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| - | [[image: ARGlogo.gif|150px|left]] ''Airgas'' is a company that sells gas, welding equipment, and safety supplies to manufacturers and end-users of industrial gases. | + | '''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.<ref name=10mainfinancial/> |
| - | Airgas and its competitors are supplied by the major gas producers such as [[Air Products and Chemicals (APD)]], L'aire Liquide or Linde, repacking industrial gases in high-pressure cylinders as required by end-customer specifications. Airgas' main revenue source comes from the sale of gases such as nitrogen, oxygen, argon, helium, hydrogen and gases for welding, such as acetylene, propylene and propane, carbon dioxide, and nitrous oxide. Additional tie-in revenue comes from renting of cylinders for gas storage as well as related safety materials. By the company's own estimates, about 80% of revenues come from the primary gas delivery business.<ref>[http://edgar.sec.gov/Archives/edgar/data/804212/000089322007002057/0000893220-07-002057-index.htm Airgas FY2007 10-K "DISTRIBUTION" pg.3]</ref> | + | 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.<ref name=10segments/> |
| - | In March of 2007, Airgas announced the intent to acquire Linde AG's US gas production operations, giving it the ability to produce its own gases as necessary. This business is relatively small, constituting less than 15% of the company's revenues.<ref>[http://edgar.sec.gov/Archives/edgar/data/804212/000089322007002057/0000893220-07-002057-index.htm Airgas FY2007 10-K "Airgas Merchant Gases" pg.6]</ref> | + | 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. |
| - | This industry is extremely regional, as significant fixed costs are associated with packaging and delivering the gas. As a result, it is dominated by local distributors catering to a specific area. Airgas is the largest competitor with the segment, and has grown its revenues via acquisitions, totaling 350 companies since the company's inception in 1986. In FY2007, the Airgas completed 13 acquisitions with annual sales of approximately $336 million.<ref>[http://edgar.sec.gov/Archives/edgar/data/804212/000089322007002057/0000893220-07-002057-index.htm Airgas FY2007 10-K "Acquisitions" pg.22]</ref> | + | ==Company Overview== |
| + | The company reports under two main business units:<ref name=10segments>[http://www.wikinvest.com/stock/Airgas_(ARG)/Filing/10-K/2010/F83513644 ARG 2010 10-K pg. 5-7]</ref> | ||
| - | ==Business Overview== | + | *'''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. |
| - | The company reports under two main business units | + | |
| - | *'''Distribution''' - This unit earns most of Airgas' revenue, and is the primary provider of value of Airgas customers. Airgas has over 1 million clients<ref>[http://seekingalpha.com/article/62163-airgas-inc-f3q08-qtr-end-12-31-07-earnings-call-transcript Air Gas December 31, 2007 Q3FY2008 Earnings Call Transcript]</ref> ranging from metal fabricators to packagers of carbonated soda. Airgas' larger size than most regional competitors gives it an advantage on the supply side as well as the sell side, negotiating better contracts than competitors due to scale, as well as concentrating administrative activities, enabling branch locations to focus on sales and services. | + | *'''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. |
| - | *'''All Other Operations''' - 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 saftey 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. | ||
| - | ==Financial Overview== | + | ==Business Growth== |
| - | ===Revenues, Growth, and Margin=== | + | ===FY 2010 (ended March 31, 2010)<ref name=10mainfinancial>[http://www.wikinvest.com/stock/Airgas_(ARG)/Filing/10-K/2010/F83513644 ARG 2010 10-K "Selected Financial Data" pg. 20]</ref>=== |
| + | *'''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. | ||
| - | Revenues at Airgas have grown consistently year on year from 2005 to 2007, growing 20% and 17% in 2006 and 2007, respectively. Operating Income has growth even more, at 33% and 27%.<ref>[http://edgar.sec.gov/Archives/edgar/data/804212/000089322007002057/w35445e10vk.htm#110 Airgas FY 2007 10-K "SELECTED FINANCIAL DATA. " pg.16]</ref> This is due to increased margins per dollar of revenue, caused by effective management of pricing and rental rates of gas and packing cylinders, as well as cost decreases from administrative overhead due to the centralized administrative business model<ref>[http://seekingalpha.com/article/62163-airgas-inc-f3q08-qtr-end-12-31-07-earnings-call-transcript?page=3 Airgas Q3FY2008 Earnings Call Transcript]</ref> | + | ==Trends/Forces== |
| - | [[image:ARG RevOpInc.png|center]] | + | ====Scale lends power to ARG's procurement and distribution networks==== |
| - | <ref>[http://edgar.sec.gov/Archives/edgar/data/804212/000089322007002057/w35445e10vk.htm#110 Airgas FY 2007 10-K "SELECTED FINANCIAL DATA. " pg.16]</ref> | + | 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. |
| - | {| {{table}} | + | |
| - | | align="center" style="background:#f0f0f0;"|'''Metrics''' | + | |
| - | | align="center" style="background:#f0f0f0;"|'''2005''' | + | |
| - | | align="center" style="background:#f0f0f0;"|'''2006''' | + | |
| - | | align="center" style="background:#f0f0f0;"|'''2007''' | + | |
| - | |- | + | |
| - | | Net Sales||2,367,782||2,829,610||3,205,051 | + | |
| - | |- | + | |
| - | | Operating Income||202,454||268,758||341,452 | + | |
| - | |- | + | |
| - | | Sales Growth||-||20%||13% | + | |
| - | |- | + | |
| - | | Operating Income Growth||-||33%||27% | + | |
| - | |- | + | |
| - | | | + | |
| - | |} | + | |
| - | With respect to the main two business units at Airgas, approximately 82% of revenues was earned by the Distribution business unit, almost equally divided between Gas sales/packaging rentals, and the value-added services consisting of safety supplies and the like, collectively labeled "Hardgoods". While "All Other Operations" currently constitute a small (<20%) contribution to total revenues, Airgas is currently investing in expanding its gas production facilities in new regions in the Midwest (Indiana and Kentucky) scheduled for early 2009<ref>[http://seekingalpha.com/article/62163-airgas-inc-f3q08-qtr-end-12-31-07-earnings-call-transcript?page=-1 Airgas Q3FY2008 Earnings Call Transcript]</ref>, which will change the contribution in the mix for the future. | + | ====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. | ||
| - | [[image:ARG RevBreakout.png|center]] | + | 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)]]. |
| - | <ref>[http://edgar.sec.gov/Archives/edgar/data/804212/000089322007002057/w35445e10vk.htm#110 Airgas FY 2007 10-K "Notes to Consolidated Financial Statements" F-49]</ref> | + | |
| - | ===Geographic Analysis=== | + | ====Rising costs for industrial gases threaten ARG's growth and margins==== |
| - | Airgas operates domestically, in selected regional markets due to the transportation dynamics of this industry mentioned above. 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."<ref>[http://seekingalpha.com/article/62163-airgas-inc-f3q08-qtr-end-12-31-07-earnings-call-transcript?page=-1 Airgas Q3FY2008 Earnings Call Transcript]</ref> | + | 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. |
| - | ==Trends/Forces== | + | ====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|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 [[U.S. Economic Cycles|cyclicality]] concerns. | ||
| - | ====The Success of Integration and the associated Management challenges are hurdles to Airgas' success==== | + | Concerns over soft demand due to manufacturing are also partially offset by the weakening [[Dollar|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 | ||
| - | ====Cost of energy==== | + | 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. | ||
| - | ====Domestic Market cyclicality and the potential of recession are challenges for Airgas' revenue and margin growth==== | + | '''Regional Gas Distributors''' |
| - | "US manufactures have become very competitive after the culling out they experienced during the recessionary environment in 1998-2004, which was exacerbated by an overvalued dollar." <ref>[http://seekingalpha.com/article/62163-airgas-inc-f3q08-qtr-end-12-31-07-earnings-call-transcript Air Gas December 31, 2007 Q3FY2008 Earnings Call Transcript]</ref> | + | *'''Many small regional players (also acquisition targets) |
| - | + | *'''[[VALLEY NATIONAL GASES (VLG)]] | |
| - | == Competitors== | + | |
| - | + | ||
| - | ===Market Share=== | + | |
| + | 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. | ||
| ==References== | ==References== | ||
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| [[category:Miscellaneous]] | [[category:Miscellaneous]] | ||
| [[category:Industrial Equipment Wholesale*]] | [[category:Industrial Equipment Wholesale*]] | ||
| + | [[Category:Mature]] | ||
Current revision
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.
- 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.
References
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