Airgas, Inc. (NYSE: ARG), headquartered in Radnor Township, Pennsylvania, through its subsidiaries, is the largest U.S. distributor of industrial, medical and specialty gases (delivered in packaged or cylinder form), and hardgoods (welding, safety and related products).

Airgas (NYSE:ARG) sells gas, welding equipment, and safety supplies to manufacturers and end-users of industrial gases, which include chemical processors, the healthcare industry, and other smaller-scale industries requiring gases as raw materials. The company earned $3.86 billion in revenue and $196 million in net income in 2010.[1]

Airgas and its competitors buy gas from gas producers such as Air Products and Chemicals (APD), L'aire Liquide or Linde in bulk, and then repackages these industrial gases into high-pressure cylinders as required by end-customer specifications. About 90% of the company's revenues come from the gas delivery business.[2]

Airgas is the only national company in an industry dominated by regional players, largely because it is expensive to package and transport gas over long distances. Airgas has aggressively consolidated regional players throughout its history, acquiring 350 companies since its inception in 1986.

Company Overview

The company reports under two main business units:[2]

Distribution (90% of revenue) - This unit earns most of Airgas' revenue. Airgas has over 1 million clients ranging from metal fabricators to packagers of carbonated soda. Airgas' national scale, in contrast with its regional competitors, gives it an advantage in negotiating better contracts than competitors.
Contents
1 Company Overview
1.1 Geographic Analysis
2 Business Growth
2.1 FY 2010 (ended March 31, 2010)[1]
3 Trends/Forces
3.1 Scale lends power to ARG's procurement and distribution networks
3.2 The success of integration and the associated management challenges are hurdles to Airgas' success
3.3 Rising costs for industrial gases threaten ARG's growth and margins
3.4 Domestic market cyclicality and the potential of recession are challenges for Airgas' growth
4 Competitors
5 References
All Other Operations (10% of revenue) - All other operations primarily consist of gas producing operations within the company. The Gas Operations Division produces and distributes carbon dioxide, dry ice, nitrous oxide, anhydrous ammonia, and specialty gases. Airgas Merchant Gases produces oxygen, nitrogen, and argon, most of which is sold internally within the company to the Distribution business unit. National Welders is a producer and distributor of industrial, medical and specialty gases, as well as the related packaging and safety products.
Geographic Analysis
Airgas operates in specific geographic regions in the US. It is limited by the expense of transporting gas in new regions, as well as the limitations of its existing infrastructure. Airgas does not have immediate plans for international acquisitions, but the CEO has indiated that, "we are open to the possibility of extending our business beyond North America and are currently evaluating opportunities on a case-by-case basis.

Business Growth

FY 2010 (ended March 31, 2010)[1]
Net sales fell 11% to $3.86 billion. Gas and rent same-store sales declined 3% and hardgoods declined 2%. Gas volumes for the current quarter were 2% lower than the prior year quarter while pricing was down 1%. Hardgoods volumes were 1% lower than the prior year quarter while pricing was down 1%, as declines in costs and prices for filler metals had the most significant impact on hardgoods pricing, with most other product lines stable to slightly down.
Net income fell 25% to $196 million.
Trends/Forces

Scale lends power to ARG's procurement and distribution networks
ARG margins are better than its competitors' because it can negotiate better deals when leasing trucks for transportation, produce gas canisters more cheaply at scale, and can negotiate larger distribution deals with clients. The effects are seen in both gross profit as well as operating profit, and ARG can win share by converting customers through lower prices, and buying-out opponents when the opportunity presents itself. This is the advantage of being the only national player in a highly fragmented industry.

The success of integration and the associated management challenges are hurdles to Airgas' success
Airgas' primary revenue growth comes from acquisitions of existing smaller distributor networks, with operating income efficiencies coming from leveraging Airgas' national structure. Although the company has historically been successful at meeting targets for acquisitions and not overpaying, integration risk exists for any one of Airgas' acquisitions.

The acquisition of Linde's bulk gas production group is a larger integration challenge than most, since it is in a business line different from the distribution side. While its products can be sold internally to ARG's distribution segment, the business will have to earn share from ARG's competitor-suppliers, such as Praxair (PX) and Air Products and Chemicals (APD).


Rising costs for industrial gases threaten ARG's growth and margins
Industrial gases are the main input to ARG's operations, and are typically purchased from a distributor such as Air Products and Chemicals (APD), L'aire Liquide or Praxair (PX). Energy price increases have been passed on to Industrial gas prices, as electricty costs are the main component of industrial gas cost of goods sold. High oil prices are creating the opposite effect - higher input costs - and competitive pricing pressure in this fractured market means ARG might not be able to pass-through cost increases. The dynamic between energy cost and industrial gas pricing will determine Airgas' revenue growth as well as margin expansion.

Domestic market cyclicality and the potential of recession are challenges for Airgas' growth
In light of the recessionary fears caused by the U.S. Housing Market, consumption of manufactured goods may drop, feeding into the economy at large. While slack demand for manufacturing will damage Airgas, as its gas sales come from manufacturer demand, there are alternative customer segments that Airgas participates in which shielded from some of the recessionary woes. For example, with rising energy inflation, alternative renewable energy becomes more attractive, which also demands gases as inputs. Healthcare, food, life sciences have also been identified as shielded from some of these cyclicality concerns.

Concerns over soft demand due to manufacturing are also partially offset by the weakening dollar. Though Airgas is a domestic-only player, many of its customers are international players in their respective markets, leading them to see more demand internationally as the dollar weakens.

Competitors

International Gas Producers

Praxair (PX)
Air Products and Chemicals (APD)
L'aire Liquide
These major international producers and distributors also happen to be ARG's chief suppliers, with long-term take-or-pay (either take the gas at our rates or pay us a small fee instead) agreements in place to guarantee their own revenues as well as ARG's supply.

These suppliers don't typically elect to compete in Airgas' "last-leg" business, delivering gases in non-bulk quantities to individual customers at a time. They instead prefer a business without the distribution challenges that ARG has embraced. However, they occasionally do choose to compete for select clients and markets.

Regional Gas Distributors

Many small regional players (also acquisition targets)
VALLEY NATIONAL GASES (VLG)
The challenges of distributing packaged gas over more than 50-100 miles are significant and costly - meaning the regional market is highly fragmented in this industry. This has created an opportunity for the acquisition strategy that has propelled Airgas to significant ownership of the market. However, even it does not have majority share in the national market.

Balance Sheet - Assets

Cash and Equivalents 35,015 53,352 57,890 47,001

Accounts Receivable 497,573 520,676 504,512 186,804

Receivables 497,573 520,676 504,512 186,804

Raw Materials * * * 108,129

Finished Goods * * * 225,832

Other Inventories 359,186 337,448 344,644 *

Inventories 359,186 337,448 344,644 333,961

Prepaid Expenses 100,934 90,904 79,985 94,978

Current Deferred Income Taxes 53,931 53,591 50,185 48,591

Total Current Assets 1,046,639 1,055,971 1,037,216 711,335

Land & Improvements * * * 153,570

Building & Improvements * * * 392,895

Machinery, Furniture & Equipment * * * 2,628,169

Construction in Progress * * * 83,093

Other Fixed Assets 3,894,538 3,845,332 3,791,373 516,481

Total Fixed Assets 3,894,538 3,845,332 3,791,373 3,774,208

Gross Fixed Assets (Plant, Prop. & Equip.) 3,894,538 3,845,332 3,791,373 3,774,208

Accumulated Depreciation & Depletion 1,460,321 1,416,895 1,366,479 1,346,212

Net Fixed Assets (Net PP&E) 2,434,217 2,428,437 2,424,894 2,427,996

Intangibles 201,699 203,151 207,011 212,752

Cost in Excess 1,117,079 1,110,345 1,106,881 1,109,276

Other Non-Current Assets 46,950 50,208 38,827 34,573

Total Non-Current Assets 3,799,945 3,792,141 3,777,613 3,784,597

Total Assets 4,846,584 4,848,112 4,814,829 4,495,932


Balance Sheet - Liabilities, Stockholders Equity

Accounts Payable 114,094 152,127 147,249 157,566

Short Term Debt 9,564 10,624 9,589 10,255

Accrued Liabilities 355,891 346,547 357,221 307,822

Total Current Liabilities 479,549 509,298 514,059 475,643

Long Term Debt 1,617,150 1,666,918 1,711,630 1,499,384

Deferred Income Taxes 702,356 676,257 658,944 652,389

Other Non-Current Liabilities 68,632 67,927 69,231 72,972

Total Non-Current Liabilities 2,388,138 2,411,102 2,439,805 2,224,745

Total Liabilities 2,867,687 2,920,400 2,953,864 2,700,388

Common Stock Equity 1,978,897 1,927,712 1,860,965 1,795,544

Common Par 865 865 864 863

Additional Paid In Capital 601,063 592,353 582,475 568,421

Retained Earnings 1,459,614 1,424,808 1,379,186 1,332,759

Treasury Stock (87,634) (93,861) (102,934) (109,941)

Other Equity Adjustments 4,989 3,547 1,374 3,442

Total Capitalization 3,596,047 3,594,630 3,572,595 3,294,928

Total Equity 1,978,897 1,927,712 1,860,965 1,795,544

Total Liabilities & Stock Equity 4,846,584 4,848,112 4,814,829 4,495,932

Cash Flow 473,499 461,626 445,300 431,249

Working Capital 567,090 546,673 523,157 235,692

Free Cash Flow (173,132) (180,145) (212,171) 203,916

Invested Capital 3,596,047 3,594,630 3,572,595 3,294,928


* = Data not available
 
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