Business Context and Reporting Period
Company: Air Products & Chemicals, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: The Company operates in five segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials, Equipment and Energy, and Healthcare. The reporting period includes the sale of the Polymer Emulsions business and the High Purity Process Chemicals (HPPC) business, which are classified as discontinued operations.
Key Financial Metrics
| Metric (Millions) | Three Months Ended Mar 31, 2008 |
Three Months Ended Mar 31, 2007 |
Six Months Ended Mar 31, 2008 |
Six Months Ended Mar 31, 2007 |
|---|---|---|---|---|
| Sales | $2,605.3 | $2,298.0 | $5,078.9 | $4,565.8 |
| Operating Income | $338.2 | $308.6 | $710.2 | $626.0 |
| Net Income | $314.3 | $227.6 | $578.0 | $457.9 |
| Diluted EPS | $1.43 | $1.02 | $2.62 | $2.05 |
| Cash from Operations | N/A | N/A | $634.0 | $386.8 |
| Total Debt | $4,386.8 | N/A | $4,386.8 | $3,670.9 |
| Cash and Cash Items | $138.8 | N/A | $138.8 | $40.5 |
Note: Total Debt includes short-term borrowings, current portion of long-term debt, and long-term debt. Cash from Operations is reported for the six-month period only.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 13% in the quarter and 11% for the six months. Growth was driven by volume increases in Tonnage Gases and Electronics segments, improved pricing in Merchant Gases, and favorable currency effects (weaker U.S. dollar).
- Profitability: Operating income rose 10% (quarter) and 13% (six months). Net income increased 38% (quarter) and 26% (six months).
- Discontinued Operations: The Company recognized a significant after-tax gain of $57.7 million from the sale of the Polymer Emulsions business in January 2008. The HPPC business was sold in December 2007, resulting in a small additional loss in Q1 2008.
- Pension Settlements: A non-recurring pension settlement charge of $26.3 million (quarter) and $27.7 million (six months) reduced operating income, related to the retirement of corporate officers in fiscal 2007.
- Segment Performance:
- Merchant Gases: Sales up 15% (quarter) due to pricing and acquisitions.
- Tonnage Gases: Sales up 25% (quarter) driven by volume and natural gas cost pass-through.
- Equipment and Energy: Sales down 21% (quarter) due to lower LNG activity.
Guidance, Outlook, and Risks
- 2008 Outlook: Management expects domestic manufacturing growth around 2% and global growth around 3%. Capital expenditures are projected between $1,100 million and $1,200 million for 2008.
- Cost Reduction: The global cost reduction plan is expected to yield $44 million in savings for 2008 and $48 million annually thereafter.
- Healthcare Segment: The U.S. Healthcare business has operated below plan. Management is evaluating strategic alternatives and monitoring goodwill recoverability, with a decision expected in Q3 2008.
- Dividends: The quarterly cash dividend was increased 16% to $0.44 per share.
- Risks and Contingencies:
- Legal: Ongoing investigation by the Brazilian Ministry of Justice regarding alleged anticompetitive activities; EPA referral regarding RCRA violations at the Pasadena, Texas facility.
- Environmental: Accruals for environmental liabilities range from $52 million to $65 million, primarily related to the Pace, Florida facility.
- Market: Sensitivity to interest rate changes and foreign currency fluctuations.
Investor Verification Checklist
- Verify the sustainability of volume growth in the Tonnage Gases segment given the impact of natural gas cost pass-throughs.
- Monitor the strategic review of the U.S. Healthcare business and potential goodwill impairment charges in Q3 2008.
- Assess the impact of the pension settlement charges ($27.7M YTD) on future earnings, noting management expects minimal additional settlements in 2008.
- Review the status of the Brazilian antitrust investigation and potential regulatory fines.
- Confirm the execution of the global cost reduction plan to achieve the targeted $44 million in savings for 2008.