MOODY'S CONFIRMS AIRGAS' RATINGS; OUTLOOK REMAINS NEGATIVE
Moody's Investors Service confirmed the Baa3 rating on the long-term debt of Airgas Inc. These actions complete the review begun on January 11, 2000 following the company's announcement that it will acquire the Puritan Bennett medical gas business of Mallinkrodt Inc.
Ratings confirmed are:
Senior unsecured medium term notes at Baa3
Senior unsecured shelf at (P) Baa3
Moodys confirmed the ratings despite the persistent weak financial profile for the rating category, recognizing the positive attributes in the Puritan Bennett acquisition, as well as the potential for good organic growth and total earnings improvement by Airgas. The company's balance sheet remains stressed due to prior acquisitions, difficulties and delays in converting to a more efficient distribution system, and poor financial performance from hardgoods and industrial supplies.
Confirmation of the ratings incorporates Moody's expectation that management will strive to improve debt protection measures over a reasonable time frame and avoid acquisitions of meaningful size until financial flexibility has been sufficiently restored.
Airgas' Baa3 ratings are supported by the continued growth in higher margin merchant gas sales and cylinder rentals, which provide a relatively steady stream of earnings and cash flow. While the Puritan Bennett acquisition will more than double Airgas' sales of gases into the high growth medical market segment, it will also raise debt to close to $900 million.
Puritan Bennett's high level of gas sales, over 90%, generates margins and cash flow significantly above the industry average. Also the significant overlap with Airgas' branches and the potential rationalization of production capacity will provide additional synergies. With this acquisition, gas sales and cylinder rentals will account for roughly 45% of Airgas' $1.6 billion in revenues.
Debt from a robust acquisition program in fiscal 1996 through 1998 significantly reduced debt protection measurements. In fiscal 1999 and 2000, improvement in the company's financial ratios stalled due to the decline in revenues from hardgoods and industrial supplies, plus expenses related to the restructuring of the distribution channel for these products. Airgas' fiscal third quarter results demonstrated a modest margin improvement sequentially, and a significant improvement versus prior year, indicating that continuing benefits from the restructuring are slowly flowing to the bottom line; management expects further improvements in fiscal 2001.
The ratings anticipate that management's highest priority will be to restore the balance sheet and financial ratios. We believe that Airgas can raise total coverage and operating cash flow to debt to nearly 3.0 and 25%, respectively, within the next two years. In fiscal 2001, Moody's estimates that the combination of Puritan Bennett, plus a significant reduction in Airgas' capital expenditures, should generate roughly $80 million of free-cash flow, thereby increasing financial flexibility.
The outlook remains negative as the additional debt limits financial flexibility for the rating category. Moreover, there is the potential for a downgrade in the event of an unanticipated decline in profitability or additional acquisitions of meaningful scale.
Headquartered in Radnor, PA, Airgas Inc. is the largest independent distributor of industrial, medical and specialty gases and related equipment in North America. Airgas reported $1.6 billion in sales for fiscal 1999.
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