TEXT - S&P rates Airgas Inc notes 'BBB'

Mon Nov 19, 2012 4:53pm EST

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Overview
     -- U.S. industrial gas and related hardgoods distributor Airgas Inc. 
 is issuing $250 million in senior unsecured notes due 2022.
     -- We are assigning a 'BBB' senior unsecured debt rating to the proposed 
notes.
     -- We're simultaneously affirming the existing ratings on Airgas, 
including the 'BBB' long-term corporate credit rating. 
     -- The outlook is stable outlook.
 
Rating Action
On Nov. 19, 2012, Standard & Poor's Ratings Services assigned its 'BBB' 
issue-level rating to Radnor, Pa.-based industrial gas and related hardgoods 
distributor Airgas Inc.'s proposed $250 million senior unsecured notes due 
2022. Airgas will use proceeds of the note offering for general corporate 
purposes, including share repurchases, to fund acquisitions, and to pay down 
outstanding borrowings under its revolving credit facility. We also affirmed 
the existing ratings on Air gas, including the 'BBB' long-term corporate 
credit rating. The outlook is stable. 

Rationale
Standard & Poor's Ratings Services' ratings on Radnor, Pa.-based Airgas Inc. 
reflect its position as the leading North American distributor of industrial 
gases and related hardgoods (e.g., welding equipment, safety supplies, and 
tools), respectable operating margins, and stable cash flows. However, the 
moderate cyclicality of the manufacturing and industrial markets the company 
serves tempers its strengths, as do management's financial policies favoring 
incremental debt-financed acquisitions to complement organic growth. Standard 
& Poor's characterizes Airgas' business risk profile as "strong" and its 
financial risk profile as "significant."
Industrial gas distribution has favorable business attributes, including good 
growth prospects, solid internal funds generation and pricing, and 
consolidation trends that favor industry leaders. About 50% of the estimated 
$13 billion U.S. packaged gases and welding hardgoods market consists of local 
and regional independent companies--most competitors for a service area are 
within a geographic radius of 50 to 75 miles--which presents considerable 
consolidation opportunities. Generating annual sales of about $4.9 billion 
(for the 12 months ended Sept. 30, 2012), Airgas has an estimated 25% of the 
U.S. market, which is a service-intensive business. The company also has the 
broadest geographic coverage within the industry, via a U.S. distribution 
network encompassing more than 1,100 locations. Overall, Airgas derives about 
60% of sales from industrial, specialty, and medical gases and cylinder rent, 
as well as 40% from hardgoods, which have lower gross margins than gas and 
rent (on cylinders and equipment) but significant overlap of customers.

Airgas' same-store sales rose 3% in the second quarter (ended Sept. 30, 2012), 
compared with 2011 due to 4% pricing increases--that 1% volume drops partially 
offset--reflecting sluggish economic conditions. EBITDA margins have been 
steady at about 18%, and return on capital is moderate at about 12%. We expect 
operating earnings to benefit from the company's phased, multiyear rollout of 
its enterprise information system (from SAP AG). Airgas expects its operating 
income to increase $75 million to $125 million on an annualized basis once it 
fully implements the system, by the end of calendar 2013. Also supporting 
Airgas' income prospects is its ability to serve large clients with its 
national footprint, which includes more than 800 retail stores, and broad 
offering of gas products and hardgoods. 

Acquisitions have been an integral part of Airgas' growth strategy. An 
important strength, in our view, is the company's demonstrated ability to 
integrate acquisitions and achieve related synergies quickly. The key ratio of 
funds from operations (FFO)-to-total adjusted debt was 32% as of Sept. 30, 
2012. Standard & Poor's considers FFO-to-total adjusted debt between 25% and 
30% as in line with our expectations at the corporate credit rating. We expect 
that management will be prudent regarding plans for future acquisitions and 
additional shareholder rewards. 

Liquidity
The company's liquidity is "adequate" and consistent with our expectations for 
the ratings. Airgas had about $48 million in cash as of Sept. 30, 2012, and 
$340 million available under the $750 million revolving credit facility 
expiring in July 2016. The revolving credit line may be increased by an 
additional $325 million, subject to certain conditions. Airgas has a $750 
million commercial paper program, which is backstopped by the $750 million 
revolving credit facility. As of Sept. 30, 2012, $329 million was outstanding 
under the commercial paper program. The company also has a trade receivables 
securitization agreement for $295 million, of which it had borrowed the full 
amount as of Sept. 30, 2012. The receivables securitization expires in 
December 2013. 

Our liquidity assessment reflects the following:
     -- We expect the company's liquidity sources (including cash, FFO, and 
credit facility availability) over the next two years to exceed its uses by 
1.2x or more. 
     -- Even if EBITDA declines by 20%, we believe sources would exceed uses 
of cash.
 
Capital spending was $357 million in fiscal 2012, and we expect capital 
expenditures in fiscal 2013 to total about 6% of sales. We believe the company 
will use its free cash flows for dividends, share repurchases, and 
acquisitions. Acquisition-related outlays were limited in the first six months 
of fiscal 2013 at $18 million. In October 2012, the company announced a 
program to purchase up to $600 million of common stock.  
Airgas' debt maturities increase significantly in the next few years to $595 
million in fiscal 2014 and $400 million in fiscal 2015. We expect the company 
to refinance its debt in a timely fashion. The credit agreement includes a 
financial covenant for a maximum leverage ratio, under which we expect the 
company to maintain adequate cushion.

Outlook
The outlook is stable. The company's strong business fundamentals, including 
its leading position in the North American industrial gas market, and 
significant barriers to competitive entry support credit quality. We expect 
the company to maintain FFO as a percentage of adjusted debt between 25% and 
30%, which we view as appropriate for the rating. We could lower the ratings 
if sales volume declines or margin pressure resulted in deterioration in 
credit measures, such that FFO-to-adjusted debt declined to less than 20% 
without clear prospects for recovery. In such a scenario, challenging 
operating conditions could cause sales to decline unexpectedly by 15% or more 
and margins to weaken by 300 basis points. We could also lower the ratings if 
sizable acquisitions or share repurchases result in FFO-to-total adjusted debt 
deteriorating to 20%, with no prospect for improvement.

Conversely, we could raise the ratings modestly if improved operating results 
and prudent financial policies supported FFO-to-total adjusted debt 
consistently greater than 35%. 

Related Criteria And Research
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
Sept. 18, 2012 
     -- Key Credit Factors: Business and Financial Risks In The Commodity And 
Specialty Chemical Industry, Nov. 20, 2008
 
Ratings List
Ratings Affirmed

Airgas Inc.
 Corporate Credit Rating                BBB/Stable/A-2     

Airgas Inc.
 Senior Unsecured                       BBB                
 Subordinated                           BBB-               
 Commercial Paper                       A-2                

New Rating

Airgas Inc.
 $250 mil. snr unsec nts due 2022       BBB
FILED UNDER:
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