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.
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.
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.
The company reports under two main business units
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%. 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
|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, which will change the contribution in the mix for the future.
Airgas operates in selected domestic markets due to the transportation limitations imposed upon this industry as 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."
Airgas' primary revenue growth comes from acquisitions of existing smaller distributor networks, with operating income efficiencies coming from leveraging Airgas' national structure. In fact, in Q2 of FY2008, Airgas acquired 8 regional players in gas distribution alone, and intends on buying more through FY2008.
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, and integration risk exists for any one of Airgas' acquisitions. While the company has been historically succesful at meeting targets for acquistions and overpaying, this will not always be the case.
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. Energy price increases have fed through due to cost pass-through into Industrial gas prices, electricty costs are the main component of industrial gas cost of goods sold.
Presently, with the weaking of the US Dollar, Oil Prices have hit new highs in CY2008, further exacerbating the issue. During the late 1990's, as oil prices trended downwards, Airgas' pricing faced significant downward pressure, as this was coupled with slack demand. Heading into the future, the dynamic between energy cost and industrial gas pricing will determine in Airgas' revenue growth.
"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."