Airgas, Inc.

views updated

Airgas, Inc.

259 N. Radnor-Chester Rd., Suite 100
Radnor, Pennsylvania 19087-5283
U.S.A.
Telephone: (610) 687-5253
Toll Free: (800) 255-2165
Fax: (610) 687-1052
Website: http://www.airgas.com

Public Company
Incorporated: 1986
Employees: 8,500
Sales: $1.63 billion (2002)
Stock Exchanges: New York
Ticker Symbol: ARG
NAIC: 325120 Industrial Gas Manufacturing; 422690 Other Chemical and Allied Products Wholesalers; 532412 Construction, Mining, and Forestry Machinery and Equipment Rental and Leasing

Airgas, Inc. is the largest distributor of industrial, medical, and specialty gases in the United States, with more than 700 sales and service locations nationwide. Industrial gases include oxygen, hydrogen, argon, helium, and nitrogen, and various gas mixtures for metal fabrication. Medical gases include nitrous oxide, breathing air, laser surgery mixtures, and lung diffusion mixtures. Specialty gases include research-grade, ultra-high purity, and specialty-blend gases used in analytical research, biotechnical, calibration, and emission monitoring. Related products include dry ice and liquid carbon dioxide used in food processing and service. Airgas operates more than 180 cylinder fill plants, 17 acetylene production facilities, more than 50 specialty gas laboratories, and five hard goods distribution centers nationwide. Airgas is also the largest distributor of welding equipment and supplies and one of the largest distributors of safety and environmental protection supplies. The company also provides supply chain management, cylinder rental, local delivery, technical support, and bulk gas supply/delivery.

Formation As an Investment: Early 1980s

When Peter McCausland purchased Connecticut Oxygen in 1982 he thought it would be a worthwhile investment. McCausland encountered the acquisition opportunity while employed as corporate attorney at the Valley Forge, Pennsylvania, office of Messer Greisheim, a German industrial gas producer. McCausland recommended that Messer Greisheim purchase Connecticut Oxygen, but the company rejected the idea. McCausland left the company to start his own law firm and raised funds through venture capital firms to purchase Connecticut Oxygen. He continued to work as an attorney while managers at Connecticut Oxygen continued to operate the company. In 1982 Connecticut Oxygen generated $3.5 million in sales and $182,000 in profits.

McCausland formed Airgas as a holding company for Connecticut Oxygen and other independent packaged gas distribution companies and hired a colleague from Messer Greisheim to manage the company. Over the next few years Airgas purchased several small independent gas distributors in Virginia, Michigan, and elsewhere. The timing coincided with a wide availability of such companies, started by veterans of World War II who approached retirement in the early 1980s. Since their children pursued other careers, these entrepreneurs sold their businesses happily. While Airgas sustained a high level of debt to fund acquisitions, strong cash flow and profitability of the businesses paid the debt. With 17 acquisitions completed over four years, operations in ten states generated revenues of $25 million in 1986.

The company’s first major expansion occurred through a reverse merger with Werco, Inc., a $68 million supplier to the industrial gas industry. Chiswell Perkins, former owner of Werco, became CEO of the combined company, renamed simply Airgas, until his retirement; McCausland took that position in March 1987.

The merger of Werco and Airgas created a company large enough to take advantage of funding through public ownership. In December 1986 Airgas made an initial public offering of stock, raising $5.5 million. In September 1987 a secondary offering raised $20 million. Proceeds of both stock offerings supported continued growth through acquisition, pursued at the rate of two to three companies per month; each acquired company added between $1 million to $5 million in revenues. Airgas’s strategy involved the acquisition of a regional anchor as it entered a new market, then the purchase of smaller distributors to supplement service availability in that market. By January 1991 Airgas completed a total of 111 acquisitions and sales exceeded $300 million. Airgas operated more than 230 branch locations in 31 states and Canada, selling packaged oxygen, nitrogen, helium, and welding gases, as well as welding products and other related supplies.

Decentralized Management Kindling Success into the 1990s

Taking a friendly approach to acquisition, Airgas succeeded by retaining existing management, allowing for local control yet integrating companies into a cohesive, larger whole. A decentralized management structure provided the basis for the company’s success in a business oriented to small-scale sales and service requirements. The pooling of intellectual efforts contributed to success at the corporate level, as well. For instance, as insurance and regulatory issues became more complex, consolidation of small companies into a larger organization provided greater protection from risks unique to the industry. Airgas found willing sellers as a high level of industry accidents led to bankruptcy for companies involved in an industry self-insurance fund. Airgas implemented its own captive insurance program, but sought to reduce accidents and risk. A task force of subsidiary managers created SAFECOR, for safety, compliance, and risk management, addressing regulations of hazardous materials by the U.S. Department of Transportation, the Occupational Safety and Health Administration, and other regulatory agencies.

As an incentive to local success McCausland offered managers stock in the subsidiaries they operated; in 1992 the stock could be exchanged for Airgas stock based on the subsidiary’s contribution to profits. Airgas supported internal growth at the store level in several ways. High-volume wholesale prices provided by Airgas created a wider margin for profitability and competitive pricing at the local level. As the company grew rapidly in certain markets, Airgas implemented training and education programs to ensure management and sales staff knowledgeable about packaged gas and related hard goods. Airgas increased its inventory of welding safety equipment and supplies which sold well in conjunction with welding gases. The company diversified into bulk and specialty gases, finding new customers in medical and biotechnology companies, and became a distributor of carbon dioxide used for beverages. The spring 1997 acquisition of American Dry Ice increased the company’s market share of liquid carbon dioxide and added dry ice to its product list.

At the corporate level, Airgas implemented a number of measures to improve operating margins. The company formed regional distribution hubs, closed redundant operations, and divested certain manufacturing facilities and unrelated businesses. Airgas built and acquired production plants, updating technologies for separating nitrogen and oxygen from air into liquid gases through compression. New systems utilized a membrane separation process and pressure-swing absorption whereby solids, such as activated carbon, attracted gases for collection. Already the largest producer of acetylene gas nationwide, Airgas in late 1993 began construction on an acetylene gas production facility to fulfill a $15 million contract to supply Dow Corning with the gas via pipeline to that company’s Midland, Michigan, plant.

During the early 1990s Airgas’s acquisitions continued at the rate of two to three per month. Airgas funded acquisitions through debt and the sale of assets from unrelated businesses acquired with companies. Airgas began to purchase larger companies, with sales at $10 million to $30 million per year, and to obtain new product capabilities. From 1991 through 1996, sales at Airgas increased an average of 19 percent while earnings increased 43 percent. Also, rental fees from a supply of millions of sturdy metal cylinders used to package gas provided a reliable source of income. The fees covered the cost of the cylinders in less than four years, but the cylinders had long, useful lives, often lasting decades. In the fiscal year ending March 31, 1996, the company reported sales of $838.1 million.

In July 1996 Airgas purchased a 45 percent interest in National Welders Supply of Charlotte, North Carolina, with 45 locations in five southern states, three air separation plants, and annual sales of $120 million. The $48 million investment pushed Airgas over the $1 billion sales mark. With 600 outlets in 41 states, Canada, and Mexico, Airgas became the largest distributor of industrial, medical, and specialty gases in the United States, with sales of $1.16 billion for 1997. The company netted $23.3 million after special charges related to losses from the sale of assets from non-core businesses and from a fraudulent breach of contract by a third party supplier.

Restructuring for National Distribution in the Late 1990s

After nearly 300 acquisitions Airgas slowed its rate of expansion in distribution to concentrate on improving its operational efficiency, especially in the industrial hardware sector. Airgas built five distribution centers and streamlined a cumbersome channel of distribution which hindered quality service. To take advantage of its extensive customer base, Airgas diversified available industrial equipment and supplies to include metal fabrication tools. Airgas aimed to become the single source of welding supplies and gases for its customers as well as the low cost supplier.

Company Perspectives:

Airgas enhances the value of its products with expert applications assistance and helps maximize the value of your purchases through a variety of options in handling, delivery and storage. We will help you plan and establish the right methodologies on-site at your location and provide the permanent or transitional services to help you operate at the highest levels of safety, quality, productivity, and cost-efficiency.

Airgas expanded its range of safety and welding products through the 1996 acquisition of IPCO Safety, based in Bristol, Pennsylvania, and Rutland Tool & Supply, based in Los Angeles. IPCO sold equipment through outbound telemarketing while Rutland offered 65,000 metalworking products via direct mail. In addition to bringing in aggregate sales of $114 million, the two companies provided Airgas with a platform for national logistics in shipping from distribution centers direct to customers, handling orders placed through branch stores, catalogs, telemarketing, and the Internet. Features of the Website, launched in 1998, allowed prequalified buyers to browse the catalog, place orders, and check the status of shipments and accounts.

Airgas streamlined operations companywide, reducing the number of regional distribution hubs from 35 to 15 by September 1999. A computer database of 200,000 products brought several different product coding systems used by local distributors, as well as several computer systems, into standard alignment throughout the company. Airgas planned to build five distribution centers to serve this new structure. The structure still allowed management latitude at the store level where managers knew their markets.

While McCausland received praise from Wall Street analysts for the successful consolidation of independent distributors into Airgas, by the late 1990s he was drawing criticism. Airgas carried a high debt to capital ratio and sales reached a plateau as vendors serving Asia were affected by the financial crisis there. Wall Street responded with a low stock market valuation. Airgas, in turn, took steps to increase its cash flow. Market conditions enabled Airgas to increase the price of carbon dioxide by 6 percent and therefore compensate for higher operating expenses. The company sold certain non-core assets, including its calcium carbide and carbon products manufacturing facilities for $13 million, and divested foreign holdings in Poland, Thailand, and India, purchased during the early and middle 1990s. The 2000 acquisition of Puritan Medical Products, with $70 million in annual revenues, strengthened Airgas’s presence in the high margin medical gases market. McCausland hired experienced executive talent as well. CFO Roger Millay joined Airgas from General Electric Capital Corporation in the fall of 1999. A year later Glenn Fischer arrived at Airgas as president and COO, coming from The BOC Group, the second largest producer of industrial gases worldwide.

By 2000 Airgas realized that the tools business did not generate the sales it expected. Customer overlap from gases to equipment was lower than anticipated, though personal protective gear and safety supplies produced satisfactory results. Airgas implemented the Strategic Accounts Program in 1999 to identify large customers that would benefit from Airgas’s new national distribution capabilities. In an agreement with Weyerhaeuser, Airgas supplied cylinder gases, welding equipment, and related goods. In early 2000 Airgas signed a five-year agreement to provide safety supplies to Boeing manufacturing facilities nationwide. A contract with Georgia Pacific involved industrial and specialty gases and welding supplies for 14 sites nationwide.

Alliances with business-to-business Websites provided new additional outlets for sales. Airgas agreed to provide a full line of gases and hard goods through Exostar, a company that brought suppliers together with users in the aerospace and defense industries. Through SciQuest, which served top research institutions, the company provided medical and specialty gases, safety supplies, and equipment with laboratory applications. Airgas sold industrial gases and welding and safety products through supplyFORCE.com. Also, to better serve customers at its own Website, Airgas implemented several new features, including detailed product information, real-time information on order status, and the capability to customize a private catalog of frequently used products.

Airgas restructured further as the gases industry experienced a general decline in business. In 2000 sales remained flat at $1.5 billion, though net earnings increased slightly to $36.9 million. The company continued to seek ways to reduce its debt load, cutting 275 jobs, closing 30 branches, and selling non-core businesses with sales of $10 million or less. The company also sold its Jackson Dome carbon dioxide reserves and pipeline for $42 million. The system of regional hubs was further reduced to 12 companies. Airgas launched Project One, a series of improvements that included standardized administrative processes and a uniform shelf pricing strategy nationwide to reduce discounting. New prices in January 2001 involved a 10 to 12 percent increase for gases and an 8 to 10 percent increase for cylinder rentals and bulk tank services. Due to higher natural gas prices, the company increased prices for dry ice 10 to 20 percent and for carbon dioxide, 20 percent.

Key Dates:

1982:: Peter McCausland forms Airgas as a holding company for independent packaged gas distributors.
1986:: Merger with Werco creates a company large enough to take public.
1987:: McCausland becomes CEO of Airgas.
1992:: After 120 acquisitions over ten years, Airgas approaches revenues of $400 million.
1996:: Airgas expands product list with Rutland Tool and Supply and IPCO Safety acquisitions.
1998:: Repositioning begins to streamline operations and to reduce the number of regional companies from 35 to 12.
2000:: Acquisition of Puritan Medical Products strengthens medical gases business; acquisitions top 300.
2002:: Airgas acquires U.S. packaged gas business from Air Products and Chemicals.

Long-term supply agreements with large corporations established new sources of revenue as Airgas offered supply chain management to customers with multiple manufacturing sites. In a three-year contract the company became the exclusive supplier of safety equipment to International Paper at 240 plants nationwide. In March 2001, one year after Airgas introduced 30-pound and 112-pound cylinders of chlorofluorocarbon and hydrofluorocarbon refrigerant, Greyhound Lines signed a two-year agreement to purchase air conditioning refrigerant for its fleet of 2,400 buses. For Heil Trailer International, Airgas agreed to supply cylinder gases and welding and safety supplies to six plants. A supply agreement with Textron, Inc. served more than 100 locations nationwide. For Chevron, Airgas supplied packaged gas and related products to five oil and gas exploration sites.

Acquisition, Initiatives Reinforcing Airgas Strengths in 2002

In early 2002 Airgas completed its largest acquisition to date, the $236 million purchase of the U.S. packaged gas and welding supplies business of Air Products and Chemicals. The acquisition involved 88 locations, including 36 filling plants and 44 retail stores. While Airgas planned to close 20 locations, the new operations inserted Airgas into important new markets in Chicago, Denver, Houston, western Pennsylvania, southern Georgia, and Ohio. Airgas’s joint venture National Welders Supply purchased Air Products packaged gas operations in North and South Carolina and Virginia. Acquired operations generated $223 million in revenues in 2001, with $170 million or 76 percent from gases and cylinder rental and the balance from welding hard goods.

A number of other initiatives supported Airgas operations. In October 2002 the company launched its line of seven Gold Gas Premium Shielding Gases. These precise blends of argon-based gases applied to various requirements of metal fabrication. In early 2003 the company completed a manufacturing plant in Hopewell, Virginia, at a Honeywell facility where carbon dioxide emissions were transformed into liquid carbon dioxide. Construction on a dry ice production plant was completed there in May. Airgas introduced the MicroBulk system of gas delivery, designed for customers that purchased argon or nitrogen at the rate of more than 30 cylinders or one liquid dewar per month. The smaller sized, bulk delivery tank vehicles refilled cylinders and dewars at the customer facility, providing a flexible, efficient, and simple method of delivery.

In late 2002 Airgas found new business in hydrogen and fuel services for commercial and industrial fuel users. In addition to hydrogen fuel, Airgas provided site preparation, installation, monitoring, and consultation on safety, storage, and use of hydrogen and hydrogen rich fuels. New customers included Avista Labs, involved in the development and marketing of modular protein exchange membrane fuel cells, and Aperion Energy Systems, serving fuel cell customers.

Principal Subsidiaries

Airgas Canada, Inc.; Airgas Carbonic, Inc.; Airgas-East, Inc.; Airgas-Great Lakes, Inc.; Airgas-Gulf States, Inc.; Airgas Inter-mountain, Inc.; Airgas Mid-America, Inc.; Airgas-Mid South, Inc.; Airgas-NorPac, Inc.; Airgas-North Central, Inc.; Airgas-Northern California &Nevada, Inc.; Airgas Safety, Inc.; Airgas-South, Inc.; Airgas-Southwest, Inc.; Airgas Specialty Gases, Inc.; Airgas-West, Inc.; Nitrous Oxide Corp.; Puritan Medical Products, Inc.; Red-D-Arc Welderentals, Inc.; Red-D-Arc Limited.