Airgas, Inc. and subsidiaries (“Airgas” or the “Company”) became a publicly traded company in 1986 and, through its subsidiaries, is the largest U.S. distributor of industrial, medical, and specialty gases (delivered in “packaged” or cylinder form), and hardgoods, such as welding equipment and supplies. Airgas is also one of the largest U.S. distributors of safety products, the largest U.S. producer of nitrous oxide and dry ice, the largest liquid carbon dioxide producer in the Southeast, the fifth largest producer of atmospheric merchant gases in North America and a leading distributor of process chemicals, refrigerants, and ammonia products. The Company markets these products to its diversified customer base through multiple sales channels including branch-based sales representatives, retail stores, strategic customer account programs, telesales, catalogs, eBusiness and independent distributors. Products reach customers through an integrated network of more than 14,000 employees and over 1,100 locations including branches, retail stores, packaged gas fill plants, cylinder testing facilities, specialty gas labs, production facilities and distribution centers. The Company’s national scale and strong local presence offer a competitive edge to its diversified customer base.
The Company’s consolidated sales were $4.35 billion, $4.02 billion and $3.21 billion in the fiscal years ended March 31, 2009, 2008 and 2007, respectively. The Company’s operations are predominantly in the United States. However, the Company does conduct operations outside of the United States, principally in Canada and, to a lesser extent, Mexico, Russia, Dubai and Europe. Revenues derived from foreign countries are based on the point of sale and were $86 million, $63 million and $51 million in the fiscal years ended March 31, 2009, 2008 and 2007, respectively. Long-lived assets attributable to the Company’s foreign operations represent less than 3.5% of the consolidated total long-lived assets of the Company and were $116 million, $74 million and $56 million at March 31, 2009, 2008 and 2007, respectively.
Since its inception, the Company has made nearly 400 acquisitions. During fiscal 2009, the Company acquired 14 businesses with aggregate historic annual sales in excess of $205 million. The largest of these businesses, acquired on July 31, 2008, was Refron, Inc., a New York-based distributor of refrigerant gases with historical annual sales of $93 million. Other acquisitions included Oilind Safety, an Arizona-based provider of industrial safety services offering a full array of rental equipment, safety supplies and technical support and training with historical annual sales of $23 million; A&N Plant, a European-based supplier of positioning and welding equipment for sale and rent with historical annual sales of $20 million; and Gordon Woods Industrial Welding Supply, an industrial gas and welding supply distributor with ten locations in the northern Los Angeles area with historical annual sales of $25 million. A total of $274 million in cash was paid for the 14 businesses, including the settlement of holdback liabilities related to prior year acquisitions. The Company acquired the businesses to expand its geographic coverage and strengthen its national distribution network, as well as to strengthen its refrigerant gas offerings, safety product offerings and international presence. See Note 3 to the Company’s Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data” for a description of current and prior year acquisition activity.
The Company has two reporting segments, Distribution and All Other Operations. During the fourth quarter of fiscal 2009, the Company changed the operating practices and organization of its air separation production facilities and national specialty gas labs. The new operating practices and organization reflect the evolution of these businesses and their role to support the regional distribution companies. The regional distribution companies market to and manage the end customer relationships, coordinating and cross-selling the Company’s multiple product and service offerings in a closely coordinated and integrated manner. As a result of these changes, these businesses are now reflected in the Distribution business segment. Also as a result of an organizational realignment, Airgas National Welders is now part of the Distribution business segment. Segment information from fiscal 2008 and 2007 has been restated to reflect these changes. The Distribution business segment engages in the distribution of industrial, medical and specialty gases and hardgoods, and in the production of gases primarily to supply the regional distribution companies. The All Other Operations business segment consists of six business units which primarily manufacture and distribute carbon dioxide, dry ice, nitrous oxide, ammonia and refrigerant gases. A more detailed description of the Company’s business segments follows:
DISTRIBUTION BUSINESS SEGMENT
The Distribution business segment accounted for approximately 90% of consolidated sales in each of the fiscal years 2009, 2008 and 2007.
Principal Products and Services
The Distribution business segment’s principal products include industrial, medical and specialty gases sold in packaged and bulk quantities, as well as hardgoods. The Company’s air separation production facilities and national specialty gas labs primarily produce gases that are sold by the Distribution segment’s business units. Business units in the Distribution business segment also recognize rental revenue and distribute hardgoods. Gas sales include nitrogen, oxygen, argon, helium, hydrogen, welding and fuel gases such as acetylene, propylene and propane, carbon dioxide, nitrous oxide, ultra high purity grades, special application blends and process chemicals. Rent is derived from gas cylinders, cryogenic liquid containers, bulk storage tanks, tube trailers and through the rental of welding and welding related equipment. Gas and rent represented 57%, 56% and 53% of the Distribution business segment’s sales in each of the fiscal years 2009, 2008 and 2007, respectively. Hardgoods consist of welding consumables and equipment, safety products, construction supplies, and maintenance, repair and operating supplies. Hardgoods sales represented 43%, 44% and 47% of the Distribution business segment’s sales in each of the fiscal years 2009, 2008 and 2007, respectively.
Principal Markets and Methods of Distribution
The industry has three principal modes of gas distribution: on-site or pipeline supply, bulk or merchant supply, and cylinder or packaged gas supply. Airgas’ market focus has primarily been on packaged gas distribution supplying customers with gases in cylinders and in less than truck load bulk quantities. Generally, packaged gas distributors also sell welding hardgoods. The Company believes the U.S. market for packaged gases and welding hardgoods to be more than $13 billion in annual revenue. Packaged gases and welding hardgoods are generally delivered to customers on Company-owned trucks, although third-party carriers are also used in the delivery of welding and safety products and customers can purchase products at retail branch stores and through catalogs and eBusiness.
Airgas is the largest distributor of packaged gases and welding hardgoods in the United States, with approximately 25% market share. The Company’s competitors in this market include local and regional independent distributors that serve about half of the market, and large independent distributors and vertically integrated gas producers such as Praxair, Inc. (“Praxair”), Matheson Tri-Gas, Inc., and Liquid Air Corporation of America (“Air Liquide”), which serve the remaining market. Packaged gas distribution is a regional business because it is generally not economical to transport gas cylinders more than 50 to 100 miles. The regionalized nature of the business makes these markets highly competitive. Competition is generally based on reliable product delivery, product availability, technical support, quality, and price. The Company also sells safety equipment. The Company believes the U.S. market for safety equipment is greater than $7 billion annually, of which Airgas’ share is almost 10%.
ALL OTHER OPERATIONS
The All Other Operations business segment consists of six business units. The primary products manufactured and distributed are carbon dioxide, dry ice (solid form of carbon dioxide), nitrous oxide, ammonia and refrigerant gases. The business units reflected in the All Other Operations business segment individually do not meet the thresholds to be reported as separate business segments.
Carbon Dioxide & Dry Ice
Airgas is the second largest U.S. manufacturer and distributor of liquid carbon dioxide, and the largest U.S. manufacturer and a leading distributor of dry ice. Customers for carbon dioxide and dry ice include food processors, food service businesses, pharmaceutical and biotech industries, and wholesale trade and grocery outlets, with food and beverage applications accounting for approximately 70% of the market. Some seasonality is experienced within this business, as the Company generally experiences a higher level of dry ice sales during the warmer months. With 12 dry ice plants (converting liquid carbon dioxide into dry ice), Airgas has the largest network of dry ice conversion plants in the United States. Additionally, Airgas operates six carbon dioxide production facilities. The Company’s carbon dioxide production capacity is supplemented by long-term take-or-pay supply contracts.
Airgas is the largest manufacturer of nitrous oxide gas in North America, with four nitrous oxide production facilities operated by the Company. Nitrous oxide is used as an anesthetic in the medical and dental fields, as a propellant in the packaged food business and in the manufacturing process of certain electronics industries. The raw materials utilized in nitrous oxide production are purchased under contracts with major manufacturers and suppliers.
Airgas Specialty Products is a distributor of anhydrous and aqua ammonia. Industrial ammonia applications primarily include the abatement of nitrogen oxide compounds in the utilities industry (“DeNOx”), chemicals processing, commercial refrigeration, water treatment and metal treatment. Airgas Specialty Products operates 24 distribution facilities across the U.S. and purchases ammonia from suppliers under agreements.
Refrigerants are used in a wide variety of commercial and consumer freezing and cooling applications. Airgas purchases and distributes refrigerants and provides technical and refrigerant reclamation services. The primary focus of the refrigerants business is on the sale and distribution of refrigerants, with a varied customer base that includes small and large HVAC contractors, facility owners, transportation companies, manufacturing facilities and government agencies. The refrigerants business typically experiences some seasonality, with higher sales levels during the warmer months as well as during the March and April timeframe in preparation for the cooling season.
AIRGAS GROWTH STRATEGIES
The Company’s primary objective is to maximize shareholder value by driving market-leading sales growth through core and strategic product offerings that leverage the Company’s infrastructure and customer base, by pursuing acquisitions in the Company’s core business and in adjacent businesses, by providing outstanding customer service and by improving operational efficiencies. To meet this objective, the Company is focusing on:
•markets with high potential growth or low cyclicality such as energy and infrastructure construction, medical, environmental, research, life sciences and food products;
•strategic product offerings with favorable growth profiles due to application development, increasing environmental regulation, and strong cross-selling opportunities e.g., bulk gases, specialty gases, medical products, carbon dioxide and safety products;
•a compelling value proposition for customers to reduce their total cost of procurement through our broad product and service offerings and custom engineered solutions;
•improved training, tools and resources for all associates;
•reducing costs associated with production, cylinder maintenance and distribution logistics; and
•acquisitions to complement and expand our business and to leverage our significant national platform.
On March 31, 2009, the Company employed more than 14,000 associates. Approximately 4% of the Company’s associates were covered by collective bargaining agreements. The Company believes it has good relations with its employees and has not experienced a significant strike or work stoppage in over ten years.