partial sales of nonfinancial assets. The update must be adopted at the same time as the new guidance on revenue recognition discussed above, which we will adopt in fiscal year 2019. The guidance may be applied retrospectively or with a cumulative-effect adjustment to retained earnings at the date of adoption. We are currently evaluating the impact this update will have on our consolidated financial statements.

Hedging Activities

In August 2017, the FASB issued guidance on hedging activities to expand the related presentation and disclosure requirements, change how companies assess effectiveness, and eliminate the separate measurement and reporting of hedge ineffectiveness. The guidance also enables more financial and nonfinancial hedging strategies to become eligible for hedge accounting. The guidance is effective in fiscal year 2020, with early adoption permitted. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment to eliminate the separate measurement of ineffectiveness within equity as of the beginning of the fiscal year the guidance is adopted. The amended presentation and disclosure guidance is applied prospectively. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

3. DISCONTINUED OPERATIONS

The results of our former Performance Materials Division (PMD) and Energy-from-Waste (EfW) segment are reflected in our consolidated financial statements as discontinued operations for all periods presented.

During the second quarter of fiscal year 2017, we completed the sale of PMD to Evonik Industries AG (Evonik) for $3.8 billion in cash. A gain of $2,870 ($1,828 after-tax, or $8.32 per share) was recognized on the sale, which closed on 3 January 2017.

In fiscal year 2016, we discontinued efforts to start up and operate two EfW projects located in Tees Valley, United Kingdom. During the second quarter of fiscal year 2016, we recorded an initial loss on disposal of $945.7 ($846.6 after-tax) to write down plant assets to their estimated net realizable value and record a liability for plant disposition and other costs. Income tax benefits related only to one of the projects as the other did not qualify for a local tax deduction. During the first quarter of fiscal year 2017, we recorded an additional loss on disposal of $59.3 ($47.1 after-tax), primarily for land lease obligations and to update our estimate of the net realizable value of the plant assets as of 31 December 2016. There have been no significant changes to our estimates as of 31 December 2017.

The losses on disposal were recorded as a component of discontinued operations while the liability associated with land lease obligations was recorded in continuing operations. The remaining carrying amount of the accrual in discontinued operations at 31 December 2017 was not material.

Summarized Financial Information of Discontinued Operations

For the three months ended 31 December 2017, the loss from discontinued operations, net of tax, on the consolidated income statements of $1.0 related to ongoing EfW project exit activities and administrative costs.

The following table details the businesses and major line items that comprise income from discontinued operations, net of tax, on the consolidated income statements for the three months ended 31 December 2016:



	Three Months Ended
	31 December 2016
							Total
	Performance			Energy-			Discontinued
	Materials			from-Waste^(A)			Operations
Sales	$	254.8		$	—		$	254.8
Cost of sales	179.0			6.6			185.6
Selling and administrative	20.4			.2			20.6
Research and development	5.1			—			5.1
Other income (expense), net	(.4		)	.3			(.1		)
Operating Income (Loss)	49.9			(6.5		)	43.4
Equity affiliates’ income	.3			—			.3
Income (Loss) Before Taxes	50.2			(6.5		)	43.7
Income tax benefit^(B)	(50.5		)	(1.1		)	(51.6		)
Income (Loss) From Operations of Discontinued Operations, net of tax	100.7			(5.4		)	95.3
Loss on Disposal, net of tax	—			(47.1		)	(47.1		)
Income (Loss) From Discontinued Operations, net of tax	100.7			(52.5		)	48.2


^(A)	The loss from operations of discontinued operations for EfW primarily relates to land lease obligations, administrative costs, and costs incurred for ongoing project exit activities.


^(B)	As a result of the expected gain on sale of PMD, we released valuation allowances related to capital loss and net operating loss carryforwards primarily during the first quarter of 2017 that favorably impacted our income tax provision within discontinued operations by approximately $69.

Current assets of discontinued operations on the consolidated balance sheets of $10.2 as of 31 December 2017 and 30 September 2017 relate to the remaining EfW plant and equipment.

Current liabilities of discontinued operations on the consolidated balance sheets of $13.6 and $15.7 as of 31 December 2017 and 30 September 2017, respectively, primarily relate to reserves associated with the disposition of PMD.

4. MATERIALS TECHNOLOGIES SEPARATION

In fiscal year 2017, we completed the separation of the divisions comprising the former Materials Technologies segment. As further discussed below, we completed the separation of the Electronic Materials Division (EMD) through the spin-off of Versum Materials, Inc. (Versum). For information on the disposition of PMD, refer to Note 3, Discontinued Operations.

Spin-off of EMD

On 1 October 2016 (the distribution date), Air Products completed the spin-off of Versum into a separate and independent public company. The spin-off was completed by way of a distribution to Air Products’ stockholders of all of the then issued and outstanding shares of common stock of Versum on the basis of one share of Versum common stock for every two shares of Air Products’ common stock held as of the close of business on 21 September 2016 (the record date for the distribution). Fractional shares of Versum common stock were not distributed to Air Products' common stockholders. Air Products’ stockholders received cash in lieu of fractional shares. The spin-off of Versum was treated as a noncash transaction in the consolidated statements of cash flows in fiscal year 2017. There has been no activity in discontinued operations on the consolidated income statements and no assets or liabilities presented in discontinued operations on the consolidated balance sheets related to EMD for the periods presented.

Business Separation Costs

In connection with the dispositions of EMD and PMD, we incurred net separation costs of $30.2 during the first quarter of fiscal year 2017. The net costs include legal and advisory fees of $32.5, which are reflected on the consolidated income statements as “Business separation costs,” and a pension settlement benefit of $2.3 that is now presented within "Other non-operating income (expense), net" as a result of the adoption of pension guidance at the beginning of fiscal year 2018. Refer to Note 2, New Accounting Guidance, for additional information.

Our income tax provision for the three months ended 31 December 2016 includes additional tax expense of $2.7 related to the separation. No business separation costs were incurred during fiscal year 2018.

5. COST REDUCTION AND ASSET ACTIONS

In the first quarter of fiscal year 2017, we recognized a net expense of $50.0, which included $45.7 from the write-down of an air separation unit in the Industrial Gases – EMEA segment that was constructed mainly to provide oxygen to one of the Energy-from-Waste plants.

In fiscal year 2017, we recognized a net expense of $151.4. The net expense included a charge of $154.8 for actions taken during fiscal year 2017, partially offset by the favorable settlement of the remaining $3.4 accrued balance associated with business restructuring actions taken in 2015. Asset actions of $88.5 included charges resulting from the write-down of an air separation unit in the Industrial Gases – EMEA segment discussed above, the planned sale of a non-industrial gas hardgoods business in the Industrial Gases – Americas segment, and the closure of a facility in the Corporate and other segment that manufactured liquefied natural gas (LNG) heat exchangers. During fiscal year 2017, severance and other benefits totaled $66.3 and related to the elimination or planned elimination of approximately 625 positions, primarily in the Corporate and other segment and in the Industrial Gases – EMEA segment. The actions in the Corporate and other segment were driven by the reorganization of our engineering, manufacturing, and technology functions. The 2017 charge related to the segments as follows: $39.3 in Industrial Gases – Americas, $77.9 in Industrial Gases – EMEA, $.9 in Industrial Gases – Asia, $2.5 in Industrial Gases – Global, and $34.2 in Corporate and other.

In the first quarter of fiscal year 2018, cash expenditures for severance and other benefits totaled $13.5.

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

The following table summarizes the carrying amount of the accrual for cost reduction and asset actions at 31 December 2017:



	Severance and Other Benefits			Asset Actions/Other			Total
30 September 2016	$	12.3		$	—		$	12.3
2017 Charge	66.3			88.5			154.8
Noncash expenses	—			(84.2		)	(84.2		)
Amount reflected in pension liability	(2.0		)	—			(2.0		)
Amount reflected in other noncurrent liabilities	—			(2.2		)	(2.2		)
Cash expenditures	(35.7		)	(1.2		)	(36.9		)
Currency translation adjustment	(.3		)	—			(.3		)
30 September 2017	$	40.6		$	.9		$	41.5
Cash expenditures	(13.5		)	(.1		)	(13.6		)
Currency translation adjustment	.2			—			.2
31 December 2017	$	27.3		$	.8		$	28.1

6. BUSINESS COMBINATIONS

During the first quarter of fiscal year 2018, we completed three acquisitions with an aggregate purchase price, net of cash acquired, of $237.1. The largest acquisition consists primarily of three air separation units serving onsite and merchant customers in China. This acquisition is expected to strengthen our position in the region. The results of this business are consolidated within our Industrial Gases – Asia segment.

The first quarter 2018 acquisitions resulted in the recognition of $148.5 of plant and equipment, $53.7 of goodwill, $3.0 of which is deductible for tax purposes, and $53.4 of intangible assets, primarily customer relationships, having a weighted-average useful life of twelve years. The goodwill recognized on the transactions is attributable to expected growth and cost synergies and was primarily recorded in the Industrial Gases – Asia segment.

7. INVENTORIES

The components of inventories are as follows:



	31 December			30 September
	2017			2017
Finished goods	$	135.1		$	120.0
Work in process	17.8			15.7
Raw materials, supplies and other	218.6			223.0
Total FIFO cost	$	371.5		$	358.7
Less: Excess of FIFO cost over LIFO cost	(24.1		)	(23.3		)
Inventories	$	347.4		$	335.4

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

8. GOODWILL

Changes to the carrying amount of consolidated goodwill by segment for the three months ended 31 December 2017 are as follows:



	Industrial Gases– Americas		Industrial Gases– EMEA		Industrial Gases– Asia		Industrial Gases– Global			Total
Goodwill, net at 30 September 2017	$	163.7	$	402.4	$	135.2	$	20.2		$	721.5
Acquisitions	—		17.3		36.4		—			53.7
Currency translation	2.3		10.9		2.5		(.1		)	15.6
Goodwill, net at 31 December 2017	$	166.0	$	430.6	$	174.1	$	20.1		$	790.8



	31 December			30 September
	2017			2017
Goodwill, gross	$	1,224.4		$	1,138.7
Accumulated impairment losses	(433.6		)	(417.2		)
Goodwill, net	$	790.8		$	721.5

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 accumulated impairment losses of $433.6 as of 31 December 2017 are attributable to LASA within the Industrial Gases– Americas segment and include impairment charges recorded in previous years as well as the impacts of currency translation on the losses.

9. FINANCIAL INSTRUMENTS

Currency Price Risk Management

Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency-denominated transactions and net investments in foreign operations. It is our policy to seek to minimize our cash flow volatility from changes in currency exchange rates. This is accomplished by identifying and evaluating the risk that our cash flows will change in value due to changes in exchange rates and by executing the appropriate strategies necessary to manage such exposures. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.

Forward Exchange Contracts

We enter into forward exchange contracts to reduce the cash flow exposure to foreign currency fluctuations associated with highly anticipated cash flows and certain firm commitments, such as the purchase of plant and equipment. We also enter into forward exchange contracts to hedge the cash flow exposure on intercompany loans. This portfolio of forward exchange contracts consists primarily of Euros and U.S. Dollars. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 31 December 2017 is 1.5 years.

Forward exchange contracts are also used to hedge the value of investments in certain foreign subsidiaries and affiliates by creating a liability in a currency in which we have a net equity position. The primary currency pair in this portfolio of forward exchange contracts is Euros and U.S. Dollars.

In addition to the forward exchange contracts that are designated as hedges, we utilize forward exchange contracts that are not designated as hedges. The primary objective of these forward exchange contracts is to protect the value of foreign currency-denominated monetary assets and liabilities, primarily working capital, from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement. This portfolio of forward exchange contracts comprises many different foreign currency pairs, with a profile that changes from time to time depending on business activity and sourcing decisions.

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



	31 December 2017			30 September 2017
	US$ Notional		Years Average Maturity	US$ Notional		Years Average Maturity
Forward Exchange Contracts:
Cash flow hedges	$	3,209.0	.5	$	3,150.2	.4
Net investment hedges	674.0		2.8	675.5		3.0
Not designated	390.2		.2	273.8		.1
Total Forward Exchange Contracts	$	4,273.2	.8	$	4,099.5	.8

In addition to the above, we use foreign currency-denominated debt to hedge the foreign currency exposures of our net investment in certain foreign subsidiaries. The designated foreign currency-denominated debt and related accrued interest included €909.0 million ($1,091.2) at 31 December 2017 and €912.2 million ($1,077.7) at 30 September 2017. The designated foreign currency-denominated debt is located on the balance sheet in the long-term debt line item.

Debt Portfolio Management

It is our policy to identify on a continuing basis the need for debt capital and evaluate the financial risks inherent in funding the Company with debt capital. Reflecting the result of this ongoing review, the debt portfolio and hedging program are managed with the objectives and intent to (1) reduce funding risk with respect to borrowings made by us to preserve our access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) manage the aggregate interest rate risk and the debt portfolio in accordance with certain debt management parameters.

Interest Rate Management Contracts

We enter into interest rate swaps to change the fixed/variable interest rate mix of our debt portfolio in order to maintain the percentage of fixed- and variable-rate debt within the parameters set by management. In accordance with these parameters, the agreements are used to manage interest rate risks and costs inherent in our debt portfolio. Our interest rate management portfolio generally consists of fixed-to-floating interest rate swaps (which are designated as fair value hedges), pre-issuance interest rate swaps and treasury locks (which hedge the interest rate risk associated with anticipated fixed-rate debt issuances and are designated as cash flow hedges), and floating-to-fixed interest rate swaps (which are designated as cash flow hedges). At 31 December 2017, the outstanding interest rate swaps were denominated in U.S. Dollars. The notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. When interest rate swaps are used to hedge variable-rate debt, the indices of the swaps and the debt to which they are designated are the same. It is our policy not to enter into any interest rate management contracts which lever a move in interest rates on a greater than one-to-one basis.

Cross Currency Interest Rate Swap Contracts

We enter into cross currency interest rate swap contracts when our risk management function deems necessary. These contracts may entail both the exchange of fixed- and floating-rate interest payments periodically over the life of the agreement and the exchange of one currency for another currency at inception and at a specified future date. The contracts are used to hedge either certain net investments in foreign operations or non-functional currency cash flows related to intercompany loans. The current cross currency interest rate swap portfolio consists of fixed-to-fixed swaps primarily between U.S. Dollars and offshore Chinese Renminbi, U.S. Dollars and Chilean Pesos, and U.S. Dollars and British Pound Sterling.

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



	31 December 2017							30 September 2017
	US$ Notional		Average Pay %		Average Receive %		Years Average Maturity	US$ Notional		Average Pay %		Average Receive %		Years Average Maturity
Interest rate swaps (fair value hedge)	$	400.0	LIBOR		2.53	%	1.6	$	600.0	LIBOR		2.28	%	1.3
Cross currency interest rate swaps (net investment hedge)	$	670.1	3.73	%	2.82	%	2.6	$	539.7	3.27	%	2.59	%	1.9
Cross currency interest rate swaps (cash flow hedge)	$	1,027.8	5.05	%	2.82	%	2.3	$	1,095.7	4.96	%	2.78	%	2.4
Cross currency interest rate swaps (not designated)	$	58.1	3.34	%	2.07	%	1.3	$	41.6	3.28	%	2.32	%	1.7

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



	Balance Sheet Location	31 December 2017		30 September 2017		Balance Sheet Location	31 December 2017		30 September 2017
Derivatives Designated as Hedging Instruments:
Forward exchange contracts	Other receivables	$	58.6	$	81.7	Accrued liabilities	$	44.3	$	82.0
Interest rate management contracts	Other receivables	7.0		11.1		Accrued liabilities	14.8		10.7
Forward exchange contracts	Other noncurrent assets	23.2		27.1		Other noncurrent liabilities	21.9		13.8
Interest rate management contracts	Other noncurrent assets	79.5		102.6		Other noncurrent liabilities	38.2		22.2
Total Derivatives Designated as Hedging Instruments		$	168.3	$	222.5		$	119.2	$	128.7
Derivatives Not Designated as Hedging Instruments:
Forward exchange contracts	Other receivables	$	2.4	$	1.1	Accrued liabilities	$	6.0	$	2.2
Interest rate management contracts	Other receivables	—		—		Accrued liabilities	2.7		1.0
Interest rate management contracts	Other noncurrent assets	4.6		4.2		Other noncurrent liabilities	—		—
Total Derivatives Not Designated as Hedging Instruments		$	7.0	$	5.3		$	8.7	$	3.2
Total Derivatives		$	175.3	$	227.8		$	127.9	$	131.9

Refer to Note 10, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.

The table below summarizes the gain or loss related to our cash flow hedges, fair value hedges, net investment hedges, and derivatives not designated as hedging instruments:



	Three Months Ended 31 December
	Forward Exchange Contracts						Foreign Currency Debt					Other ^(A)						Total
	2017			2016			2017			2016		2017			2016			2017			2016
Cash Flow Hedges, net of tax:
Net gain (loss) recognized in OCI (effective portion)	$	7.5		$	(59.4	)	$	—		$	—	$	(17.0	)	$	49.6		$	(9.5	)	$	(9.8	)
Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)	1.0			4.6			—			—		—			—			1.0			4.6
Net (gain) loss reclassified from OCI to other income (expense), net (effective portion)	(17.6		)	49.5			—			—		16.4			(28.2		)	(1.2		)	21.3
Net (gain) loss reclassified from OCI to interest expense (effective portion)	.6			(.8		)	—			—		.6			.7			1.2			(.1		)
Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion)	(.2		)	(.2		)	—			—		—			—			(.2		)	(.2		)
Fair Value Hedges:
Net gain (loss) recognized in interest expense^(B)	$	—		$	—		$	—		$	—	$	(3.2	)	$	(9.1	)	$	(3.2	)	$	(9.1	)
Net Investment Hedges, net of tax:
Net gain (loss) recognized in OCI	$	(7.5	)	$	27.9		$	(17.3	)	$	41.8	$	(11.2	)	$	13.1		$	(36.0	)	$	82.8
Derivatives Not Designated as Hedging Instruments:
Net gain (loss) recognized in other income (expense), net^(C)	$	(1.5	)	$	2.1		$	—		$	—	$	(1.3	)	$	.8		$	(2.8	)	$	2.9


^(A)	Other includes the impact on other comprehensive income (OCI) and earnings primarily related to interest rate and cross currency interest rate swaps.


^(B)	The impact of fair value hedges noted above was largely offset by recognized gains and losses resulting from the impact of changes in related interest rates on outstanding debt.


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

The amount of cash flow hedges’ unrealized gains and losses at 31 December 2017 that are expected to be reclassified to earnings in the next twelve months is approximately $14. The balance primarily consists of losses on forward exchange contracts that hedged foreign currency exposures for a sale of equipment project and intercompany loans.

The cash flows related to all derivative contracts are reported in the operating activities section of the consolidated statements of cash flows.

Credit Risk-Related Contingent Features

Certain derivative instruments are executed under agreements that require us to maintain a minimum credit rating with both Standard & Poor’s and Moody’s. If our credit rating falls below this threshold, the counterparty to the derivative instruments has the right to request full collateralization on the derivatives’ net liability position. The net liability position of derivatives with credit risk-related contingent features was $78.7 as of 31 December 2017 and $34.6 as of 30 September 2017. Because our current credit rating is above the various pre-established thresholds, no collateral has been posted on these liability positions.

Counterparty Credit Risk Management

We execute financial derivative transactions with counterparties that are highly rated financial institutions, all of which are investment grade at this time. Some of our underlying derivative agreements give us the right to require the institution to post collateral if its credit rating falls below the pre-established thresholds with Standard & Poor’s or Moody’s. The collateral that the counterparties would be required to post was $100.6 as of 31 December 2017 and $138.5 as of 30 September 2017. No financial institution is required to post collateral at this time, as all have credit ratings at or above threshold.

10. FAIR VALUE MEASUREMENTS

Fair value is defined as an exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:


Level 1	— Quoted prices (unadjusted) in active markets for identical assets or liabilities.


Level 2	— Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.


Level 3	— Inputs that are unobservable for the asset or liability based on our own assumptions (about the assumptions market participants would use in pricing the asset or liability).

The methods and assumptions used to measure the fair value of financial instruments are as follows:

Short-term Investments

Short-term investments primarily include time deposits and treasury securities with original maturities greater than three months and less than one year. The estimated fair value of the short-term investments, which approximates carrying value as of 31 December 2017 and 30 September 2017, was determined using level 2 inputs within the fair value hierarchy. Level 2 measurements were based on current interest rates for similar investments with comparable credit risk and time to maturity.

Derivatives

The fair value of our interest rate management contracts and forward exchange contracts are quantified using the income approach and are based on estimates using standard pricing models. These models take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. The computation of the fair values of these instruments is generally performed by the Company. These standard pricing models utilize inputs which are derived from or corroborated by observable market data such as interest rate yield curves as well as currency spot and forward rates. Therefore, the fair value of our derivatives is classified as a level 2 measurement. On an ongoing basis, we randomly test a subset of our valuations against valuations received from the transaction’s counterparty to validate the accuracy of our standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions.

Refer to Note 9, Financial Instruments, for a description of derivative instruments, including details on the balance sheet line classifications.

Long-term Debt

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

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



	31 December 2017				30 September 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Derivatives
Forward exchange contracts	$	84.2	$	84.2	$	109.9	$	109.9
Interest rate management contracts	91.1		91.1		117.9		117.9
Liabilities
Derivatives
Forward exchange contracts	$	72.2	$	72.2	$	98.0	$	98.0
Interest rate management contracts	55.7		55.7		33.9		33.9
Long-term debt, including current portion	3,426.2		3,519.6		3,818.8		3,928.2

The carrying amounts reported in the balance sheet for cash and cash items, short-term investments, trade receivables, payables and accrued liabilities, accrued income taxes, and short-term borrowings approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the above table.

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



	31 December 2017								30 September 2017
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets at Fair Value
Derivatives
Forward exchange contracts	$	84.2	$	—	$	84.2	$	—	$	109.9	$	—	$	109.9	$