Form 10-Q
Table of Contents

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 2014

OR

 

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

For the transition period from              to             

Commission file number 1-4534

AIR PRODUCTS AND CHEMICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   23-1274455
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
7201 Hamilton Boulevard, Allentown, Pennsylvania   18195-1501
(Address of Principal Executive Offices)   (Zip Code)

610-481-4911

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

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

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES        NO   ü  

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

 

Class

      

Outstanding at 31 December 2014

Common Stock, $1 par value      214,274,045


Table of Contents

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

INDEX

 

         Page No.  
PART I.  

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  

Consolidated Income Statements – Three Months Ended 31 December 2014 and 2013

     3   

Consolidated Comprehensive Income Statements – Three Months Ended 31  December 2014 and 2013

     4   

Consolidated Balance Sheets – 31 December 2014 and 30 September 2014

     5   

Consolidated Statements of Cash Flows – Three Months Ended 31 December 2014 and 2013

     6   

Notes to Consolidated Financial Statements

     7   

Item 2.

 

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

     24   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     36   

Item 4.

 

Controls and Procedures

     36   
PART II.  

OTHER INFORMATION

  

Item 6.

 

Exhibits

     37   

Signatures

     38   

Exhibit Index

     39   

 

2


Table of Contents

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 data)      2014      2013

Sales

       $ 2,560.8          $ 2,545.5  

Cost of sales

         1,831.0            1,865.9  

Selling and administrative

         258.2            280.9  

Research and development

         35.4            33.5  

Business restructuring and cost reduction actions

         32.4            —    

Gain on previously held equity interest

         17.9            —    

Other income (expense), net

         8.3            20.4  

Operating Income

         430.0            385.6  

Equity affiliates’ income

         43.1            38.2  

Interest expense

         29.1            33.3  

Income from Continuing Operations before Taxes

         444.0            390.5  

Income tax provision

         106.5            94.5  

Income from Continuing Operations

         337.5            296.0  

Income from Discontinued Operations, net of tax

         —              3.1  

Net Income

         337.5            299.1  

Less: Net Income Attributable to Noncontrolling Interests

         12.9            8.9  

Net Income Attributable to Air Products

       $ 324.6          $ 290.2  

Net Income Attributable to Air Products

             

Income from continuing operations

       $ 324.6          $ 287.1  

Income from discontinued operations

         —              3.1  

Net Income Attributable to Air Products

       $ 324.6          $ 290.2  

Basic Earnings Per Common Share Attributable to Air Products

             

Income from continuing operations

       $ 1.52          $ 1.36  

Income from discontinued operations

         —              .01  

Net Income Attributable to Air Products

       $ 1.52          $ 1.37  

Diluted Earnings Per Common Share Attributable to Air Products

             

Income from continuing operations

       $ 1.50          $ 1.34  

Income from discontinued operations

         —              .01  

Net Income Attributable to Air Products

       $ 1.50          $ 1.35  

Weighted Average Common Shares – Basic (in millions)

         214.2            211.8  

Weighted Average Common Shares – Diluted (in millions)

         216.6            214.3  

Dividends Declared Per Common Share – Cash

       $ .77          $ .71  

The accompanying notes are an integral part of these statements.

 

3


Table of Contents

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

(Unaudited)

 

       Three Months Ended
31 December
(Millions of dollars)      2014    2013

Net Income

       $ 337.5        $ 299.1  

Other Comprehensive Income (Loss), net of tax:

           

Translation adjustments, net of tax of $16.1 and ($13.6)

         (244.4 )        31.4  

Net gain (loss) on derivatives, net of tax of ($11.4) and $4.8

         (23.8 )        13.1  

Reclassification adjustments:

           

Derivatives, net of tax of $5.4 and ($4.4)

         13.5          (11.9 )

Pension and postretirement benefits, net of tax of $10.1 and $9.6

         20.9          20.0  

Total Other Comprehensive Income (Loss)

         (233.8 )        52.6  

Comprehensive Income

         103.7          351.7  

Net Income Attributable to Noncontrolling Interests

         12.9          8.9  

Other Comprehensive Loss Attributable to Noncontrolling Interests

         (5.1 )        (1.1 )

Comprehensive Income Attributable to Air Products

       $ 95.9        $ 343.9  

The accompanying notes are an integral part of these statements.

 

4


Table of Contents

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Millions of dollars, except for share data)      31 December
2014
   30 September
2014

Assets

                       

Current Assets

           

Cash and cash items

       $ 238.8        $ 336.6  

Trade receivables, net

         1,430.4          1,486.0  

Inventories

         709.7          706.0  

Contracts in progress, less progress billings

         143.0          155.4  

Prepaid expenses

         76.4          87.8  

Other receivables and current assets

         538.9          523.0  

Total Current Assets

         3,137.2          3,294.8  

Investment in net assets of and advances to equity affiliates

         1,252.2          1,257.9  

Plant and equipment, at cost

         20,256.5          20,223.5  

Less: accumulated depreciation

         10,648.9          10,691.4  

Plant and equipment, net

         9,607.6          9,532.1  

Goodwill, net

         1,200.7          1,237.3  

Intangible assets, net

         585.2          615.8  

Noncurrent capital lease receivables

         1,397.6          1,414.9  

Other noncurrent assets

         454.9          426.3  

Total Noncurrent Assets

         14,498.2          14,484.3  

Total Assets

       $ 17,635.4        $ 17,779.1  

Liabilities and Equity

                       

Current Liabilities

           

Payables and accrued liabilities

       $ 1,585.1        $ 1,591.0  

Accrued income taxes

         79.1          78.0  

Short-term borrowings

         1,283.5          1,228.7  

Current portion of long-term debt

         54.2          65.3  

Total Current Liabilities

         3,001.9          2,963.0  

Long-term debt

         4,751.3          4,824.5  

Other noncurrent liabilities

         1,070.7          1,187.5  

Deferred income taxes

         1,019.5          995.5  

Total Noncurrent Liabilities

         6,841.5          7,007.5  

Total Liabilities

         9,843.4          9,970.5  

Commitments and Contingencies – See Note 11

           

Redeemable Noncontrolling Interest

         288.7          287.2  

Air Products Shareholders’ Equity

           

Common stock (par value $1 per share; issued 2015 and 2014 – 249,455,584 shares)

         249.4          249.4  

Capital in excess of par value

         852.8          842.0  

Retained earnings

         10,152.0          9,993.2  

Accumulated other comprehensive loss

         (1,470.6 )        (1,241.9 )

Treasury stock, at cost (2015 – 35,181,539 shares; 2014 – 35,917,440 shares)

         (2,432.1 )        (2,476.9 )

Total Air Products Shareholders’ Equity

         7,351.5          7,365.8  

Noncontrolling Interests

         151.8          155.6  

Total Equity

         7,503.3          7,521.4  

Total Liabilities and Equity

       $ 17,635.4        $ 17,779.1  

The accompanying notes are an integral part of these statements.

 

5


Table of Contents

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

       Three Months Ended
31 December
(Millions of dollars)      2014    2013

Operating Activities

           

Net Income

       $ 337.5        $ 299.1  

Less: Net income attributable to noncontrolling interests

         12.9          8.9  

Net income attributable to Air Products

         324.6          290.2  

Income from discontinued operations

         —            (3.1 )

Income from continuing operations attributable to Air Products

         324.6          287.1  

Adjustments to reconcile income to cash provided by operating activities:

           

Depreciation and amortization

         235.5          234.2  

Deferred income taxes

         26.2          33.0  

Gain on previously held equity interest

         (17.9 )        —    

Undistributed earnings of unconsolidated affiliates

         (31.3 )        1.5  

Share-based compensation

         11.9          11.8  

Noncurrent capital lease receivables

         (8.1 )        (10.0 )

Other adjustments

         (60.5 )        12.7  

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

           

Trade receivables

         22.3          (17.7 )

Inventories

         (16.0 )        11.9  

Contracts in progress, less progress billings

         6.8          32.6  

Other receivables

         (27.3 )        (.9 )

Payables and accrued liabilities

         5.0          (65.2 )

Other working capital

         15.4          15.2  

Cash Provided by Operating Activities

         486.6          546.2  

Investing Activities

           

Additions to plant and equipment

         (446.5 )        (391.1 )

Acquisitions, less cash acquired

         (22.6 )        —    

Proceeds from sale of assets and investments

         3.7          5.5  

Other investing activities

         2.2          —    

Cash Used for Investing Activities

         (463.2 )        (385.6 )

Financing Activities

           

Long-term debt proceeds

         .9          1.4  

Payments on long-term debt

         (38.5 )        (434.0 )

Net increase in commercial paper and short-term borrowings

         54.0          339.1  

Dividends paid to shareholders

         (164.4 )        (149.9 )

Proceeds from stock option exercises

         42.1          19.9  

Excess tax benefit from share-based compensation

         13.4          4.1  

Other financing activities

         (19.4 )        (18.8 )

Cash Used for Financing Activities

         (111.9 )        (238.2 )

Discontinued Operations

           

Cash provided by operating activities

         —            .7  

Cash provided by investing activities

         —            9.8  

Cash used for financing activities

         —            —    

Cash Provided by Discontinued Operations

         —            10.5  

Effect of Exchange Rate Changes on Cash

         (9.3 )        4.3  

Decrease in Cash and Cash Items

         (97.8 )        (62.8 )

Cash and Cash Items – Beginning of Year

         336.6          450.4  

Cash and Cash Items – End of Period

       $ 238.8        $ 387.6  

Supplemental Cash Flow Information

           

Cash paid for taxes (net of cash refunds)

       $ 62.5        $ 31.4  

The accompanying notes are an integral part of these statements.

 

6


Table of Contents

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

1. BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES

Refer to our 2014 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 2015.

The Company realigned its businesses in new reporting segments and began operating under the new structure effective 1 October 2014. Prior year segment information presented has been restated to conform with the fiscal year 2015 presentation. See Note 18, Business Segment Information, for further details.

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

 

2. NEW ACCOUNTING GUIDANCE

Accounting Guidance Implemented in 2015

Unrecognized Tax Benefits

In July 2013, the Financial Accounting Standards Board (FASB) issued guidance to require standard presentation of an unrecognized tax benefit when a carryforward related to net operating losses or tax credits exists. We adopted this guidance prospectively beginning in the first quarter of fiscal year 2015. This guidance did not have a significant impact on our consolidated financial statements.

New Accounting Guidance to be Implemented

Discontinued Operations

In April 2014, the FASB issued an update to change the criteria for determining which disposals qualify as a discontinued operation and to expand related disclosure requirements. Under the new guidance, a disposal is required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on operations and financial results. This guidance will be effective prospectively for new disposals and new disposal groups classified as held for sale beginning in fiscal year 2016, with early adoption permitted.

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. This guidance is effective for us beginning in fiscal year 2018 and can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. We are currently evaluating the adoption alternatives and impact that this update will have on our consolidated financial statements.

 

7


Table of Contents

Share-Based Compensation

In June 2014, the FASB issued guidance clarifying that share-based compensation performance targets that could be achieved after the requisite service period should be treated as a performance condition that affects vesting, rather than a condition that affects the grant-date fair value of the award. This guidance is effective for us beginning in fiscal year 2017, with early adoption permitted. We do not expect this guidance to have a significant impact on our consolidated financial statements.

Going Concern

In August 2014, the FASB issued guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year of the issuance of the financial statements. If substantial doubt exists, additional disclosures would be required. This guidance will be effective beginning in the fourth quarter of fiscal year 2017, with early adoption permitted. This guidance will not have a significant impact on our consolidated financial statements.

Extraordinary Items

In January 2015, the FASB issued an update to eliminate the concept of extraordinary items. Previously, extraordinary items were required to be segregated and shown separately in the income statement, net of tax, when the items were deemed both unusual and infrequent. The guidance is effective beginning in fiscal year 2017 and may be applied retrospectively for periods presented. Early adoption is permitted if applied from the beginning of the fiscal year of adoption.

 

3. DISCONTINUED OPERATIONS

During the second quarter of 2012, the Board of Directors authorized the sale of our Homecare business which has been accounted for as a discontinued operation.

In the third quarter of 2012, we sold the majority of our Homecare business to The Linde Group for sale proceeds of €590 million ($777) and recognized a gain of $207.4 ($150.3 after-tax, or $.70 per share). Additionally, during the third quarter of 2012, an impairment charge of $33.5 ($29.5 after-tax, or $.14 per share) was recorded to write down the remaining business, which was primarily in the United Kingdom and Ireland, to its estimated net realizable value. In the fourth quarter of 2013, an additional charge of $18.7 ($13.6 after-tax, or $.06 per share) was recorded to update our estimate of the net realizable value. In the first quarter of 2014, we sold the remaining portion of the Homecare business for £6.1 million ($9.8) and recorded a gain on sale of $2.4. We entered into an operations guarantee related to the obligations under certain homecare contracts assigned in connection with the transaction. Our maximum potential payment under the guarantee is £20 million (approximately $31 at 31 December 2014), and our exposure will be extinguished by 2020. The fair value of the guarantee is not material.

The results of discontinued operations are summarized below:

 

       Three Months Ended
31 December
        2014      2013

Sales

       $ —            $ 8.5  

Income before taxes

       $ —            $ .7  

Income tax provision

         —              —    

Income from operations of discontinued operations

         —              .7  

Gain on sale of business, net of tax

         —              2.4  

Income from Discontinued Operations, net of tax

       $ —            $ 3.1  

 

8


Table of Contents
4. BUSINESS RESTRUCTURING AND COST REDUCTION ACTIONS

The charges we record for business restructuring and cost reduction actions have been excluded from segment operating income and are reflected on the consolidated income statements as “Business Restructuring and Cost Reduction Actions.”

Business Realignment and Reorganization

On 18 September 2014, we announced plans to reorganize the Company, including realignment of our businesses in new reporting segments and other organizational changes, effective as of 1 October 2014. Refer to Note 18, Business Segment Information, for additional details. As a result of this reorganization, we will incur ongoing severance and other charges.

During the fourth quarter of 2014, an expense of $12.7 ($8.2 after-tax, or $.04 per share) was incurred relating to the elimination of approximately 50 positions. The 2014 charge related to the segment level as follows: $2.9 in Industrial Gases – Americas, $3.1 in Industrial Gases – EMEA, $1.5 in Industrial Gases – Asia, $1.5 in Industrial Gases – Global, $1.6 in Materials Technologies, and $2.1 in Corporate and other.

In the first quarter of 2015, we recognized an expense of $32.4 ($21.7 after-tax, or $.10 per share) related to the elimination of approximately 450 positions. The 2015 charge related to the segment level as follows: $5.1 in Industrial Gases – Americas, $2.6 in Industrial Gases – EMEA, $2.7 in Industrial Gases – Asia, $1.3 in Industrial Gases – Global, $8.1 in Materials Technologies, and $12.6 in Corporate and other.

The following table summarizes the carrying amount of the accrual for the business realignment and reorganization at 31 December 2014:

 

        Severance and
Other Benefits

2014 Charge

       $ 12.7  

Cash expenditures

         (2.2 )

30 September 2014

       $ 10.5  

2015 Charge

       $ 32.4  

Amount reflected in pension liability

         (2.7 )

Cash expenditures

         (25.0 )

Currency translation adjustment

         (.1 )

31 December 2014

       $ 15.1  

2013 Plan

During the fourth quarter of 2013, we recorded an expense of $231.6 ($157.9 after-tax, or $.74 per share) reflecting actions to better align our cost structure with current market conditions. The asset and contract actions primarily impacted the Electronics Materials business due to continued weakness in the photovoltaic (PV) and light-emitting diode (LED) markets. The severance and other contractual benefits primarily impacted our Industrial Gases businesses and corporate functions in response to weaker than expected business conditions in Europe and Asia, reorganization of our operations and functional areas, and previously announced senior executive changes. The remaining planned actions were completed in the first quarter of 2015.

 

9


Table of Contents

The following table summarizes the carrying amount of the accrual for the 2013 Plan at 31 December 2014:

 

        Severance and
Other Benefits
   Asset
Actions
   Contract
Actions/
Other
   Total

2013 Charge

       $ 71.9        $ 100.4        $ 59.3        $ 231.6  

Amount reflected in pension liability

         (6.9 )        —            —            (6.9 )

Noncash expenses

         —            (100.4 )        —            (100.4 )

Cash expenditures

         (3.0 )        —            (58.5 )        (61.5 )

Currency translation adjustment

         .4          —            —            .4  

30 September 2013

       $ 62.4        $ —          $ .8        $ 63.2  

Cash expenditures

         (51.7 )        —            (.8 )        (52.5 )

Currency translation adjustment

         (.6 )        —            —            (.6 )

30 September 2014

       $ 10.1        $ —          $ —          $ 10.1  

Cash expenditures

         (7.1 )        —            —            (7.1 )

Currency translation adjustment

         (.1 )        —            —            (.1 )

31 December 2014

       $ 2.9        $ —          $ —          $ 2.9  

 

5. BUSINESS COMBINATIONS

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

The acquisition date fair value of the previously held equity interest was determined using a discounted cash flow analysis under the income approach. The three months ended 31 December 2014 include a gain of $17.9 ($11.2 after-tax, or $.05 per share) as a result of revaluing our previously held equity interest to fair value as of the acquisition date. This gain is reflected on the consolidated income statements as “Gain on previously held equity interest.”

 

6. INVENTORIES

The components of inventories are as follows:

 

        31 December
2014
   30 September
2014

Finished goods

       $ 506.3        $ 493.9  

Work in process

         37.6          34.1  

Raw materials, supplies and other

         273.6          283.4  
       $ 817.5        $ 811.4  

Less: Excess of FIFO cost over LIFO cost

         (107.8 )        (105.4 )
         $ 709.7        $ 706.0  

First-in, first-out (FIFO) cost approximates replacement cost. Our inventories generally have a high turnover, and as a result, there is little difference between the original cost of an item and its current replacement cost.

 

10


Table of Contents
7. GOODWILL

Changes to the carrying amount of consolidated goodwill by segment for the three months ended 31 December 2014 are as follows:

 

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

Balance at 30 September 2014

       $ 327.2        $ 433.3        $ 140.0        $ 21.4        $ 315.4        $ 1,237.3  

Acquisitions and adjustments

         2.2          —            —            —            —            2.2  

Currency translation and other

         (3.1 )        (21.8 )        (4.0 )        (.8 )        (9.1 )        (38.8 )

Balance at 31 December 2014

       $ 326.3        $ 411.5        $ 136.0        $ 20.6        $ 306.3        $ 1,200.7  

 

        31 December
2014
   30 September
2014

Goodwill, gross

       $ 1,481.6        $ 1,522.1  

Accumulated impairment losses (A)

         (280.9 )        (284.8 )

Goodwill, net

       $ 1,200.7        $ 1,237.3  

 

(A) 

Amount is attributable to the Industrial Gases – Americas segment and includes currency translation of $24.3 and $20.4 as of 31 December 2014 and 30 September 2014, respectively.

Due to the reorganization of our business effective as of 1 October 2014, we conducted a goodwill impairment test in the first quarter of 2015. We determined that the fair value of each of our reporting units except Latin America within the Industrial Gases – Americas segment substantially exceeded the carrying value. The fair value of the Latin America reporting unit exceeded its carrying value, and no impairment of goodwill was recorded. We previously recorded an impairment of goodwill of $305.2 related to this reporting unit in the fourth quarter of 2014. The carrying value of goodwill for the Latin America reporting unit at 31 December 2014 was $229.7.

The fair value of the Latin America reporting unit at 1 October 2014 was estimated based on a similar outlook and assumptions as those used for the testing at 30 September 2014. Management judgment is required in the determination of each assumption utilized in the valuation model, and actual results could differ from the estimates. We will continue to evaluate goodwill on an annual basis as of the beginning of our fourth fiscal quarter and whenever there are indicators of potential impairment.

 

8. FINANCIAL INSTRUMENTS

Currency Price Risk Management

Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency-denominated transactions and net investments in foreign operations. It is our policy to 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. The portfolio of forward exchange contracts consists primarily of Euros and British Pound Sterling as well as 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 2014 is 3.7 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 the Euro/U.S. dollar.

 

11


Table of Contents

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

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

 

       31 December 2014      30 September 2014
        US$
Notional
     Years
Average
Maturity
     US$
Notional
     Years
Average
Maturity

Forward Exchange Contracts:

                           

Cash flow hedges

       $ 3,243.5            .6          $ 2,965.5            .7  

Net investment hedges

         660.5            2.6            685.9            2.9  

Not designated

         1,079.6            .5            381.5            .1  

Total Forward Exchange Contracts

       $ 4,983.6            .8          $ 4,032.9            1.0  

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 €900.0 million ($1,089.3) and Chinese Renminbi 922.7 million ($148.6) at 31 December 2014 and €879.3 million ($1,110.6) and Chinese Renminbi 900.9 million ($146.8) at 30 September 2014. The designated foreign currency-denominated debt is located on the balance sheet in the long-term debt and short-term borrowings line items.

Debt Portfolio Management

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

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 2014, the outstanding interest rate swaps were denominated in U.S. dollars, Euros, and Chilean Pesos. The maximum remaining term of any interest rate swap designated as a cash flow hedge is .2 years. 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 that lever a move in interest rates on a greater than one-to-one basis.

Cross Currency Interest Rate Swap Contracts

We enter into cross currency interest rate swap contracts when our risk management function deems necessary. These contracts may entail both the exchange of fixed- and floating-rate interest payments periodically over the life of the agreement and the exchange of one currency for another currency at inception and at a specified future date. These contracts effectively convert the currency denomination of a debt instrument into another currency in which we have a net equity position while changing the interest rate characteristics of the instrument. The contracts are used to hedge either certain net investments in foreign operations or nonfunctional currency cash flows related to intercompany loans. The current cross currency interest rate swap portfolio consists of fixed-to-fixed swaps between U.S. dollars and Chilean Pesos, U.S. dollars and offshore Chinese Renminbi, U.S. dollars and British Pound Sterling, as well as U.S. dollars and Euros.

 

12


Table of Contents

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

 

     31 December 2014    30 September 2014
      US$
Notional
   Average
Pay %
  Average
Receive
%
  Years
Average
Maturity
   US$
Notional
   Average
Pay %
  Average
Receive
%
  Years
Average
Maturity

Interest rate swaps
(fair value hedge)

     $ 600.0          LIBOR         2.77 %       4.0        $ 600.0          LIBOR         2.77 %       4.3  

Cross currency interest rate swaps
(net investment hedge)

     $ 773.1          3.43 %       2.01 %       3.5        $ 404.5          3.70 %       1.15 %       2.7  

Interest rate swaps
(cash flow hedge)

     $ 392.6          2.12 %       .43 %       .2        $ 431.7          2.36 %       .71 %       .4  

Cross currency interest rate swaps
(cash flow hedge)

     $ 483.9          3.46 %       2.86 %       4.0        $ 446.3          3.39 %       2.86 %       4.2  

Cross currency interest rate swaps
(not designated)

     $ —            —   %       —   %       —          $ 15.4          3.62 %       .05 %       .8  

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

 

     Balance Sheet
Location
  31 December
2014
  30 September
2014
  Balance Sheet
Location
  31 December
2014
  30 September
2014

Derivatives Designated as Hedging Instruments:

                   

Forward exchange contracts

  Other receivables     $ 104.5       $ 78.9     Accrued liabilities     $ 109.0       $ 61.8  

Interest rate management contracts

  Other receivables       25.5         21.1     Accrued liabilities       31.2         18.8  

Forward exchange contracts

  Other noncurrent
assets
      31.8         10.5     Other noncurrent
liabilities
      2.6         3.1  

Interest rate management contracts

  Other noncurrent
assets
      77.9         54.6     Other noncurrent
liabilities
      —           .3  

Total Derivatives Designated as Hedging Instruments

        $ 239.7       $ 165.1           $ 142.8       $ 84.0  

Derivatives Not Designated as Hedging Instruments:

                   

Forward exchange contracts

  Other receivables     $ 3.2       $ 4.0     Accrued liabilities     $ 1.6       $ 1.9  

Interest rate management contracts

  Other receivables       —           2.6     Accrued liabilities       —           —    

Total Derivatives Not Designated as Hedging Instruments

        $ 3.2       $ 6.6           $ 1.6       $ 1.9  

Total Derivatives

        $ 242.9       $ 171.7           $ 144.4       $ 85.9  

 

13


Table of Contents

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
     2014   2013   2014   2013   2014   2013   2014   2013

Cash Flow Hedges, net of tax:

                               

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

    $ (24.0 )     $ 14.3       $ —         $ —         $ .2       $ (1.2 )     $ (23.8 )     $ 13.1  

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

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

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

      18.8         (12.7 )       —           —           (5.2 )       1.4         13.6         (11.3 )

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

      (.3 )       —           —           —           .3         (.2 )       —           (.2 )

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

      .5         (.6 )       —           —           —           —           .5         (.6 )

Fair Value Hedges:

                               

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

    $ —         $ —         $ —         $ —         $ 3.5       $ (4.4 )     $ 3.5       $ (4.4 )

Net Investment Hedges, net of tax:

                               

Net gain (loss) recognized in OCI

    $ 20.1       $ (9.9 )     $ 31.1       $ (13.6 )     $ 10.1       $ 5.1       $ 61.3       $ (18.4 )

Derivatives Not Designated as Hedging Instruments:

                               

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

    $ .2       $ .1       $ —         $ —         $ —         $ —         $ .2       $ .1  

 

(A)

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

(B)

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

(C)

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

The amount of cash flow hedges’ unrealized gains and losses at 31 December 2014 that are expected to be reclassified to earnings in the next twelve months is not material.

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

Credit Risk-Related Contingent Features

Certain derivative instruments are executed under agreements that require us to maintain a minimum credit rating with both Standard & Poor’s and Moody’s. If our credit rating falls below this threshold, the counterparty to the derivative instruments has the right to request full collateralization on the derivatives’ net liability position. The net liability position of derivatives with credit risk-related contingent features was $11.7 as of 31 December 2014 and $2.1 as of 30 September 2014. 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. These are the same agreements referenced in Credit Risk-Related Contingent Features above. The collateral that the counterparties would be required to post was $159.8 as of 31 December 2014 and $107.8 as of 30 September 2014. No financial institution is required to post collateral at this time, as all have credit ratings at or above the threshold.

 

14


Table of Contents
9. FAIR VALUE MEASUREMENTS

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

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

 

Level 1     Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2     Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3     Inputs that are unobservable for the asset or liability based on our own assumptions (about the assumptions market participants would use in pricing the asset or liability).

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

Derivatives

The fair value of our interest rate management contracts and forward exchange contracts are quantified using the income approach and are based on estimates using standard pricing models. These models take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. The computation of the fair values of these instruments is generally performed by the Company. These standard pricing models utilize inputs which are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. In addition, 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 8, 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 2014      30 September 2014
        Carrying Value      Fair Value      Carrying Value      Fair Value

Assets

                           

Derivatives

                           

Forward exchange contracts

       $ 139.5          $ 139.5          $ 93.4          $ 93.4  

Interest rate management contracts

         103.4            103.4            78.3            78.3  

Liabilities

                           

Derivatives

                           

Forward exchange contracts

       $ 113.2          $ 113.2          $ 66.8          $ 66.8  

Interest rate management contracts

         31.2            31.2            19.1            19.1  

Long-term debt, including current portion

         4,805.5            5,078.7            4,889.8            5,130.7  

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

 

15


Table of Contents

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

 

       31 December 2014      30 September 2014
        Total      Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3

Assets at Fair Value

                                                       

Derivatives

                                                       

Forward exchange contracts

       $ 139.5          $ —            $ 139.5          $ —            $ 93.4          $ —            $ 93.4          $ —    

Interest rate management contracts

         103.4            —              103.4            —              78.3            —              78.3            —    

Total Assets at Fair Value

       $ 242.9          $ —            $ 242.9          $ —            $ 171.7          $ —            $ 171.7          $ —    

Liabilities at Fair Value

                                                       

Derivatives

                                                       

Forward exchange contracts

       $ 113.2          $ —            $ 113.2          $ —            $ 66.8          $ —            $ 66.8          $ —    

Interest rate management contracts

         31.2            —              31.2            —              19.1            —              19.1            —    

Total Liabilities at Fair Value

       $ 144.4          $ —            $ 144.4          $ —            $ 85.9          $ —            $ 85.9          $ —    

 

10. RETIREMENT BENEFITS

The components of net periodic benefit cost for the defined benefit pension and other postretirement benefit plans for the three months ended 31 December 2014 and 2013 were as follows:

 

       Pension Benefits    Other Benefits
       2014    2013    2014      2013
Three Months Ended 31 December      U.S.    International    U.S.    International              

Service cost

       $ 10.6        $ 8.2        $ 10.7        $ 8.8        $ .7          $ .8  

Interest cost

         31.2          15.0          32.7          16.6          .6            .6  

Expected return on plan assets

         (50.5 )        (21.1 )        (47.0 )        (19.2 )        —              —    

Prior service cost amortization

         .7          —            .7          .1          —              —    

Actuarial loss amortization

         19.8          10.5          19.6          8.8          .2            .4  

Settlement and curtailment charges

         (.1 )        (.1 )        —            —            —              —    

Special termination benefits

         2.7          —            .2          —            —              —    

Other

         1.1          .5          —            .5          —              —    

Net periodic benefit cost

       $ 15.5        $ 13.0        $ 16.9        $ 15.6        $ 1.5          $ 1.8  

Net periodic benefit cost is primarily included in cost of sales and selling and administrative expense on our consolidated income statements. The amount of net periodic benefit cost capitalized in 2014 and 2013 was not material.

For the three months ended 31 December 2014 and 2013, our cash contributions to funded pension plans and benefit payments under unfunded pension plans were $76.4 and $31.4, respectively. Total contributions for fiscal 2015 are expected to be approximately $130 to $150. During fiscal 2014, total contributions were $78.2.

 

11. COMMITMENTS AND CONTINGENCIES

Litigation

We are involved in various legal proceedings, including competition, environmental, health, safety, product liability, and insurance matters. In September 2010, the Brazilian Administrative Council for Economic Defense (CADE) issued a decision against our Brazilian subsidiary, Air Products Brasil Ltda., and several other Brazilian industrial gas companies for alleged anticompetitive activities. CADE imposed a civil fine of R$179.2 million (approximately $67 at 31 December 2014) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, whose investigation began in 2003, alleging violation of competition laws with respect to the sale of industrial and medical gases. The fines are based on a percentage of our total revenue in Brazil in 2003.

 

16


Table of Contents

We have denied the allegations made by the authorities and filed an appeal in October 2010 with the Brazilian courts. On 6 May 2014, our appeal was granted and the fine against Air Products Brasil Ltda. was dismissed. CADE has appealed that ruling and the matter remains pending. We, with advice of our outside legal counsel, have assessed the status of this matter and have concluded that, although an adverse final judgment after exhausting all appeals is possible, such a judgment is not probable. As a result, no provision has been made in the consolidated financial statements. We estimate the maximum possible loss to be the full amount of the fine of R$179.2 million (approximately $67 at 31 December 2014) plus interest accrued thereon until final disposition of the proceedings.

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

Environmental

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

Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The consolidated balance sheets at 31 December 2014 and 30 September 2014 included an accrual of $84.8 and $86.2, respectively, primarily as part of other noncurrent liabilities. The environmental liabilities will be paid over a period of up to 30 years. We estimate the exposure for environmental loss contingencies to range from $84 to a reasonably possible upper exposure of $98 as of 31 December 2014.

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

PACE

At 31 December 2014, $31.7 of the environmental accrual was related to the Pace facility.

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

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

 

17


Table of Contents

PIEDMONT

At 31 December 2014, $18.6 of the environmental accrual was related to the Piedmont site.

On 30 June 2008, we sold our Elkton, Maryland and Piedmont, South Carolina production facilities and the related North American atmospheric emulsions and global pressure sensitive adhesives businesses. In connection with the sale, we recognized a liability for retained environmental obligations associated with remediation activities at the Piedmont site. This site is under active remediation for contamination caused by an insolvent prior owner. We are required by the South Carolina Department of Health and Environmental Control to address both contaminated soil and groundwater. Numerous areas of soil contamination have been addressed, and contaminated groundwater is being recovered and treated. We estimate that it will take until 2017 to complete source area remediation and another 15 years thereafter to complete groundwater recovery, with costs through completion estimated to be $24. We recognized a pretax expense in 2008 of $24 as a component of income from discontinued operations and recorded an environmental liability of $24 in continuing operations on the consolidated balance sheets. There has been no change to the estimated exposure.

PASADENA

At 31 December 2014, $12.1 of the environmental accrual was related to the Pasadena site.

During the fourth quarter of 2012, management committed to permanently shutting down our polyurethane intermediates (PUI) production facility in Pasadena, Texas. In shutting down and dismantling the facility, we have undertaken certain obligations related to soil and groundwater contaminants. We have been pumping and treating groundwater to control off-site contaminant migration in compliance with regulatory requirements and under the approval of the Texas Commission on Environmental Quality (TCEQ). We estimate that the pump and treat system will continue to operate for 30 years subsequent to the shutdown of the PUI production facility. We plan to perform additional work to address other environmental obligations at the site. This additional work includes investigating solid waste management units, which are now accessible as a result of the shutdown, remediating as required impacted soils, performing post closure care for two closed RCRA surface impoundment units and establishing engineering controls. In 2012, we estimated the total exposure at this site to be $13. There has been no change to the estimated exposure.

 

12. SHARE-BASED COMPENSATION

We have various share-based compensation programs, which include deferred stock units, stock options, and restricted stock. Under all programs, the terms of the awards are fixed at the grant date. We issue shares from treasury stock upon the payout of deferred stock units, the exercise of stock options, and the issuance of restricted stock awards. As of 31 December 2014, there were 5,057,910 shares available for future grant under our Long-Term Incentive Plan, which is shareholder approved.

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

 

Three Months Ended 31 December      2014    2013

Before-Tax Share-Based Compensation Cost

       $ 11.9        $ 11.8  

Income Tax Benefit

         (4.0 )        (4.3 )

After-Tax Share-Based Compensation Cost

       $ 7.9        $ 7.5  

Before-tax share-based compensation cost is primarily included in selling and administrative expense on our consolidated income statements. The amount of share-based compensation cost capitalized in 2015 and 2014 was not material.

Deferred Stock Units

During the three months ended 31 December 2014, we granted 116,111 market-based deferred stock units. The market-based deferred stock units vest as long as the employee continues to be employed by the Company and upon the achievement of the performance target. The performance target, which is approved by the Compensation Committee, is the Company’s relative total shareholder return in relation to a defined peer group over the three year performance period beginning 1 October 2014 and ending 30 September 2017.

 

18


Table of Contents

The market-based deferred stock units had an estimated grant-date fair value of $194.51 per unit. The grant-date fair value was estimated using a Monte Carlo simulation model as these equity awards were tied to a market condition. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the awards. We generally expense the grant-date fair value of these awards on a straight line basis over the vesting period. The calculation of the fair value of market-based deferred stock units used the following assumptions:

 

Expected volatility

         19.6 %

Risk-free interest rate

         .9 %

Expected dividend yield

         2.5 %

In addition, during the three months ended 31 December 2014, we granted 126,504 time-based deferred stock units at a weighted-average grant-date fair value of $144.14.

Stock Options

During the three months ended 31 December 2014, we granted 175,829 stock options at a weighted-average exercise price of $144.09 and an estimated fair value of $37.19 per option. The fair value of these options was estimated using a Black-Scholes option valuation model that used the following assumptions:

 

Expected volatility

         30.3 %

Expected dividend yield

         2.6 %

Expected life (in years)

         7.5  

Risk-free interest rate

         2.2 %

Restricted Stock

During the three months ended 31 December 2014, we issued 19,691 restricted shares at a weighted-average grant-date fair value of $144.09.

 

13. EQUITY

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

 

       Three Months Ended 31 December
       2014    2013
        Air
Products
   Non-
controlling
Interests
   Total
Equity
   Air
Products
   Non-
controlling
Interests
   Total
Equity

Balance at 30 September

       $ 7,365.8        $ 155.6        $ 7,521.4        $ 7,042.1        $ 156.8        $ 7,198.9  

Net income (A)

         324.6          7.5          332.1          290.2          7.6          297.8  

Other comprehensive income (loss)

         (228.7 )        (5.1 )        (233.8 )        53.7          (1.1 )        52.6  

Dividends on common stock (per share $.77, $.71)

         (165.4 )        —            (165.4 )        (150.3 )        —            (150.3 )

Dividends to noncontrolling interests

         —            (6.2 )        (6.2 )        —            (4.6 )        (4.6 )

Share-based compensation

         11.9          —            11.9          11.8          —            11.8  

Issuance of treasury shares for stock option and award plans

         30.1          —            30.1          13.2          —            13.2  

Tax benefit of stock option and award plans

         13.5          —            13.5          4.8          —            4.8  

Purchase of noncontrolling interests

         —            —            —            (.5 )        —            (.5 )

Other equity transactions

         (.3 )        —            (.3 )        (1.0 )        —            (1.0 )

Balance at 31 December

       $ 7,351.5        $ 151.8        $ 7,503.3        $ 7,264.0        $ 158.7        $ 7,422.7  

 

(A) 

Net income attributable to noncontrolling interests excludes net income related to redeemable noncontrolling interests, which is not included in total equity. Refer to Note 15, Noncontrolling Interests, for additional information.

 

19


Table of Contents
14. ACCUMULATED OTHER COMPREHENSIVE LOSS

The table below summarizes changes in accumulated other comprehensive loss (AOCL), net of tax, attributable to Air Products for the three months ended 31 December 2014:

 

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

Balance at 30 September 2014

       $ (28.5 )      $ (268.7 )      $ (944.7 )      $ (1,241.9 )

Other comprehensive income (loss) before reclassifications

         (23.8 )        (244.4 )        —            (268.2 )

Amounts reclassified from AOCL

         13.5          —            20.9          34.4  

Net current period other comprehensive income (loss)

       $ (10.3 )      $ (244.4 )      $ 20.9        $ (233.8 )

Amount attributable to noncontrolling interest

         .1          (5.2 )        —            (5.1 )

Balance at 31 December 2014

       $ (38.9 )      $ (507.9 )      $ (923.8 )      $ (1,470.6 )

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

 

       Three Months Ended
31 December
          2014        2013  

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

           

Sales/Cost of sales

       $ (.6 )      $ .2  

Other income (expense), net

         14.1          (11.9 )

Interest expense

         —            (.2 )

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

       $ 13.5        $ (11.9 )

Pension and Postretirement Benefits, net of tax (A)

       $ 20.9        $ 20.0  

 

(A) 

The components include items such as prior service cost amortization, actuarial loss amortization, and settlements and are reflected in net periodic benefit cost. Refer to Note 10, Retirement Benefits.

 

15. NONCONTROLLING INTERESTS

INDURA S.A.

Redeemable Noncontrolling Interest

In 2012, we purchased a 64.8% controlling equity interest in the outstanding shares of Indura S.A. As part of the purchase agreement, the largest minority shareholder in Indura S.A. has the right to exercise a put option to require us to purchase up to a 30.5% equity interest during the two-year period beginning on 1 July 2015, at a redemption value equal to the greater of fair market value or the acquisition date value escalated by an inflation factor (the “floor value”). The put option is not accounted for separate from the minority interest shares that are subject to the put option. The redemption feature of the put option requires classification of the minority shareholder’s interest in the consolidated balance sheet outside of equity under the caption “Redeemable Noncontrolling Interest.”

Adjustments to the value of the redeemable noncontrolling interest due to the redemption feature are recognized as they occur. Currently, the floor value of the redemption feature is in excess of the fair value of the minority interest shares. Because the value of the redeemable noncontrolling interest cannot be less than the floor value, the attribution of net income between Air Products and the minority shareholders is adjusted so that the value of the redeemable noncontrolling interest is not less than the floor value.

 

20


Table of Contents

The following is a summary of the changes in redeemable noncontrolling interest for the three months ended 31 December:

 

        2014    2013

Balance at 30 September

       $ 287.2        $ 375.8  

Net income

         5.4          1.3  

Dividends

         —            (3.5 )

Currency translation adjustment

         (3.9 )        (14.9 )

Balance at 31 December

       $ 288.7        $ 358.7  

As of 31 December 2014, we have a 67.3% controlling equity interest in Indura S.A.

 

16. EARNINGS PER SHARE

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

 

       Three Months Ended
31 December
          2014          2013  

Numerator

             

Income from continuing operations

       $ 324.6          $ 287.1  

Income from discontinued operations

         —              3.1  

Net Income Attributable to Air Products

       $ 324.6          $ 290.2  

Denominator (in millions)

             

Weighted average number of common shares – Basic

         214.2            211.8  

Effect of dilutive securities

             

Employee stock option and other award plans

         2.4            2.5  

Weighted average number of common shares – Diluted

         216.6            214.3  

Basic EPS Attributable to Air Products

             

Income from continuing operations

       $ 1.52          $ 1.36  

Income from discontinued operations

         —              .01  

Net Income Attributable to Air Products

       $ 1.52          $ 1.37  

Diluted EPS Attributable to Air Products

             

Income from continuing operations

       $ 1.50          $ 1.34  

Income from discontinued operations

         —              .01  

Net Income Attributable to Air Products

       $ 1.50          $ 1.35  

For the three months ended 31 December 2014 and 2013, outstanding share-based awards of .4 million and ..8 million shares were antidilutive and therefore excluded from the computation of diluted earnings per share.

 

17. SUPPLEMENTAL INFORMATION

As of 31 December 2014, we have classified a 3.875% Eurobond for €300 million ($363.1) maturing in March 2015 as long-term debt because we have the ability to refinance the debt on a long-term basis under our $2,595.0 committed credit facility maturing 30 April 2018. Our current intent is to refinance this debt via the U.S. or European public or private placement markets.

 

21


Table of Contents
18. BUSINESS SEGMENT INFORMATION

The Company began operating under a new structure effective 1 October 2014. Our new reporting segments reflect the manner in which our chief operating decision maker reviews results and allocates resources. Except in the Corporate and other segment, each reporting segment meets the definition of an operating segment and does not include the aggregation of multiple operating segments. Our liquefied natural gas (LNG) and helium storage and distribution sale of equipment businesses are aggregated within the Corporate and other segment. The prior year information presented has been restated to conform with the fiscal year 2015 presentation.

The new reporting segments are:

 

   

Industrial Gases – Americas

 

   

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

 

   

Industrial Gases – Asia

 

   

Industrial Gases – Global

 

   

Materials Technologies

 

   

Energy-from-Waste

 

   

Corporate and other

Industrial Gases – Regional

The regional Industrial Gases (Americas, EMEA, Asia) segments include the results of our regional industrial gas businesses, which produce and sell atmospheric gases such as oxygen, nitrogen, and argon (primarily recovered by the cryogenic distillation of air) and process gases such as hydrogen, carbon monoxide, helium, syngas, and specialty gases. We supply gases to customers in many industries, including those in metals, glass, chemical processing, energy production and refining, food processing, metallurgical industries, medical, and general manufacturing. We distribute gases to our customers through a variety of supply modes including liquid or gaseous bulk supply delivered by tanker or tube trailer and, for smaller customers, packaged gases delivered in cylinders and dewars or small on-sites (cryogenic or noncryogenic generators). For large-volume customers, we construct an on-site plant adjacent to or near the customer’s facility or deliver product from one of our pipelines. We are the world’s largest provider of hydrogen, which is used by refiners to facilitate the conversion of heavy crude feedstock and lower the sulfur content of gasoline and diesel fuels.

Electricity is the largest cost component in the production of atmospheric gases, and natural gas is the principal raw material for hydrogen, carbon monoxide, and syngas production. We mitigate energy and natural gas prices contractually through pricing formulas, surcharges, and cost pass-through arrangements. The regional Industrial Gases segments also include our share of the results of several joint ventures accounted for by the equity method. The largest of these joint ventures operate in Mexico, Italy, South Africa, India, Saudi Arabia, and Thailand. Each of the regional Industrial Gases segments competes against global industrial gas companies as well as regional competitors. Competition is based primarily on price, reliability of supply, and the development of industrial gas applications. We derive a competitive advantage in locations where we have pipeline networks, which enable us to provide reliable and economic supply of products to larger customers.

Industrial Gases – Global

The Industrial Gases – Global segment includes cryogenic and gas processing equipment sales for air separation. The equipment is sold worldwide to customers in a variety of industries, including chemical and petrochemical manufacturing, oil and gas recovery and processing, and steel and primary metals processing. The Industrial Gases – Global segment also includes centralized global costs associated with management of all the Industrial Gases segments. These costs include Industrial Gases global administrative costs, product development costs, and research and development costs. We compete with a large number of firms for all the offerings included in the Industrial Gases – Global segment. Competition in the equipment businesses is based primarily on technological performance, service, technical know-how, price, and performance guarantees.

Materials Technologies

The Materials Technologies segment includes applications technology to make products that provide solutions to a broad range of global industries through chemical synthesis, analytical technology, process engineering, and surface science. This segment provides specialty gases, specialty chemicals, services, and equipment to the electronics industry primarily for the manufacture of silicon and compound semiconductors as well as liquid crystal (LCD) and other displays. The Materials Technologies segment also provides performance chemical solutions for the coatings, inks, adhesives, civil engineering, personal care, institutional and industrial cleaning, mining, oil field, polyurethane, and other industries. We compete in the businesses included in the Materials Technologies segment on a product-by-product basis against companies ranging from niche suppliers with a single product to large, vertically integrated companies. Competition is principally conducted on the basis of product performance, price, quality, reliability of product supply, technical innovation, service, and global infrastructure.

 

22


Table of Contents

Energy-from-Waste

The Energy-from-Waste segment consists of two projects that are under construction in Tees Valley, United Kingdom. Once operational, these projects will process waste materials and generate renewable power for customers under long-term contracts.

Corporate and other

The Corporate and other segment includes two on-going global businesses (our LNG sale of equipment business and our helium storage and distribution vessel sale of equipment business), the polyurethane intermediates business that was exited in early fiscal year 2014, and corporate support functions that benefit all the segments. Competition for the two sale of equipment businesses is based primarily on technological performance, service, technical know-how, price, and performance guarantees.

Business Segment

 

     Industrial
Gases–
Americas
  Industrial
Gases–
EMEA
  Industrial
Gases–
Asia
  Industrial
Gases–
Global
  Materials
Technologies
  Energy-
from-
Waste
  Corporate
and other
  Total

Three Months Ended 31 December 2014

                               

Sales

    $ 1,003.0       $ 500.8       $ 398.7       $ 59.0       $ 524.0       $ —         $ 75.3       $ 2,560.8  

Operating income

      211.2         81.3         90.5         (17.9 )       104.6         (2.5 )       (22.7 )       444.5  

Depreciation and amortization

      103.6         51.1         49.6         4.3         24.0         —           2.9         235.5  

Equity affiliates’ income

      17.2         10.3         14.6         .4         .6         —           —           43.1  

Three Months Ended 31 December 2013

                               

Sales

    $ 943.9       $ 549.9       $ 395.3       $ 67.2       $ 479.5       $ —         $ 109.7       $ 2,545.5  

Operating income

      184.5         85.2         82.7         (10.3 )       64.3         (2.9 )       (17.9 )       385.6  

Depreciation and amortization

      104.0         54.9         46.4         1.7         24.5         —           2.7         234.2  

Equity affiliates’ income

      17.6         9.7         9.6         .7         .6         —           —           38.2  

Total Assets

                               

31 December 2014

    $ 6,225.4       $ 3,414.7       $ 4,106.1       $ 345.2       $ 1,790.3       $ 689.4       $ 1,064.3       $ 17,635.4  

30 September 2014

      6,240.7         3,521.0         4,045.6         389.4         1,835.7         591.9         1,154.8         17,779.1  

The sales information noted above relates to external customers only. All intersegment sales are eliminated in consolidation. For the three months ended 31 December 2014 and 2013, the Industrial Gases – Global segment had intersegment sales of $59.6 and $41.3, respectively. These sales are generally transacted at market pricing. For all other segments, intersegment sales are not material for all periods presented. Equipment manufactured for our industrial gases segments are generally transferred at cost and not reflected as an intersegment sale.

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

 

       Three Months Ended
31 December
         2014        2013  

Operating Income

                       

Segment total

       $ 444.5        $ 385.6  

Business restructuring and cost reduction actions

         (32.4 )        —    

Gain on previously held equity interest

         17.9          —    

Consolidated Total

       $ 430.0        $ 385.6  

 

23


Table of Contents

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

(Millions of dollars, except for share data)

The disclosures in this quarterly report are complementary to those made in our 2014 Form 10-K. An analysis of results for the first quarter of 2015 is provided in the Management’s Discussion and Analysis to follow.

All comparisons in the discussion are to the corresponding prior year unless otherwise stated. All amounts presented are in accordance with U.S. generally accepted accounting principles (GAAP), except as noted.

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

The discussion of results that follows includes comparisons to non-GAAP financial measures. For 2015, the non-GAAP measures exclude: business reorganization and cost reduction charges and the gain on the previously held equity interest. Included in these non-GAAP measures is Adjusted EBITDA, which we believe to be a useful operational metric. The presentation of non-GAAP measures is intended to enhance the usefulness of financial information by providing measures that our management uses internally to evaluate our performance. The reconciliation of reported GAAP results to non-GAAP measures is presented on pages 31-32. Descriptions of the excluded items appear on page 26.

FIRST QUARTER 2015 VS. FIRST QUARTER 2014

FIRST QUARTER 2015 IN SUMMARY

 

   

Sales of $2,560.8 increased 1%, or $15.3. Underlying sales were up 4%, primarily due to higher volumes in the Industrial Gases – Americas, Materials Technologies, and Industrial Gases – Asia segments and favorable pricing in Industrial Gases – Americas, partially offset by the exit from our Polyurethane Intermediates (PUI) business. Unfavorable currency impacts decreased sales by 3%.

 

   

Operating income of $430.0 increased 12%, or $44.4, and operating margin of 16.8% increased 170 basis points (bp) primarily from higher volumes, favorable cost performance and higher pricing. On a non-GAAP basis, operating income of $444.5 increased 15%, or $58.9, and operating margin of 17.4% increased 230 bp.

 

   

Adjusted EBITDA of $723.1, increased 10%, or $65.1, primarily due to higher volumes, favorable cost performance, and higher pricing. Adjusted EBITDA margin of 28.2% increased 240 bp.

 

   

Net income of $324.6 increased 13%, or $37.5, and diluted earnings per share of $1.50 increased 12%, or $.16. On a non-GAAP basis, net income of $335.1 increased 17%, or $48.0, and diluted earnings per share of $1.55 increased 16%, or $.21. A summary table of changes in diluted earnings per share is presented below.

 

   

The Company realigned its businesses in new reporting segments and began operating under the new structure effective 1 October 2014.

 

24


Table of Contents

Changes in Diluted Earnings per Share Attributable to Air Products

 

       Three Months Ended
31 December
     Increase
(Decrease)
        2014    2013     

Diluted Earnings per Share

                  

Net Income

       $ 1.50        $ 1.35          $ .15  

Income from discontinued operations

         —            .01            (.01 )

Income from Continuing Operations – GAAP Basis

         1.50          1.34            .16  

Business restructuring and cost reduction actions

         .10          —              .10  

Gain on previously held equity interest

         (.05 )        —              (.05 )

Income from Continuing Operations – Non-GAAP Basis

       $ 1.55        $ 1.34          $ .21  

Operating Income (after-tax)

                  

Underlying business

                  

Volume

                   $ .14  

Price/raw materials

                     .04  

Costs

                     .08  

Currency

                                 (.05 )

Operating Income

                   $ .21  

Other (after-tax)

                  

Equity affiliates’ income

                   $ .02  

Interest expense

                     .02  

Noncontrolling interests

                     (.02 )

Average shares outstanding

                                 (.02 )

Other

                               $ —    

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

                               $ .21  

RESULTS OF OPERATIONS

Discussion of Consolidated Results

 

       Three Months Ended
31 December
          
        2014   2013   $ Change      Change

Sales

       $ 2,560.8       $ 2,545.5       $ 15.3        1%

Operating income

         430.0         385.6         44.4        12%

Operating margin

         16.8 %       15.1 %          170bp

Equity affiliates’ income

         43.1         38.2         4.9        13%

Non-GAAP Basis

                   

Adjusted EBITDA

       $ 723.1       $ 658.0       $ 65.1        10%

Adjusted EBITDA margin

         28.2 %       25.8 %          240bp

Operating income

         444.5         385.6         58.9        15%

Operating margin

         17.4 %       15.1 %                230bp

 

25


Table of Contents

Sales

 

        % Change from
Prior Year

Underlying business

      

Volume

         3 %

Price

         1 %

Currency

         (3 )%

Total Consolidated Change

         1 %

Underlying sales increased 4% from higher volumes of 3% and higher pricing of 1%. Volumes increased from growth in the Industrial Gases – Americas, Materials Technologies, and Industrial Gases – Asia segments, partially offset by the exit from our PUI business, which decreased sales by 1%. The favorable pricing was primarily in the Industrial Gases – Americas segment.

Operating Income

Operating income of $430.0 increased 12%, or $44.4, as higher volumes of $39, lower operating costs of $23, and favorable pricing net of energy and distribution costs of $11, were partially offset by unfavorable currency impacts of $14. The current year also included a charge of $32 for business restructuring and cost reduction actions and a gain of $18 on the previously held equity interest. On a non-GAAP basis, operating income of $444.5 increased 15%, or $58.9, and operating margin of 17.4% increased 230 bp.

Adjusted EBITDA

We define Adjusted EBITDA as income from continuing operations (including noncontrolling interests) excluding certain items previously discussed, which the Company does not believe to be indicative of ongoing business trends, plus interest expense, income tax provision, and depreciation and amortization expense. We believe Adjusted EBITDA is a useful operational metric.

Adjusted EBITDA of $723.1 increased 10%, or $65.1, primarily due to higher volumes, favorable cost performance, and higher pricing. Adjusted EBITDA margin of 28.2% increased 240 bp.

Equity Affiliates’ Income

Income from equity affiliates of $43.1 increased $4.9 primarily due to higher volumes and favorable cost performance in our Industrial Gases – Asia affiliates.

Selling and Administrative Expense

Selling and administrative expense of $258.2 decreased $22.7 primarily due to lower costs, including the benefits of our recent cost reduction actions, of $13 and favorable currency effects of $10. Selling and administrative expense, as a percent of sales, decreased from 11.0% to 10.1%.

Research and Development

Research and development expense of $35.4 increased $1.9. Research and development expense, as a percent of sales, was 1.4% and 1.3% in 2015 and 2014, respectively.

Business Restructuring and Cost Reduction Actions

On 18 September 2014, we announced plans to reorganize the Company, including realignment of our businesses in new reporting segments and other organizational changes, effective as of 1 October 2014. As a result of this reorganization, we will incur ongoing severance and other charges. In the first quarter of 2015, we recognized an expense of $32.4 ($21.7 after-tax, or $.10 per share) related to the elimination of approximately 450 positions. In the fourth quarter of 2014, we recognized expense of $12.7 ($8.2 after-tax, or $.04 per share) related to the elimination of approximately 50 positions. We expect these actions to provide approximately $50 in savings in fiscal year 2015. In fiscal year 2016 and beyond, we expect these actions to provide approximately $60 of annual savings. Refer to Note 4, Business Restructuring and Cost Reduction Actions, for additional details.

Gain on Previously Held Equity Interest

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

The acquisition date fair value of the previously held equity interest was determined using a discounted cash flow analysis under the income approach. The three months ended 31 December 2014 include a gain of $17.9 ($11.2 after-tax, or $.05 per share) as a result of revaluing our previously held equity interest to fair value as of the acquisition date.

 

26


Table of Contents

Other Income (Expense), Net

Other income (expense), net of $8.3 decreased $12.1 as the prior year included higher gains from the sale of assets, including emissions credits. Otherwise, no individual items were significant in comparison to the prior year.

Interest Expense

 

       Three Months Ended
31 December
          2014          2013  

Interest incurred

       $ 40.2          $ 40.8  

Less: capitalized interest

         11.1            7.5  

Interest expense

       $ 29.1          $ 33.3  

Interest incurred decreased $.6. The decrease was driven primarily by the impact of a stronger U.S. dollar on the translation of foreign currency interest, partially offset by a higher average debt balance. The change in capitalized interest was driven by an increase in projects under construction.

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 24.0% and 24.2% in the first quarter of 2015 and 2014, respectively. In the current year, the impacts of the business restructuring and cost reduction actions and the gain on our previously held equity interest decreased our effective tax rate by 10 bp. Refer to Note 4, Business Restructuring and Cost Reduction Actions, and Note 5, Business Combinations, for additional details regarding these items. On a non-GAAP basis, the effective tax rate was 24.1% and 24.2% in 2015 and 2014, respectively.

Discontinued Operations

In the first quarter of 2014, we sold the remaining portion of the Homecare business for £6.1 million ($9.8) and recorded a gain on sale of $2.4. Refer to Note 3, Discontinued Operations, for additional details.

Segment Analysis

Industrial Gases – Americas

 

       Three Months Ended
31 December
        
        2014   2013   $ Change    % Change

Sales

       $ 1,003.0       $ 943.9       $ 59.1          6 %

Operating income

         211.2         184.5         26.7          14 %

Operating margin

         21.1 %       19.5 %            160bp  

Equity affiliates’ income

         17.2         17.6         (.4 )        (2 )%

Adjusted EBITDA

         332.0         306.1         25.9          8 %

Adjusted EBITDA margin

         33.1 %       32.4 %                  70bp  

Industrial Gases – Americas Sales

 

        % Change from
Prior Year

Underlying business

      

Volume

         4 %

Price

         3 %

Currency

         (3 )%

Energy and raw material cost pass-through

         2 %

Total Industrial Gases – Americas Sales Change

         6 %

 

27


Table of Contents

Underlying sales increased 7% from higher volumes of 4% and higher pricing of 3%. Volumes increased in North America from growth in liquid oxygen, nitrogen, and argon due to strong demand across our customer base. Additionally, hydrogen volumes were higher due to strong demand from refinery customers. In Latin America, volumes were flat due to continued economic weakness in the region. Pricing was higher due to general price increases and inflation recovery.

Currency decreased sales by 3% primarily due to the impacts of the Chilean Peso and Canadian Dollar. Higher energy contractual cost pass-through to customers increased sales by 2%.

Industrial Gases – Americas Operating Income and Margin

Operating income increased 14%, or $26.7, due to higher pricing net of energy and distribution costs of $17 and higher volumes of $12, partially offset by unfavorable currency impacts of $3. Operating margin increased 160 bp from the prior year due to the higher volumes and pricing.

Industrial Gases – Americas Equity Affiliates’ Income

Equity affiliates’ income of $17.2 decreased $.4.

Industrial Gases – EMEA

 

       Three Months Ended
31 December
        
        2014   2013   $ Change    % Change

Sales

       $ 500.8       $ 549.9       $ (49.1 )        (9 )%

Operating income

         81.3         85.2         (3.9 )        (5 )%

Operating margin

         16.2 %       15.5 %            70bp  

Equity affiliates’ income

         10.3         9.7         .6          6 %

Adjusted EBITDA

         142.7         149.8         (7.1 )        (5 )%

Adjusted EBITDA margin

         28.5 %       27.2 %                  130bp  

Industrial Gases – EMEA Sales

 

        % Change from
Prior Year

Underlying business

      

Volume

         —   %

Price

         —   %

Currency

         (7 )%

Energy and raw material cost pass-through

         (2 )%

Total Industrial Gases – EMEA Sales Change

         (9 )%

Underlying sales were flat as higher liquid/bulk volumes were offset by lower cylinder volumes due to weakness in the metal fabrication and construction markets. Unfavorable currency effects from the Euro, the British Pound Sterling, and the Polish Zloty reduced sales by 7%. Lower energy contractual cost pass-through to customers decreased sales by 2%.

Industrial Gases – EMEA Operating Income and Margin

Operating income decreased by 5%, or $3.9, primarily due to unfavorable currency impacts. Operating margin increased 70 bp from the prior year.

Industrial Gases – EMEA Equity Affiliates’ Income

Equity affiliates’ income of $10.3 increased $.6.

 

28


Table of Contents

Industrial Gases – Asia

 

       Three Months Ended
31 December
          
        2014   2013   $ Change      % Change

Sales

       $ 398.7       $ 395.3       $ 3.4            1 %

Operating income

         90.5         82.7         7.8            9 %

Operating margin

         22.7 %       20.9 %              180bp  

Equity affiliates’ income

         14.6         9.6         5.0            52 %

Adjusted EBITDA

         154.7         138.7         16.0            12 %

Adjusted EBITDA margin

         38.8 %       35.1 %                    370bp  

Industrial Gases – Asia Sales

 

        % Change from
Prior Year

Underlying business

      

Volume

         6 %

Price

         (1 )%

Currency

         (2 )%

Energy and raw material cost pass-through

         (2 )%

Total Industrial Gases – Asia Sales Change

         1 %

 

Underlying sales increased by 5% from higher volumes of 6%, partially offset by lower pricing of 1%. Volumes were higher primarily from new plants, and in particular, a large on-site project in China. Pricing was slightly lower due to continued pricing pressure on liquid products in China. Unfavorable currency impacts decreased sales by 2%. Lower energy contractual cost-pass through to customers decreased sales by 2%.

Industrial Gases – Asia Operating Income and Margin

Operating income increased 9%, or $7.8, primarily due to higher volumes of $11 and lower operating costs of $6, partially offset by lower pricing net of power and distribution costs of $8. Operating margin increased 180 bp from the prior year primarily due to the higher volumes and favorable cost performance, partially offset by lower pricing.

Industrial Gases – Asia Equity Affiliates’ Income

Equity affiliates’ income of $14.6 increased $5.0 primarily due to higher volumes and favorable cost performance.

Industrial Gases – Global

 

       Three Months Ended
31 December
         
        2014    2013    $ Change    % Change

Sales

       $ 59.0        $ 67.2        $ (8.2 )        (12 )%

Operating loss

         (17.9 )        (10.3 )        (7.6 )        (74 )%

Industrial Gases – Global Sales and Operating Loss

Sales of $59.0 decreased $8.2, or 12%, primarily due to lower project activity. Operating loss of $17.9 increased by $7.6 due to lower inventory costs in the prior year and the lower project activity.

 

29


Table of Contents

Materials Technologies

 

       Three Months Ended
31 December
          
        2014   2013   $ Change      % Change

Sales

       $ 524.0       $ 479.5       $ 44.5            9 %

Operating income

         104.6         64.3         40.3            63 %

Operating margin

         20.0 %       13.4 %              660bp  

Adjusted EBITDA

         129.2         89.4         39.8            45 %

Adjusted EBITDA margin

         24.7 %       18.6 %                    610bp  

Materials Technologies Sales

 

        % Change from
Prior Year

Underlying business

      

Volume

         11 %

Price

         —   %

Currency

         (2 )%

Total Materials Technologies Sales Change

         9 %

Sales increased by 9% as higher volumes of 11% were partially offset by unfavorable currency impacts of 2%. Electronics Materials sales increased 13% from growth across all product lines. Performance Materials sales increased 6% from higher volumes across all product lines and major regions due to higher demand and new product introductions. Currency was unfavorable primarily due to the Euro.

Materials Technologies Operating Income and Margin

Operating income of $104.6 increased 63%, or $40.3, primarily from higher volumes of $21 and lower costs of $20. The lower costs include higher inventory costs in the prior year and the benefits of our recent business restructuring and cost reduction actions. Operating margin increased 660 bp primarily from the higher volumes and improved cost performance.

Energy-from-Waste

 

       Three Months Ended
31 December
           
        2014    2013    $ Change      % Change

Operating loss

       $ (2.5 )      $ (2.9 )      $ .4            14 %

Adjusted EBITDA

         (2.5 )        (2.9 )        .4            14 %

The Energy-from-Waste segment consists of two projects that are under construction in Tees Valley, United Kingdom. Once operational, these projects will process waste materials and generate renewable power for customers under long-term contracts. Costs incurred prior to project completion include a land lease and commercial management.

Corporate and other

 

       Three Months Ended
31 December
         
        2014    2013    $ Change    % Change

Sales

       $ 75.3        $ 109.7        $ (34.4 )        (31 )%

Operating loss

         (22.7 )        (17.9 )        (4.8 )        (27 )%

Adjusted EBITDA

         (19.8 )        (15.2 )        (4.6 )        (30 )%

Corporate and other Sales and Operating Loss

Sales of $75.3 and operating loss of $22.7 were unfavorable versus the prior year due to the exit from our PUI business, which was completed in the first quarter of fiscal year 2014. Higher liquefied natural gas (LNG) project activity was offset by lower helium container sales. In the prior year, the PUI business contributed $13 of operating income.

 

30


Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

The discussion of first quarter results includes comparisons to non-GAAP financial measures, including Adjusted EBITDA. The presentation of non-GAAP measures is intended to enhance the usefulness of financial information by providing measures which our management uses internally to evaluate our operating performance. Definitions of non-GAAP measures may not be comparable to similar definitions used by other companies and are not a substitute for similar GAAP measures. Presented below are reconciliations of the reported GAAP results to the non-GAAP measures.

CONSOLIDATED RESULTS

 

       Continuing Operations
        Operating
Income
  Operating
Margin (A)
  Income   Diluted
EPS

2015 GAAP

       $ 430.0         16.8 %     $ 324.6       $ 1.50  

2014 GAAP

         385.6         15.1 %       287.1         1.34  

Change GAAP

       $ 44.4         170bp       $ 37.5       $ .16  

% Change GAAP

         12 %                 13 %       12 %

2015 GAAP

       $ 430.0         16.8 %     $ 324.6       $ 1.50  

Business restructuring and cost reduction actions (tax impact $10.7)

         32.4         1.3 %       21.7         .10  

Gain on previously held equity interest (tax impact $6.7)

         (17.9 )       (.7 )%       (11.2 )       (.05 )

2015 Non-GAAP Measure

       $ 444.5         17.4 %     $ 335.1       $ 1.55  

2014 GAAP

       $ 385.6         15.1 %     $ 287.1       $ 1.34  

2014 Non-GAAP Measure

       $ 385.6         15.1 %     $ 287.1       $ 1.34  

Change Non-GAAP Measure

       $ 58.9         230bp       $ 48.0       $ .21  

% Change Non-GAAP Measure

         15 %                 17 %       16 %

 

(A) 

Operating margin is calculated by dividing operating income by sales.

ADJUSTED EBITDA

We define Adjusted EBITDA as income from continuing operations (including noncontrolling interests) excluding certain items previously discussed, which the Company does not believe to be indicative of ongoing business trends, plus interest expense, income tax provision, and depreciation and amortization expense. We believe Adjusted EBITDA is a useful operational metric.

Below is a reconciliation from Income from Continuing Operations to Adjusted EBITDA:

 

       Three Months Ended
31 December
        2014   2013

Income from Continuing Operations (A)

       $ 337.5       $ 296.0  

Add: Interest expense

         29.1         33.3  

Add: Income tax provision

         106.5         94.5  

Add: Depreciation and amortization

         235.5         234.2  

Add: Business restructuring and cost reduction actions

         32.4         —    

Less: Gain on previously held equity interest

         17.9         —    

Adjusted EBITDA

       $ 723.1       $ 658.0  

Change from prior year

         65.1      

% Change from prior year

         10 %          

 

(A) 

Includes net income attributable to noncontrolling interests.

 

31


Table of Contents

Below is a reconciliation from segment Operating Income to Adjusted EBITDA:

 

     Industrial
Gases–
Americas
  Industrial
Gases–
EMEA
  Industrial
Gases–
Asia
  Industrial
Gases–
Global
  Materials
Technologies
  Energy-
from-
Waste
  Corporate
and other
  Total

Three Months Ended 31 December 2014

                               

Operating Income

    $ 211.2       $ 81.3       $ 90.5       $ (17.9 )     $ 104.6       $ (2.5 )     $ (22.7 )     $ 444.5  

Add: Depreciation and amortization

      103.6         51.1         49.6         4.3         24.0         —           2.9         235.5  

Add: Equity affiliates’ income

      17.2         10.3         14.6         .4         .6         —           —           43.1  

Adjusted EBITDA

    $ 332.0       $ 142.7       $ 154.7       $ (13.2 )     $ 129.2       $ (2.5 )     $ (19.8 )     $ 723.1  

Adjusted EBITDA margin

      33.1 %       28.5 %       38.8 %                 24.7 %                           28.2 %

Three Months Ended 31 December 2013

                               

Operating Income

    $ 184.5       $ 85.2       $ 82.7       $ (10.3 )     $ 64.3       $ (2.9 )     $ (17.9 )     $ 385.6  

Add: Depreciation and amortization

      104.0         54.9         46.4         1.7         24.5         —           2.7         234.2  

Add: Equity affiliates’ income

      17.6         9.7         9.6         .7         .6         —           —           38.2  

Adjusted EBITDA

    $ 306.1       $ 149.8       $ 138.7       $ (7.9 )     $ 89.4       $ (2.9 )     $ (15.2 )     $ 658.0  

Adjusted EBITDA margin

      32.4 %       27.2 %       35.1 %                 18.6 %                           25.8 %

Adjusted EBITDA change

    $ 25.9       $ (7.1 )     $ 16.0       $ (5.3 )     $ 39.8       $ .4       $ (4.6 )     $ 65.1  

Adjusted EBITDA % change

      8 %       (5 )%       12 %       (67 )%       45 %       14 %       (30 )%       10 %

Adjusted EBITDA margin change

      70bp         130bp         370bp                   610bp                             240bp  

INCOME TAXES

 

       Effective Tax Rate
        2015   2014

Income Tax Provision — GAAP

       $ 106.5       $ 94.5  

Income from continuing operations before taxes — GAAP

       $ 444.0       $ 390.5  

Effective Tax Rate — GAAP

         24.0 %       24.2 %

Income Tax Provision — GAAP

       $ 106.5       $ 94.5  

Business restructuring and cost reduction actions

         10.7         —    

Gain on previously held equity interest

         (6.7 )       —    

Income Tax Provision — Non-GAAP Measure

       $ 110.5       $ 94.5  

Income from continuing operations before taxes — GAAP

       $ 444.0       $ 390.5  

Business restructuring and cost reduction actions

         32.4         —    

Gain on previously held equity interest

         (17.9 )       —    

Income from continuing operations before taxes — Non-GAAP Measure

       $ 458.5       $ 390.5  

Effective Tax Rate — Non-GAAP Measure

         24.1 %       24.2 %

PENSION BENEFITS

For the three months ended 31 December 2014, required cash contributions to funded pension plans and benefit payments under unfunded pension plans were $76.4. For the three months ended 31 December 2013, cash contributions were $31.4. Total contributions for fiscal 2015 are expected to be approximately $130 to $150. During fiscal 2014, total contributions were $78.2.

Our U.S. supplemental pension plan provides for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after the retirement date. Pension settlements are recognized when cash payments exceed the sum of the service and interest cost components of net periodic pension cost of the plan for the fiscal year. We expect to record pension settlement losses of approximately $20 to $25 in the second quarter of 2015. We also anticipate additional pension settlement losses in the second half of fiscal year 2015.

Refer to Note 10, Retirement Benefits, to the consolidated financial statements for details on pension cost and cash contributions.

 

32


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

We have maintained a strong financial position through the first three months of 2015. We continue to have consistent access to commercial paper markets and cash flows from operations and financing activities are expected to meet liquidity needs for the foreseeable future.

As of 31 December 2014, we had $229.4 of foreign cash and cash items compared to total cash and cash items of $238.8. If the foreign cash and cash items are needed for operations in the U.S. or we otherwise elect to repatriate the funds, we may be required to accrue and pay U.S. taxes on a significant portion of these amounts. 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 outside the U.S. Current financing alternatives do not require the repatriation of foreign funds.

The narrative below refers to the consolidated statements of cash flows included on page 6.

Operating Activities

For the first three months of 2015, cash provided by operating activities was $486.6. Income from continuing operations of $324.6 reflected the non-cash gain on the previously held equity interest of $17.9 and undistributed earnings of unconsolidated affiliates of $31.3. Income from continuing operations is adjusted for reconciling items that include depreciation and amortization, deferred income taxes, share-based compensation, and noncurrent capital lease receivables. Other adjustments included pension and postretirement expense of $27.3 and contributions to our pension plans of $76.4, primarily for plans in the U.S. and U.K. Management considers various factors when making pension funding decisions, including tax, cash flow, and regulatory implications. The working capital accounts were a source of cash of $6.2.

For the first three months of 2014, cash provided by operating activities was $546.2, primarily driven by income from continuing operations of $287.1. The working capital accounts were a use of cash of $24.1, including an increase in trade receivables of $17.7 and a decrease in accounts payable and accrued liabilities of $65.2 which included payments related to the business restructuring and cost reduction plans of $4.9. We contributed $31.4 to our pension plans, primarily for plans in the U.K.

Investing Activities

For the first three months of 2015, cash used for investing activities was $463.2, primarily driven by capital expenditures for plant and equipment of $446.5. On 30 December 2014, we acquired our partner’s equity ownership interest in a liquefied industrial gases production joint venture in North America which increased our ownership from 50% to 100%. Refer to Note 5, Business Combinations, to the consolidated financial statements for additional information.

For the first three months of 2014, cash used for investing activities was $385.6, primarily driven by capital expenditures for plant and equipment of $391.1.

Capital expenditures are detailed in the table below:

 

       Three Months Ended
31 December
        2014      2013

Additions to plant and equipment

       $ 446.5          $ 391.1  

Acquisitions, less cash acquired

         22.6            —    

Capital expenditures on a GAAP basis

       $ 469.1          $ 391.1  

Capital lease expenditures (A)

         31.9            48.1  

Purchase of noncontrolling interests (A)

         —              .5  

Capital expenditures on a Non-GAAP basis

       $ 501.0          $ 439.7  

 

(A) 

We utilize a non-GAAP measure in the computation of capital expenditures and include spending associated with facilities accounted for as capital leases and purchases of noncontrolling interests. Certain contracts associated with facilities that are built to provide product to a specific customer are required to be accounted for as leases, and such spending is reflected as a use of cash within cash provided by operating activities, if the arrangement qualifies as a capital lease. Additionally, the payment for subsidiary shares from noncontrolling interests in a subsidiary is accounted for as an equity transaction and is reflected as a financing activity in the statement of cash flows. The presentation of this non-GAAP measure is intended to enhance the usefulness of information by providing a measure that our management uses internally to evaluate and manage our expenditures.

 

33


Table of Contents

The sales backlog for the Company at 31 December 2014 was $519, compared to $520 at 30 September 2014. The sales backlog represents our estimate of revenue to be recognized in the future on sale of equipment orders and related process technology that are under firm contracts.

Financing Activities

For the first three months of 2015, cash used for financing activities was $111.9. The primary use of cash was to pay dividends of $164.4. Proceeds from stock option exercises were $42.1 and our borrowings (short- and long-term proceeds, net of repayments) were a net source of cash of $16.4.

For the first three months of 2014, cash used for financing activities was $238.2. The primary use of cash was to pay dividends of $149.9. Additionally, our borrowings (short- and long-term proceeds, net of repayments) were a net use of cash of $93.5, driven primarily by the repayment of a 3.75% Eurobond of €300 million ($401.0) in November 2013, partially offset by an increase in commercial paper and short-term borrowings of $339.1.

Discontinued Operations

For the first three months of 2015, there were no discontinued operations.

For the first three months of 2014, cash provided by discontinued operations was $10.5. The sale of the remaining Homecare business, which was primarily in the United Kingdom and Ireland, generated proceeds of £6.1 million ($9.8) and a $2.4 gain which are included in discontinued operations in the consolidated statements of cash flows. Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional information.

Financing and Capital Structure

Capital needs were satisfied primarily with cash from operations. Total debt at 31 December 2014 and 30 September 2014, expressed as a percentage of the sum of total debt and total capitalization (total debt plus total equity plus redeemable noncontrolling interest), was constant at 43.9%. Total debt decreased from $6,118.5 at 30 September 2014 to $6,089.0 at 31 December 2014.

During fiscal 2013, we entered into a five-year $2,500.0 revolving credit agreement maturing 30 April 2018 with a syndicate of banks (the “2013 Credit Agreement”), under which senior unsecured debt is available to both the Company and certain of its subsidiaries. Effective 30 June 2014, the 2013 Credit Agreement was amended to increase the facility to $2,595.0. The 2013 Credit Agreement provides a source of liquidity for the Company and supports its commercial paper program. The Company’s only financial covenant is a maximum ratio of total debt to total capitalization (total debt plus total equity plus redeemable noncontrolling interest) no greater than 70%. No borrowings were outstanding under the 2013 Credit Agreement as of 31 December 2014.

Commitments totaling $176.0 are maintained by our foreign subsidiaries, of which $176.0 was borrowed and outstanding at 31 December 2014.

As of 31 December 2014, we are in compliance with all of the financial and other covenants under our debt agreements.

As of 31 December 2014, we classified our 3.875% Eurobond of €300 million ($363.1) maturing in March 2015 as long-term debt because we have the ability to refinance the debt under the 2013 Credit Agreement. Our current intent is to refinance this debt via the U.S. or European public or private placement markets.

On 15 September 2011, the Board of Directors authorized the repurchase of up to $1,000 of our outstanding common stock. During the first three months of fiscal year 2015, we did not purchase any of our outstanding shares. At 31 December 2014, $485.3 in share repurchase authorization remains.

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. There have been no material changes to contractual obligations since 30 September 2014.

COMMITMENTS AND CONTINGENCIES

There have been no material changes to commitments and contingencies since 30 September 2014. For current updates on Litigation and Environmental matters, refer to Note 11, Commitments and Contingencies, in this quarterly filing.

OFF-BALANCE SHEET ARRANGEMENTS

There have been no material changes to off-balance sheet arrangements since 30 September 2014. 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, and results of operations or liquidity.

 

34


Table of Contents

RELATED PARTY TRANSACTIONS

Our principal related parties are equity affiliates operating in the industrial gas business. We did not engage in any material transactions involving related parties that included terms or other aspects that differ from those which would be negotiated at arm’s length with clearly independent parties.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of our financial condition and results of operations is based on the consolidated financial statements and accompanying notes that have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Information concerning our implementation and impact of new accounting standards issued by the FASB is included in Note 2, New Accounting Guidance, to the consolidated financial statements. There have been no changes in accounting policy in the current period that had a significant impact on our financial condition, change in financial condition, liquidity, or results of operations.

NEW ACCOUNTING GUIDANCE

See Note 2, New Accounting Guidance, to the consolidated financial statements for information concerning our implementation and impact of new accounting guidance.

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about earnings guidance and business outlook. These forward-looking statements are based on management’s reasonable expectations and assumptions as of the date this report is filed. 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, weakening or reversal of global or regional economic recovery; significant fluctuations in interest rates and foreign currencies from that currently anticipated; future financial and operating performance of major customers; unanticipated contract terminations or customer cancellations or postponement of projects and sales; the impact of competitive products and pricing; unexpected changes in raw material supply and markets; the impact of price fluctuations in natural gas and disruptions in markets and the economy due to oil price volatility; unanticipated asset impairments or losses; the ability to recover increased energy and raw material costs from customers; costs and outcomes of litigation or regulatory investigations; the impact of management and organizational changes, including pension settlement and other associated costs; the success of productivity programs; the timing, impact, and other uncertainties of future acquisitions or divestitures; political risks, including the risks of unanticipated government actions that may result in project delays, cancellations or expropriations; the impact of changes in environmental, tax or other legislation and regulatory activities in jurisdictions in which the Company and its affiliates operate; the impact on the effective tax rate of changes in the mix of earnings among our U.S. and international operations; and other risk factors described in the Company’s Form 10-K for its fiscal year ended September 30, 2014. The Company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in this report to reflect any change in the Company’s assumptions, beliefs or expectations or any change in events, conditions, or circumstances upon which any such forward-looking statements are based.

 

35


Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information on our utilization of financial instruments and an analysis of the sensitivity of these instruments to selected changes in market rates and prices is included in our 2014 Form 10-K.

The net financial instrument position decreased from a liability of $5,044.9 at 30 September 2014 to a liability of $4,980.2 at 31 December 2014. The decrease was due primarily to a stronger U.S. dollar which reduced the translated value of foreign currency debt.

There were no material changes to the sensitivity analysis related to the fixed portion of our debt portfolio since 30 September 2014.

There were no material changes to the sensitivity analysis related to the variable portion of our debt portfolio since 30 September 2014.

The sensitivity analysis related to foreign currency exchange rates assumes an instantaneous 10% change in the foreign currency exchange rates from their levels at 31 December 2014, 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 in the net liability position of financial instruments of $466 at 31 December 2014 versus $419 at 30 September 2014, respectively. The change in the sensitivity analysis includes a higher notional amount of cross currency interest rate swaps primarily to hedge intercompany loans as of 31 December 2014.

Item 4. Controls and Procedures

We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). As of 31 December 2014 (the Evaluation Date), an evaluation of the effectiveness of our disclosure controls and procedures was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report these disclosure controls and procedures were effective.

During the quarter ended on the Evaluation Date, there was no change in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The Company began operating under a new structure effective 1 October 2014. As a result of the new organizational structure, there have been changes in the individuals responsible for executing the controls; however, we continue to execute our business processes under the same controls.

 

36


Table of Contents

Item 6. Exhibits.

Exhibits required by Item 601 of Regulation S-K

 

10.1    Form of Award Agreement under the Long-Term Incentive Plan of the Company, used for FY2015 awards.
12.    Computation of Ratios of Earnings to Fixed Charges.
31.1.    Certification by the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.    Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.    Certification by the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase
101.LAB    XBRL Taxonomy Extension Label Linkbase
101.PRE    XBRL Taxonomy Extension Presentation Linkbase
101.DEF    XBRL Taxonomy Extension Definition Linkbase

† The certification attached as Exhibit 32 that accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Air Products and Chemicals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

37


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

Air Products and Chemicals, Inc.

  (Registrant)
Date: 30 January 2015   By:  

/s/ M. Scott Crocco

    M. Scott Crocco
    Senior Vice President and Chief Financial Officer

 

38


Table of Contents

EXHIBIT INDEX

 

10.1    Form of Award Agreement under the Long-Term Incentive Plan of the Company, used for FY2015 awards.
12.    Computation of Ratios of Earnings to Fixed Charges.
31.1.    Certification by the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.    Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.    Certification by the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase
101.LAB    XBRL Taxonomy Extension Label Linkbase
101.PRE    XBRL Taxonomy Extension Presentation Linkbase
101.DEF    XBRL Taxonomy Extension Definition Linkbase

† The certification attached as Exhibit 32 that accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Air Products and Chemicals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

39