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 March 2015
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
(Registrants 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 issuers classes of common stock, as of the latest practicable date.
Class |
Outstanding at 31 March 2015 | |||
Common Stock, $1 par value | 214,764,754 |
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
Page No. | ||||||
PART I. | FINANCIAL INFORMATION |
|||||
Item 1. |
Financial Statements |
|||||
Consolidated Income Statements Three and Six Months Ended 31 March 2015 and 2014 |
3 | |||||
Consolidated Comprehensive Income Statements Three and Six Months Ended 31 March 2015 and 2014 |
4 | |||||
Consolidated Balance Sheets 31 March 2015 and 30 September 2014 |
5 | |||||
Consolidated Statements of Cash Flows Six Months Ended 31 March 2015 and 2014 |
6 | |||||
7 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
26 | ||||
Item 3. |
47 | |||||
Item 4. |
47 | |||||
PART II. | OTHER INFORMATION |
|||||
Item 6. |
48 | |||||
49 | ||||||
50 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three Months Ended 31 March |
Six Months Ended 31 March | |||||||||||||||||||
(Millions of dollars, except for share data) | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||
Sales |
$ | 2,414.5 | $ | 2,581.9 | $ | 4,975.3 | $ | 5,127.4 | ||||||||||||
Cost of sales |
1,699.6 | 1,917.6 | 3,530.6 | 3,783.5 | ||||||||||||||||
Selling and administrative |
240.9 | 263.4 | 499.1 | 544.3 | ||||||||||||||||
Research and development |
36.3 | 33.2 | 71.7 | 66.7 | ||||||||||||||||
Business restructuring and cost reduction actions |
55.4 | | 87.8 | | ||||||||||||||||
Pension settlement loss |
12.6 | | 12.6 | | ||||||||||||||||
Gain on previously held equity interest |
| | 17.9 | | ||||||||||||||||
Other income (expense), net |
4.7 | 17.0 | 13.0 | 37.4 | ||||||||||||||||
Operating Income |
374.4 | 384.7 | 804.4 | 770.3 | ||||||||||||||||
Equity affiliates income |
33.0 | 30.4 | 76.1 | 68.6 | ||||||||||||||||
Interest expense |
23.4 | 31.5 | 52.5 | 64.8 | ||||||||||||||||
Income from Continuing Operations before Taxes |
384.0 | 383.6 | 828.0 | 774.1 | ||||||||||||||||
Income tax provision |
87.1 | 92.1 | 193.6 | 186.6 | ||||||||||||||||
Income from Continuing Operations |
296.9 | 291.5 | 634.4 | 587.5 | ||||||||||||||||
Income from Discontinued Operations, net of tax |
| | | 3.1 | ||||||||||||||||
Net Income |
296.9 | 291.5 | 634.4 | 590.6 | ||||||||||||||||
Less: Net Income Attributable to Noncontrolling Interests |
6.9 | 8.0 | 19.8 | 16.9 | ||||||||||||||||
Net Income Attributable to Air Products |
$ | 290.0 | $ | 283.5 | $ | 614.6 | $ | 573.7 | ||||||||||||
Net Income Attributable to Air Products |
||||||||||||||||||||
Income from continuing operations |
$ | 290.0 | $ | 283.5 | $ | 614.6 | $ | 570.6 | ||||||||||||
Income from discontinued operations |
| | | 3.1 | ||||||||||||||||
Net Income Attributable to Air Products |
$ | 290.0 | $ | 283.5 | $ | 614.6 | $ | 573.7 | ||||||||||||
Basic Earnings Per Common Share Attributable to Air Products |
||||||||||||||||||||
Income from continuing operations |
$ | 1.35 | $ | 1.33 | $ | 2.87 | $ | 2.69 | ||||||||||||
Income from discontinued operations |
| | | .01 | ||||||||||||||||
Net Income Attributable to Air Products |
$ | 1.35 | $ | 1.33 | $ | 2.87 | $ | 2.70 | ||||||||||||
Diluted Earnings Per Common Share Attributable to Air Products |
||||||||||||||||||||
Income from continuing operations |
$ | 1.33 | $ | 1.32 | $ | 2.83 | $ | 2.66 | ||||||||||||
Income from discontinued operations |
| | | .01 | ||||||||||||||||
Net Income Attributable to Air Products |
$ | 1.33 | $ | 1.32 | $ | 2.83 | $ | 2.67 | ||||||||||||
Weighted Average Common Shares Basic (in millions) |
214.9 | 212.4 | 214.5 | 212.1 | ||||||||||||||||
Weighted Average Common Shares Diluted (in millions) |
217.4 | 214.9 | 217.0 | 214.6 | ||||||||||||||||
Dividends Declared Per Common Share Cash |
$ | .81 | $ | .77 | $ | 1.58 | $ | 1.48 |
The accompanying notes are an integral part of these statements.
3
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(Unaudited)
Three Months Ended 31 March | ||||||||||
(Millions of dollars) | 2015 | 2014 | ||||||||
Net Income |
$ | 296.9 | $ | 291.5 | ||||||
Other Comprehensive Loss, net of tax: |
||||||||||
Translation adjustments, net of tax of $61.4 and ($8.1) |
(232.1 | ) | (85.6 | ) | ||||||
Net gain (loss) on derivatives, net of tax of ($1.4) and $.5 |
(.4 | ) | 4.6 | |||||||
Pension and postretirement benefits, net of tax of ($2.7) |
(4.6 | ) | | |||||||
Reclassification adjustments: |
||||||||||
Derivatives, net of tax of $6.2 and ($3.6) |
17.6 | (10.8 | ) | |||||||
Pension and postretirement benefits, net of tax of $14.7 and $9.6 |
28.6 | 20.6 | ||||||||
Total Other Comprehensive Loss |
(190.9 | ) | (71.2 | ) | ||||||
Comprehensive Income |
106.0 | 220.3 | ||||||||
Net Income Attributable to Noncontrolling Interests |
6.9 | 8.0 | ||||||||
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interests |
.6 | (3.5 | ) | |||||||
Comprehensive Income Attributable to Air Products |
$ | 98.5 | $ | 215.8 | ||||||
Six Months Ended 31 March | ||||||||||
(Millions of dollars) | 2015 | 2014 | ||||||||
Net Income |
$ | 634.4 | $ | 590.6 | ||||||
Other Comprehensive Loss, net of tax: |
||||||||||
Translation adjustments, net of tax of $77.5 and ($21.7) |
(476.5 | ) | (54.2 | ) | ||||||
Net gain (loss) on derivatives, net of tax of ($12.8) and $5.3 |
(24.2 | ) | 17.7 | |||||||
Pension and postretirement benefits, net of tax of ($2.7) |
(4.6 | ) | | |||||||
Reclassification adjustments: |
||||||||||
Derivatives, net of tax of $11.6 and ($8.0) |
31.1 | (22.7 | ) | |||||||
Pension and postretirement benefits, net of tax of $24.8 and $19.2 |
49.5 | 40.6 | ||||||||
Total Other Comprehensive Loss |
(424.7 | ) | (18.6 | ) | ||||||
Comprehensive Income |
209.7 | 572.0 | ||||||||
Net Income Attributable to Noncontrolling Interests |
19.8 | 16.9 | ||||||||
Other Comprehensive Loss Attributable to Noncontrolling Interests |
(4.5 | ) | (4.6 | ) | ||||||
Comprehensive Income Attributable to Air Products |
$ | 194.4 | $ | 559.7 |
The accompanying notes are an integral part of these statements.
4
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
(Unaudited)
(Millions of dollars, except for share data) | 31 March 2015 |
30 September 2014 | ||||||||
Assets |
||||||||||
Current Assets |
||||||||||
Cash and cash items |
$ | 195.7 | $ | 336.6 | ||||||
Trade receivables, net |
1,381.4 | 1,486.0 | ||||||||
Inventories |
693.3 | 706.0 | ||||||||
Contracts in progress, less progress billings |
159.3 | 155.4 | ||||||||
Prepaid expenses |
114.9 | 87.8 | ||||||||
Other receivables and current assets |
569.9 | 523.0 | ||||||||
Total Current Assets |
3,114.5 | 3,294.8 | ||||||||
Investment in net assets of and advances to equity affiliates |
1,223.9 | 1,257.9 | ||||||||
Plant and equipment, at cost |
19,981.8 | 20,223.5 | ||||||||
Less: accumulated depreciation |
10,495.9 | 10,691.4 | ||||||||
Plant and equipment, net |
9,485.9 | 9,532.1 | ||||||||
Goodwill, net |
1,155.4 | 1,237.3 | ||||||||
Intangible assets, net |
553.4 | 615.8 | ||||||||
Noncurrent capital lease receivables |
1,373.9 | 1,414.9 | ||||||||
Other noncurrent assets |
586.8 | 426.3 | ||||||||
Total Noncurrent Assets |
14,379.3 | 14,484.3 | ||||||||
Total Assets |
$ | 17,493.8 | $ | 17,779.1 | ||||||
Liabilities and Equity |
||||||||||
Current Liabilities |
||||||||||
Payables and accrued liabilities |
$ | 1,606.9 | $ | 1,591.0 | ||||||
Accrued income taxes |
55.7 | 78.0 | ||||||||
Short-term borrowings |
1,261.0 | 1,228.7 | ||||||||
Current portion of long-term debt |
157.7 | 65.3 | ||||||||
Total Current Liabilities |
3,081.3 | 2,963.0 | ||||||||
Long-term debt |
4,511.5 | 4,824.5 | ||||||||
Other noncurrent liabilities |
1,042.9 | 1,187.5 | ||||||||
Deferred income taxes |
1,101.8 | 995.5 | ||||||||
Total Noncurrent Liabilities |
6,656.2 | 7,007.5 | ||||||||
Total Liabilities |
9,737.5 | 9,970.5 | ||||||||
Commitments and Contingencies See Note 11 |
||||||||||
Redeemable Noncontrolling Interest |
280.0 | 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 |
877.7 | 842.0 | ||||||||
Retained earnings |
10,267.2 | 9,993.2 | ||||||||
Accumulated other comprehensive loss |
(1,662.1 | ) | (1,241.9 | ) | ||||||
Treasury stock, at cost (2015 34,690,830 shares; 2014 35,917,440 shares) |
(2,399.7 | ) | (2,476.9 | ) | ||||||
Total Air Products Shareholders Equity |
7,332.5 | 7,365.8 | ||||||||
Noncontrolling Interests |
143.8 | 155.6 | ||||||||
Total Equity |
7,476.3 | 7,521.4 | ||||||||
Total Liabilities and Equity |
$ | 17,493.8 | $ | 17,779.1 |
The accompanying notes are an integral part of these statements.
5
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended 31 March | ||||||||||
(Millions of dollars) | 2015 | 2014 | ||||||||
Operating Activities |
||||||||||
Net Income |
$ | 634.4 | $ | 590.6 | ||||||
Less: Net income attributable to noncontrolling interests |
19.8 | 16.9 | ||||||||
Net income attributable to Air Products |
614.6 | 573.7 | ||||||||
Income from discontinued operations |
| (3.1 | ) | |||||||
Income from continuing operations attributable to Air Products |
614.6 | 570.6 | ||||||||
Adjustments to reconcile income to cash provided by operating activities: |
||||||||||
Depreciation and amortization |
468.8 | 463.3 | ||||||||
Deferred income taxes |
53.5 | 36.4 | ||||||||
Gain on previously held equity interest |
(17.9 | ) | | |||||||
Undistributed earnings of unconsolidated affiliates |
(58.0 | ) | (19.2 | ) | ||||||
Share-based compensation |
24.8 | 23.4 | ||||||||
Noncurrent capital lease receivables |
(8.7 | ) | 1.1 | |||||||
Other adjustments |
(58.6 | ) | 75.0 | |||||||
Working capital changes that provided (used) cash, excluding effects of acquisitions and divestitures: |
||||||||||
Trade receivables |
23.6 | (82.0 | ) | |||||||
Inventories |
(14.0 | ) | 33.6 | |||||||
Contracts in progress, less progress billings |
(16.2 | ) | 17.6 | |||||||
Other receivables |
(75.2 | ) | (3.7 | ) | ||||||
Payables and accrued liabilities |
71.8 | (130.0 | ) | |||||||
Other working capital |
(41.3 | ) | 38.6 | |||||||
Cash Provided by Operating Activities |
967.2 | 1,024.7 | ||||||||
Investing Activities |
||||||||||
Additions to plant and equipment |
(817.6 | ) | (802.2 | ) | ||||||
Acquisitions, less cash acquired |
(34.5 | ) | | |||||||
Proceeds from sale of assets and investments |
10.8 | 11.2 | ||||||||
Other investing activities |
1.5 | (.4 | ) | |||||||
Cash Used for Investing Activities |
(839.8 | ) | (791.4 | ) | ||||||
Financing Activities |
||||||||||
Long-term debt proceeds |
337.3 | 39.2 | ||||||||
Payments on long-term debt |
(384.6 | ) | (491.2 | ) | ||||||
Net increase in commercial paper and short-term borrowings |
54.3 | 370.9 | ||||||||
Dividends paid to shareholders |
(329.4 | ) | (300.2 | ) | ||||||
Proceeds from stock option exercises |
77.2 | 57.7 | ||||||||
Excess tax benefit from share-based compensation |
22.7 | 12.6 | ||||||||
Other financing activities |
(34.1 | ) | (26.7 | ) | ||||||
Cash Used for Financing Activities |
(256.6 | ) | (337.7 | ) | ||||||
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 |
(11.7 | ) | .4 | |||||||
Decrease in Cash and Cash Items |
(140.9 | ) | (93.5 | ) | ||||||
Cash and Cash Items Beginning of Year |
336.6 | 450.4 | ||||||||
Cash and Cash Items End of Period |
$ | 195.7 | $ | 356.9 | ||||||
Supplemental Cash Flow Information |
||||||||||
Cash paid for taxes (net of cash refunds) |
$ | 155.8 | $ | 64.5 |
The accompanying notes are an integral part of these statements.
6
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars unless otherwise indicated, except for share data)
1. | BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES |
Refer to our 2014 Form 10-K for a description of major accounting policies. There have been no significant changes to these accounting policies during the first six 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.
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.
7
Consolidation Analysis
In February 2015, the FASB issued an update to amend current consolidation guidance. The guidance impacts the analysis an entity must perform in determining if it should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures. The guidance is effective beginning fiscal year 2017, with early adoption permitted. The guidance may be applied retrospectively or using a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. We are currently evaluating the impact this update will have on our consolidated financial statements.
Debt Issuance Costs
In April 2015, the FASB issued guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt instead of as a separate deferred asset. This change in accounting principle will be effective beginning in fiscal year 2017 with early adoption permitted and must be applied retrospectively. This guidance only affects the presentation of debt issuance costs and will not have a significant impact on our consolidated financial statements.
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 $30 at 31 March 2015), and our exposure will be extinguished by 2020. The fair value of the guarantee is not material.
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.
For the three and six months ended 31 March 2015, we recognized an expense of $55.4 ($38.2 after-tax, or $.18 per share) and $87.8 ($59.9 after-tax, or $.27 per share), respectively. During the first six months of fiscal year 2015, the reorganization has resulted in the elimination of approximately 1,100 positions. The 2015 charges related to the segments as follows: $13.8 in Industrial Gases Americas, $29.5 in Industrial Gases EMEA, $7.5 in Industrial Gases Asia, $3.1 in Industrial Gases Global, $10.6 in Materials Technologies, and $23.3 in Corporate and other.
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 segments 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.
8
The following table summarizes the carrying amount of the accrual for the business realignment and reorganization at 31 March 2015:
Severance and | |||||
Other Benefits | |||||
2014 Charge |
$ | 12.7 | |||
Cash expenditures |
(2.2 | ) | |||
30 September 2014 |
$ | 10.5 | |||
2015 Charge |
87.8 | ||||
Amount reflected in pension liability |
(8.8 | ) | |||
Cash expenditures |
(57.4 | ) | |||
Currency translation adjustment |
(1.1 | ) | |||
31 March 2015 |
$ | 31.0 |
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 following table summarizes the carrying amount of the accrual for the 2013 Plan at 31 March 2015:
Severance and | Asset | Contract | ||||||||||||||||||
Other Benefits | Actions | 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 |
(9.8 | ) | | | (9.8 | ) | ||||||||||||||
Currency translation adjustment |
(.3 | ) | | | (.3 | ) | ||||||||||||||
31 March 2015 |
$ | | $ | | $ | | $ | |
5. | BUSINESS COMBINATIONS |
On 30 December 2014, we acquired our partners 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 six months ended 31 March 2015 include a gain of $17.9 ($11.2 after-tax, or $.05 per share) as a result of revaluing our previously held equity interest to fair value as of the acquisition date. This gain is reflected on the consolidated income statements as Gain on previously held equity interest.
9
6. | INVENTORIES |
The components of inventories are as follows:
31 March 2015 |
30 September 2014 | |||||||||
Finished goods |
$ | 509.2 | $ | 493.9 | ||||||
Work in process |
36.3 | 34.1 | ||||||||
Raw materials, supplies and other |
259.4 | 283.4 | ||||||||
$ | 804.9 | $ | 811.4 | |||||||
Less: Excess of FIFO cost over LIFO cost |
(111.6 | ) | (105.4 | ) | ||||||
Inventories |
$ | 693.3 | $ | 706.0 |
First-in, first-out (FIFO) cost approximates replacement cost.
7. | GOODWILL |
Changes to the carrying amount of consolidated goodwill by segment for the six months ended 31 March 2015 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 | 3.2 | | | | 5.4 | ||||||||||||||||||||||||
Currency translation and other |
(9.8 | ) | (58.5 | ) | (4.0 | ) | (1.2 | ) | (13.8 | ) | (87.3 | ) | ||||||||||||||||||
Balance at 31 March 2015 |
$ | 319.6 | $ | 378.0 | $ | 136.0 | $ | 20.2 | $ | 301.6 | $ | 1,155.4 |
31 March 2015 |
30 September 2014 | |||||||||
Goodwill, gross |
$ | 1,427.6 | $ | 1,522.1 | ||||||
Accumulated impairment losses(A) |
(272.2 | ) | (284.8 | ) | ||||||
Goodwill, net |
$ | 1,155.4 | $ | 1,237.3 |
(A) | Amount is attributable to the Industrial Gases Americas segment and includes currency translation of $33.0 and $20.4 as of 31 March 2015 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 on our thirteen reporting units. We determined that the fair value of all of our reporting units, except Latin America within the Industrial Gases Americas segment, substantially exceeded their carrying value. The Latin America reporting unit is composed predominately of our Indura business acquired by the Company in 2012, with business units in Chile, Colombia, and other Latin America countries. In the fourth quarter of 2014, we recorded an impairment of goodwill of $305.2 related to this reporting unit. As of 1 October 2014, the fair value of our Latin America reporting unit exceeded its carrying value by approximately 10% primarily due to depreciation, amortization, and the impact of a Chilean tax rate change which had previously been reflected in the determination of the fair value of the reporting unit but not reflected in the carrying value until the enactment date. 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 in the 2014 impairment testing. As of 31 March 2015, the carrying value of Latin America goodwill was $223.0, or approximately 1.3% of consolidated total assets.
Management judgement is required in the determination of each assumption utilized in the valuation model, and actual results could differ from the estimates. Revenue growth and EBITDA margin assumptions are two primary drivers of the fair value of our Latin America reporting unit, and these assumptions are underpinned by our expectations for long-term manufacturing growth in the region. 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.
10
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 U.S. dollars as well as Euros and British Pound Sterling. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 31 March 2015 is 3.5 years.
Forward exchange contracts are also used to hedge the value of investments in certain foreign subsidiaries and affiliates by creating a liability in a currency in which we have a net equity position. The primary currency pair in this portfolio of forward exchange contracts is Euros and U.S. dollars.
In addition to the forward exchange contracts that are designated as hedges, we utilize forward exchange contracts that are not designated as hedges. 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 March 2015 | 30 September 2014 | |||||||||||||||||||
US$ Notional |
Years Average Maturity |
US$ Notional |
Years Average Maturity | |||||||||||||||||
Forward Exchange Contracts: |
||||||||||||||||||||
Cash flow hedges |
$ | 3,100.0 | .5 | $ | 2,965.5 | .7 | ||||||||||||||
Net investment hedges |
587.6 | 4.0 | 685.9 | 2.9 | ||||||||||||||||
Not designated |
1,027.6 | .4 | 381.5 | .1 | ||||||||||||||||
Total Forward Exchange Contracts |
$ | 4,715.2 | .9 | $ | 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 890.4 million ($956.2) and Chinese Renminbi 1,085.8 million ($175.1) at 31 March 2015 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.
11
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 March 2015, the outstanding interest rate swaps were denominated in U.S. dollars and Chilean Pesos. The maximum remaining term of any interest rate swap designated as a cash flow hedge is 0.4 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 primarily consists of fixed-to-fixed swaps between U.S. dollars and offshore Chinese Renminbi, U.S. dollars and British Pound Sterling, U.S. dollars and Chilean Pesos, as well as U.S. dollars and Euros.
The following table summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:
31 March 2015 | 30 September 2014 | |||||||||||||||||||||||||||||||||||||||
US$ Notional |
Average Pay % |
Average Receive % |
Years Average Maturity |
US$ Notional |
Average Pay % |
Average Receive % |
Years Average Maturity | |||||||||||||||||||||||||||||||||
Interest rate swaps |
$ | 600.0 | LIBOR | 2.77 | % | 3.8 | $ | 600.0 | LIBOR | 2.77 | % | 4.3 | ||||||||||||||||||||||||||||
Cross currency interest rate swaps |
$ | 773.1 | 3.43 | % | 2.01 | % | 3.2 | $ | 404.5 | 3.70 | % | 1.15 | % | 2.7 | ||||||||||||||||||||||||||
Interest rate swaps |
$ | 52.8 | 6.84 | % | 3.68 | % | .4 | $ | 431.7 | 2.36 | % | .71 | % | .4 | ||||||||||||||||||||||||||
Cross currency interest rate swaps |
$ | 558.0 | 3.85 | % | 2.94 | % | 3.9 | $ | 446.3 | 3.39 | % | 2.86 | % | 4.2 | ||||||||||||||||||||||||||
Cross currency interest rate swaps |
$ | | | % | | % | | $ | 15.4 | 3.62 | % | .05 | % | .8 |
12
The table below summarizes the fair value and balance sheet location of our outstanding derivatives:
Balance Sheet Location |
31 March 2015 |
30 September 2014 |
Balance Sheet Location |
31 March 2015 |
30 September 2014 | |||||||||||||||||||
Derivatives Designated as Hedging Instruments: |
||||||||||||||||||||||||
Forward exchange contracts |
Other receivables | $109.3 | $78.9 | Accrued liabilities | $194.8 | $61.8 | ||||||||||||||||||
Interest rate management contracts |
Other receivables | 29.7 | 21.1 | Accrued liabilities | .1 | 18.8 | ||||||||||||||||||
Forward exchange contracts |
Other noncurrent assets | 96.8 | 10.5 | Other noncurrent liabilities | 4.8 | 3.1 | ||||||||||||||||||
Interest rate management contracts |
Other noncurrent assets | 143.7 | 54.6 | Other noncurrent liabilities | | .3 | ||||||||||||||||||
Total Derivatives Designated as Hedging Instruments |
$379.5 | $165.1 | $199.7 | $84.0 | ||||||||||||||||||||
Derivatives Not Designated as Hedging Instruments: |
||||||||||||||||||||||||
Forward exchange contracts |
Other receivables | $29.2 | $4.0 | Accrued liabilities | $33.1 | $1.9 | ||||||||||||||||||
Interest rate management contracts |
Other receivables | | 2.6 | Accrued liabilities | | | ||||||||||||||||||
Total Derivatives Not Designated as Hedging Instruments |
$29.2 | $6.6 | $33.1 | $1.9 | ||||||||||||||||||||
Total Derivatives |
$408.7 | $171.7 | $232.8 | $85.9 |
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 March | ||||||||||||||||||||||||||||||||||||||||
Forward Exchange Contracts |
Foreign Currency Debt |
Other (A) | Total | |||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||||||
Cash Flow Hedges, net of tax: |
||||||||||||||||||||||||||||||||||||||||
Net gain (loss) recognized in OCI |
$ | (22.0) | $ | 5.1 | $ | | $ | | $ | 21.6 | $ | (.5 | ) | $ | (.4 | ) | $ | 4.6 | ||||||||||||||||||||||
Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion) |
.9 | .8 | | | | | .9 | .8 | ||||||||||||||||||||||||||||||||
Net (gain) loss reclassified from OCI to other income (expense), net (effective portion) |
23.9 | (5.9 | ) | | | (8.0 | ) | (5.1 | ) | 15.9 | (11.0 | ) | ||||||||||||||||||||||||||||
Net (gain) loss reclassified from OCI to interest expense (effective portion) |
.1 | (.8 | ) | | | .6 | .3 | .7 | (.5 | ) | ||||||||||||||||||||||||||||||
Net (gain) loss reclassified from OCI to other income (expense), net (ineffective portion) |
.1 | (.1 | ) | | | | | .1 | (.1 | ) | ||||||||||||||||||||||||||||||
Fair Value Hedges: |
||||||||||||||||||||||||||||||||||||||||
Net gain (loss) recognized in interest expense (B) |
$ | | $ | | $ | | $ | | $ | 4.5 | $ | 1.0 | $ | 4.5 | $ | 1.0 | ||||||||||||||||||||||||
Net Investment Hedges, net of tax: |
||||||||||||||||||||||||||||||||||||||||
Net gain (loss) recognized in OCI |
$ | 50.0 | $ | (6.7 | ) | $ | 76.7 | $ | 1.9 | $ | 27.3 | $ | 2.5 | $ | 154.0 | $ | (2.3 | ) | ||||||||||||||||||||||
Derivatives Not Designated as Hedging Instruments: |
|
|||||||||||||||||||||||||||||||||||||||
Net gain (loss) recognized in other income (expense), net (C) |
$ | (7.4 | ) | $ | (.3 | ) | $ | | $ | | $ | | $ | .2 | $ | (7.4 | ) | $ | (.1 | ) |
13
Six Months Ended 31 March | ||||||||||||||||||||||||||||||||||||||||
Forward Exchange Contracts |
Foreign Currency Debt |
Other (A) | Total | |||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||||||
Cash Flow Hedges, net of tax: |
||||||||||||||||||||||||||||||||||||||||
Net gain (loss) recognized in OCI |
$ | (46.0 | ) | $ | 19.4 | $ | | $ | | $ | 21.8 | $ | (1.7 | ) | $ | (24.2 | ) | $ | 17.7 | |||||||||||||||||||||
Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion) |
.3 | 1.0 | | | | | .3 | 1.0 | ||||||||||||||||||||||||||||||||
Net (gain) loss reclassified from OCI to other income, net (effective portion) |
42.7 | (18.6 | ) | | | (13.2 | ) | (3.7 | ) | 29.5 | (22.3 | ) | ||||||||||||||||||||||||||||
Net (gain)loss reclassified from OCI to interest expense (effective portion) |
(.2 | ) | (.8 | ) | | | .9 | .1 | .7 | (.7 | ) | |||||||||||||||||||||||||||||
Net (gain) loss reclassified from OCI to other income, net (ineffective portion) |
.6 | (.7 | ) | | | | | .6 | (.7 | ) | ||||||||||||||||||||||||||||||
Fair Value Hedges: |
||||||||||||||||||||||||||||||||||||||||
Net gain (loss) recognized in interest expense(B) |
$ | | $ | | $ | | $ | | $ | 8.0 | $ | (3.4 | ) | $ | 8.0 | $ | (3.4 | ) | ||||||||||||||||||||||
Net Investment Hedges, net of tax: |
||||||||||||||||||||||||||||||||||||||||
Net gain (loss) recognized in OCI |
$ | 70.1 | $ | (16.6 | ) | $ | 107.8 | $ | (11.7 | ) | $ | 37.4 | $ | 7.6 | $ | 215.3 | $ | (20.7 | ) | |||||||||||||||||||||
Derivatives Not Designated as Hedging Instruments: |
|
|||||||||||||||||||||||||||||||||||||||
Net gain (loss) recognized in other income (expense), net(C) |
$ | (7.2 | ) | $ | (.2 | ) | $ | | $ | | $ | | $ | .2 | $ | (7.2 | ) | $ | |
(A) | Other includes the impact on other comprehensive income (OCI) and earnings primarily related to interest rate and cross currency interest rate swaps. |
(B) | The impact of fair value hedges noted above was largely offset by gains and losses resulting from the impact of changes in related interest rates on recognized outstanding debt. |
(C) | The impact of the non-designated hedges noted above was largely offset by gains and losses resulting from the |
impact of changes in exchange rates on recognized assets and liabilities denominated in nonfunctional currencies.
The amount of cash flow hedges unrealized gains and losses at 31 March 2015 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 & Poors and Moodys. 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 $5.0 as of 31 March 2015 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 & Poors or Moodys. These are the same agreements referenced in Credit Risk-Related Contingent Features above. The collateral that the counterparties would be required to post was $231.1 as of 31 March 2015 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
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. Therefore, the fair value of our derivatives is classified as a level 2 measurement. On an ongoing basis, we randomly test a subset of our valuations against valuations received from the transactions 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 March 2015 | 30 September 2014 | |||||||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||
Assets |
||||||||||||||||||||
Derivatives |
||||||||||||||||||||
Forward exchange contracts |
$ | 235.3 | $ | 235.3 | $ | 93.4 | $ | 93.4 | ||||||||||||
Interest rate management contracts |
173.4 | 173.4 | 78.3 | 78.3 | ||||||||||||||||
Liabilities |
||||||||||||||||||||
Derivatives |
||||||||||||||||||||
Forward exchange contracts |
$ | 232.7 | $ | 232.7 | $ | 66.8 | $ | 66.8 | ||||||||||||
Interest rate management contracts |
.1 | .1 | 19.1 | 19.1 | ||||||||||||||||
Long-term debt, including current portion |
4,669.2 | 4,941.9 | 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
The following table summarizes assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets:
31 March 2015 | 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 |
$ | 235.3 | $ | | $ | 235.3 | $ | | $ | 93.4 | $ | | $ | 93.4 | $ | | ||||||||||||||||||||||||
Interest rate management contracts |
173.4 | | 173.4 | | 78.3 | | 78.3 | | ||||||||||||||||||||||||||||||||
Total Assets at Fair Value |
$ | 408.7 | $ | | $ | 408.7 | $ | | $ | 171.7 | $ | | $ | 171.7 | $ | | ||||||||||||||||||||||||
Liabilities at Fair Value |
||||||||||||||||||||||||||||||||||||||||
Derivatives |
||||||||||||||||||||||||||||||||||||||||
Forward exchange contracts |
$ | 232.7 | $ | | $ | 232.7 | $ | | $ | 66.8 | $ | | $ | 66.8 | $ | | ||||||||||||||||||||||||
Interest rate management contracts |
.1 | | .1 | | 19.1 | | 19.1 | | ||||||||||||||||||||||||||||||||
Total Liabilities at Fair Value |
$ | 232.8 | $ | | $ | 232.8 | $ | | $ | 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 and six months ended 31 March 2015 and 2014 were as follows:
Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||
Three Months Ended 31 March | U.S. | International | U.S. | International | ||||||||||||||||||||||||||
Service cost |
$ | 10.6 | $ | 7.9 | $ | 10.6 | $ | 9.0 | $ | .7 | $ | .8 | ||||||||||||||||||
Interest cost |
31.3 | 14.2 | 32.7 | 16.9 | .5 | .6 | ||||||||||||||||||||||||
Expected return on plan assets |
(50.5 | ) | (19.1 | ) | (46.9 | ) | (19.6 | ) | | | ||||||||||||||||||||
Prior service cost amortization |
.7 | .1 | .7 | | | | ||||||||||||||||||||||||
Actuarial loss amortization |
19.6 | 10.1 | 19.6 | 8.9 | .2 | .5 | ||||||||||||||||||||||||
Settlements and curtailments |
15.7 | | | .5 | | | ||||||||||||||||||||||||
Special termination benefits |
2.1 | .9 | | | | | ||||||||||||||||||||||||
Other |
| .5 | | .5 | | | ||||||||||||||||||||||||
Net periodic benefit cost |
$ | 29.5 | $ | 14.6 | $ | 16.7 | $ | 16.2 | $ | 1.4 | $ | 1.9 | ||||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||
Six Months Ended 31 March | U.S. | International | U.S. | International | ||||||||||||||||||||||||||
Service cost |
$ | 21.2 | $ | 16.1 | $ | 21.3 | $ | 17.8 | $ | 1.4 | $ | 1.6 | ||||||||||||||||||
Interest cost |
62.5 | 29.2 | 65.4 | 33.5 | 1.1 | 1.2 | ||||||||||||||||||||||||
Expected return on plan assets |
(101.0 | ) | (40.2 | ) | (93.9 | ) | (38.8 | ) | | | ||||||||||||||||||||
Prior service cost amortization |
1.4 | .1 | 1.4 | .1 | | | ||||||||||||||||||||||||
Actuarial loss amortization |
39.4 | 20.6 | 39.2 | 17.7 | .4 | .9 | ||||||||||||||||||||||||
Settlements and curtailments |
15.6 | (.1 | ) | | .5 | | | |||||||||||||||||||||||
Special termination benefits |
4.8 | .9 | .2 | | | | ||||||||||||||||||||||||
Other |
1.1 | 1.0 | | 1.0 | | | ||||||||||||||||||||||||
Net periodic benefit cost |
$ | 45.0 | $ | 27.6 | $ | 33.6 | $ | 31.8 | $ | 2.9 | $ | 3.7 |
Net periodic benefit cost is primarily included in cost of sales, selling and administrative expense, and pension settlement loss on our consolidated income statements. The amount of net periodic benefit cost capitalized in 2015 and 2014 was not material.
16
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 their retirement date. Pension settlements are immediately 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. The participants vested benefit is considered settled upon cash payment of the lump sum. For the three months ended 31 March 2015, we recognized a pension settlement charge of $12.6 to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss associated with the U.S. supplemental pension plan.
Special termination benefits for the three and six months ended 31 March 2015 are $3.0 and $5.7 respectively, related to the business restructuring and cost reduction actions. In addition, curtailment losses related to the U.S. Supplementary pension plan of $3.1 are also reflected in the business restructuring and cost reduction actions charge.
For the six months ended 31 March 2015 and 2014, our cash contributions to funded pension plans and benefit payments under unfunded pension plans were $95.4 and $43.9, respectively. Total contributions for fiscal 2015 are expected to be approximately $130.0 to $150.0. 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 $56 at 31 March 2015) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, whose investigation began in 2003, alleging violation of competition laws with respect to the sale of industrial and medical gases. The fines are based on a percentage of our total revenue in Brazil in 2003.
We have denied the allegations made by the authorities and filed an appeal in October 2010 with the Brazilian courts. On 6 May 2014, our appeal was granted and the fine against Air Products Brasil Ltda. was dismissed. CADE has appealed that ruling and the matter remains pending. We, with advice of our outside legal counsel, have assessed the status of this matter and have concluded that, although an adverse final judgment after exhausting all appeals is possible, such a judgment is not probable. As a result, no provision has been made in the consolidated financial statements. We estimate the maximum possible loss to be the full amount of the fine of R$179.2 million (approximately $56 at 31 March 2015) 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 March 2015 and 30 September 2014 included an accrual of $83.6 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 $83 to a reasonably possible upper exposure of $97 as of 31 March 2015.
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.
17
PACE
At 31 March 2015, $31.5 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.
PIEDMONT
At 31 March 2015, $18.4 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 March 2015, $12.0 of the environmental accrual was related to the Pasadena site.
During the fourth quarter of 2012, management committed to permanently shutting down our polyurethane intermediates (PUI) production facility in Pasadena, Texas. In shutting down and dismantling the facility, we have undertaken certain obligations related to soil and groundwater contaminants. We have been pumping and treating groundwater to control off-site contaminant migration in compliance with regulatory requirements and under the approval of the Texas Commission on Environmental Quality (TCEQ). We estimate that the pump and treat system will continue to operate until 2042. We plan to perform additional work to address other environmental obligations at the site. This additional work includes investigating solid waste management units, 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.
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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 March 2015, there were 5,085,893 shares available for future grant under our Long-Term Incentive Plan, which is shareholder approved.
Share-based compensation cost recognized in the consolidated income statements is summarized below:
Three Months Ended 31 March |
Six Months Ended 31 March | |||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||
Before-Tax Share-Based Compensation Cost |
$ | 12.9 | $ | 11.6 | $ | 24.8 | $ | 23.4 | ||||||||||||
Income Tax Benefit |
(4.7 | ) | (3.9 | ) | (8.7 | ) | (8.2 | ) | ||||||||||||
After-Tax Share-Based Compensation Cost |
$ | 8.2 | $ | 7.7 | $ | 16.1 | $ | 15.2 |
Before-tax share-based compensation cost is primarily included in selling and administrative expense on our consolidated income statements. The amount of share-based compensation cost capitalized in 2015 and 2014 was not material.
Deferred Stock Units
During the six months ended 31 March 2015, 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 Companys 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.
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 six months ended 31 March 2015, we granted 136,574 time-based deferred stock units at a weighted-average grant-date fair value of $144.26.
Stock Options
During the six months ended 31 March 2015, 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 six months ended 31 March 2015, we issued 19,691 restricted shares at a weighted-average grant-date fair value of $144.09.
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13. | EQUITY |
The following is a summary of the changes in total equity:
Three Months Ended 31 March | ||||||||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||||||||
Air Products |
Non- controlling Interests |
Total Equity |
Air Products |
Non- controlling Interests |
Total Equity | |||||||||||||||||||||||||
Balance at 31 December |
$ | 7,351.5 | $ | 151.8 | $ | 7,503.3 | $ | 7,264.0 | $ | 158.7 | $ | 7,422.7 | ||||||||||||||||||
Net income (A) |
290.0 | 6.9 | 296.9 | 283.5 | 7.3 | 290.8 | ||||||||||||||||||||||||
Other comprehensive income (loss) |
(191.5 | ) | .6 | (190.9 | ) | (67.7 | ) | (3.5 | ) | (71.2 | ) | |||||||||||||||||||
Dividends on common stock (per share $.81, $.77) |
(173.9 | ) | | (173.9 | ) | (163.4 | ) | | (163.4 | ) | ||||||||||||||||||||
Dividends to noncontrolling interests |
| (13.1 | ) | (13.1 | ) | | (5.6 | ) | (5.6 | ) | ||||||||||||||||||||
Share-based compensation |
12.9 | | 12.9 | 11.6 | | 11.6 | ||||||||||||||||||||||||
Issuance of treasury shares for stock option and award plans |
32.8 | | 32.8 | 34.7 | | 34.7 | ||||||||||||||||||||||||
Tax benefit of stock option and award plans |
9.4 | | 9.4 | 9.2 | | 9.2 | ||||||||||||||||||||||||
Other equity transactions |
1.3 | (2.4 | ) | (1.1 | ) | (1.0 | ) | | (1.0 | ) | ||||||||||||||||||||
Balance at 31 March |
$ | 7,332.5 | $ | 143.8 | $ | 7,476.3 | $ | 7,370.9 | $ | 156.9 | $ | 7,527.8 | ||||||||||||||||||
Six Months Ended 31 March | ||||||||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||||||||
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) |
614.6 | 14.4 | 629.0 | 573.7 | 14.9 | 588.6 | ||||||||||||||||||||||||
Other comprehensive loss |
(420.2 | ) | (4.5 | ) | (424.7 | ) | (14.0 | ) | (4.6 | ) | (18.6 | ) | ||||||||||||||||||
Dividends on common stock (per share $1.58, $1.48) |
(339.3 | ) | | (339.3 | ) | (313.7 | ) | | (313.7 | ) | ||||||||||||||||||||
Dividends to noncontrolling interests |
| (19.3 | ) | (19.3 | ) | | (10.2 | ) | (10.2 | ) | ||||||||||||||||||||
Share-based compensation |
24.8 | | 24.8 | 23.4 | | 23.4 | ||||||||||||||||||||||||
Issuance of treasury shares for stock option and |
||||||||||||||||||||||||||||||
award plans |
62.9 | | 62.9 | 47.9 | | 47.9 | ||||||||||||||||||||||||
Tax benefit of stock option and award plans |
22.9 | | 22.9 | 14.0 | | 14.0 | ||||||||||||||||||||||||
Purchase of noncontrolling interests |
| | | (.5 | ) | | (.5 | ) | ||||||||||||||||||||||
Other equity transactions |
1.0 | (2.4 | ) | (1.4 | ) | (2.0 | ) | | (2.0 | ) | ||||||||||||||||||||
Balance at 31 March |
$ | 7,332.5 | $ | 143.8 | $ | 7,476.3 | $ | 7,370.9 | $ | 156.9 | $ | 7,527.8 |
(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. |
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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 and six months ended 31 March 2015:
Net loss on derivatives qualifying as hedges |
Foreign currency translation adjustments |
Pension and postretirement benefits |
Total | |||||||||||||||||
Balance at 31 December 2014 |
$ | (38.9 | ) | $ | (507.9 | ) | $ | (923.8 | ) | $ | (1,470.6 | ) | ||||||||
Other comprehensive loss before reclassifications |
(.4 | ) | (232.1 | ) | (4.6 | ) | (237.1 | ) | ||||||||||||
Amounts reclassified from AOCL |
17.6 | | 28.6 | 46.2 | ||||||||||||||||
Net current period other comprehensive income (loss) |
$ | 17.2 | $ | (232.1 | ) | $ | 24.0 | $ | (190.9 | ) | ||||||||||
Amount attributable to noncontrolling interest |
| .6 | | .6 | ||||||||||||||||
Balance at 31 March 2015 |
$ | (21.7 | ) | $ | (740.6 | ) | $ | (899.8 | ) | $ | (1,662.1 | ) | ||||||||
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 loss before reclassifications |
(24.2 | ) | (476.5 | ) | (4.6 | ) | (505.3 | ) | ||||||||||||
Amounts reclassified from AOCL |
31.1 | | 49.5 | 80.6 | ||||||||||||||||
Net current period other comprehensive income (loss) |
$ | 6.9 | $ | (476.5 | ) | $ | 44.9 | $ | (424.7 | ) | ||||||||||
Amount attributable to noncontrolling interest |
.1 | (4.6 | ) | | (4.5 | ) | ||||||||||||||
Balance at 31 March 2015 |
$ | (21.7 | ) | $ | (740.6 | ) | $ | (899.8 | ) | $ | (1,662.1 | ) |
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 March |
Six Months Ended 31 March | |||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||
(Gain) Loss on Cash Flow Hedges, net of tax |
||||||||||||||||||||
Sales/Cost of sales |
$ | .9 | $ | .8 | $ | .3 | $ | 1.0 | ||||||||||||
Other income (expense), net |
16.0 | (11.1 | ) | 30.1 | (23.0 | ) | ||||||||||||||
Interest expense |
.7 | (.5 | ) | .7 | (.7 | ) | ||||||||||||||
Total (Gain) Loss on Cash Flow Hedges, net of tax |
$ | 17.6 | $ | (10.8 | ) | $ | 31.1 | $ | (22.7 | ) | ||||||||||
Pension and Postretirement Benefits, net of tax(A) |
$ | 28.6 | $ | 20.6 | $ | 49.5 | $ | 40.6 |
(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. |
21
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 shareholders 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.
The following is a summary of the changes in redeemable noncontrolling interest for the three and six months ended 31 March:
Three Months Ended 31 March | ||||||||||
2015 | 2014 | |||||||||
Balance at 31 December |
$ | 288.7 | $ | 358.7 | ||||||
Net income |
| .7 | ||||||||
Currency translation adjustment |
(8.7 | ) | (15.8 | ) | ||||||
Balance at 31 March |
$ | 280.0 | $ | 343.6 | ||||||
Six Months Ended 31 March | ||||||||||
2015 | 2014 | |||||||||
Balance at 30 September |
$ | 287.2 | $ | 375.8 | ||||||
Net income |
5.4 | 2.0 | ||||||||
Dividends |
| (3.5 | ) | |||||||
Currency translation adjustment |
(12.6 | ) | (30.7 | ) | ||||||
Balance at 31 March |
$ | 280.0 | $ | 343.6 |
As of 31 March 2015, we have a 67.3% controlling equity interest in Indura S.A.
22
16. | EARNINGS PER SHARE |
The following table sets forth the computation of basic and diluted earnings per share (EPS):
Three Months Ended 31 March |
Six Months Ended 31 March | |||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||
Numerator |
||||||||||||||||||||
Income from continuing operations |
$ | 290.0 | $ | 283.5 | $ | 614.6 | $ | 570.6 | ||||||||||||
Income from discontinued operations |
| | | 3.1 | ||||||||||||||||
Net Income Attributable to Air Products |
$ | 290.0 | $ | 283.5 | $ | 614.6 | $ | 573.7 | ||||||||||||
Denominator (in millions) |
||||||||||||||||||||
Weighted average number of common shares Basic |
214.9 | 212.4 | 214.5 | 212.1 | ||||||||||||||||
Effect of dilutive securities |
||||||||||||||||||||
Employee stock option and other award plans |
2.5 | 2.5 | 2.5 | 2.5 | ||||||||||||||||
Weighted average number of common shares Diluted |
217.4 | 214.9 | 217.0 | 214.6 | ||||||||||||||||
Basic EPS Attributable to Air Products |
||||||||||||||||||||
Income from continuing operations |
$ | 1.35 | $ | 1.33 | $ | 2.87 | $ | 2.69 | ||||||||||||
Income from discontinued operations |
| | | .01 | ||||||||||||||||
Net Income Attributable to Air Products |
$ | 1.35 | $ | 1.33 | $ | 2.87 | $ | 2.70 | ||||||||||||
Diluted EPS Attributable to Air Products |
||||||||||||||||||||
Income from continuing operations |
$ | 1.33 | $ | 1.32 | $ | 2.83 | $ | 2.66 | ||||||||||||
Income from discontinued operations |
| | | .01 | ||||||||||||||||
Net Income Attributable to Air Products |
$ | 1.33 | $ | 1.32 | $ | 2.83 | $ | 2.67 |
Outstanding share-based awards of .2 million and .3 million shares were antidilutive and therefore excluded from the computation of diluted earnings per share for the three and six months ended 31 March 2015, respectively. Outstanding share-based awards of .8 million shares were antidilutive and therefore excluded from the computation of diluted earnings per share for the three and six months ended 31 March 2014.
17. | SUPPLEMENTAL INFORMATION |
On 12 February 2015, we issued a 1.0% Eurobond for 300 million ($335.3) that matures on 12 February 2025. The proceeds were used to repay a 3.875% Eurobond of 300 million ($335.9) that matured on 10 March 2015.
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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 customers facility or deliver product from one of our pipelines. We are the worlds 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.
24
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 |
Segment Total | |||||||||||||||||||||||||||||||||
Three Months Ended 31 March 2015 |
||||||||||||||||||||||||||||||||||||||||
Sales |
$ | 890.4 | $ | 448.8 | $ | 393.0 | $ | 67.1 | $ | 533.3 | $ | | $ | 81.9 | $ | 2,414.5 | ||||||||||||||||||||||||
Operating income (loss) |
182.0 | 71.0 | 84.7 | (7.9 | ) | 124.2 | (2.8 | ) | (8.8 | ) | 442.4 | |||||||||||||||||||||||||||||
Depreciation and amortization |
103.3 | 47.6 | 50.3 | 5.5 | 23.3 | | 3.3 | 233.3 | ||||||||||||||||||||||||||||||||
Equity affiliates income (loss) |
15.1 | 8.0 | 9.4 | (.2 | ) | .7 | | | 33.0 | |||||||||||||||||||||||||||||||
Three Months Ended 31 March 2014 |
||||||||||||||||||||||||||||||||||||||||
Sales |
$ | 1,032.9 | $ | 542.7 | $ | 365.7 | $ | 68.4 | $ | 499.6 | $ | | $ | 72.6 | $ | 2,581.9 | ||||||||||||||||||||||||
Operating income (loss) |
169.6 | 87.5 | 71.2 | (14.6 | ) | 93.8 | (3.5 | ) | (19.3 | ) | 384.7 | |||||||||||||||||||||||||||||
Depreciation and amortization |
99.4 | 55.0 | 48.1 | 1.6 | 22.7 | | 2.3 | 229.1 | ||||||||||||||||||||||||||||||||
Equity affiliates income |
12.6 | 9.3 | 7.6 | .3 | .6 | | | 30.4 | ||||||||||||||||||||||||||||||||
Six Months Ended 31 March 2015 |
||||||||||||||||||||||||||||||||||||||||
Sales |
$ | 1,893.4 | $ | 949.6 | $ | 791.7 | $ | 126.1 | $ | 1,057.3 | $ | | $ | 157.2 | $ | 4,975.3 | ||||||||||||||||||||||||
Operating income (loss) |
393.2 | 152.3 | 175.2 | (25.8 | ) | 228.8 | (5.3 | ) | (31.5 | ) | 886.9 | |||||||||||||||||||||||||||||
Depreciation and amortization |
206.9 | 98.7 | 99.9 | 9.8 | 47.3 | | 6.2 | 468.8 | ||||||||||||||||||||||||||||||||
Equity affiliates income |
32.3 | 18.3 | 24.0 | .2 | 1.3 | | | 76.1 | ||||||||||||||||||||||||||||||||
Six Months Ended 31 March 2014 |
||||||||||||||||||||||||||||||||||||||||
Sales |
$ | 1,976.8 | $ | 1,092.6 | $ | 761.0 | $ | 135.6 | $ | 979.1 | $ | | $ | 182.3 | $ | 5,127.4 | ||||||||||||||||||||||||
Operating income (loss) |
354.1 | 172.7 | 153.9 | (24.9 | ) | 158.1 | (6.4 | ) | (37.2 | ) | 770.3 | |||||||||||||||||||||||||||||
Depreciation and amortization |
203.4 | 109.9 | 94.5 | 3.3 | 47.2 | | 5.0 | 463.3 | ||||||||||||||||||||||||||||||||
Equity affiliates income |
30.2 | 19.0 | 17.2 | 1.0 | 1.2 | | | 68.6 | ||||||||||||||||||||||||||||||||
Total Assets |
||||||||||||||||||||||||||||||||||||||||
31 March 2015 |
$ | 6,074.5 | $ | 3,131.6 | $ | 4,174.3 | $ | 338.8 | $ | 1,801.2 | $ | 724.8 | $ | 1,248.6 | $ | 17,493.8 | ||||||||||||||||||||||||
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 and six months ended 31 March 2015, the Industrial Gases Global segment had intersegment sales of $54.1 and $113.7, respectively. For the three and six months ended 31 March 2014, the Industrial Gases Global segment had intersegment sales of $48.4 and $89.7, 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.
25
Below is a reconciliation of segment total operating income to consolidated operating income:
Three Months Ended 31 March |
Six Months Ended 31 March | |||||||||||||||||||
Operating Income | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||
Segment total |
$ | 442.4 | $ | 384.7 | $ | 886.9 | $ | 770.3 | ||||||||||||
Business restructuring and cost reduction actions |
(55.4 | ) | | (87.8 | ) | | ||||||||||||||
Pension settlement loss |
(12.6 | ) | | (12.6 | ) | | ||||||||||||||
Gain on previously held equity interest |
| | 17.9 | | ||||||||||||||||
Consolidated Total |
$ | 374.4 | $ | 384.7 | $ | 804.4 | $ | 770.3 |
Item 2. Managements 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 second quarter and first six months of 2015 is provided in the Managements 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 Managements Discussion and Analysis, unless otherwise stated.
The discussion of results that follows includes comparisons of non-GAAP financial measures. For 2015, the non-GAAP measures exclude: business reorganization and cost reduction charges, pension settlement losses, 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 metric to assess operating performance. The presentation of non-GAAP measures is intended to enhance the usefulness of financial information by providing measures that our management uses internally to evaluate our performance. The reconciliation of reported GAAP results to non-GAAP measures is presented on pages 41-43. Descriptions of the excluded items appear on pages 28-29 and 35-36.
SECOND QUARTER 2015 VS. SECOND QUARTER 2014
SECOND QUARTER 2015 IN SUMMARY
| Sales of $2,414.5 decreased 6%, or $167.4, as underlying sales growth of 5% was more than offset by an unfavorable currency impact of 5% and lower energy contractual pass-through to customers of 6%. The increase in underlying sales primarily resulted from higher volumes in the Industrial Gases Asia and Materials Technologies segments. |
| Operating income of $374.4 decreased 3%, or $10.3, and operating margin of 15.5% increased 60 basis points (bp). On a non-GAAP basis, operating income of $442.4 increased 15%, or $57.7, and operating margin of 18.3% increased 340 bp, primarily due to higher volumes and higher pricing. |
| Adjusted EBITDA of $708.7 increased 10%, or $64.5, primarily due to higher volumes and higher pricing. Adjusted EBITDA margin of 29.4% increased 440 bp. |
| Net income of $290.0 increased 2%, or $6.5, and diluted earnings per share of $1.33 increased 1%, or $.01. On a non-GAAP basis, net income of $336.1 increased 19%, or $52.6, and diluted earnings per share of $1.55 increased 17%, or $.23. A summary table of changes in diluted earnings per share is presented below. |
| We increased our quarterly dividend by 5% from $.77 to $.81 per share. This represents the 33rd consecutive year that we increased our dividend payment. |
26
Changes in Diluted Earnings per Share Attributable to Air Products Non-GAAP Basis
Three Months Ended 31 March |
Increase | ||||||||||||||
2015 | 2014 | (Decrease) | |||||||||||||
Diluted Earnings per Share GAAP Basis |
$ | 1.33 | $ | 1.32 | $ | .01 | |||||||||
Business restructuring and cost reduction actions |
.18 | | .18 | ||||||||||||
Pension settlement loss |
.04 | | .04 | ||||||||||||
Diluted Earnings per Share Non-GAAP Basis |
$ | 1.55 | $ | 1.32 | $ | .23 | |||||||||
Operating Income (after-tax) |
|||||||||||||||
Underlying business |
|||||||||||||||
Volume |
$ | .22 | |||||||||||||
Price/raw materials |
.10 | ||||||||||||||
Costs |
(.02 | ) | |||||||||||||
Currency |
(.09 | ) | |||||||||||||
Operating Income |
$ | .21 | |||||||||||||
Other (after-tax) |
|||||||||||||||
Equity affiliates income |
$ | .01 | |||||||||||||
Interest expense |
.03 | ||||||||||||||
Weighted average diluted shares |
(.02 | ) | |||||||||||||
Other |
$ | .02 | |||||||||||||
Total Change in Diluted Earnings per Share Non-GAAP Basis |
$ | .23 |
RESULTS OF OPERATIONS
Discussion of Consolidated Results
Three Months Ended 31 March |
||||||||||||||||||||
2015 | 2014 | $ Change | Change | |||||||||||||||||
Sales |
$ | 2,414.5 | $ | 2,581.9 | $ | (167.4 | ) | (6)% | ||||||||||||
Operating income |
374.4 | 384.7 | (10.3 | ) | (3)% | |||||||||||||||
Operating margin |
15.5 | % | 14.9 | % | 60bp | |||||||||||||||
Equity affiliates income |
33.0 | 30.4 | 2.6 | 9% | ||||||||||||||||
Non-GAAP Basis |
||||||||||||||||||||
Adjusted EBITDA |
$ | 708.7 | $ | 644.2 | $ | 64.5 | 10% | |||||||||||||
Adjusted EBITDA margin |
29.4 | % | 25.0 | % | 440bp | |||||||||||||||
Operating income |
442.4 | 384.7 | 57.7 | 15% | ||||||||||||||||
Operating margin |
18.3 | % | 14.9 | % | 340bp |
Sales
% Change from Prior Year | |||||
Underlying business |
|||||
Volume |
4 | % | |||
Price |
1 | % | |||
Currency |
(5 | )% | |||
Energy and raw material cost pass-through |
(6 | )% | |||
Total Consolidated Change |
(6 | )% |
27
Underlying sales were up 5% from higher volumes of 4% and higher pricing of 1%. Volumes increased primarily from growth in the Industrial Gases Asia and Materials Technologies segments. The favorable pricing was driven by price increases across the Materials Technologies, Industrial Gases Americas, and Industrial Gases EMEA segments. Currency unfavorably impacted sales by 5%, and lower energy contractual cost pass-through to customers decreased sales by 6%.
Operating Income and Margin
Operating income of $374.4 decreased 3%, or $10.3, as higher volumes of $63 and favorable pricing net of energy and distribution costs of $26 were more than offset by charges associated with the business restructuring and cost reduction actions of $55, unfavorable currency impacts of $27, a pension settlement loss of $13, and unfavorable other income and favorable operating costs that netted to $4. Operating costs were lower as benefits from our recent cost reduction actions and lower maintenance expense were mostly offset by higher incentive compensation. Incentive compensation was approximately $45 higher due to a year-to-date adjustment this quarter for improved results while the prior year reflected a year-to-date adjustment to reduce expense on lower performance.
On a non-GAAP basis, operating income of $442.4 increased 15%, or $57.7, and operating margin of 18.3% increased 340 bp, primarily due to higher volumes and higher pricing, partially offset by unfavorable currency impacts.
Adjusted EBITDA
We define Adjusted EBITDA as income from continuing operations (including noncontrolling interests) excluding certain disclosed items, which the Company does not believe to be indicative of underlying business trends, before interest expense, income tax provision, and depreciation and amortization expense. Adjusted EBITDA provides a useful metric for management to assess operating performance.
Adjusted EBITDA of $708.7 increased 10%, or $64.5, primarily due to higher volumes and higher pricing, partially offset by unfavorable currency impacts. Adjusted EBITDA margin of 29.4% increased 440 bp.
Equity Affiliates Income
Income from equity affiliates of $33.0 increased $2.6, primarily due to better performance in our Industrial Gases Americas and Industrial Gases Asia affiliates.
Cost of Sales and Gross Margin
Cost of sales of $1,699.6 decreased $218, primarily due to lower energy costs of $138, a favorable currency impact of $100, and lower operating costs of $22, partially offset by costs attributable to higher sales volumes of $42. Operating costs included favorable impacts from restructuring actions and lower maintenance partially offset by higher incentive compensation.
Gross margin of 29.6% increased 390 bp, primarily due to favorable costs, including energy pass-through, of 180 bp, higher volumes of 140 bp, and higher price, net of raw materials, of 80 bp.
Selling and Administrative Expense
Selling and administrative expense of $240.9 decreased $22.5, primarily due to the benefits of our recent cost reduction actions of $22 and favorable currency effects of $16, partially offset by higher other costs of $16, including incentive compensation. Selling and administrative expense, as a percent of sales, decreased from 10.2% to 10.0%.
Research and Development
Research and development expense of $36.3 increased $3.1 due to higher operating costs. Research and development expense, as a percent of sales, was 1.5% 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 incurred severance and other charges of $55.4 ($38.2 after-tax, or $.18 per share) during the three months ended 31 March 2015. We will continue to incur severance and other charges in future periods. Refer to Note 4, Business Restructuring and Cost Reduction Actions, for additional details.
28
Pension Settlement Losses
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 their retirement date. Pension settlements are immediately 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. The participants vested benefit is considered settled upon cash payment of the lump sum. For the three months ended 31 March 2015, we recognized a pension settlement charge of $12.6 ($7.9 after-tax, or $.04 per share) to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss associated with the U.S. supplemental pension plan.
Other Income (Expense), Net
Other income (expense), net of $4.7 decreased $12.3, partially due to unfavorable foreign exchange impacts and lower gains from the sale of assets and emissions credits. No other individual items were significant in comparison to the prior year.
Interest Expense
Three Months Ended 31 March | ||||||||||
2015 | 2014 | |||||||||
Interest incurred |
$ | 35.5 | $ | 39.4 | ||||||
Less: capitalized interest |
12.1 | 7.9 | ||||||||
Interest expense |
$ | 23.4 | $ | 31.5 |
Interest incurred decreased $3.9. The decrease was driven primarily by the impact of a stronger U.S. dollar on the translation of foreign currency interest and a lower average interest rate on the debt portfolio, 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 22.7% and 24.0% in the second quarter of 2015 and 2014, respectively. During the three months ended 31 March 2015, the impacts of the business restructuring and cost reduction actions and the pension settlement loss decreased our effective tax rate by 140 bp. On a non-GAAP basis, the effective tax rate was 24.1% and 24.0% in 2015 and 2014, respectively.
Segment Analysis
Industrial Gases Americas
Three Months Ended 31 March |
||||||||||||||||||||
2015 | 2014 | $ Change | % Change | |||||||||||||||||
Sales |
$ | 890.4 | $ | 1,032.9 | $ | (142.5 | ) | (14)% | ||||||||||||
Operating income |
182.0 | 169.6 | 12.4 | 7% | ||||||||||||||||
Operating margin |
20.4 | % | 16.4 | % | 400bp | |||||||||||||||
Equity affiliates income |
15.1 | 12.6 | 2.5 | 20% | ||||||||||||||||
Adjusted EBITDA |
300.4 | 281.6 | 18.8 | 7% | ||||||||||||||||
Adjusted EBITDA margin |
33.7 | % | 27.3 | % | 640bp |
29
Industrial Gases Americas Sales
% Change from Prior Year | |||||
Underlying business |
|||||
Volume |
1 | % | |||
Price |
1 | % | |||
Currency |
(3 | )% | |||
Energy and raw material cost pass-through |
(13 | )% | |||
Total Industrial Gases Americas Sales Change |
(14 | )% |
Underlying sales increased 2% with higher volumes and higher pricing both contributing 1%. Volumes were modestly higher in North America due to growth in liquid oxygen, nitrogen, and argon and improved gaseous hydrogen volumes due to fewer outages but were mostly offset by lower helium volumes. In Latin America, volumes were flat due to continued economic weakness. Pricing was higher due to general price increases and inflation recovery. Lower energy contractual cost pass-through to customers, primarily related to natural gas, decreased sales by 13%. In addition, currency reduced sales by 3% due to the weakening of the Chilean Peso, Brazilian Real, and Canadian Dollar.
Industrial Gases Americas Operating Income and Margin
Operating income of $182.0 increased 7%, or $12.4, due to higher pricing net of energy and fuel costs of $18 and higher volumes of $6, partially offset by higher other costs of $8 and unfavorable currency impacts of $4. The higher other costs included higher incentive compensation and the impact of lower energy pass-through, partially offset by lower maintenance expense and benefits of our restructuring actions. Operating margin of 20.4% increased 400 bp from the prior year due to the higher pricing, lower energy contractual cost pass-through to customers, and higher volumes.
Industrial Gases Americas Equity Affiliates Income
Equity affiliates income of $15.1 increased $2.5 due to favorable performance in our Mexican affiliate.
Industrial Gases EMEA
Three Months Ended 31 March |
||||||||||||||||||||
2015 |