2.	NEW ACCOUNTING GUIDANCE

Accounting Guidance Implemented

CONSOLIDATION OF VARIABLE INTEREST ENTITIES

In June 2009, the FASB issued authoritative guidance that amends previous guidance for determining whether an entity is a variable interest entity (VIE). It requires an enterprise to perform an analysis to determine whether the company's variable interests give it a controlling financial interest in a VIE. A company would be required to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has the power to direct the activities of the VIE that most significantly impact the entity's economic performance. In addition, ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE are required. This guidance was effective for us on 1 October 2010. The adoption of this guidance did not have a material impact on our consolidated financial statements.

MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS

In October 2009, the FASB issued authoritative guidance on multiple-deliverable revenue arrangements. This new guidance amends the existing criteria for separating consideration received in multiple-deliverable arrangements and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price. The guidance establishes a hierarchy for determining the selling price of a deliverable which is based on vendor-specific objective evidence, third-party evidence, or management estimates. Expanded disclosures related to multiple-deliverable revenue arrangements are also required. This guidance was effective for us on 1 October 2010. Upon adoption, the guidance was applied prospectively from the beginning of the fiscal year for new or materially modified arrangements. The adoption of this guidance did not have a material impact on our consolidated financial statements.

3.	AIRGAS TRANSACTION

In February 2010, we commenced a tender offer to acquire all the outstanding common stock of Airgas, Inc. (Airgas), including the associated preferred stock purchase rights, for $60.00 per share in cash, less any required withholding tax. The offer was subject to certain terms and conditions set forth in the Offer to Purchase dated 11 February 2010, as amended, including Airgas' redemption of the preferred stock purchase rights or such rights otherwise being inapplicable to our purchase of Airgas stock. Airgas, a Delaware company, is the largest U.S. distributor of industrial, medical, and specialty gases, and hard goods. On 9 December 2010, we increased the value of our tender offer to $70.00 per share. At this price, the total value of the transaction would have been approximately $7.8 billion, including $6.1 billion of equity and $1.7 billion of assumed debt. Based on a decision by the Delaware Chancery Court to uphold the decision of Airgas' Board of Directors to retain the preferred stock purchase rights, we withdrew our offer on 15 February 2011.

In connection with the tender offer, we had secured committed financing in the form of a $6.7 billion term loan credit facility. Refer to Note 15, Debt, in our 2010 Form 10-K for additional information on this credit facility which would have expired 4 February 2011. On 3 February 2011, we entered into an amended and restated credit agreement providing for an amended $6.7 billion term loan credit facility with a maturity date of 4 June 2011. The amended credit facility agreement contained the same covenants as the original agreement: one financial covenant, a maximum leverage ratio, and other affirmative and negative covenants, including restrictions on liens and certain subsidiary indebtedness. No additional underwriting fees were incurred in relation to the amended agreement. On 16 February 2011, in connection with the termination of the offer to purchase all outstanding shares of common stock of Airgas, the credit facility was terminated. No early termination penalties were incurred and all fees previously accrued and due under the credit facility were paid as of the date of termination.

Prior to the tender offer, we purchased approximately 1.5 million shares of Airgas stock for a total cost of $69.6. This amount was recorded as an available-for-sale investment within other noncurrent assets on the consolidated balance sheet. On 16 February 2011, we sold the 1.5 million shares of Airgas stock for total proceeds of $94.7 and recognized a gain of $25.1 ($15.9 after-tax, or $.07 per share).

For the three and six months ended 31 March 2011, a net loss of $5.0 ($4.4 after-tax, or $.02 per share) and $48.5 ($31.6 after-tax, or $.14 per share), respectively, was recognized related to this transaction. These amounts are reflected separately on the consolidated income statement within "Net loss on Airgas transaction" and include amortization of the fees related to the term loan credit facility, the gain on the sale of Airgas stock, and other acquisition-related costs. For the year ended 30 September 2010, $96.0 ($60.1 after-tax, or $.28 per share) in expense was recognized in relation to this transaction. For the six months ended 31 March 2011 and 2010, cash payments for the acquisition-related costs were $153.8 and $2.4, respectively. These payments are classified as operating activities on the consolidated statements of cash flows.

4.	BUSINESS COMBINATIONS

In the second quarter of 2010, we entered into agreements that enabled us to acquire 100% of the outstanding shares of the French SAGA group (SAGA), which consists of SAGA, SAGA Medical, and SAGA Technologies. SAGA is an independent industrial gas provider in France with packaged gases, liquid/bulk, and medical businesses. The acquisition of SAGA supports the Merchant Gases segment's integration strategy by enhancing its market position in southwest and central France. SAGA revenues for calendar year 2009 were approximately €25 million, or $35.

Under the terms of these agreements, we purchased 51.47% of the shares of SAGA on 1 March 2010 for €34.5 million or $47.2 ($25.0 net of cash acquired of $22.2). The remaining shares were purchased on 30 November 2010 for a fixed price of €44.8 million, or approximately $62. At 30 September 2010, this structure was accounted for as a financing of the purchase of the remaining shares and reported within short-term borrowings on the consolidated balance sheet.

5.	INVENTORIES

The components of inventories are as follows:

 

		31 March 2011				30 September 2010
Inventories at FIFO Cost
Finished goods		$	435.2			$	405.3
Work in process			30.7				29.3
Raw materials and supplies			207.9				208.2
			673.8				642.8
Less: Excess of FIFO cost over LIFO cost			(76.6	)			(71.2	)
		$	597.2			$	571.6

FIFO cost approximates replacement cost. Our inventories have a high turnover, and as a result, there is little difference between the original cost of an item and its current replacement cost.

6.

GOODWILL

Changes to the carrying amount of consolidated goodwill by segment for the six months ended 31 March 2011 are as follows:

 

		30 September 2010				Acquisitions and Adjustments				Currency Translation				31 March 2011
Merchant Gases		$	595.7			$	—			$	23.0			$	618.7
Tonnage Gases			15.5				—				.5				16.0
Electronics and Performance Materials			303.4				—				7.5				310.9
		$	914.6			$	—			$	31.0			$	945.6

Goodwill is subject to impairment testing at least annually. In addition, goodwill is tested more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists.

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 minimize the cash flow volatility to 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 determining 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. 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 contracts is the Euro/U.S. Dollar.

In addition to the foreign exchange contracts that are designated as hedges, we also hedge foreign currency exposures utilizing forward exchange contracts that are not designated as hedges. These contracts are used to hedge foreign currency-denominated monetary assets and liabilities, primarily working capital. The primary objective of these forward 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 is comprised of 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 the Company's outstanding currency price risk management instruments:

 

		31 March 2011								30 September 2010
		US$ Notional				Years Average Maturity				US$ Notional				Years Average Maturity
Forward exchange contracts:
Cash flow hedges		$	1,568.0				.4			$	1,605.5				.5
Net investment hedges			665.8				2.5				648.5				3.0
Hedges not designated			424.7				.1				373.6				.2
Total Forward Exchange Contracts		$	2,658.5				.9			$	2,627.6				1.1

In addition to the above, we use foreign currency denominated debt and qualifying intercompany loans to hedge the foreign currency exposures of our net investment in certain foreign affiliates. The designated foreign currency denominated debt at 31 March 2011 includes €746.7 million and NT$967.0 million, and at 30 September 2010 includes €782.1 million and NT$967.0 million. The designated intercompany loans include €437.0 million at 31 March 2011 and 30 September 2010.

 

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, our debt portfolio and hedging program are managed with the objectives and intent to (1) reduce funding risk with respect to borrowings made by us to preserve our access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) manage the aggregate interest rate risk and the debt portfolio in accordance with certain debt management parameters.

Interest Rate Swap Contracts

We enter into interest rate swap contracts 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 optimize interest rate risks and costs inherent in our debt portfolio. The current interest rate swap portfolio consists of fixed to floating swaps denominated in U.S. dollars and in Euros. In addition, we use interest rate swap agreements to hedge the interest rate on anticipated fixed-rate debt issuance. The notional amount of the interest rate swap agreements are equal to or less than the designated debt instrument being hedged. When interest rate swaps are used, the indices of the swap instruments and the debt to which they are designated are the same. It is our policy not to enter into any interest rate swap 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 risk management 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 long-term intercompany and third-party borrowing transactions and certain net investments in foreign operations. The current cross currency swap portfolio consists of a single fixed to fixed swap between U.S. dollars and British Pound Sterling.

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

 

		31 March 2011																30 September 2010
		US$ Notional				Pay %				Average Receive %				Years Average Maturity				US$ Notional				Pay %				Average Receive %				Years Average Maturity
Interest rate swaps (fair value hedge)		$	591.8				LIBOR				3.39	%			5.0			$	617.0				LIBOR				3.66	%			3.8
Cross currency interest rate swaps (net investment hedge)		$	32.2				5.54	%			5.48	%			3.0			$	32.2				5.54	%			5.48	%			3.5

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

 

		Balance Sheet				31 March 2011				30 September 2010				Balance Sheet				31 March 2011				30 September 2010
		Location				Fair Value				Fair Value				Location				Fair Value				Fair Value
Derivatives Designated as Hedging Instruments:
Foreign exchange contracts			Other receivables			$	23.7			$	29.8				Accrued liabilities			$	17.8			$	22.3
Interest rate swap contracts			Other receivables				6.9				6.6				Accrued liabilities				.9				1.3
Foreign exchange contracts			Other noncurrent assets				24.9				38.7				Other noncurrent liabilities				29.4				19.9
Interest rate swap contracts			Other noncurrent assets				13.1				33.1				Other noncurrent liabilities				2.9				2.4
Total Derivatives Designated as Hedging Instruments						$	68.6			$	108.2							$	51.0			$	45.9
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts			Other receivables			$	3.1			$	6.2				Accrued liabilities			$	3.6			$	8.3
Total Derivatives						$	71.7			$	114.4							$	54.6			$	54.2

 

Refer to Note 8, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.

The table below summarizes the gain or loss related to our cash flow hedges, net investment hedges, and derivatives not designated as hedging instruments. The amounts of gain or loss associated with the outstanding fair value hedges are not material.

 

		Three Months Ended 31 March
		Forward Exchange Contracts								Foreign Currency Debt								Other  (A)								Total
		2011				2010				2011				2010				2011				2010				2011				2010
Cash Flow Hedges:
Net (gain) loss recognized in OCI (effective portion)		$	(8.6	)		$	6.9			$	—			$	—			$	—			$	—			$	(8.6	)		$	6.9
Net gain (loss) reclassified from OCI to sales/cost of sales (effective portion)			(6.6)				(2.1)				—				—				—				.2				(6.6)				(1.9)
Net gain (loss) reclassified from OCI to other (income) expense (effective portion)			8.1				(3.2	)			—				—				—				—				8.1				(3.2	)
Net gain (loss) reclassified from OCI to other (income) expense (ineffective portion)			.1				(.2	)			—				—				—				—				.1				(.2	)
Net Investment Hedges:
Net (gain) loss recognized in OCI		$	18.3			$	(27.0	)		$	71.2			$	(58.4	)		$	.5			$	(1.2	)		$	90.0			$	(86.6	)
Derivatives Not Designated as Hedging Instruments:
Net (gain) loss recognized in other (income) expense (B)		$	.9			$	(4.5	)		$	—			$	—			$	—			$	—			$	.9			$	(4.5	)
		Six Months Ended 31 March
		Forward Exchange Contracts								Foreign Currency Debt								Other  (A)								Total
		2011				2010				2011				2010				2011				2010				2011				2010
Cash Flow Hedges:
Net (gain) loss recognized in OCI (effective portion)		$	(2.4	)		$	9.1			$	—			$	—			$	—			$	.2			$	(2.4	)		$	9.3
Net gain (loss) reclassified from OCI to sales/cost of sales (effective portion)			(6.1)				(4.9)				—				—				—				2.0				(6.1)				(2.9)
Net gain (loss) reclassified from OCI to other (income) expense (effective portion)			.8				(4.7	)			—				—				—				—				.8				(4.7	)
Net (loss) reclassified from OCI to other (income) expense (ineffective portion)			(.1	)			(.2	)			—				—				—				—				(.1	)			(.2	)
Net Investment Hedges:
Net (gain) loss recognized in OCI		$	14.3			$	(35.6	)		$	54.1			$	(90.2	)		$	.3			$	(.9	)		$	68.7			$	(126.7	)
Derivatives Not Designated as Hedging Instruments:
Net (gain) loss recognized in other (income) expense (B)		$	.7			$	(3.5	)		$	—			$	—			$	—			$	—			$	.7			$	(3.5	)

(A)	Other includes the impact on other comprehensive income (OCI) and earnings related to commodity swap contracts and interest rate swaps.

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

 

Credit Risk-Related Contingent Features

Certain derivative instruments are executed under agreements that require us to maintain a minimum credit rating with both Standard & Poor's and Moody's. If our credit rating falls below this threshold, the counterparty to the derivative instruments has the right to request full collateralization on the derivatives' net liability position. The net liability position of derivatives with credit risk-related contingent features was $16.7 as of 31 March 2011 and $4.2 as of 30 September 2010. 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 all derivative transactions with counterparties that are highly rated financial institutions all of which are investment grade at this time. Some of our underlying derivative agreements give us the right to require the institution to post collateral if its credit rating falls below the pre-established thresholds with Standard & Poor's or Moody's. These are the same agreements referenced in Credit Risk-Related Contingent Features above. The collateral that the counterparties would be required to post was $23.7 as of 31 March 2011 and $52.2 as of 30 September 2010. No financial institution is required to post collateral at this time, as all have credit ratings at or above the threshold.