Edgar Filing: AIR PRODUCTS & CHEMICALS INC /DE/

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________

FORM 10-Q

(Mark One)



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

For the quarterly period ended 31 December 2018



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

For the transition period from to

Commission file number 001-04534

AIR PRODUCTS AND CHEMICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)



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

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

610-481-4911

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No ¨

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



Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨	Emerging growth company ¨

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

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

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



Class		Outstanding at 31 December 2018
Common Stock, $1 par value		219,631,171

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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

INDEX




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
Consolidated Income Statements – Three Months Ended 31 December 2018 and 2017	4
Consolidated Comprehensive Income Statements – Three Months Ended 31 December 2018 and 2017	5
Consolidated Balance Sheets – 31 December 2018 and 30 September 2018	6
Consolidated Statements of Cash Flows – Three Months Ended 31 December 2018 and 2017	7
Consolidated Statements of Equity – Three Months Ended 31 December 2018 and 2017	8
Notes to Consolidated Financial Statements	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk	42
Item 4. Controls and Procedures	43

PART II. OTHER INFORMATION

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

FORWARD-LOOKING STATEMENTS

This quarterly report contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “outlook,” “plan,” “positioned,” “possible,” “potential,” “project,” “should,” “target,” “will,” “would,” and similar expressions or variations thereof, or the negative thereof, but these terms are not the exclusive means of identifying such statements. Forward-looking statements are based on management’s expectations and assumptions as of the date of this report and are not guarantees of future performance. You are cautioned not to place undue reliance on our forward-looking statements.

Forward-looking statements may relate to a number of matters, including expectations regarding revenue, margins, expenses, earnings, tax provisions, cash flows, pension obligations, share repurchases or other statements regarding economic conditions or our business outlook; statements regarding plans, projects, strategies and objectives for our future operations, including our ability to win new projects and execute the projects in our backlog; and statements regarding our expectations with respect to pending legal claims or disputes. While forward-looking statements are made in good faith and based on assumptions, expectations and projections that management believes are reasonable based on currently available information, actual performance and financial results may differ materially from projections and estimates expressed in the forward-looking statements because of many factors, including, without limitation:


•	changes in global or regional economic conditions, supply and demand dynamics in the market segments we serve, or in the financial markets;


•	risks associated with having extensive international operations, including political risks, risks associated with unanticipated government actions and risks of investing in developing markets;


•	project delays, contract terminations, customer cancellations, or postponement of projects and sales;


•	the future financial and operating performance of major customers and joint venture partners;


•	our ability to develop, implement, and operate new technologies, or to execute the projects in our backlog;

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•	tariffs, economic sanctions and regulatory activities in jurisdictions in which we and our affiliates and joint ventures operate;


•	the impact of environmental, tax or other legislation, as well as regulations affecting our business and related compliance requirements, including regulations related to global climate change;


•	changes in tax rates and other changes in tax law;


•	the timing, impact, and other uncertainties relating to acquisitions and divestitures, including our ability to integrate acquisitions and separate divested businesses, respectively;


•	risks relating to cybersecurity incidents, including risks from the interruption, failure or compromise of our information systems;


•	catastrophic events, such as natural disasters, acts of war, or terrorism;


•	the impact of price fluctuations in natural gas and disruptions in markets and the economy due to oil price volatility;


•	costs and outcomes of legal or regulatory proceedings and investigations;


•	asset impairments due to economic conditions or specific events;


•	significant fluctuations in interest rates and foreign currency exchange rates from those currently anticipated;


•	damage to facilities, pipelines or delivery systems, including those we own or operate for third parties;


•	availability and cost of raw materials; and


•	the success of productivity and operational improvement programs

In addition to the foregoing factors, forward-looking statements contained herein are qualified with respect to the risks disclosed elsewhere in this document, including in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 3, Quantitative and Qualitative Disclosures About Market Risk, as well as with respect to the risks described in Item 1A, Risk Factors, to our Annual Report on Form 10-K for the year ended 30 September 2018. Any of these factors, as well as those not currently anticipated by management, could cause our results of operations, financial condition or liquidity to differ materially from what is expressed or implied by any forward-looking statement. Except as required by law, we disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein to reflect any change in assumptions, beliefs, or expectations or any change in events, conditions, or circumstances upon which any such forward-looking statements are based.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED INCOME STATEMENTS

(Unaudited)



	Three Months Ended
	31 December
(Millions of dollars, except for share and per share data)	2018		2017
Sales		$2,224.0		$2,216.6
Cost of sales	1,544.0		1,571.8
Facility closure	29.0		—
Selling and administrative	189.6		191.6
Research and development	15.0		14.6
Other income (expense), net	8.6		22.1
Operating Income	455.0		460.7
Equity affiliates' income	52.9		13.8
Interest expense	37.3		29.8
Other non-operating income (expense), net	18.5		9.8
Income From Continuing Operations Before Taxes	489.1		454.5
Income tax provision	132.1		291.8
Income From Continuing Operations	357.0		162.7
Loss From Discontinued Operations, net of tax	—		(1.0		)
Net Income	357.0		161.7
Net Income Attributable to Noncontrolling Interests of Continuing Operations	9.5		7.1
Net Income Attributable to Air Products		$347.5		$154.6
Net Income Attributable to Air Products
Income from continuing operations		$347.5		$155.6
Loss from discontinued operations	—		(1.0		)
Net Income Attributable to Air Products		$347.5		$154.6
Basic Earnings Per Common Share Attributable to Air Products
Income from continuing operations		$1.58		$.71
Loss from discontinued operations	—		—
Net Income Attributable to Air Products		$1.58		$.71
Diluted Earnings Per Common Share Attributable to Air Products
Income from continuing operations		$1.57		$.70
Loss from discontinued operations	—		—
Net Income Attributable to Air Products		$1.57		$.70
Weighted Average Common Shares – Basic (in millions)	219.9		218.9
Weighted Average Common Shares – Diluted (in millions)	221.0		220.4

The accompanying notes are an integral part of these statements.

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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

(Unaudited)



	Three Months Ended
	31 December
(Millions of dollars)	2018			2017
Net Income		$357.0			$161.7
Other Comprehensive Income (Loss), net of tax:
Translation adjustments, net of tax of $4.9 and ($6.6)	(68.1		)	136.4
Net loss on derivatives, net of tax of ($0.7) and ($5.3)	(10.3		)	(9.5		)
Pension and postretirement benefits, net of tax of ($0.8) and $–	(3.9		)	—
Reclassification adjustments:
Currency translation adjustment	—			3.1
Derivatives, net of tax of ($0.8) and $1.7	(3.1		)	.8
Pension and postretirement benefits, net of tax of $5.0 and $11.0	15.2			22.9
Total Other Comprehensive Income (Loss)	(70.2		)	153.7
Comprehensive Income	286.8			315.4
Net Income Attributable to Noncontrolling Interests	9.5			7.1
Other Comprehensive Income (Loss) Attributable to Noncontrolling Interests	(.9		)	1.9
Comprehensive Income Attributable to Air Products		$278.2			$306.4

The accompanying notes are an integral part of these statements.

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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Unaudited)



	31 December			30 September
(Millions of dollars, except for share and per share data)	2018			2018
Assets
Current Assets
Cash and cash items		$2,923.3			$2,791.3
Short-term investments	12.3			184.7
Trade receivables, net	1,268.2			1,207.2
Inventories	403.4			396.1
Prepaid expenses	74.9			129.6
Other receivables and current assets	407.8			373.3
Total Current Assets	5,089.9			5,082.2
Investment in net assets of and advances to equity affiliates	1,242.4			1,277.2
Plant and equipment, at cost	21,586.5			21,490.2
Less: accumulated depreciation	11,626.7			11,566.5
Plant and equipment, net	9,959.8			9,923.7
Goodwill, net	780.4			788.9
Intangible assets, net	416.9			438.5
Noncurrent capital lease receivables	985.9			1,013.3
Other noncurrent assets	666.7			654.5
Total Noncurrent Assets	14,052.1			14,096.1
Total Assets		$19,142.0			$19,178.3
Liabilities and Equity
Current Liabilities
Payables and accrued liabilities		$1,738.3			$1,817.8
Accrued income taxes	111.9			59.6
Short-term borrowings	23.0			54.3
Current portion of long-term debt	430.3			406.6
Total Current Liabilities	2,303.5			2,338.3
Long-term debt	2,954.4			2,967.4
Long-term debt – related party	360.2			384.3
Other noncurrent liabilities	1,551.6			1,536.9
Deferred income taxes	768.9			775.1
Total Noncurrent Liabilities	5,635.1			5,663.7
Total Liabilities	7,938.6			8,002.0
Commitments and Contingencies - See Note 10
Air Products Shareholders’ Equity
Common stock (par value $1 per share; issued 2019 and 2018 - 249,455,584 shares)	249.4			249.4
Capital in excess of par value	1,030.4			1,029.3
Retained earnings	13,497.9			13,409.9
Accumulated other comprehensive loss	(1,811.2		)	(1,741.9		)
Treasury stock, at cost (2019 - 29,824,413 shares; 2018 - 29,940,339 shares)	(2,083.6		)	(2,089.2		)
Total Air Products Shareholders’ Equity	10,882.9			10,857.5
Noncontrolling Interests	320.5			318.8
Total Equity	11,203.4			11,176.3
Total Liabilities and Equity		$19,142.0			$19,178.3

The accompanying notes are an integral part of these statements.

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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three Months Ended
	31 December
(Millions of dollars)	2018			2017
Operating Activities
Net income		$357.0			$161.7
Less: Net income attributable to noncontrolling interests of continuing operations	9.5			7.1
Net income attributable to Air Products	347.5			154.6
Loss from discontinued operations	—			1.0
Income from continuing operations attributable to Air Products	347.5			155.6
Adjustments to reconcile income to cash provided by operating activities:
Depreciation and amortization	258.0			227.9
Deferred income taxes	(1.0		)	(76.7		)
Tax reform repatriation	46.2			310.3
Facility closure	29.0			—
Undistributed losses of unconsolidated affiliates	1.0			29.9
Gain on sale of assets and investments	(.7		)	(.6		)
Share-based compensation	9.3			11.8
Noncurrent capital lease receivables	24.8			23.3
Other adjustments	12.7			5.3
Working capital changes that provided (used) cash, excluding effects of acquisitions:
Trade receivables	(73.6		)	(34.2		)
Inventories	(10.4		)	(8.4		)
Other receivables	10.3			23.8
Payables and accrued liabilities	(55.4		)	(113.5		)
Other working capital	57.5			5.5
Cash Provided by Operating Activities	655.2			560.0
Investing Activities
Additions to plant and equipment	(403.4		)	(256.6		)
Acquisitions, less cash acquired	—			(237.1		)
Proceeds from sale of assets and investments	1.1			10.6
Purchases of investments	(5.3		)	(212.2		)
Proceeds from investments	178.0			208.9
Other investing activities	3.1			5.6
Cash Used for Investing Activities	(226.5		)	(480.8		)
Financing Activities
Payments on long-term debt	(2.6		)	(408.6		)
Net decrease in commercial paper and short-term borrowings	(38.0		)	(40.7		)
Dividends paid to shareholders	(241.5		)	(207.5		)
Proceeds from stock option exercises	4.7			34.4
Other financing activities	(12.4		)	(18.7		)
Cash Used for Financing Activities	(289.8		)	(641.1		)
Discontinued Operations
Cash used for operating activities	—			(3.1		)
Cash provided by investing activities	—			—
Cash provided by financing activities	—			—
Cash Used for Discontinued Operations	—			(3.1		)
Effect of Exchange Rate Changes on Cash	(6.9		)	14.0
Increase (Decrease) in cash and cash items	132.0			(551.0		)
Cash and Cash items – Beginning of Year	2,791.3			3,273.6
Cash and Cash Items – End of Period		$2,923.3			$2,722.6

The accompanying notes are an integral part of these statements.

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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)



	Three Months Ended
	31 December 2018
(Millions of dollars, except for per share data)	Common Stock		Capital in Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Air Products Shareholders' Equity			Non- controlling Interests			Total Equity
Balance at 30 September 2018		$249.4		$1,029.3			$13,409.9			($1,741.9	)		($2,089.2	)		$10,857.5			$318.8			$11,176.3
Net income	—		—			347.5			—			—			347.5			9.5			357.0
Other comprehensive income (loss)	—		—			—			(69.3		)	—			(69.3		)	(.9		)	(70.2		)
Dividends on common stock (per share $1.10)	—		—			(241.6		)	—			—			(241.6		)	—			(241.6		)
Dividends to noncontrolling interests	—		—			—			—			—			—			(6.9		)	(6.9		)
Share-based compensation	—		8.9			—			—			—			8.9			—			8.9
Issuance of treasury shares for stock option and award plans	—		(7.6		)	—			—			5.6			(2.0		)	—			(2.0		)
Cumulative change in accounting principle	—		—			(17.1		)	—			—			(17.1		)	—			(17.1		)
Other equity transactions	—		(.2		)	(.8		)	—			—			(1.0		)	—			(1.0		)
Balance at 31 December 2018		$249.4		$1,030.4			$13,497.9			($1,811.2	)		($2,083.6	)		$10,882.9			$320.5			$11,203.4




	Three Months Ended
	31 December 2017
(Millions of dollars, except for per share data)	Common Stock		Capital in Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Air Products Shareholders' Equity			Non- controlling Interests			Total Equity
Balance at 30 September 2017		$249.4		$1,001.1			$12,846.6			($1,847.4	)		($2,163.5	)		$10,086.2			$99.3			$10,185.5
Net income	—		—			154.6			—			—			154.6			7.1			161.7
Other comprehensive income (loss)	—		—			—			151.8			—			151.8			1.9			153.7
Dividends on common stock (per share $0.95)	—		—			(208.0		)	—			—			(208.0		)	—			(208.0		)
Dividends to noncontrolling interests	—		—			—			—			—			—			(7.7		)	(7.7		)
Share-based compensation	—		11.1			—			—			—			11.1			—			11.1
Issuance of treasury shares for stock option and award plans	—		(14.7		)	—			—			34.6			19.9			—			19.9
Other equity transactions	—		.6			(.9		)	—			—			(.3		)	5.3			5.0
Balance at 31 December 2017		$249.4		$998.1			$12,792.3			($1,695.6	)		($2,128.9	)		$10,215.3			$105.9			$10,321.2
The accompanying notes are an integral part of these statements.

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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



1	.	Basis of Presentation and Major Accounting Policies	9
2	.	New Accounting Guidance	10
3	.	Revenue Recognition	12
4	.	Acquisitions	15
5	.	Inventories	15
6	.	Goodwill	16
7	.	Financial Instruments	16
8	.	Fair Value Measurements	20
9	.	Retirement Benefits	21
10	.	Commitments and Contingencies	22
11	.	Share-Based Compensation	24
12	.	Accumulated Other Comprehensive Loss	24
13	.	Earnings per Share	25
14	.	Income Taxes	26
15	.	Supplemental Information	26
16	.	Business Segment Information	27

1. BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES

The interim consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries (“we,” “our,” “us,” the “Company,” “Air Products,” or “registrant”) included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In our opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the notes. The notes to the interim consolidated financial statements, unless otherwise indicated, are on a continuing operations basis.

In order to fully understand the basis of presentation, the consolidated financial statements and related notes included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our 2018 Form 10-K. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

Refer to our 2018 Form 10-K for a description of major accounting policies. During the first three months of fiscal year 2019, these policies were impacted by the implementation of certain new accounting guidance, including the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and all related amendments (“the new revenue standard”). We adopted the new revenue standard as of 1 October 2018 under the modified retrospective approach. Comparative prior year information has not been restated and continues to be reported under the accounting standards in effect for those periods. Our updated revenue recognition policy, which reflects the principles under the new revenue standard, is discussed below.

Other than the adoption of new accounting guidance as discussed in Note 2, New Accounting Guidance, there have been no notable changes to our accounting policies during the first three months of fiscal year 2019.

Certain prior year information has been reclassified to conform to the fiscal year 2019 presentation.

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Revenue Recognition

The Company recognizes revenue when or as performance obligations are satisfied, which occurs when control is transferred to the customer.

We determine the transaction price of our contracts based on the amount of consideration to which we expect to be entitled to receive in exchange for the goods or services provided. Our contracts within the scope of revenue guidance do not contain payment terms that would be considered a significant financing component.

Our sale of gas contracts are either accounted for over time during the period in which we deliver or make available the agreed upon quantity of goods or at a point in time when the customer receives and obtains control of the product, which generally occurs upon delivery. We generally recognize revenue from our sale of gas contracts based on the right to invoice practical expedient.

Our sale of equipment contracts are generally comprised of a single performance obligation as the individual promised goods or services contained within the contracts are integrated with or dependent upon other goods or services in the contract for a single output to the customer. Revenue from our sale of equipment contracts is generally recognized over time as we have an enforceable right to payment for performance completed to date and our performance under the contract terms does not create an asset with alternative use. We recognize these contracts using a cost incurred input method by which costs incurred to date relative to total estimated costs at completion are used to measure progress toward satisfying performance obligations.

Amounts billed for shipping and handling fees are classified as sales in the consolidated income statements. Shipping and handling activities for our sale of equipment contracts may be performed after the customer obtains control of the promised goods. In these cases, we have elected to apply the practical expedient to account for shipping and handling as activities to fulfill the promise to transfer the goods. For our sale of gas contracts, control generally transfers to the customer upon delivery.

Amounts billed for sales and use taxes, value-added taxes, and certain excise and other specific transactional taxes imposed on revenue-producing transactions are presented on a net basis and excluded from sales in the consolidated income statements.

For additional information, refer to Note 3, Revenue Recognition.

2. NEW ACCOUNTING GUIDANCE

Accounting Guidance Implemented in Fiscal Year 2019

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued the new revenue standard, which is based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be entitled in exchange for the transfer of goods or services. We adopted this guidance under the modified retrospective approach as of 1 October 2018. Upon adoption, we no longer present "Contracts in progress, less progress billings" on our consolidated balance sheets and have expanded disclosure requirements. Otherwise, adoption of this guidance did not impact our consolidated financial statements, and no adjustment was necessary to opening retained earnings. Accordingly, sales presented during the first quarter of fiscal year 2019 would not change if presented under accounting standards in effect prior to 1 October 2018.

For additional information, including the balance sheet impacts of no longer presenting "Contracts in progress, less progress billings" and expanded disclosures under the new revenue standard, refer to Note 3, Revenue Recognition.

Cash Flow Statement Classification

In August 2016, the FASB issued guidance to reduce diversity in practice related to the classification of certain cash receipts and cash payments in the statement of cash flows. We adopted this guidance retrospectively in the first quarter of fiscal year 2019 and elected to use the cumulative earnings approach to determine the classification of distributions received from equity affiliates. As a result, we reclassified $4.1 of net activity from operating activities to investing activities for the three months ended 31 December 2017.

Intra-Entity Asset Transfers

In October 2016, the FASB issued guidance on accounting for the income tax effects of intra-entity transfers of assets other than inventory. Previous guidance prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party. Under the new guidance, the income tax consequences of an intra-entity asset transfer are recognized when the transfer occurs. We adopted this guidance in the first quarter of fiscal year 2019 on a modified retrospective basis through a cumulative-effect adjustment of $17.1 that decreased retained earnings as of 1 October 2018.

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New Accounting Guidance to be Implemented

Leases

In February 2016, the FASB issued guidance that requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements.

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

We will adopt this guidance in fiscal year 2020. The guidance must be applied using a modified retrospective approach with the option to apply the guidance either at the adoption date or at the earliest comparative period presented in the consolidated financial statements.

We are evaluating the impact the guidance will have on our consolidated financial statements, including the assessment of our current lease population under the revised definition of what qualifies as a leased asset. In addition, we are implementing a new application to administer the accounting and disclosure requirements under the new guidance.

Credit Losses on Financial Instruments

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

Hedging Activities

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

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued guidance allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act. The guidance is effective in fiscal year 2020, with early adoption permitted, including adoption in an interim period. If elected, the reclassification can be applied in either the period of adoption or retrospectively to the period of the enactment of the U.S. Tax Cuts and Jobs Act (i.e., our first quarter of fiscal year 2018). We are evaluating the adoption alternatives and the impact this guidance will have on our consolidated financial statements.

Fair Value Measurement Disclosures

In August 2018, the FASB issued guidance that modifies the disclosure requirements for fair value measurements. The guidance is effective in fiscal year 2021, with early adoption permitted. Certain amendments must be applied prospectively while other amendments must be applied retrospectively. We are evaluating the impact this guidance will have on the disclosures in the notes to our consolidated financial statements.

Retirement Benefit Disclosures

In August 2018, the FASB issued guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance is effective in fiscal year 2021, with early adoption permitted, and must be applied on a retrospective basis. We are evaluating the impact this guidance will have on the disclosures in the notes to our consolidated financial statements.

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Cloud Computing Implementation Costs

In August 2018, the FASB issued guidance that aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software. The guidance is effective in fiscal year 2021, with early adoption permitted, and may be applied either prospectively or retrospectively. We are evaluating the impact this guidance will have on our consolidated financial statements.

Related Party Guidance for Variable Interest Entities

In October 2018, the FASB issued an update that amends the guidance for determining whether a decision-making fee is a variable interest. The amendments require consideration of indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety as required under current accounting standards. The guidance is effective in fiscal year 2021, with early adoption permitted. The amendments must be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. We are evaluating the impact this guidance will have on our consolidated financial statements.

3. REVENUE RECOGNITION

Nature of Goods and Services

The principal activities from which the Company generates its sales from its contracts with customers, separated between our regional industrial gases businesses and industrial gases equipment businesses, are described below with their respective revenue recognition policies. For an overall summary of these policies and discussion on payment terms and presentation, refer to Note 1, Basis of Presentation and Major Accounting Policies.

Industrial Gases – Regional

Our regional industrial gas businesses 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, helium, carbon dioxide, carbon monoxide, syngas, and specialty gases. We distribute gases to our sale of gas customers through different supply modes depending on various factors including the customer's volume requirements and location. Our supply modes are as follows:

On-Site Gases—Supply mode associated with customers who require large volumes of gases and have relatively constant demand. Gases are produced and supplied by large facilities we construct on or near the customers’ facilities or by pipeline systems from centrally located production facilities. These sale of gas contracts generally have 15- to 20- year terms. The Company also delivers smaller quantities of product through small on-site plants (cryogenic or non-cryogenic generators), typically via a 10- to 15- year sale of gas contract. The contracts within this supply mode generally contain fixed monthly charges and/or minimum purchase requirements with price escalation provisions that are generally based on external indices. Revenue associated with this supply mode is generally recognized over time during the period in which we deliver or make available the agreed upon quantity of goods.

Merchant Gases—Supply mode associated with liquid bulk and packaged gases customers. Liquid bulk customers receive delivery of product in liquid or gaseous form by tanker or tube trailer. The product is stored, usually in its liquid state, in equipment typically designed and installed by the Company at the customer’s site for vaporizing into a gaseous state as needed. Packaged gases customers receive small quantities of product delivered in either cylinders or dewars. Both liquid bulk and packaged gases sales do not contain minimum purchase requirements as they are governed by contracts and/or purchase orders based on the customer's requirements. These contracts contain stated terms that are generally 5 years or less. Performance obligations associated with this supply mode are satisfied at a point in time when the customer receives and obtains control of the product, which generally occurs upon delivery.

The timing of revenue recognition for our regional industrial gases businesses is generally consistent with our right to invoice the customer. Variable components of consideration that may not be resolved within the month, such as the ability to earn an annual bonus or incur a penalty, are more relevant to on-site contracts and are considered constrained as they can be impacted by a single significant event such as a plant outage, which could occur at the end of a contract period. We consider contract modifications on an individual basis to determine appropriate accounting treatment. However, contract modifications are generally accounted for prospectively as they relate to distinct goods or services associated with future periods of performance.

We mitigate energy and natural gas price risk contractually through pricing formulas, surcharges, and cost pass-through arrangements.

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Industrial Gases – Equipment

The Company designs and manufactures equipment for air separation, hydrocarbon recovery and purification, natural gas liquefaction (LNG), and liquid helium and liquid hydrogen transport and storage. The Industrial Gases – Global and the Corporate and other segments serve our sale of equipment customers.

Revenue from our sale of equipment contracts is generally recognized over time as we have an enforceable right to payment for performance completed to date and our performance under the contract terms does not create an asset with alternative use. Otherwise, sale of equipment contracts are satisfied at the point in time the customer obtains control of the equipment, which is generally determined based on the shipping terms of the contract. For contracts recognized over time, we primarily recognize revenue using a cost incurred input method by which costs incurred to date relative to total estimated costs at completion are used to measure progress toward satisfying performance obligations. Costs incurred include material, labor, and overhead costs and represent work contributing and proportionate to the transfer of control to the customer.

Since our contracts are generally comprised of a single performance obligation, contract modifications are typically accounted for as part of the existing contract and are recognized as a cumulative adjustment for the inception-to-date effect of such change.

Disaggregation of Revenue

The table below presents our consolidated sales disaggregated by each of the supply modes described above for each of our reporting segments. We believe this presentation best depicts the nature, timing, type of customer, and contract terms for our sales.



	Industrial Gases– Americas		Industrial Gases– EMEA		Industrial Gases– Asia		Industrial Gases– Global		Corporate and other		Total		%
Three Months Ended 31 December 2018
On-site		$596.0		$222.2		$381.0		$—		$—		$1,199.2	54	%
Merchant	393.2		302.0		245.8		—		—		941.0		42	%
Sale of Equipment	—		—		—		68.2		15.6		83.8		4	%
Total		$989.2		$524.2		$626.8		$68.2		$15.6		$2,224.0	100	%

Of total consolidated sales, approximately 4% was associated with lease revenue relating to our on-site supply mode and therefore not within the scope of the new revenue standard.

Remaining Performance Obligations

As of 31 December 2018, the transaction price allocated to remaining performance obligations is estimated to be approximately $14 billion. This amount includes fixed-charge contract provisions associated with our on-site and sale of equipment supply modes. We estimate that approximately half of this revenue will be recognized over approximately the next five years and the balance thereafter.

Expected revenue associated with new on-site plants that are not yet onstream is excluded from this amount. In addition, this amount excludes consideration associated with contracts determined to be leases, those with an expected duration of less than one year, and variable consideration for which we recognize revenue at the amount to which we have the right to invoice, including pass-through costs related to energy and natural gas.

In the future, actual amounts will differ due to events outside of our control, including but not limited to inflationary price escalations, currency exchange rates, and terminated or renewed contracts.

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Contract Balances

Upon adoption of the new revenue standard, we no longer present "Contracts in progress, less progress billings" on our consolidated balance sheets. Our sale of equipment contracts generally contain a single performance obligation which, as discussed below, results in presentation of either a contract asset or contract liability. Contracts in progress, less progress billings as of 30 September 2018 has been reclassified to "Other receivables and current assets" on our consolidated balance sheets within this quarterly report.

The table below summarizes the balance sheet impacts of no longer presenting "Contracts in progress, less progress billings" upon adoption of the new revenue standard on 1 October 2018:



	30 September 2018		New Revenue Standard Adjustments			1 October 2018
Assets
Current Assets
Cash and cash items		$2,791.3		$—			$2,791.3
Short-term investments	184.7		—			184.7
Trade receivables, net	1,207.2		—			1,207.2
Inventories	396.1		—			396.1
Contracts in progress, less progress billings	77.5		(77.5		)	—
Prepaid expenses	129.6		—			129.6
Other receivables and current assets	295.8		103.7			399.5
Total Current Assets	5,082.2		26.2			5,108.4
Total Noncurrent Assets	14,096.1		—			14,096.1
Total Assets		$19,178.3		$26.2			$19,204.5
Liabilities and Equity
Current Liabilities
Payables and accrued liabilities		$1,817.8		$26.2			$1,844.0
Accrued income taxes	59.6		—			59.6
Short-term borrowings	54.3		—			54.3
Current portion of long-term debt	406.6		—			406.6
Total Current Liabilities	2,338.3		26.2			2,364.5
Total Noncurrent Liabilities	5,663.7		—			5,663.7
Total Liabilities	8,002.0		26.2			8,028.2
Total Equity	11,176.3		—			11,176.3
Total Liabilities and Equity		$19,178.3		$26.2			$19,204.5

The table below details balances arising from contracts with customers as of our most recent balance sheet date and our date of adoption:



	31 December 2018		1 October 2018
Assets
Contract assets – current		$51.5		$53.0
Contract fulfillment costs – current	54.0		50.7
Liabilities
Contract liabilities – current	152.4		174.5
Contract liabilities – noncurrent	52.5		53.5

Contract assets and liabilities result from differences in timing of revenue recognition and customer invoicing. These balances are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.

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Contract assets primarily relate to our sale of equipment contracts for which revenue is recognized over time. These balances represent unbilled revenue, which occurs when revenue recognized under the measure of progress exceeds the amount invoiced to our customers. Our ability to invoice the customer for contract asset balances is not only based on the passage of time, but also the achievement of certain contractual milestones. Our contract assets are included within "Other receivables and current assets" on the consolidated balance sheets.

Contract fulfillment costs primarily include deferred costs related to sale of equipment projects that cannot be inventoried and for which we expect to recognize revenue upon transfer of control at project completion or costs related to fulfilling a specific anticipated contract. Contract fulfillment costs are generally classified as current and are included within "Other receivables and current assets" on the consolidated balance sheets.

Costs to obtain a contract, or contract acquisition costs, are capitalized only after we have established a contract with the customer. We elected to apply the practical expedient to expense these costs as they are incurred if the amortization period of the asset that would have otherwise been recognized is one year or less. Our contract acquisition costs for the three months ended 31 December 2018 were not material.

Contract liabilities include advance payments or right to consideration prior to performance under the contract. Contract liabilities are recognized as revenue as, or when, we perform under the contract. The decrease in the contract liability balance during the three months ended 31 December 2018 primarily related to our sale of equipment contracts for which we recognized approximately $50. The current and noncurrent portions of our contract liabilities are included within "Payables and accrued liabilities" and "Other noncurrent liabilities" on our consolidated balance sheets, respectively. Advanced payments from our customers do not represent a significant financing component as these payments are intended for purposes other than financing, such as to meet working capital demands or to protect us from our customer failing to meet its obligations under the terms of the contract.

Changes in contract asset and liability balances during the three months ended 31 December 2018 were not materially impacted by any other factors.

4. ACQUISITIONS

There have been no acquisitions completed during the first quarter of fiscal year 2019.

During the first quarter of fiscal year 2018, we completed three acquisitions that were accounted for as business combinations. These acquisitions had an aggregate purchase price, net of cash acquired, of $237.1. The largest of the acquisitions primarily consisted of three air separation units serving onsite and merchant customers in China, which strengthened our position in the region. The results of this business are consolidated within our Industrial Gases – Asia segment.

5. INVENTORIES

The components of inventories are as follows:



	31 December		30 September
	2018		2018
Finished goods		$138.4		$125.4
Work in process	20.4		21.2
Raw materials, supplies and other	244.6		249.5
Inventories		$403.4		$396.1

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6. GOODWILL

Changes to the carrying amount of consolidated goodwill by segment for the three months ended 31 December 2018 are as follows:



	Industrial Gases– Americas			Industrial Gases– EMEA			Industrial Gases– Asia			Industrial Gases– Global			Corporate and other		Total
Goodwill, net at 30 September 2018		$162.1			$424.4			$171.9			$20.1			$10.4		$788.9
Currency translation and other	(3.2		)	(5.2		)	(.1		)	(.3		)	.3		(8.5		)
Goodwill, net at 31 December 2018		$158.9			$419.2			$171.8			$19.8			$10.7		$780.4



	31 December			30 September
	2018			2018
Goodwill, gross		$1,164.1			$1,194.7
Accumulated impairment losses^(A)	(383.7		)	(405.8		)
Goodwill, net		$780.4			$788.9


^(A)	Accumulated impairment losses are attributable to our Latin America reporting unit (LASA) within the Industrial Gases – Americas segment and include the impacts of currency translation.

We review goodwill for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying value of goodwill might not be recoverable.

7. FINANCIAL INSTRUMENTS

Currency Price Risk Management

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

Forward Exchange Contracts

We enter into forward exchange contracts to reduce the cash flow exposure to foreign currency fluctuations associated with highly anticipated cash flows and certain firm commitments, such as the purchase of plant and equipment. We also enter into forward exchange contracts to hedge the cash flow exposure on intercompany loans. This portfolio of forward exchange contracts consists primarily of Euros and U.S. Dollars. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 31 December 2018 is 2.7 years.

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

We also 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 consists of many different foreign currency pairs, with a profile that changes from time to time depending on business activity and sourcing decisions.

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



	31 December 2018			30 September 2018
	US$ Notional		Years Average Maturity	US$ Notional		Years Average Maturity
Forward Exchange Contracts:
Cash flow hedges		$2,666.9	0.5		$2,489.1	0.4
Net investment hedges	448.2		1.4	457.5		1.7
Not designated	808.6		1.3	1,736.1		0.8
Total Forward Exchange Contracts		$3,923.7	0.8		$4,682.7	0.7

The notional value of forward exchange contracts not designated decreased from the prior year as a result of maturities.

We also 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 was €911.1 million ($1,044.7) at 31 December 2018 and €908.8 million ($1,054.6) at 30 September 2018. The designated foreign currency-denominated debt is presented within "Long-term debt" on the consolidated balance sheets.

Debt Portfolio Management

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

Interest Rate Management Contracts

We enter into interest rate swaps to change the fixed/variable interest rate mix of our debt portfolio in order to maintain the percentage of fixed- and variable-rate debt within the parameters set by management. In accordance with these parameters, the agreements are used to manage interest rate risks and costs inherent in our debt portfolio. Our interest rate management portfolio generally consists of fixed-to-floating interest rate swaps (which are designated as fair value hedges), pre-issuance interest rate swaps and treasury locks (which hedge the interest rate risk associated with anticipated fixed-rate debt issuances and are designated as cash flow hedges), and floating-to-fixed interest rate swaps (which are designated as cash flow hedges). As of 31 December 2018, the outstanding interest rate swaps were denominated in U.S. Dollars. The notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. When interest rate swaps are used to hedge variable-rate debt, the indices of the swaps and the debt to which they are designated are the same. It is our policy not to enter into any interest rate management contracts which lever a move in interest rates on a greater than one-to-one basis.

Cross Currency Interest Rate Swap Contracts

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

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



	31 December 2018							30 September 2018
	US$ Notional		Average Pay %		Average Receive %		Years Average Maturity	US$ Notional		Average Pay %		Average Receive %		Years Average Maturity
Interest rate swaps (fair value hedge)		$600.0	LIBOR		2.60	%	1.4		$600.0	LIBOR		2.60	%	1.6
Cross currency interest rate swaps (net investment hedge)		$265.4	4.63	%	3.10	%	3.3		$201.7	4.42	%	2.97	%	3.1
Cross currency interest rate swaps (cash flow hedge)		$1,048.6	4.99	%	2.90	%	2.2		$1,052.7	4.99	%	2.89	%	2.3
Cross currency interest rate swaps (not designated)		$16.5	3.33	%	3.15	%	0.2		$80.2	4.88	%	3.43	%	3.9

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



	Balance Sheet Location	31 December 2018		30 September 2018		Balance Sheet Location	31 December 2018		30 September 2018
Derivatives Designated as Hedging Instruments:
Forward exchange contracts	Other receivables		$34.7		$24.9	Accrued liabilities		$27.9		$37.0
Interest rate management contracts	Other receivables	23.0		24.3		Accrued liabilities	1.3		2.3
Forward exchange contracts	Other noncurrent assets	25.7		19.8		Other noncurrent liabilities	1.9		4.6
Interest rate management contracts	Other noncurrent assets	39.1		48.7		Other noncurrent liabilities	9.1		11.6
Total Derivatives Designated as Hedging Instruments			$122.5		$117.7			$40.2		$55.5
Derivatives Not Designated as Hedging Instruments:
Forward exchange contracts	Other receivables		$.9		$7.9	Accrued liabilities		$1.1		$14.9
Interest rate management contracts	Other receivables	3.6		4.0		Accrued liabilities	—		—
Forward exchange contracts	Other noncurrent assets	21.4		16.2		Other noncurrent liabilities