-- 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
-- We're simultaneously affirming the existing ratings on Airgas,
including the 'BBB' long-term corporate credit rating.
-- The outlook is stable outlook.
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.
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.
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
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
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.
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
Corporate Credit Rating BBB/Stable/A-2
Senior Unsecured BBB
Commercial Paper A-2
$250 mil. snr unsec nts due 2022 BBB