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Air Products and Chemicals (APD)Stock (Chemicals - Major Diversified Industry)
 Gases are vital inputs to many manufacturing processes, and APD is one of the largest global bulk gas sellers. For large customers, APD will put one of its own plants next to the customers' factory and supply gas directly via pipeline. Earnings have grown at double digit rates from 2003 to 2007.[1] Over 50% of APD's revenues are earned overseas.[2] APD's exposure to the energy and high-tech industries, in both R&D, as well as consumer devices, have helped it grow from $7.673B in revenues in FY2005 to $10.038BN in FY 2007.[3] [edit] Business OverviewAfter the Q1 2008 divestiture of the Chemicals business, APD reports revenues in 5 segments:
In the above two segments, the chief component of cost of goods sold comes from electricity prices, as the separation of air and other gases is energy intensive.
[edit] Financial OverviewNote: Financials are sometimes presented pro-forma for the divestiture of the chemicals business. As a result, information is presented in a FY manner rather than CY manner. (APD's fiscal year ends on September 31) [edit] Revenues, Growth, and MarginAir Products and Chemicals (APD) has increased its revenues in FY2007 and FY2006 by 15.73% and 16.61%, excluding the divested Chemical business.[8] Fastest growing segments, as can be seen in the table, were the Merchant and Tonnage Gases business, which were also the largest contributors to overall revenue. This reflects APD's restructuring from 2006 to the present to focus on higher-growth and margin business.[9] APD reported a sales volume increase of 12% in FY2007 (including the chemical business), with no corrosponding price increase (which would be inflationary However, acquisitions and currency exchange contributed a total of 4% to the revenue figure. In addition, pass-through of raw material cost to the consumer of -1% also occurred, lowering the sales figure.[10]
 Businesses with the best operating margin as a percentage of revenue are the Merchant and Tonnage gases segments, as would be expected since these are the "focus" businesses that APD has favored over the lower-margin chemical businesses. Growth in the Equipment and Energy segment slowed, due to mean reversion from higher energy activity in 2005. [11] The sharp drop in Healthcare operating margin from 2005 to 2006 is the result of increased bad debt expense and infrastructure costs to support growth.[12] 
 [edit] Geographic Analysis
Geographic distribution of APD's revenues are well-diversified, with operations across the Americas, Asia, and Europe. Revenue growth in each segment has been in-pace with the company's growth at large, although Asia and Europe has increased its share from 12% and 28%, to about 15% and 30% approximately, between 2005 and 2007, due to higher growth in those areas. [14]
 [edit] Trends/Forces[edit] Significant Manufacturing Exposure to Electronics and Energy
APD's gases are inputs to many chemical and energy processes necessary for the production of energy and the manufacture of electronic devices. In addition, APD is the largest mover of hydrogen gas worldwide[16], which offers tremendous upside in any potential future hydrogen-based energy economy - such as one in which cars are powered by hydrogen fuel cells instead of gasoline.[17] Air Product also supplies gases vital to LCD manufacturers, especially interesting as consumers in the United States are mandated to switch over to newer sets to take advantage of digital signals on February 19, 2009. [18] Other electronic devices also require input gases delivered by APD. On the other hand, this exposure can be a double-edged sword. Significant economic contraction would impact consumer consumption, which will reduce consumer demand for goods and energy. Consumer demand is the lifeblood of manufacturing, and even more so for high-risk industries like electronics, where goods are typically consumer wants, rather than consumer needs. [edit] APD's business is subject to legislation and regulationAlthough the majority of APD's gases are environmentally innocuous, many of its customers use industrial gases in ways that are facing scrutiny. In addition, regulation adds to administrative costs to APD. For example, the European Union now requires volume producers of chemicals to register their chemicals and all their uses with the European Chemicals Agency.[19] This has both positive and negative effects for APD, as industrial gases can be used to improve energy efficiency as well as environmental performance, but demand for gases will decrease if regulation makes client businesses less profitable.[20] [edit] Further development of the Nanotechnology industry can grow APD's revenuesTotal global demand for materials fabricated on the nano/micro-meter scale, nano-devices and nano-tools is expected to reach $28 billion by 2008. The domestic nanotechnology market is predicted to reach $3.3 billion by 2008 and cross $19.8 billion by 2013. Air Products has increased its focus on the high potential nanotech market. [21] APD acquired Nanogate Advanced Materials GmbH in April 2006 in order to create manufacturing tools on the nano-scale. This consolidated its commercialization of nanoscale materials and gave it first mover advantage in the growing market of nanoscale manufacturing.[22] [edit] Increasing energy costs pose a risk to APD's business, as energy is a significant input to its operationsCost of electricity is the most significant component in cost of goods sold in the gases segments, and significant amounts of energy are required in any of APD's plants.[23] If prices were to substantially rise, APD will either be forced to pass-through costs to clients, or if it is not able to do so, take a hit to its margins. Historically, this complicated relationship with energy was evidenced during the 1970's energy crisis. Increasing petrochemical fuel costs lowered revenues in that segment, but increased popularity of oxygen as a fuel. In addition, the higher input costs were offset by higher demand for other gases to create cheaper energy sources, such as liquified natural gas.[24] [edit] Competitors[edit] Global competitors
These 3 global suppliers operate on similar platforms to Air Products and Chemicals. Combined, these companies earned over 56% of market revenues in 2006. This concentration makes sense in light of that fact that the industry requires capital-intensive investment, large production units and complex distribution networks. Firms compete on a variety of factors, including price, performance or specifications, continuity of supply, and customer service. Market sizing can be measured in terms of $USD revenue or volume of gas delivered. The table below presents both metrics for the time period 2002-2006.
[edit] Regional (domestic)Since another large component of cost of goods sold is transportation, regional players can compete effectively against APD when they have on-site or cheaper delivery options. [edit] Market ShareMarket share information for this segment is given below in table, for the year 2006.[25]
Note that BOC group has been acquired by Linde since 2006. [edit] References
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