-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ah+7BTvqJgGQW1POmjrIuXwb1Q17LWdicW8r2J01++UEt+K++GuKib1HmxSMJR4r uoAG0zRcgK1SgKNNKzwsWA== 0000804212-96-000020.txt : 19961115 0000804212-96-000020.hdr.sgml : 19961115 ACCESSION NUMBER: 0000804212-96-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRGAS INC CENTRAL INDEX KEY: 0000804212 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-CHEMICALS & ALLIED PRODUCTS [5160] IRS NUMBER: 560732648 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09344 FILM NUMBER: 96660174 BUSINESS ADDRESS: STREET 1: 100 MATSONFORD RD STE 550 STREET 2: 5 RADNOR CORPORATE CENTER CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 2156875253 MAIL ADDRESS: STREET 1: 5 RADNOR CORPORATE CENTER, STE 550 STREET 2: 100 MATSONFORD ROAD CITY: RADNOR STATE: PA ZIP: 19087 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended: September 30, 1996 _____________________________ Commission file number: 1-9344 _____________________________ AIRGAS, INC. ______________________________________________________________________________ (Exact name of Registrant as specified in its charter) Delaware 56-0732648 _______________________________ __________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 Radnor Corporate Center, Suite 550 100 Matsonford Road Radnor, PA 19087-4579 _______________________________________ ________________ (Address of principal executive offices) (ZIP code) (610) 687-5253 __________________________________________________ (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ ______ Common Stock outstanding at November 1, 1996: 68,217,251 shares 2 AIRGAS, INC. FORM 10-Q September 30, 1996 INDEX PART I - FINANCIAL INFORMATION ______________________________ Consolidated Balance Sheets as of September 30, 1996 and March 31, 1996....................................................3 Consolidated Statements of Earnings for the Three Months Ended September 30, 1996 and 1995................5 Consolidated Statements of Earnings for the Six Months Ended September 30, 1996 and 1995..................6 Consolidated Statements of Cash Flows for the Six Months Ended September 30, 1996 and 1995..................7 Notes to Consolidated Financial Statements.................................8 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................12 PART II - OTHER INFORMATION ___________________________ Legal Proceedings.........................................................22 Submission of Matters to a vote of Security Holders.......................23 Exhibits and Reports on Form 8-K..........................................23 Signatures................................................................24 3 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements. AIRGAS, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
September 30, March 31, 1996 1996 (Unaudited) _____________ ________ ASSETS ____________________________________________ Current Assets Trade receivables, less allowances for doubtful accounts of $4,062 at September 30, 1996 and $3,396 at March 31, 1996 $144,054 $120,811 Inventories 134,489 86,162 Prepaid expenses and other current assets 18,480 11,601 _________ _______ Total current assets 297,023 218,574 _________ _______ Plant and Equipment, at cost 638,190 586,328 Less accumulated depreciation and amortization (166,143) (147,451) _________ _______ Plant and equipment, net 472,047 438,877 Other Non-current Assets 131,931 60,948 Goodwill, net of accumulated amortization of $22,866 at September 30, 1996 and $19,552 at March 31, 1996 280,673 165,243 _________ _______ Total assets $1,181,674 $883,642 ========= ======= See accompanying notes to consolidated financial statements.
4 AIRGAS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands, except per share amounts)
September 30, March 31, 1996 1996 (Unaudited) ___________ ________ LIABILITIES AND STOCKHOLDERS' EQUITY ____________________________________ Current Liabilities Current portion of long-term debt $ 18,546 $ 12,179 Accounts payable, trade 54,459 52,528 Accrued expenses and other current liabilities 78,497 72,279 _________ _______ Total current liabilities 151,502 136,986 _________ _______ Long-Term Debt 557,367 385,832 Deferred Income Taxes 92,616 88,400 Other Non-current Liabilities 35,157 34,490 Minority Interest in Subsidiaries 2,105 1,725 Stockholders' Equity Common stock $.01 par value, 200,000 shares authorized, 68,201 and 66,314 shares issued at September 30, 1996 and March 31, 1996, respectively 684 663 Capital in excess of par value 146,823 91,512 Retained earnings 195,820 173,360 Cumulative translation adjustment (400) (410) Treasury stock, 2,355 common shares at cost at March 31, 1996 - (28,916) _________ _______ Total stockholders' equity 342,927 236,209 _________ _______ Total liabilities and stockholders' equity $1,181,674 $ 883,642 ========= ======= See accompanying notes to consolidated financial statements.
5 AIRGAS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In thousands, except per share amounts)
Three Months Ended Three Months Ended September 30, 1996 September 30, 1995 __________________ __________________ Net sales: Distribution $249,150 $190,456 Direct Industrial 20,437 - Manufacturing 9,125 8,574 _______ _______ Total net sales 278,712 199,030 _______ _______ Costs and expenses: Cost of products sold (excluding depreciation and amortization) Distribution 123,753 93,424 Direct Industrial 15,537 - Manufacturing 5,847 5,293 Selling, distribution and administrative expenses 89,544 66,997 Depreciation and amortization 15,023 11,172 _______ _______ Total costs and expenses 249,704 176,886 _______ _______ Operating income: Distribution 26,578 20,260 Direct Industrial 638 - Manufacturing 1,792 1,884 _______ _______ 29,008 22,144 Interest expense, net (9,753) (5,867) Other income, net 70 155 Equity in earnings of unconsolidated affiliate 114 - Minority interest (152) (174) _______ _______ Earnings before income taxes 19,287 16,258 Income taxes 7,977 6,923 _______ _______ Net earnings $ 11,310 $ 9,335 ======= ======= Earnings per share $ .17 $ .14 ======= ======= Weighted average common and common equivalent shares 67,660 65,352 ======= ======= See accompanying notes to consolidated financial statements.
6 AIRGAS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In thousands, except per share amounts)
Six Months Ended Six Months Ended September 30, 1996 September 30, 1995 __________________ __________________ Net sales: Distribution $497,279 $376,090 Direct Industrial 36,889 - Manufacturing 18,642 17,212 _______ _______ Total net sales 552,810 393,302 _______ _______ Costs and expenses: Cost of products sold (excluding depreciation and amortization) Distribution 250,343 184,345 Direct Industrial 28,969 - Manufacturing 12,177 11,029 Selling, distribution and administrative expenses 175,731 132,134 Depreciation and amortization 29,261 21,613 _______ _______ Total costs and expenses 496,481 349,121 _______ _______ Operating income: Gas Distribution 51,522 40,739 Industrial Distribution 1,182 - Manufacturing 3,625 3,442 _______ _______ 56,329 44,181 Interest expense, net (18,034) (11,455) Other income, net 351 366 Equity in earnings of unconsolidated affiliate 114 - Minority interest (381) (365) _______ _______ Earnings before income taxes 38,379 32,727 Income taxes 15,919 13,938 _______ _______ Net earnings $ 22,460 $ 18,789 ======= ======= Earnings per share $ .33 $ .29 ======= ======= Weighted average common and common equivalent shares 67,350 65,212 ======= ======= See accompanying notes to consolidated financial statements.
7 AIRGAS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended Six Months Ended September 30, 1996 September 30, 1995 __________________ __________________ CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 22,460 $ 18,789 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 29,261 21,613 Deferred income taxes 4,776 5,924 Equity in earnings of unconsolidated affiliates (749) (683) Loss on sale of plant and equipment 101 13 Minority interest in earnings 381 365 Stock issued for employee benefit plan 2,353 1,603 Changes in assets and liabilities, excluding effects of business acquisitions: Trade receivables, net (2,681) (1,777) Inventories (20,458) (632) Prepaid expenses and other current assets (2,912) (3,876) Accounts payable, trade (6,649) (8,943) Accrued expenses and other current liabilities 1,777 1,403 Other assets and liabilities, net (6,001) (710) _______ _______ Net cash provided by operating activities 21,659 33,089 _______ _______ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (31,101) (19,414) Proceeds from sale of plant and equipment 1,313 1,501 Business acquisitions, net of cash acquired (92,348) (35,163) Investment in unconsolidated affiliates (33,849) - Dividend from joint venture 413 293 Other, net (2,378) (440) _______ _______ Net cash used by investing activities (157,950) (53,223) _______ _______ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 667,681 303,305 Repayment of debt (528,546) (268,857) Financing costs (1,667) (56) Repurchase of treasury stock - (15,540) Exercise of options and warrants 2,444 2,991 Net overdraft (3,621) (1,709) _______ _______ Net cash provided by financing activities 136,291 20,134 _______ _______ CHANGE IN CASH $ 0 $ 0 Cash - beginning of period 0 _______ _______ Cash - end of period $ 0 $ 0 ======= ======= See accompanying notes to consolidated financial statements. 8 AIRGAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION _____________________ The consolidated financial statements include the accounts of Airgas, Inc. and its subsidiaries (the "Company"). Unconsolidated affiliates are accounted for on the equity method and generally consist of 20 - 50% owned operations where control does not exist or is considered temporary. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to interim financial statements. These statements do not include all disclosures required for annual financial statements. These financial statements should be read in conjunction with the more complete disclosures contained in the Company's audited consolidated financial statements for the year ended March 31, 1996. The financial statements reflect, in the opinion of management, all adjustments (normal recurring adjustments) necessary to present fairly the Company's consolidated balance sheets at September 30, 1996 and March 31, 1996; the consolidated statements of earnings for the three and six months ended September 30,1996 and 1995; and the consolidated statements of cash flows for the six months ended September 30, 1996 and 1995. The interim operating results are not necessarily indicative of the results to be expected for an entire year. (2) ACQUISITIONS ____________ From April 1, 1996 to September 30, 1996, the Company acquired thirteen businesses engaged in the distribution of industrial, medical and specialty gases and welding supplies and two distributors of safety and industrial tools and supplies, with aggregate annual sales of approximately $184 million. The aggregate purchase price, including amounts related to non-competition and confidentiality agreements, amounted to approximately $211 million and includes cash and real estate acquired of $281 thousand and $2 million, respectively. Included in the aggregate purchase price is the issuance of approximately 3.4 million shares of the Company's common stock, (which includes approximately 2.4 million treasury shares), issued in connection with the acquisition of Rutland Tool & Supply Co., Inc. Acquisitions have been recorded using the purchase method of accounting, and, accordingly, results of their operations have been included in the Company's consolidated financial statements since the effective dates of the respective acquisitions. Subsequent to September 30, 1996, the Company acquired distributor businesses with annual sales of approximately $26 million. In addition, on October 29, 1996, the Company announced that it signed a letter of intent to acquire Carbonic Industries Corporation ("Carbonic Industries"). In the proposed transaction, Carbonic Industries will be merged into a newly-formed subsidiary of the Company in exchange for a combination of the Company's common stock and cash, and is expected to close on February 1, 1997. In a separate transaction which was also announced on October 29, 1996, the Company agreed to acquire Shell Land & Energy Company ("Shell") interests in unitized leases producing carbon dioxide in the Northeast Jackson Dome area of Mississippi and Shell's 183-mile pipeline from the Northeast Jackson Dome area to White Castle, Louisiana. The Shell transaction is scheduled to close in November 1996. 9 AIRGAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) (3) INVENTORIES ___________ Inventories consist of: (In thousands)
September 30, March 31, 1996 1996 ___________ ________ Finished goods $134,422 $ 85,626 Raw materials 1,546 1,879 _______ _______ 135,968 87,505 Less reduction to LIFO cost ( 1,479) (1,343) _______ _______ $134,489 $ 86,162 ======= =======
(4) PLANT AND EQUIPMENT ___________________ The major classes of plant and equipment are as follows: (In thousands)
September 30 March 31, 1996 1996 _____________ _________ Land and land improvements $ 21,401 $ 20,066 Building and leasehold improvements 60,441 58,153 Machinery and equipment, including cylinders 516,800 472,868 Transportation equipment 37,447 33,724 Construction in progress 2,101 1,517 _______ _______ $638,190 $586,328 ======= =======
10 AIRGAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) (5) OTHER NON-CURRENT ASSETS _______________________ Other non-current assets include: (In thousands)
September 30, March 31, 1996 1996 _____________ _________ Investment in unconsolidated affiliates $ 63,537 $ 9,332 Noncompete agreements and other intangible assets, at cost, net of accumulated amortization of $52.6 million at September 30, 1996 and $46.7 million at March 31, 1996 59,152 47,530 Other assets 9,242 4,086 _______ _______ $131,931 $ 60,948 ======= ======= Investment in unconsolidated affiliates at September 30, 1996 includes the Company's investment of approximately $47.6 million in cash and notes related to the June 28, 1996 purchase of 45% of the voting capital stock of National Welders Supply Company, Inc. As of September 30, 1996, the investment in unconsolidated affiliates includes goodwill of approximately $30 million which is being amortized into income over 40 years.
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES ______________________________________________ Accrued expenses and other current liabilities include: (In thousands)
September 30, March 31, 1996 1996 _____________ _________ Cash overdraft $ 12,085 $ 15,706 Insurance payable and related reserves 7,598 5,297 Customer cylinder deposits 8,080 7,058 Other accrued expenses and current liabilities 50,734 44,218 _______ _______ $ 78,497 $ 72,279 ======= =======
11 AIRGAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) (7) INDEBTEDNESS ____________ On August 8, 1996, the Company commenced a medium term note program pursuant to a registration statement filed with the Securities and Exchange Commission on July 15, 1996, which provides for the issuance of its securities with an aggregate public offering price of up to $450 million. In September 1996, the Company issued the following long-term debt under the medium term note program: (a) $100 million of unsecured notes due September 2006 bearing interest at a fixed rate of 7.75%; and (b) $50 million of unsecured notes due September 2001 bearing interest at a fixed rate of 7.15%. The proceeds from the medium term note issuances were used to repay bank debt. In connection with the issuance of the notes, the Company entered into three reverse interest rate swap agreements. (8) EARNINGS PER SHARE __________________ Earnings per share amounts were determined using the treasury stock method. This method assumes the exercise of all dilutive outstanding options and warrants and the use of the aggregate proceeds therefrom to acquire the Company's outstanding common stock. (9) COMMITMENTS AND CONTINGENCIES _____________________________ The Company is involved in various legal proceedings which have arisen in the ordinary course of its business and have not been finally adjudicated. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse effect upon the Company's financial condition, results of operations or liquidity. On July 26, 1996, Praxair, Inc. ("Praxair") filed suit against the Company in the Circuit Court of Mobile County, Alabama. The complaint alleges tortious interference with business or contractual relations with respect to Praxair's Right of First Refusal contract with National Welders Supply Company, Inc. ("National Welders") by the Company in connection with the Company's formation of a joint venture with the majority shareholders of National Welders. Praxair is seeking compensatory damages in excess of $100 million and punitive damages. The Company believes that Praxair's claims are without merit and intends to defend vigorously against such claims. 12 Item 2. AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL REVIEW ________________ OVERVIEW ________ The Company's financial results for the quarter ended September 30, 1996 reflect substantial growth compared with the second quarter last year. Net sales of $278.7 million, net earnings of $11.3 million and earnings per share of $.17 represent increases over the prior period of 40%, 21% and 21%,respectively. Net sales increased during the quarter compared to the prior period primarily as a result of the acquisition of 44 distribution companies since July 1, 1995 and an increase in same-store distribution sales of approximately 3%. The increase in net earnings was primarily due to an increase in gross profits from higher same-store distribution sales, distribution gross margin expansion and earnings and cash flow generated by the 44 distribution businesses acquired since July 1, 1995. Somewhat offsetting the Company's earnings growth were costs to consolidate the 60 distribution acquisitions which have been completed over the past 18 months. Also, earnings in the current quarter were diluted by the interest costs associated the Company's joint venture investment in National Welders. The Company's growth strategy through acquisitions continued through the second quarter. During the current fiscal year, the Company has acquired industrial gas distributors with annual sales of approximately $90 million. During the current fiscal year, the Company has also acquired IPCO Safety Products Company (IPCO) and Rutland Tool & Supply Co., Inc. (Rutland) which have aggregate annual sales of $120 million. IPCO and Rutland provides additional product lines and management talent to form the base for the Company's industrial distribution segment which is called Airgas Direct Industrial ("ADI"). On October 29, 1996, the Company announced that it had signed a letter of intent to acquire Carbonic Industries Corporation ("Carbonic Industries"), the fourth largest producer of carbon dioxide in the United States, in a merger scheduled for completion by February 1, 1997. Carbonic Industries will be merged into a newly-formed subsidiary of the Company in exchange for a combination of the Company's common stock and cash. The Company also announced on October 29, 1996 that it has agreed to acquire Shell Land & Energy Company's interest in unitized leases producing carbon dioxide in the Northeast Jackson Dome area of Mississippi and Shell's 183-mile carbon dioxide pipeline which originates at the Northeast Jackson Dome area and extends to White Castle, Louisiana. Closing with Shell is scheduled during November 1996. The Carbonic Industries and Shell acquisitions will become part of the Company's Manufacturing segment. 13 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company intends to continue to grow through acquisitions while exploring ways to leverage its broad geographic presence by selling additional products and services to existing customers through its network of more than 600 distribution locations in 41 states, Canada and Mexico. Recent product line additions have included returnable containers, specialty gases (such as refrigerants and sterilizing gases) and additional hardgoods (such as industrial supplies, safety products and coatings). The Company believes the selective addition of complementary products will enable it to better serve its diverse, expanding customer base. After tax cash flow (net earnings plus depreciation, amortization and deferred income taxes) increased 22% to the record level of $28.7 million from $23.6 million in the prior year. After tax cash flow is an important measurement of the Company's ability to repay debt through operations and provides the Company with the ability to pursue investment alternatives such as acquisitions and the repurchase of Company stock. RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995 ________________________________ Net sales increased 40% during the quarter ended September 30, 1996 compared to the same quarter in the prior year: (in thousands)
1996 1995 Increase ____ ____ __________ Distribution $249,150 $190,456 $ 58,694 Direct Industrial 20,437 - 20,437 Manufacturing 9,125 8,574 551 _______ _______ _______ $278,712 $199,030 $ 79,682 ======= ======= =======
For the quarter ended September 30, 1996, Distribution sales increased approximately $50 million resulting from the acquisition of 42 distributors since July 1, 1995 and approximately $9 million from same-store sales growth. The increase in same-store Distribution sales of approximately 3% was a result growth in all three product groups: gases, hardgoods and rent. The growth was attributable to selective price increases and the Company's gas sales initiatives related to small bulk, specialty and refrigerant gases. The Company believes its same-store sales growth is slightly understated since it does not reflect the Company's decision to cease unprofitable sales to certain customers and other sales lost during the consolidation and integration of acquisitions. 14 Item 2. AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company estimates same-store sales based on a comparison of current period sales to the prior period's sales, adjusted for acquisitions. Future same-store sales growth is dependent on the economy, and, to a lesser extent, the Company's ability to expand markets for new and existing products and to increase prices. Sales related to the Company's ADI segment increased approximately 13% during the quarter ended September 30, 1996 compared to historical sales results of the prior year. Sales for the Company's Manufacturing segment increased 6% during the quarter ended September 30, 1996 as a result of a new carbon paste product and export sales of calcined coal, offset by slightly lower sales of nitrous oxide. The increase in Distribution gross profits of approximately $28 million compared to the prior period resulted from acquisitions which contributed approximately $22 million and from same-store gross profit growth of approximately $6 million. The same-store gross profit growth is attributable to expansion of gross margins through selective price increases and better buying through national purchasing programs combined with increased sales of lower margin hardgoods, increased sales of gases related to the Company's small bulk and refrigerant programs and growth in cylinder and other equipment rental income. Compared to the prior year, the Company's Distribution gross margin of 50.3% is down 60 basis points primarily due to industrial gas distribution acquisitions which have an average gross margin of approximately 45%. Selling, distribution and administrative expenses as a percentage of gross profits increased 20 basis points to 67% compared to the prior year. The increase is partially attributable to higher operating costs associated with consolidating the 60 acquisitions which were completed over the past 18 months. Until such acquisitions are fully integrated, the Company expects that it will continue to incur additional operating expenses. The Company has undertaken plans to address acquisition consolidations, and significant progress is being achieved. Operating income increased 31% during the quarter ended September 30, 1996 compared to the same quarter in 1995: (in thousands)
Increase 1996 1995 (Decrease) ____ ____ __________ Distribution $26,578 $20,260 $ 6,318 Direct Industrial 638 - 638 Manufacturing 1,792 1,884 (92) ______ ______ ______ $29,008 $22,144 $ 6,864 ====== ====== ======
15 Item 2. AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Distribution operating income margin increased 10 basis points to 10.7% compared to the prior year. The improvement more than offset the effects of consolidation costs and recent industrial gas distribution acquisitions which have operating margins averaging around 8%. Subject to the effects of future acquisitions, the Company believes that its distribution operating margins should continue to improve as it integrates acquisitions. The operating income margin related to the ADI segment was 3.1%. Operating margins were impacted by certain division start-up costs. The Company believes that its ADI operating margins will improve as it cross-sells to current distribution hub customers and realizes cost savings related to more efficient warehousing and shipping. Manufacturing operating income decreased $92 thousand compared to the prior year as a result of a shift in sales more towards lower margin exports of calcined coal versus domestic coal sales. Interest expense, net, increased $3.9 million compared to the prior year primarily as a result of the increase in average outstanding debt associated with the acquisition of distribution businesses acquired since July 1, 1995 and interest costs associated with the Company's investment in National Welders Supply, offset by slightly lower interest rates. As discussed in "Liquidity and Capital Resources" below, the Company has hedged floating interest rates under certain borrowings with interest rate swap agreements. Income tax expense represented 41.4% of pre-tax earnings in the current quarter compared to 42.6% in the prior year. The decrease in the effective income tax rate was a result of state tax planning strategies which were implemented late in fiscal 1996 and the effect of reporting joint venture earnings related to National Welders on a net-of-tax basis. 16 Item 2. AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS: SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 1995 ________________________________ Net sales increased 41% during the six months ended September 30, 1996 compared to the prior year: (in thousands)
1996 1995 Increase ____ ____ __________ Distribution $497,279 $376,090 $121,189 Direct Industrial 36,889 - 36,889 Manufacturing 18,642 17,212 1,430 _______ _______ _______ $552,810 $393,302 $159,508 ======= ======= =======
For the six months ended September 30, 1996, Distribution sales increased approximately $103 million resulting from the acquisition of 60 distributors since April 1, 1995 and approximately $18 million from same-store sales growth. The Company estimates that had all acquisitions during the six months ended September 30, 1996 been consummated on April 1, 1996, Distribution sales for 1996 would have been approximately $7 million higher. The increase in same-store Distribution sales of approximately 3.5% was a result of growth in all three product groups: gases, hardgoods and rent. The growth was attributable to strong sales of lower margin hardgoods during the quarter ended June 30, 1996 combined with selective price increases and the Company's gas sales initiatives related to small bulk, specialty and refrigerant gases. The Company believes its same-store sales growth is slightly understated since it does not reflect the Company's decision to cease unprofitable sales to certain customers and other sales lost during the consolidation and integration of acquisitions. The Company estimates same-store sales based on a comparison of current period sales to the prior period's sales, adjusted for acquisitions. Future same-store sales growth is dependent on the economy, and, to a lesser extent, the Company's ability to expand markets for new and existing products and to increase prices. Management believes the Company's broad customer base and geographic diversity help to reduce the adverse effects of an economic downturn on the Company. Also, management believes that the gas portion of its Distribution business is somewhat resistant to an economic downturn. Management further believes that sales of certain lower margin non-consumable hardgoods equipment, such as welding machines, are more likely to be adversely impacted during a downturn in the economy and, conversely, are typically the fastest to rebound during an economic recovery. Sales related to the Company's ADI segment increased approximately 15% during the six months ended September 30, 1996 compared to historical sales results of the prior year. 17 Item 2. AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Sales for the Company's Manufacturing segment increased 8% during the six months ended September 30, 1996 as a result of a new carbon paste product and export sales of calcined coal. The increase in Distribution gross profit of approximately $55 million compared to the prior period resulted from acquisitions which contributed approximately $46 million and from same-store gross profit growth of approximately $9 million. The same-store gross profit growth is attributable to expansion of gross margins through selective price increases and better buying through national purchasing programs combined with increased sales of lower margin hardgoods, increased sales of gases related to the Company's small bulk and refrigerant programs and growth in cylinder and other equipment rental income. Compared to the prior year, the Company's Distribution gross margin of 49.7% is down 130 basis points primarily due to industrial gas distribution acquisitions which have an average gross margin of approximately 45% and strong first quarter sales of lower margin hardgoods. Selling, distribution and administrative expenses as a percentage of gross profits increased 40 basis points to 67.2% compared to the prior year. The increase is partially attributable to higher operating costs associated with consolidating the 60 acquisitions which were completed over the past 18 months. Until such acquisitions are fully integrated, the Company expects that it will continue to incur additional operating expenses. The Company has undertaken plans to address acquisition consolidations, and significant progress is being achieved. Operating income increased 27% during the six months ended September 30, 1996 compared to the prior year: (in thousands)
1996 1995 Increase ____ ____ __________ Distribution $51,522 $40,739 $10,783 Direct Industrial 1,182 - 1,182 Manufacturing 3,625 3,442 183 ______ ______ ______ $56,329 $44,181 $12,148 ====== ====== ======
The Distribution operating income margin decreased 40 basis points to 10.4% compared to the prior year. The decrease was a result of lower gross margins during the first quarter, the effects of consolidation costs and recent industrial gas distribution acquisitions which have operating margins averaging around 8%. Subject to the effects of future acquisitions, the Company believes that its distribution operating margins should continue to improve as it integrates acquisitions. The operating income margin related to the ADI segment was 3.2%. Operating margins were impacted by certain division start-up costs. The Company believes that its ADI operating margins will improve as it cross-sells to current distribution hub customers and realizes cost savings related to more efficient warehousing and shipping. 18 Item 2. AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Manufacturing operating income increased $183 thousand compared to the prior year as a result of strong demand for carbon products offset by a shift in sales more towards lower margin exports of calcined coal versus domestic coal sales and slightly lower nitrous oxide sales. Interest expense, net, increased $6.6 million compared to the prior year primarily as a result of the increase in average outstanding debt associated with the acquisition of distribution businesses acquired since July 1, 1995 and interest costs associated with the Company's investment in National Welders Supply, offset by slightly lower interest rates. As discussed in "Liquidity and Capital Resources" below, the Company has hedged floating interest rates under certain borrowings with interest rate swap agreements. Income tax expense represented 41.5% of pre-tax earnings in the six months ended September 30, 1996 compared to 42.6% in the prior year. The decrease in the effective income tax rate was a result of state tax planning strategies which were implemented late in fiscal 1996 and the effect of reporting joint venture earnings related to National Welders on a net-of-tax basis. LIQUIDITY AND CAPITAL RESOURCES _______________________________ The Company has primarily financed its operations, capital expenditures, stock repurchases, and acquisitions with borrowings, the issuance of common stock and funds provided by operating activities. Cash flows from operating activities totaled $21.6 million for the six months ended September 30, 1996. Depreciation and amortization represent $29.3 million of cash flows from operating activities. Deferred income taxes of $4.8 million resulted from temporary differences. Working capital components of cash flow increased $30.9 million as a result of an increase in accounts receivable associated with higher same store sales, an increase in inventory levels to meet increased hardgoods and refrigerant gas sales volumes and an increase in prepaid expenses and other current assets. The increase in other assets and liabilities, net, primarily relates to amounts paid in connection with securing a product supply agreement. Days-sales outstanding is comparable to the March 31, 1996 level. Distribution hardgoods days supply of inventory is comparable to the March 31, 1996 level. Total inventories have increased primarily as a result of an increase in refrigerant gas inventories and the addition of new product lines from the acquisition of IPCO and Rutland, respectively. Cash used by investing activities totaled $158.4 million which was primarily comprised of $31.1 million for capital expenditures, $92.3 million related to acquisitions and $33.8 million related to the Company's investment in unconsolidated affiliates ($27.9 related to the joint venture with National Welders and $5.3 million related to foreign operations). The Company's use of cash for capital expenditures was attributable to the continued assimilation of certain acquisitions which has required the Company to make capital expenditures in areas such as combining cylinder fill plants, improving truck fleets and purchasing cylinders in order to return cylinders which were rented from third parties. Additionally, capital expenditures include the purchase of cylinders and bulk tanks necessary to facilitate gas sales growth. The Company estimates that its maintenance capital expenditures are approximately 2% of net sales. The 19 Item 2. AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Company considers the replacement of existing capital assets to be maintenance capital expenditures. In addition, the Company has recently undertaken initiatives to further develop its industrial gas customer base to selectively include customers which require large volume supplies of gases, such as nitrogen. For these customers, the Company will enter into a long-term supply contract in conjunction with an air separation plant which will be built near the customer's facility or facilities. The Company has entered into agreements with two customers which requires the construction of two air separation plants which will begin production during fiscal 1998. Upon completion, as lessee, the Company intends to lease the plants under long-term operating leases. Financing activities provided cash of $136.7 million with total debt outstanding increasing by $177.9 million from March 31, 1996. Debt incurred in connection with the acquisition of distribution businesses and the Company's investment in National Welders and other foreign operations, totalled $126.2 million. The Company's primary source of borrowing is a $500 million unsecured revolving credit facility with various commercial banks which matures on September 30, 2001. At September 30, 1996, the Company had approximately $273 million in borrowings under the facility and approximately $83 million committed under letters of credit, resulting in unused availability under the facility of approximately $144 million. On August 8, 1996, the Company commenced a medium term note program pursuant to a registration statement filed with the Securities and Exchange Commission on July 15, 1996, which provides for the issuance of its securities with an aggregate public offering price of up to $450 million. In September 1996, the Company issued the following long-term debt under the medium term note program: $100 million of unsecured notes due September 2006 bearing interest at a fixed rate of 7.75%; $50 million of unsecured notes due September 2001 bearing interest at a fixed rate of 7.15%. The proceeds from the medium term note issuances were used to repay bank debt. The Company has a CDN $50 million Canadian credit facility ($37 million U.S.) with various commercial banks which matures on November 14, 1998. At September 30, 1996, the Company had approximately CDN $41 million ($30 million U.S.) in borrowings outstanding under the facility, resulting in unused availability under the facility of approximately CDN $9 million ($7 million U.S.). The Company also has unsecured line of credit agreements with various commercial banks. At September 30, 1996, these agreements totaled $50 million, under which the Company had aggregate outstanding borrowings of $10 million. At September 30, 1996, the effective interest rate related to outstanding borrowings under all credit lines was approximately 5.99%. The Company's loan agreements contain covenants which include the maintenance of a minimum equity level, and maintenance of certain financial ratios. In managing interest rate exposure, principally under the Company's floating rate revolving credit facilities, the Company has entered into 21 interest rate swap agreements during the period from June 1992 20 Item 2. AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) through September 30, 1996. The swap agreements are with major financial institutions and aggregate $324 million in notional principal amount at September 30, 1996. Approximately $205 million of the notional principal amount of the swap agreements require fixed interest payments based on an average effective rate of 6.53% for remaining periods ranging between 1 and 8 years. Five swap agreements require floating rates ($119.5 million notional amount at 5.75% at September 30, 1996). Under the terms of seven of the swap agreements, the Company has elected to receive the discounted value of the counterparty's interest payments upfront. At September 30, 1996, approximately $20.8 million of such payments were included in other liabilities. The Company continually monitors its positions and the credit ratings of its counterparties, and does not anticipate nonperformance by the counterparties. The Company will continue to look for appropriate acquisitions and expects to fund such acquisitions, future capital expenditure requirements and commitments related to foreign investments primarily through the use of cash flow from operations, debt, common stock for certain acquisition candidates and other available sources. In connection with the acquisition of Rutland, the Company issued approximately 3.4 million shares of the Company's common stock, including approximately 2.4 million treasury shares. Subsequent to September 30, 1996, the Company acquired distributor businesses with annual sales of approximately $26 million. In addition, on October 29, 1996, the Company announced that it signed a letter of intent to acquire Carbonic Industries Corporation ("Carbonic Industries"). In the proposed transaction, Carbonic Industries will be merged into a newly-formed subsidiary of the Company in exchange for a combination of the Company's common stock and cash, and is expected to close on February 1, 1997. In a separate transaction which was also announced on October 29, 1996, the Company agreed to acquire Shell Land & Energy Company ("Shell") interests in unitized leases producing carbon dioxide in the Northeast Jackson Dome area of Mississippi and Shell's 183-mile pipeline from the Northeast Jackson Dome area to White Castle, Louisiana. The Company does not currently pay dividends. 21 Item 2. AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER _____ New Accounting Pronouncements In the first quarter of fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement requires the recognition of an impairment loss for an asset held for use when the estimate of undiscounted future cash flows expected to be generated by the asset is less than its carrying amount. Measurement of the impairment loss is based on fair value of the asset. Management believes that the adoption of this statement did not have a material impact on earnings, financial condition or liquidity of the Company. The Company accounts for stock options according to the provisions of Accounting Principles Board Opinion 25 (APB 25), "Accounting for Stock Issued to Employees." In October 1995, the Financial Accounting Standards Board issued FASB Statement No. 123, "Accounting for Stock-Based Compensation." The new standard defines a fair value method of accounting for stock options and similar equity instruments. Companies may elect to continue to use existing accounting rules or adopt the fair value method for expense recognition. Companies that elect to continue to use existing accounting rules are required to provide pro-forma disclosures of net income and earnings per share assuming the fair value method was adopted. The Company has elected to continue to use existing accounting rules. Accordingly, the Company will present the required pro-forma disclosure provisions for its fiscal year ending March 31, 1997. As the Company will continue to account for stock-based compensation using the intrinsic value method, this statement will not have a material impact on earnings, financial condition or liquidity of the Company. In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial- components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under the financial-components approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The financial- components approach focuses on the assets and liabilities that exist after the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. This statement is effective for transfer and servicing of financial assets and extinguishments of liabilities for fiscal years beginning after December 15, 1996 and is to be applied prospectively. Management believes that the adoption of this statement will not have a material impact on earnings, financial condition or liquidity of the Company. 22 In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1 (SOP), which prescribes generally accepted accounting principles for environmental remediation liabilities. This SOP more specifically identifies future, long-term monitoring and administration expenditures as remediation liabilities that need to be accrued on the balance sheet as an existing obligation. This SOP is effective for fiscal years beginning after December 15, 1996. Management believes that the adoption of this statement will not have a material impact on earnings, financial condition or liquidity of the Company. Forward-looking Statements This report contains forward-looking statements. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, there are certain important factors that could cause the Company's actual results to differ materially from those included in such forward- looking statements. Some of the important factors which could cause actual results to differ materially from those projected include, but are not limited to: the Company's ability to continue to identify, complete and integrate strategic acquisitions to enter new markets and expand existing business (including Carbonic Industries and the Northeast Jackson Dome); continued availability of financing to provide additional sources of funding for future acquisitions; capital expenditure requirements and foreign investments; the effects of competition from independent distributors and vertically integrated gas producers on products and pricing, growth and acceptance of new product lines through the Company's sales and marketing programs; changes in product prices from gas producers and name-brand manufacturers and suppliers of hardgoods; uncertainties regarding accidents or litigation which may arise in the ordinary course of business; and the effects of, and changes in the economy, monetary and fiscal policies, laws and regulations, inflation and monetary fluctuations and fluctuations in interest rates, both on a national and international basis. The Company does not undertake to update any forward-looking statement made herein or that may be made from time to time by or on behalf of the Company. PART II - OTHER INFORMATION Item 1. Legal Proceedings On July 26, 1996, Praxair, Inc. ("Praxair") filed suit against the Company in the Circuit Court of Mobile County, Alabama. The complaint alleges tortious interference with business or contractual relations with respect to Praxair's Right of First Refusal contract with the majority shareholders of National Welders Supply Company, Inc. ("National Welders") by the Company in connection with the Company's formation of a joint venture with National Welders. Praxair is seeking compensatory damages in excess of $100 million and punitive damages. The Company believes that Praxair's claims are without merit and intends to defend vigorously against such claims. 23 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On August 5, 1996, the Registrant held its Annual Meeting of Stockholders. The stockholders voted to elect three members to the Board and to ratify the selection of KPMG Peat Marwick LLP as the Company's independent auditors for the fiscal year ending March 31, 1997. Elected to the Board of Directors were Argeris N. Karabelas (57,092,752 shares voted for election and 3,249,014 shares were withheld), John A.H. Shober (57,094,918 shares voted for election and 3,246,848 shares were withheld) and Merrill L. Stott (57,075,552 shares voted for election and 3,266,214 shares were withheld). In addition to the board members elected at the Annual Meeting, the following are directors whose terms in office as directors continued after the meeting; Erroll C. Sult, Robert E. Naylor, Jr., Robert L. Yohe, W. Thacher Brown, Frank B. Foster III, and Peter McCausland. Also at the Annual Meeting, 59,740,321 shares voted to ratify the selection of KPMG Peat Marwick LLP as independent auditors, with 21,106 shares voting against the ratification and 580,339 shares abstaining. Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits ________ 11. Calculation of earnings per share. b. Reports on Form 8-K ___________________ On July 11, 1996, the Company filed a Form 8-K/A amendment to the June 28, 1996 current report on 8-K, which described the Company's 45% investment in National Welders Supply Company, Inc. This Form 8-K/A provided under Item 7, audited financial statements as of September 30, 1995 and September 24, 1994 and for the years then ended and pro forma information for National Welders which were previously unavailable pursuant to Item 7(a)(4). On July 31, 1996, the Company filed a current report on Form 8-K pursuant to Item 5, announcing the filing of a suit on July 26, 1996 against the Company by Praxair, Inc. in the Circuit Court of Mobile County, Alabama. On August 5, 1996, the Company filed a current report on Form 8-K pursuant to Item 5, announcing it had signed a letter of intent to acquire Rutland Tool & Supply Co., Inc. On August 22, 1996, the Company filed a current report on Form 8-K which provided under Item 5, audited financial statements and pro forma information for IPCO Safety Products Company, Inc., an individually insignificant business acquisition, in accordance with Regulation S-X, Rule 3-05 (b)1(i). 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. November 12, 1996 /s/ Jeffrey P. Cornwell _________________ _______________________ Date Jeffrey P. Cornwell Vice President Finance and Corporate Controller EX-11 2 EXHIBIT 11 25 EXHIBIT 11 AIRGAS, INC. EARNINGS PER SHARE CALCULATIONS
Three Months Ended Six Months Ended September 30, September 30, 1996 1995 1996 1995 ____ ____ ____ ____ Adjustment of Weighted Average Shares Outstanding: Shares of common stock outstanding - weighted 65,490,000 62,489,000 64,700,000 62,191,000 Add: Net common stock equivalents 3,081,000 2,863,000 3,105,000 3,021,000 Less: Airgas shares held by National Welders Supply - weighted (911,000) -- (455,000) -- __________ __________ __________ __________ Adjusted shares outstanding 67,660,000 65,352,000 67,350,000 65,212,000 ========== ========== ========== ========== Net earnings $11,310,000 $ 9,335,000 22,460,000 18,789,000 ========== ========== ========== ========== Earnings per share $ .17 $ .14 $ .33 $ .29 ========== ========= ========== =========
Earnings per share amounts were determined using the treasury stock method. This method assumes the exercise of all dilutive outstanding options and warrants and the use of the aggregate proceeds therefrom to acquire the Company's outstanding common stock. Net earnings were divided by the weighted average number of shares outstanding adjusted for the assumed exercise of the options and warrants outstanding and repurchase of common stock to calculate per share amounts. EX-27 3 ART. 5 FDS FOR 2ND QUARTER 10-Q
5 1000 6-MOS MAR-31-1997 SEP-30-1996 0 0 144,054 4,062 134,489 297,023 638,190 166,143 1,181,674 151,502 557,367 684 0 0 342,243 1,181,674 552,810 552,810 291,489 291,489 0 0 18,034 38,379 15,919 22,460 0 0 0 22,460 .33 .33
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