APD

Air Products & Chemicals, Inc. - 10-Q Summary (Q2 2009)

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2009, and the six months ended on that date. Air Products & Chemicals, Inc. operates in four segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. The company is navigating a significant global economic downturn, resulting in reduced manufacturing activity and lower demand across most end markets.

Key Financial Metrics

Note: Debt figures represent total debt (short-term + long-term) as of March 31, 2009, and September 30, 2008.

Material Changes vs. Prior Period

• Revenue Decline: Sales decreased 23% in Q2 and 16% for the six months ended March 31, 2009. This was driven by a 13% volume decline, unfavorable currency impacts (7%), and lower natural gas/raw material cost pass-throughs (5%).
• Operating Income Drop: Operating income fell 25% in Q2 and 49% for the six-month period. The six-month decline was significantly impacted by a $174.2 million global cost reduction charge recorded in Q1 2009.
• Segment Performance:
  • Electronics and Performance Materials: Sales plummeted 41% in Q2 due to a severe downturn in semiconductor and flat panel capacity utilization. The segment reported an operating loss of $11.1 million in Q2.
  • Tonnage Gases: Sales dropped 28% in Q2, driven by reduced demand from steel and chemical customers and lower natural gas pass-throughs.
  • Merchant Gases: Sales declined 14%, but higher pricing partially offset volume declines.
  • Equipment and Energy: Sales increased 22% due to higher large air separation unit (ASU) activity.
• Discontinued Operations: The company recognized a one-time tax benefit of $16.7 million in Q2 related to the U.S. Healthcare business, offsetting an impairment charge of $48.7 million recorded in Q1.

Guidance, Outlook, and Risks

• 2009 Outlook: Management expects a slower recovery in the second half of 2009 than previously anticipated. Global manufacturing is expected to decline 9-10% for the full year. Steel and chemical markets are expected to remain weak until late 2009.
• Cost Reduction Plan: The company announced a plan to eliminate approximately 1,400 positions (7% of the workforce) to reduce overhead and infrastructure costs. The plan includes a $174.2 million charge and is expected to yield $130 million in annualized savings beyond 2010.
• Dividends: The quarterly dividend was increased to $0.45 per share, marking the 27th consecutive year of dividend increases.
• Risks: Key risks include continued deterioration in economic conditions, weakening demand, customer bankruptcies (one major customer filed for Chapter 11 in Jan 2009), and the inability to recover increased energy costs from customers.

Investor Verification Checklist

• Cost Reduction Execution: Verify the timeline and actual cash outflows associated with the $174.2 million restructuring charge and the elimination of 1,400 jobs.
• Electronics Segment Recovery: Monitor the semiconductor and flat panel markets for signs of stabilization, as this segment drove the majority of the volume decline.
• Customer Bankruptcy Exposure: Assess the collectability of the $37.3 million in receivables from the customer that filed for Chapter 11 bankruptcy in January 2009.
• Discontinued Operations: Track the progress of the sale of the remaining U.S. Healthcare business and potential for further impairment charges or tax benefits.
• Currency Impact: Evaluate the sensitivity of future earnings to the strengthening U.S. dollar, which negatively impacted sales and operating income by approximately 7% and 33% respectively in Q2.