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