-----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, HCZ3e864ON3btdFmbYei1oPTF7jmvK6Ajpqk3IR/kE6m1oqM9kV0umqpSJTU5VJP 0Ifddy1+fRdVTBtpbNb94A== 0000804212-98-000013.txt : 19980529 0000804212-98-000013.hdr.sgml : 19980529 ACCESSION NUMBER: 0000804212-98-000013 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19980528 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-K/A SEC ACT: SEC FILE NUMBER: 001-09344 FILM NUMBER: 98632613 BUSINESS ADDRESS: STREET 1: 259 RADNOR-CHESETER ROAD STREET 2: SUITE 100 CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 6106875253 MAIL ADDRESS: STREET 1: 259 RADNOR-CHESTER ROAD STREET 2: SUITE 100 CITY: RADNOR STATE: PA ZIP: 19087 10-K/A 1 AMENDED 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ Form 10-K/A3 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File No. 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.) 259 Radnor-Chester Road, Suite 100 Radnor, Pennsylvania 19087-5240 (Address of principal executive offices) (Zip Code) (610) 687-5253 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12 (b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ______________________________________ _____________________ Common Stock, par value $.01 per share New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 _____ ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the 57,075,279 shares of voting stock held by non-affiliates of the registrant on May 30, 1997 was approximately $970 million. For purposes of this calculation, only executive officers and directors were deemed to be affiliates. The number of shares of Common Stock outstanding as of May 30, 1997 was 66,818,522. DOCUMENTS INCORPORATED BY REFERENCE The Company's Proxy Statement for the Annual Meeting of Stockholders to be held August 4, 1997 is partially incorporated by reference into Part III. Those portions of the Proxy Statement included in response to Item 402(k) and Item 402(l) of Regulation S-K are not incorporated by reference into Part III. 2 AIRGAS, INC. TABLE OF CONTENTS PART I ITEM PAGE NO. _____ ________ 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . .13 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . .13 PART II 5. Market for the Company's Common Stock and Related Stockholder Matters . 14 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . 27 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . 27 PART III 10. Directors and Executive Officers of the Company . . . . . . . . . . . . 27 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 27 12. Security Ownership of Certain Beneficial Owners and Management. . . . . 27 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . 27 PART IV 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K . . . . 27 3 PART I ITEM 1. BUSINESS. GENERAL Airgas, Inc. ("Airgas" or the "Company") classifies its operations into three business segments: Distribution, Direct Industrial and Manufacturing. Sales for Airgas were $1.16 billion in fiscal 1997, and $838 and $688 million in fiscal 1996, and 1995, respectively. Distribution sales represented 88% of total sales and 85% of Airgas' operating income in fiscal 1997. Financial information by business segment can be found in 1) Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Financial Statements and Supplementary Data", and 2) Note 22 to the Company's consolidated financial statements for the three years ended March 31, 1997 under Item 8. The Distribution business is conducted through approximately 600 locations in 41 states, Canada and Mexico. Principal products distributed include: industrial, medical and specialty gases and a wide selection of name-brand welding equipment, accessories and industrial protective equipment ("hardgoods"), including electrode holders, welding wire, cable lugs and connectors, hard hats, welding helmets, hearing protectors, goggles, face shields, safety glasses, welding machines and electrodes. In connection with the distribution of gases, Airgas rents industrial gas cylinders and bulk storage tanks to its customers. In 1997, sales related to gases and rent represent 50% of total distribution sales and sales related to hardgoods business accounted for 50% of total distribution sales. Additionally, acetylene gas is manufactured and sold as part of the Company's Distribution business. Distribution sales on behalf of third parties are immaterial to the Company's financial condition (see Note 22 of the Company's consolidated financial statement under Item 8 for disclosure related to segment sales). Since its formation, the Company's strategy has been to expand through the acquisition of independent distributors. The Company believes that it is the largest distributor of industrial, medical and specialty gases and related equipment in North America. During fiscal 1997, the Company acquired IPCO Safety Products Company (IPCO) and Rutland Tool & Supply Co., Inc. (Rutland), which had historical combined annual sales of approximately $120 million. IPCO and Rutland formed the basis for the Company's Direct Industrial segment, Airgas Direct Industrial ("ADI"). ADI sells an expansive line of welding, metalworking, safety and other MRO (Maintenance, Repair and Operations) products directly to end-users. The Company believes ADI will help enable it to be a low cost supplier and increase sales of other products and services by leveraging the Company's strong local presence and the relationships with its existing customer base and distribution network. Many of Airgas' customers use the same types of safety products sold by IPCO. Rutland targets the same metal fabrication market which also accounts for a large part of Airgas' current Distribution gas and hardgoods sales. Manufacturing operations include the production of carbon products, calcium carbide, nitrous oxide and carbon dioxide. In connection with its carbon dioxide business, Airgas has implemented a strategy to expand the distribution of carbon dioxide. During 1997, the Company acquired Shell Land & Energy Company's (Shell) interest in unitized leases producing carbon dioxide, including Shell's 183 mile pipeline. The Company acquired its interest from Shell by taking assignment of various leases to which Shell was a party, which permit it to extract carbon dioxide from the Jackson Dome area, subject to the payment of various fees and royalties. The carbon dioxide goes into the Company's pipeline for delivery to various customers. In June 1997, the Company closed the acquisition of Carbonic Industries Corporation ("CIC"), the fourth largest producer of carbon dioxide in the United States. 4 THE DISTRIBUTION BUSINESS Industry Background The industrial gas distribution market is broad and includes customers from most major industries. Airgas sells nitrogen, oxygen, argon, helium, acetylene, carbon dioxide, nitrous oxide, hydrogen and welding gases and a variety of medical and specialty gases to a diverse customer base. Gases are distributed and stored in industrial gas cylinders and bulk storage tanks. Hardgoods sold through its distribution network include: protective equipment, such as hard hats, welding helmets, goggles, face shields and protective glasses; welding machines and welding consumables; and accessories, such as electrodes, electrode holders and cable connectors. The United States market for industrial gases is approximately $7 billion annually. Sales to major users of industrial gases that have the capacity to accept large bulk shipments or pipeline deliveries are generally serviced directly by industrial gas producers and account for approximately $3.5 billion of such market. The remaining $3.5 billion of annual industrial gas sales are made to small bulk users and cylinder gas customers. These small bulk users and cylinder gas customers are also believed to purchase approximately $3.5 billion of hardgoods annually. Small bulk users and cylinder gas customers are primarily served by a fragmented distribution system of approximately 1,000 distributors, the majority of which are independently owned. The Company concentrates on the small bulk, cylinder gas, welding and protective equipment segment of the market. This segment is less capital intensive, in part, because of the long useful lives of the fixed assets, principally cylinders. Acquisition Strategy Since May 1986, the Company has acquired over 225 distributors of industrial gases and related equipment. These distributors are organized into three divisions with approximately 600 locations in 41 states, Canada and Mexico which provide a national distribution network. The Company acquired 47% of the voting capital stock of National Welders Supply Company ("National Welders"), a large independent distributor of industrial, medical and specialty gases and related equipment based in Charlotte, North Carolina and simultaneously entered into a joint venture agreement. The parties structured the transaction as a joint venture because the majority shareholders of National Welders were unwilling to sell voting control of National Welders. The purpose of the joint venture is to carry on the business of National Welders, enhanced by its association with the Company and its financial, purchasing and national marketing strengths, and to pursue acquisition opportunities in the area currently served by National Welders. In carrying on the business of National Welders, the Company makes available various services to National Welders, including participation in national accounts and marketing programs, access to, and participation in, purchasing programs, assistance in negotiation of insurance relationships and consultation related to income tax matters. In exchange for these services, the Company is paid a service fee equal to .667% of National Welders' sales. Although the Company does not have voting control of the joint venture, the long-standing relationship between National Welders and the Company, including National Welders' position as a substantial stockholder of the Company, was an important factor in the Company's decision to enter into the transaction. Inasmuch as National Welders is a joint venture, it represents a departure from Airgas' usual method of expansion which is acquisitions. A former director of the Company is the president and chief executive officer of National Welders. 5 The Company's principal business strategy is to continue to expand its distribution network through a program of acquiring independent distributors. The industrial gas distribution industry continues to undergo a consolidation process which Airgas believes will continue to present it with opportunities to acquire industrial gas distributors. The Company believes that its principal competitive advantages in acquiring distributors are its extensive distribution network, its well- organized acquisition program, flexibility in structuring acquisitions to meet sellers' needs and the ability to offer sellers and their employees a continuing management role in a decentralized entrepreneurial environment. In seeking to acquire distributors, the Company competes with industrial gas producers and other independent distributors. The Company has made investments in industrial gas operations in Poland, India and Thailand. At March 31, 1997, the total investment in these foreign operations was approximately 1% of total assets. The Company will continue to evaluate foreign industrial gas opportunities, although its principal focus remains on North American expansion. The Company has financed distributor acquisitions primarily with internally generated funds and debt. The Company has been able to obtain debt financing due, in part, to its ability to generate cash flow from operating activities and the long useful lives and relatively stable market values of the fixed assets, principally cylinders. Operating Policies The Company believes that its operations are best managed at the local level by entrepreneurial, incentive-driven executives with backgrounds principally in the industrial gas industry. The president of each distribution subsidiary is typically a former owner or key employee of the acquired business or an experienced executive recruited by management. The continuity afforded by retaining the key employees of an acquired business combined with local management is essential because the Company's distribution business is local in nature and is dependent upon satisfied repeat customers. Customer Base The majority of the Company's gases are generally stored in bulk tanks at the Company's cylinder fill plants and are pumped into cylinders for distribution to customers or, in the case of bulk customers, in tanker trucks or tube trailers for delivery into bulk tanks at the customer's business location. The Company emphasizes sales to cylinder and small bulk gas customers. The distribution of industrial gases historically has been to customers engaged in the business of welding and metal fabrication. In order to better serve these customers, industrial gas distributors have traditionally sold hardgood items through their distribution branch locations. As certain sectors of the economy have grown, such as the electronics and chemicals industries, and as new applications for gases have developed, the customer base of the gas distribution business has broadened significantly to include businesses in almost every major industry, from medical and high technology to consumer and basic industries. For example, the food and beverage industry uses carbon dioxide and nitrogen; the electronics industry uses oxygen, nitrogen, argon, and hydrogen; the healthcare industry uses oxygen, nitrogen, and nitrous oxide; and the chemical and fiber industries use nitrogen. 6 Specialty gases, which are used in numerous industries, including the electronic, healthcare, biotechnology and high technology industries, and in laboratory applications, include rare gases, high-purity gases, and blended multi-component gas mixtures. In fiscal 1997, the Company formed a new wholly- owned subsidiary, Airgas Specialty Gases ("ASG"), to unify the operation and manufacture of specialty gases in order to increase efficiency and quality controls and facilitate marketing efforts nationwide. ASG operates nationally within Airgas in connection with the operation of the Company's network of 24 specialty gas laboratories in the U.S., selling specialty gas through the Company's subsidiaries. ASG operates four "A" laboratories, which produce complicated gas mixtures, and oversees the Company's twenty (20) "B" laboratories, which produce simple, pure gases and certain common mixtures. The four "A" laboratories and the twenty (20) "B" laboratories are owned by subsidiaries of the Company. ASG also assists the subsidiaries in growing their specialty gas business and improving the responsiveness and quality of the subsidiaries' specialty gas operations. The principal drivers for market growth include: (1) environmental regulations, such as the Clean Air Act, water testing and pollution remediation and testing and monitoring; (2) quality control services using in-line chromatography and spectrography to analyze samples; and (3) the growth of environmental, research and clinical laboratories. The specialty gas business operating results are included in the distribution segment. The Company continues to concentrate its efforts in the small bulk gas market. The primary gases that Airgas sells in bulk are liquid oxygen, nitrogen, argon, and carbon dioxide, and gaseous hydrogen, helium and nitrogen. The Company charges customers rent for the use of bulk tanks and tube trailers which are placed on the customer's property. The Company believes there are growth opportunities in marketing to these small bulk customers, which it can serve more effectively than industrial gas producers. The Company has undertaken selected initiatives to develop further its industrial gas customer base to include customers which require large-volume supplies of gases, such as nitrogen. The Company has entered into long-term supply agreements with two customers which require the construction of two air separation plants which will begin production late in calendar 1997. These two plants will also produce liquid oxygen and argon which will be sold to Airgas' Distribution customers. The Company views these investments as opportunities and not as its principal investment strategy. The Company's same-store sales, a comparison of current period sales to the prior period's sales, adjusted for acquisitions, has historically followed the real gross domestic product annual growth rate as published by the Commerce Department. 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 economic downturns due to the following factors: 1) gases frequently represent a fixed cost of operations that do not necessarily decline with production levels; 2) gases are required for maintenance and renovation activities which tend to increase during an economic downturn; 3) industries less subject to the effects of an economic downturn, such as the medical field, are major purchasers of gases; and 4) gas purchases often represent a small portion of a typical user's overall cost of operation and, therefore, do not typically represent a large cost-cutting item. Management further believes that sales of certain lower margin nonconsumable hard-goods equipment, such as welding machines, are more adversely impacted during a downturn in the economy and are typically the fastest to rebound during an economic recovery. 7 Products Gases distributed by Airgas include oxygen, nitrogen, hydrogen, argon, helium, acetylene, carbon dioxide, nitrous oxide and specialty gases. In addition to gases, the Company distributes a wide selection of name-brand hardgoods, including electrode holders, welding wire, cable lugs and connectors, hard hats, welding helmets, hearing protectors, goggles, face shields, safety glasses, welding machines and electrodes. Of Airgas' fiscal 1997 sales from the Distribution segment, approximately 50% represent sales of gases and rentals of cylinders and bulk tanks, and 50% represent hardgood sales. The Company intends to strategically broaden its product line in order to increase sales in existing locations and to take advantage of its distribution network. Recent product line additions have included returnable containers, specialty gases and additional hardgoods (such as industrial safety products and coatings). The Company believes the selective addition of complementary product offerings through its distribution network and ADI will enable it to better serve its diverse, expanding customer base. Suppliers The Company purchases industrial, medical and specialty gases pursuant to requirements contracts from all four of the major producers of industrial gases in the United States and three regional producers. The Company believes that if a contractual arrangement with any supplier of gases were terminated, it would be able to locate alternative sources of supply without significant cost increases and with no disruption of service. The Company purchases hardgoods from name-brand manufacturers and suppliers. For certain products, the Company has negotiated favorable pricing based on national purchasing arrangements and is reducing its investment in hardgood inventories by consolidating vendors. DIRECT INDUSTRIAL BUSINESS During fiscal 1997, the Company acquired IPCO and Rutland. IPCO and Rutland provided an industrial distribution infrastructure, additional product lines and management talent to form the basis for ADI. IPCO is a distributor of safety, industrial and environmental supplies, and utilizes a system of regional warehouses and telemarketing centers to market its products. Rutland is a distributor of industrial tools, MRO supplies and welding and safety equipment, and markets its products through direct mail, catalogs and monthly fliers. ADI's principal thrust is to sell directly to customers, through outbound telemarketing and catalogs, and to build on Airgas' existing base of approximately 650,000 Airgas customers and strong customer relationships. To serve its customers, ADI has distribution centers located in key industrial distribution markets,including Georgia, Pennsylvania, Texas, Wisconsin, New York, Colorado, Illinois and California. ADI targets the same metal fabrication market that accounts for a large part of Airgas' current Distribution gas and hardgoods equipment sales. The safety and metalworking tools market represents approximately $55 billion in annual revenues. The Company's acquisition strategy with respect to ADI is to acquire additional industrial distribution companies which comprise this highly fragmented industry. Such acquisitions may provide for enhanced warehouse logistics, information systems, new product lines, geographic expansion and unique marketing concepts. 8 Suppliers The Company purchases safety, industrial and environmental supplies from name- brand manufacturers and suppliers. For certain products, the Company has negotiated national purchasing contracts. The Company believes that if a contractual arrangement with any manufacturer or supplier were terminated, it would be able to locate alternative sources of supply without significant cost increases and with no disruption of service. MANUFACTURING AND RELATED BUSINESS Nitrous Oxide The Company produces nitrous oxide which is used in various medical and commercial applications. Nitrous oxide is used as an anesthetic in the medical and dental fields, as a propellant in the packaged food business and is utilized in the manufacturing process of certain high technology electronic industries. The Company's nitrous oxide manufacturing facilities are located in Yazoo City, Mississippi and Donora, Pennsylvania. Sales of nitrous oxide were not material to total Distribution sales (see Note 22 of the Company's consolidated financial statements under Item 8 for disclosure related to segment sales). Carbon Products The Company manufactures carbon electrode paste, carbon ramming paste and electrically calcined anthracite ("ECA") at its manufacturing facility located in Keokuk, Iowa. The Company is the nation's primary manufacturer of carbon electrode paste which is used as a consumable electrode in the production of special alloy steel, nickel and other metals in the metals industry. ECA is used as an ingredient in carbon mixes used in the aluminum industry and as an additive in the production of certain metals. Calcium Carbide The Company is a partner with Elkem Metals Company ("Elkem") in a joint venture (Elkem-American Carbide Company) which primarily sells calcium carbide which is used in the production of acetylene gas. The Company and Elkem receive certain fees, based on net sales, for acting as agents for the joint venture. Additionally, as general manager of the joint venture, Elkem receives a management fee based on net sales. The Company operates a manufacturing facility in Pryor, Oklahoma which sells calcium carbide to the joint venture. Calcium carbide is used by the industrial gas distribution market. Carbon Dioxide The Company is implementing a strategy to expand its carbon dioxide business. In December 1996, the Company acquired Shell's interest in unitized leases producing carbon dioxide, including Shell's 183 mile pipeline stretching from the Northeast Jackson Dome area of Mississippi to White Castle, Louisiana (the "Jackson Dome" properties). The pipeline services three major liquid carbon dioxide producers (including CIC) and a major methanol producer, each pursuant to a long-term supply contract, as well as a group of enhanced oil recovery fields. Carbon dioxide is used in refrigeration, food processing, beverage carbonation, chemical processing, crude oil recovery, metal fabrication and agricultural fumigation industries. 9 As part of its carbon dioxide strategy, the Company also made related acquisitions of liquid carbon dioxide distributors and carbon dioxide beverage companies during 1997. In June 1997, the Company closed the acquisition of CIC, merged into a newly-formed subsidiary of the Company in exchange for a combination of the Company's common stock and cash. Suppliers The Company purchases the raw materials utilized in its nitrous oxide, carbon products and calcium carbide division of its manufacturing segment pursuant to contracts from name-brand manufacturers and suppliers. The Company's carbon dioxide requirements are obtained from the Jackson Dome carbon dioxide reserves and purchased from all three of the major producers of carbon dioxide in the United States. The Company believes that if a contractual arrangement with any supplier were terminated, it would not have a material adverse effect on the operation of the Company's manufacturing business. COMPETITION Each of the major business areas in which the Company participates is highly competitive. Some competitors are larger than the Company and have greater resources. The Company's industrial gas distribution operations compete with independent distributors and vertically integrated gas producers such as Air Products and Chemicals, Inc. ("Air Products"), Praxair, Inc. ("Praxair"), Liquid Air Corporation of America ("Air Liquide"), BOC Gases Group ("BOC Gases") and others, all of which have distribution operations. The Company also purchases industrial gases pursuant to requirements contracts from all four of the above major producers of industrial gases. Competition in the distribution market is based on customer service, prompt delivery, price, consistent product quality, attention to safety procedures, and employee and customer training in the uses of gases and hardgoods. The Company believes its decentralized system allows competitive decisions to be made on the local level which results in reduced costs and/or improved service. In addition, the Company's distribution network allows it to realize economies of scale in purchasing, training, marketing and information systems. Regarding the Company's carbon dioxide business strategy, the carbon dioxide market includes suppliers of crude CO2 and three major carbon dioxide companies: Praxair, BOC Gases and Air Liquide. These three companies produce over 80% of the United States merchant carbon dioxide, develop most of the new applications, and handle much of the distribution. The ADI segment competes with small branch-based industrial distribution companies at the local level. In addition, ADI also competes nationally with large, branch-based and direct marketers, which include W.W. Grainger, Inc. and MSC Industrial Direct, Inc. which sell through catalogs and stores, and Vallen Corporation, a safety equipment distributor. REGULATORY AND ENVIRONMENTAL MATTERS The businesses of the Company's subsidiaries are subject to federal and state laws and regulations adopted for the protection of the environment and the health and safety of employees and users of the Company's products. The Company has programs for the operation and design of its facilities to achieve compliance with applicable environmental rules and regulations. The Company believes that it is in compliance in all material respects with such laws and 10 regulations. Expenditures for environmental purposes during the fiscal year ended March 31, 1997 were not material. INSURANCE The Company's policy is to obtain liability and property insurance coverage that is currently available at what management determines to be a fair and reasonable price. As of March 31, 1997, the Company had a liability insurance limit of $100 million. The liability insurance is subject to per- occurrence deductible amounts of $1 million for product liability, general liability and workers' compensation claims, and $500 thousand for motor vehicle liability. The nature of the Company's business may subject it to product and general liability lawsuits. To the extent that the Company is subject to claims which exceed its liability insurance coverage, such suits could have a material adverse effect on the Company's financial position, results of operations or liquidity. EMPLOYEES On March 31, 1997, the Company employed approximately 6,400 people of whom approximately 6% were covered by collective bargaining agreements. The Company believes it has good relations with its employees and has not experienced a strike or work stoppage in the past 10 years. PATENTS, TRADEMARKS AND LICENSES The Company holds trademark registrations for "Airgas", "Dyna-Switch" and "Va-Weld", and a patent registration for the purification of acetonitrile. The Company believes that its businesses as a whole are not materially dependent upon any single patent, trademark or license. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows: Name Age Position Peter McCausland (1) 47 Chairman of the Board, President and Chief Executive Officer Hermann Knieling 59 Executive Vice President and Group President - Manufacturing, Business Engineering and International Group E. Pat Baker 57 Group President - Distribution William A. Rice, Jr. 50 Group President - Airgas Direct Industrial Alfred B. Crichton 49 Division President - West Ronald B. Rush 53 Division President - South John Musselman 48 Division President - East Thomas C. Deas, Jr. 47 Vice President-Finance & Chief Financial Officer Gordon L. Keen, Jr. 52 Senior Vice President - Law and Corporate Development William E. Sanford 36 Executive Vice President of Airgas Direct Industrial Thomas Mason 63 Senior Vice President Scott M. Melman 40 Vice President - Administration Rudi G. Endres 53 Vice President - International Samuel H. Goldstein 38 Vice President - Information Systems Andrew R. Cichocki 34 Vice President - Corporate Development __________________ (1) Member of the Board of Directors 11 Mr. McCausland has been a Director of the Company since June 1986, the Chairman of the Board and Chief Executive Officer of the Company since May 1987, President from June 1986 to August 1988, from April 1, 1993 to November 30, 1995, and since April 1, 1997. Mr. McCausland has been Chairman and Chief Executive Officer of US Airgas since its organization in February 1982. From January 1982 until June 1990, Mr. McCausland was a partner in the law firm of McCausland, Keen & Buckman, Radnor, Pennsylvania, which provides legal services to the Company. In May 1997, Mr. McCausland was elected to the board of directors of Hercules Inc., a worldwide manufacturer of chemical specialty products. Mr. Knieling has been Executive Vice President of the Company and Group President - Manufacturing, Business Engineering and International since April 1, 1997. Prior to that, Mr. Knieling served as the President and Chief Operating Officer of Airgas from December 1, 1995 to March 1997. Mr. Knieling served as Division President - Southern Division from April 1, 1995 to November 30, 1995 and as Division President - Eastern Division from February 3, 1993 to March 1995. Mr. Knieling served as a Regional Vice President from June 1990 to February 1993 and as President of Gulf States Airgas from June 1989 to February 1993. Mr. Knieling owned and operated an industrial gas distributor which was sold to the Company in 1989. Also, Mr. Knieling served in various capacities for Hoechst AG during a period of 18 years, and, prior to his leaving Hoechst in 1982 was President and Chief Executive Officer of its subsidiary, MG Burdett Gas Products Company. Mr. Baker has been Group President - Distribution since April 1, 1997. Prior to that, Mr. Baker served as the Company's Division President - Eastern Division from April 1, 1995 to March 1997. Mr. Baker served as a Regional Vice President from May 1991 to February 1993 and President of Southwest Airgas since the acquisition of Southwest Airgas (formerly West Texas Welders Supply), in October 1988, to March 1995. Prior to joining the Company, Mr. Baker was President and owner of West Texas Welders Supply from August 1981 to October 1988. Mr. Rice has been Group President - Airgas Direct Industrial since April 1, 1997. Prior to that he served as Airgas' Division President - Industrial Distribution and Purchasing from April 1, 1995 to March 1997 and served as Vice President - Purchasing from August 1, 1993 to March 1995. Until August 1993, Mr. Rice was President of Virginia Welding Supply, which was acquired by the Company in July 1992. Mr. Rice has over 20 years of industry experience and serves on the boards of various companies. Mr. Crichton has been the Company's Division President - West since February 3, 1993. Mr. Crichton served as a Regional Vice President from May 1991 to February 1993 and as President of Sierra Airgas since the acquisition of Sierra Airgas (formerly Moore Bros.) in January 1987. Mr. Crichton was employed by Union Carbide Industrial Gases (UCIG) from 1969 through 1986, and prior to joining Moore Bros., was President of a subsidiary of UCIG. Mr. Rush has been the Company's Division President - South since December 1, 1995. Mr. Rush served as President of Sooner Airgas from June 1, 1991 to November 30, 1995 and as Vice President of Sales for Southwest Airgas from September 1990 to May 31, 1991. Mr. Musselman has been Division President - East since April 1, 1997. Prior to that, Mr. Musselman served as President of Northeast Airgas from January 1989 to March 1997. 12 Mr. Deas has been the Vice President-Finance & Chief Financial Officer since February 17, 1997. From March 1996 to February 1997, Mr. Deas served as Chief Financial Officer of Maritrans, Inc., a New York Stock Exchange listed shipping company headquartered in Philadelphia. Prior to that, Mr. Deas served for 18 years in various positions at Scott Paper Company, a manufacturer of tissue products, including Vice President, Treasury and Assistant Treasurer from October 1988 to February 1996. Mr. Keen has been Senior Vice President - Law and Corporate Development since April 1, 1997. Prior to that, Mr. Keen served as Vice President - Corporate Development from January 1, 1992 to March 1997. From January 1982 until December 1991, Mr. Keen was a partner in the law firm of McCausland, Keen & Buckman, Radnor, Pennsylvania, which provides legal services to the Company. Mr. Sanford has been Executive Vice President of Airgas Direct Industrial since April 1, 1997. Prior to that, he served as the Company's Executive Vice President from December 1, 1995 to March 1997 and Vice President - Sales and Marketing since February 3, 1993. Mr. Sanford served as President of Cascade Airgas from March 1989 to February 1993. From May 1984 to February 1989 Mr. Sanford served as Vice President -- Sales and Marketing for Midwest Carbide. Mr. Mason has been Senior Vice President since December 1, 1995. Mr. Mason served as Assistant to the Chairman from January 1993 to November 1995. Prior to that, Mr. Mason served as Executive Vice President of the Company from March 1990 until January 1993 and served as President from August 1988 until February 1990. Mr. Melman has been Vice President - Administration since April 1, 1995. Mr. Melman served as Vice President - Corporate Controller from August 1994 to March 1995 and Corporate Controller from August 1986 to July 1994. Prior to joining the Company, Mr. Melman was the Controller for Integrated Circuit Systems, Inc. from November 1983 to July 1986, and prior to joining Integrated Circuit Systems, Inc., was a Tax Manager for KPMG Peat Marwick LLP. Mr. Endres has been Vice President - International since January 1993. Mr. Endres served as Vice President - Marketing from July 1991 until December 1992. From February 1987, Mr. Endres served as General Manager and Vice President for the western region of Airgas. Prior to joining Airgas, Mr. Endres served for 18 years in various positions nationally and internationally for Messer Griesheim, a major producer of industrial gases headquartered in Germany. His last position was Vice President for Specialty Gases and Chemicals at MG Industries in Valley Forge, PA. Mr. Goldstein has been the Vice President-Information Systems of Airgas since September 9, 1996. He joined Airgas from KPMG Peat Marwick LLP (KPMG) where he served as a National Service Leader for their Consulting Division since June 1991. Prior to 1991, he was a Senior Manager at KPMG. Mr. Goldstein held a variety of consulting positions at Coopers & Lybrand LLP from June 1986 to July 1989. Mr. Cichocki has been Vice President - Corporate Development of Airgas since April 1, 1997. Mr. Cichocki served as Assistant Vice President - Corporate Development from August 1992 to March 1997. Prior to that, he served in various corporate development and finance positions from April 1988 to July 1992. ITEM 2. PROPERTIES. The Company has offices, manufacturing and distribution facilities in 41 states, Canada and Mexico. The principal executive offices of the Company are located in leased space in Radnor, Pennsylvania. 13 The Company's Manufacturing segment produces carbon products at its Keokuk, Iowa, facility; calcium carbide at its Pryor, Oklahoma, facility; nitrous oxide at its Donora, Pennsylvania and Yazoo City, Mississippi facilities; and carbon dioxide at the Jackson Dome production facility located in Jackson, Mississippi. Manufacturing facility utilization, based on market demand, has ranged from 65% to 100%. The Keokuk and Pryor facilities are owned by the Company. The Donora plant is located on property leased through the year 2006. The Yazoo City property is owned by the Company; however, it will revert to the local municipality if the plant terminates operations. The Keokuk, Pryor and Donora facilities are pledged as collateral under industrial development board revenue bonds. The Company's Distribution segment conducts business from approximately 600 locations in 41 states, Canada and Mexico. These locations are either owned or are leased from third parties or from employees of the Company who were previous owners of businesses acquired on terms consistent with commercial rental rates prevailing in the surrounding rental market. Fifteen (15) distribution locations in eleven (11) states have acetylene manufacturing plants. The Company's acetylene plants operate at an average production capacity of approximately 65%. The Company's Direct Industrial segment conducts its business from locations strategically located throughout the United States. IPCO's principal offices are located in leased space in Langhorne, Pennsylvania, with additional warehouse locations in Pennsylvania, Texas, and California. Rutland's principal offices are located in leased space in the City of Industry, California, and also include warehouse locations in California, Arizona, Texas, Illinois, Ohio and South Carolina. The Company believes that its facilities are adequate for its present needs and that its properties are generally in good condition, well maintained and suitable for their intended use. ITEM 3. LEGAL PROCEEDINGS. The Company and its subsidiaries are parties to pending legal proceedings arising out of their business operations. The proceedings involve claims for personal injuries, breach of contract, product warranty and product design, and claims involving employee relations and certain administrative proceedings. Management does not believe that the eventual outcome of any litigation to which the Company or its subsidiaries are parties would have a material adverse effect on the consolidated financial position, 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 the majority shareholders of 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. On February 24, 1997, the court entered an order denying the Company's motion to dismiss for forum non conveniens. The Company has filed a petition for writ of mandamus with the Alabama Supreme Court requesting that the lower court's order be vacated or set aside. The Company believes that Praxair's claims are without merit and intends to defend vigorously against such claims. 14 On September 9, 1996, the Company filed suit against Praxair in the Court of Common Pleas of Philadelphia County, Pennsylvania. The complaint alleges breach of contract, fraud, conversion and misappropriation of trade secrets with respect to an agreement between Praxair and the Company, pursuant to which Praxair induced the Company to provide Praxair valuable information and conclusions developed by the Company concerning CBI Industries, Inc. ("CBI") in exchange for Praxair's promise not to acquire CBI without the Company's participation. The Company has alleged that it became entitled, pursuant to such agreement, to acquire certain of CBI's assets having a value in excess of $800 million. The Company is seeking compensatory and punitive damages. On January 2, 1997, the court entered an order overruling Praxair's preliminary objections to the Company's complaint and ordering Praxair to file an answer to the complaint. Praxair has since filed an answer and asserted various defenses. The fraudulent breach of contract by a third-party supplier of refrigerant gas was reported by the Company on December 23, 1996. On February 12, 1997, the Company filed a lawsuit in the United States District Court for the Southern District of Georgia against Discount Auto Parts, Inc. ("Discount"), an employee of Discount and certain other business and individual defendants, alleging that Discount and the other defendants engaged in racketeering activity involving the fraudulent sale of smuggled and counterfeit R-12 refrigerant gas. The Company's complaint alleges that the racketeering activity of the defendants caused damages to the Company in an amount not less than $20 million. The complaint seeks treble damages under the Federal RICO and Georgia RICO statutes, as well as monetary damages under other counts alleging fraud, conspiracy and related wrongful conduct. The Company believes there will be future recoveries, including cash in bank accounts frozen under restraining orders, net assets of the refrigerant supplier which breached the contract and insurance proceeds under Airgas' and the refrigerant supplier's policies. The Company will continue to pursue vigorously all possible sources of recovery. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 15 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is listed on the New York Stock Exchange (ticker symbol: ARG). The following table sets forth, for each quarter during the last two fiscal years, the high and low sales prices as reported by the New York Stock Exchange. High Low ---- --- 1997 Fiscal (1) First Quarter $22.38 $18.75 Second Quarter 25.50 17.38 Third Quarter 27.13 21.13 Fourth Quarter 24.50 16.50 1996 Fiscal (1) First Quarter $13.88 $12.50 Second Quarter 15.00 13.31 Third Quarter 16.63 15.69 Fourth Quarter 20.06 19.81 ________________ (1) Adjusted to reflect a two-for-one stock split effective on April 15, 1996 (See Note 10 to the Company's consolidated financial statements under Item 8). On May 30, 1997, there were approximately 13,000 holders of record of the Company's Common Stock. The present policy of the Company is to retain earnings to provide funds for the operation and expansion of its business and not to pay cash dividends on its Common Stock. Any payment of future dividends and the amounts thereof will depend upon the Company's earnings, financial condition, loan covenants, capital requirements and other factors deemed relevant by the Board of Directors (See Note 9 to the Company's consolidated financial statements). 16 ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the Company is presented in the table below and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 and the Company's consolidated financial statements included in Item 8 herein. (amounts in thousands except per share amounts): Years Ended March 31, (5) ___________________________________________ 1997 1996 1995 1994 1993 (6) ____ ____ ____ ____ ____ Operating Results: Net sales $1,158,894 $838,144 $687,983 $519,349 $410,771 Depreciation, depletion & amortization(2) 62,491 45,762 36,868 30,571 28,045 Operating income 82,285 92,985 72,600 48,667 34,367 Interest expense, net 39,752 24,862 17,625 12,486 11,403 Income taxes(1) 21,080 28,522 23,894 16,027 10,811 Net earnings 23,266 39,720 31,479 20,290 12,469 Earnings Per Share(3) $ .34 $ .60 $ .48 $ .31 $ .19 Balance Sheet Data: Working capital $ 124,849 $ 81,588 $ 54,084 $ 47,071 $ 40,253 Total assets 1,291,031 883,642 645,637 514,897 399,477 Current portion of long-term debt 25,158 12,179 11,780 10,304 9,923 Long-term debt 629,931 385,832 259,970 205,311 158,629 Other non-current liabilities 29,565 34,490 11,116 6,635 762 Stockholders' equity(4) $ 336,657 $236,209 $189,652 $156,867 $127,571 _______________ (1) The Company retroactively adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" as of April 1, 1992. (2) Effective April 1, 1993, the Company changed its estimate of the useful lives of its acetylene and high pressure cylinders from 20 to 30 years. This change was made to better reflect the estimated periods during which these assets will remain in service. The change had the effect of reducing depreciation expense in 1994 by approximately $3.1 million and increasing net earnings by $1.9 million or $.03 per share. (3) See Notes 4 and 10 to the Company's consolidated financial statements for information regarding earnings per share calculations and adjustment for the stock split effective April 15, 1996. (4) The Company has not paid any dividends on its common stock. (5) During the fiscal years 1993 through 1997, the Company acquired 127 distributors. (6) As discussed in Note 3 to the Company's consolidated financial statements, during the fourth quarter of fiscal 1997, the Company recorded special charges totaling $31.4 million ($20.2 million after tax) and incurred a net loss of $780 thousand related to the sale of a medical home-care business. Excluding the effects of the special charges and the loss, operating income, net earnings and earnings per share were $113.7 million, $44.3 million, and $.65 per share, respectively. 17 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 7. OVERVIEW The Company's sales for the year ended March 31, 1997 increased 38% to a record $1.16 billion, compared to $838.1 million in the prior year. Net earnings for the year, before fourth-quarter special charges and a loss related to the sale of a medical business, increased by 11% to $44.3 million, or $.65 per share, compared to $39.7 million or $.60 per share in the prior year. Net earnings were $23.3 million or $.34 per share, after including the special charges and loss. Cash flow, excluding the special charges and the loss, also increased to record levels. After-tax cash flow (net earnings plus depreciation, amortization and deferred income taxes) for the year, before special charges and the loss, increased 22% to $117.3 million compared to $96.4 million in the prior year. These increases were attributable to the continued success of the Company's acquisition growth strategies combined with internal sales growth and continuous improvement in other areas. Offsetting this growth was lower-than-expected performances at certain Distribution subsidiaries caused by difficult consolidations, costs associated with an accelerated rate of new branch start-ups and planned expenses related to the expansion of Airgas Direct Industrial ("ADI"). Since April 1, 1995, the Company has completed 65 acquisitions with a combined annual revenue base of approximately $420 million. During 1997, the Company completed 24 acquisitions with annual sales of $230 million. The Company has successfully acquired, integrated and consolidated more than 250 businesses over the past 15 years, creating a national network of hubs and branches that form the largest distributor of industrial, medical and specialty gases and welding-related equipment and supplies in North America. With over 600 locations in 41 states, Canada and Mexico, the Company has established a strong local presence and has developed high value-added relationships with its 650,000 customers. The Company continues to remain focused on improved profitability and cash flow fueled by operational efficiencies, improved pricing and business development opportunities, including acquisitions. Growth in the Company's industrial gas distribution business during 1997 was helped by the acquisition of 21 businesses with annual sales of $102 million. Internal development and expansion of existing product lines resulted in same-store sales growth of 3.4% and same-store gross profit growth of 3.9%. Among the Company's other initiatives which are helping to build its industrial gas business include the acquisition of Shell Land & Energy Company's Jackson Dome carbon dioxide reserves and 183-mile pipeline in the Southeastern United States. Additionally, in June 1997, the Company closed the Carbonic Industries Corporation acquisition, the fourth largest producer of carbon dioxide in the United States. These two key acquisitions, combined with related acquisitions of liquid carbon dioxide distributors and carbon dioxide beverage companies, complement the Company's existing industrial gas business and provide opportunities for future growth. In addition, the Company entered into a 47% joint venture with National Welders Supply Company, a premier independent distributor with annual sales of $125 million. 18 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) During 1997, the Company entered a new business segment and formed its ADI Group with the acquisitions of IPCO Safety Products ("IPCO", effective April 1, 1996) and Rutland Tool & Supply Co., Inc. ("Rutland", effective September 1, 1996). These two ADI companies offer a multi-channel, direct mail, national distribution infrastructure which broadens the line of hardgoods and positions the Company for entry into the $55 billion safety and metalworking industrial segment of the Maintenance, Repair and Operations ("MRO") market. The MRO market encompasses the same metal fabrication market that also accounts for approximately 28% of Airgas' current gas and hardgoods equipment sales. The Company believes that ADI's direct channel of delivery will lower the costs to customers by leveraging the Company's purchasing power, taking advantage of economies of scale and reducing the number of times an order is handled before products reach the customer. ADI's focus is to build on the Company's existing base of 650,000 local customers and strong customer relationships by selling more products to existing customers. The Company believes ADI will also provide improved customer services, such as next-day delivery, and will enhance the Company's branch-based network's ability to obtain and service national accounts. During the fourth quarter of fiscal 1997, the Company recorded special charges totaling $31.4 million and a net loss of $780 thousand related to the sale of a medical home-care business. The special charges consist of a non- recurring charge of $26.4 million ($17 million after tax) for product losses and costs associated with the Company's investigation into the fraudulent breach of contract by a third-party supplier of refrigerant gas and a $5 million ($3.2 million after tax)non-cash charge related to the impairment write-down of certain machinery and equipment, goodwill and other intangible assets of two non-core product-line businesses. The fraudulent breach of contract by a third-party supplier of refrigerant gas was reported by the Company on December 23, 1996. On February 12, 1997, the Company disclosed it had filed a lawsuit in the United States District Court against Discount Auto Parts, Inc. ("Discount"), an employee of Discount, and certain other business and individual defendants, alleging that Discount and the other defendants engaged in racketeering activity involving the fraudulent sale of smuggled and counterfeit R-12 refrigerant gas. Airgas' complaint alleges that the racketeering activity of the defendants caused damages to Airgas in an amount not less than $20 million. The complaint seeks treble damages under the Federal RICO and Georgia RICO statutes, as well as monetary damages under other counts alleging fraud, conspiracy and related wrongful conduct. The Company believes there will be future recoveries, including cash in bank accounts frozen under restraining orders, net assets of the refrigerant supplier which breached the contract and insurance proceeds under Airgas' and the refrigerant supplier's policies. The Company will continue to pursue vigorously all possible sources of recovery. See Item 3, "Legal Proceedings," and Notes 3 and 19 to the Company's Consolidated Financial Statements under Item 8. 19 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS: 1997 COMPARED TO 1996 ____________________________________________ Net sales increased 38% in 1997, compared to 1996: (in thousands)
1997 1996 Increase ____ ____ __________ Distribution $1,018,704 $801,552 $217,152 Direct Industrial 99,216 -- 99,216 Manufacturing 40,974 36,592 4,382 _______ _______ _______ $1,158,894 $838,144 $320,750 ======= ======= =======
For the year ended March 31, 1997, Distribution sales increased approximately $181 million resulting from the acquisition of 62 distributors since April 1, 1995 and approximately $36 million from same-store sales growth. The Company estimates that had all acquisitions during the year ended March 31, 1997 been consummated on April 1, 1996, sales for 1997 would have been approximately $1.050 billion. The increase in same-store Distribution sales of 3.4% was a result of growth in all three product groups: gases, hardgoods and rent. The internal growth was attributable to higher sales volume and from improved pricing. The Company continues to focus on internal sales growth through the development of new gas products and product-line extensions, including specialty gases, small bulk gases, carbon dioxide, replacement refrigerants in returnable containers, expansion of rental welder fleets and increased hardgoods business through ADI. 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 acquisition consolidation and integration activity. Airgas subsidiaries without significant acquisition activity averaged approximately 5% same-store sales growth. 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 the Company's ability to expand markets for new and existing products and to increase prices. ADI's sales include welding, metalworking, safety and other MRO hardgoods. The internal sales growth rate for ADI was approximately 12% during fiscal 1997. Pro forma unaudited sales for ADI, assuming that the Rutland acquisition had been completed on April 1, 1996, would have been approximately $120 million. Sales to the Distribution segment totaled approximately $1 million. The Manufacturing segment's sales increased 12% during fiscal 1997 primarily as a result of the December 1, 1996 acquisition of the Jackson Dome carbon dioxide business. Sales related to carbide, carbon products and nitrous oxide were essentially flat. Sales to the Distribution segment totaled approximately $1.5 million. The increase in Distribution gross profits of approximately $100 million compared to the prior year resulted from acquisitions which contributed approximately $81 million and from same-store gross profit growth of 3.9% or 20 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) approximately $19 million. Same-store gross profit growth resulted from margin improvement of $2 million and sales volume growth of $17 million. On a same- store basis, the Distribution gross margin was 50.9% which represented an improvement of .2% compared to the prior year. Same-store gross margins improved as a result of selective price increases to customers, leveraging the Company's purchasing power through national purchasing programs and improvements in rent margins. Compared to the prior year, the Distribution gross margin of 49.7% is down 100 basis points due primarily to acquisitions which have an average gross margin of approximately 45%. Acquisitions have had an average sales mix of 53% hardgoods/47% gas and rent compared to the Company's sales mix for fiscal 1996 of 49% hardgoods/51% gas and rent. The gross profit margin of 26.9% for ADI does not reflect a full year of Rutland's operations which has historically had gross margins of approximately 40%. Gross margins for the fourth quarter of fiscal 1997 for ADI were 29.5%, reflecting Rutland's operations for the full period. Selling, distribution and administrative expenses ("SG&A") increased $91.4 million compared to the prior year primarily due to acquisitions. As a percentage of net sales, SG&A expenses decreased 140 basis points to 32% compared to the prior year. Excluding ADI which has a lower SG&A expense-to-sales ratio, SG&A expenses as a percentage of net sales decreased 30 basis points compared to the prior year. The improvement in the SG&A expenses relative to sales was somewhat offset by higher operating expenses associated with the consolidation and integration of certain Distribution acquisitions, costs associated with the start-up of new Distribution branches and expenses related to the expansion of ADI. As the Company continues to integrate such acquisitions and complete such start-up and expansion activities, SG&A expenses relative to net sales should improve, although such increased expenses could recur as a result of future acquisitions and expansion activities. Depreciation and amortization increased $16.7 million compared to the prior year primarily due to acquisitions and from increased capital expenditures. Of the $33.1 million increase in capital expenditures, approximately 60% of the increase resulted from purchases of cylinders, bulk tanks and machinery and equipment which are necessary to facilitate gas sales growth and the integration of acquisitions. Depreciation, depletion and amortization as a percentage of sales decreased 10 basis points as a result of ADI which has depreciation and amortization relative to sales of 2.9% compared to the Distribution segment of 5.7%. Excluding special charges of $31.4 million, operating income increased 22% in 1997 compared to 1996: (in thousands)
1997 1996 Increase ____ ____ __________ Distribution $102,571 $ 86,130 $ 16,441 Direct Industrial 3,076 -- 3,076 Manufacturing 8,063 6,855 1,208 _______ _______ _______ $113,710 $ 92,985 $ 20,725 ======= ======= =======
21 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Distribution segment's operating income margin decreased 60 basis points to 10.1% compared to the prior year. The decrease was primarily the result of recent industrial gas distribution acquisitions which have operating margins averaging around 8% and from an increase in operating costs associated with the integration and consolidation of certain acquisitions and new branch start-ups. Excluding three subsidiaries undergoing difficult consolidations, a product-line company which was written down during the Company's fourth quarter and the new branch start-ups, the Distribution operating income margin reflected a slight improvement compared to the prior year. Subject to the effects of future acquisitions and the Company's ability to increase sales and expand margins, the Company believes that its Distribution operating income margin should improve. The operating income margin for ADI was 3.1%. The Company believes that ADI's operating income margin will continue to be impacted in the foreseeable future by expansion costs related to information systems, logistics and facility enhancements. The Manufacturing segment's operating income increased $1.2 million compared to the prior year primarily as a result of the Jackson Dome acquisition. Higher operating margins related to the Jackson Dome acquisition also accounted for the 100 basis point increase in operating margins compared to the prior year. Interest expense, net, increased $14.9 million compared to the prior year primarily as a result of the increase in average outstanding debt associated with the acquisition of businesses acquired since April 1, 1995, the joint venture investment in National Welders Supply Company, costs associated with the fraudulent breach of contract by a third-party refrigerant gas supplier and the repurchase of Airgas common stock. As discussed in "Liquidity and Capital Resources" below, the Company has hedged floating interest rates under certain borrowings with interest rate swap agreements. Equity in earnings of unconsolidated affiliates of $958 thousand is primarily attributable to the Company's 45% interest in National Welders Supply Company. Income tax expense, excluding the special charges and the loss related to the sale of a medical home-care business represented 41% of pre-tax earnings for the year ended March 31, 1997 compared to 41.8% in the prior year. The decrease in the effective income tax rate is primarily a result of equity affiliate income which is recorded net-of-tax. Net earnings for the year ended March 31, 1997, before fourth quarter special charges and the loss on the sale of a medical home-care business, increased 11% to $44.3 million, or $.65 per share, from $39.7 million, or $.60 per share in 1996. Net earnings for the year, after the special charges and the loss, were $23.3 million, or $.34 per share. 22 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS: 1996 COMPARED TO 1995 ____________________________________________ Net sales increased 22% in 1996 compared to 1995: (in thousands)
1996 1995 Increase ____ ____ __________ Distribution $801,552 $654,381 $147,171 Manufacturing 36,592 33,602 2,990 _______ _______ _______ $838,144 $687,983 $150,161 ======= ======= =======
For the year ended March 31, 1996, Distribution sales increased approximately $133 million resulting from the acquisition of 66 distributors of industrial, medical and specialty gases and related equipment since April 1, 1994 and approximately $14 million from same-store sales growth. The Company estimates that had all acquisitions during the year ended March 31, 1996 been consummated on April 1, 1995, distribution sales for the year ended March 31, 1996 would have increased by an additional $100 million. The increase in same-store sales of approximately 2% was the result of slightly higher prices based on selected price increases to certain customers and increased volume within its gas, rental and hardgoods businesses. During 1996, the Company's same-store sales increased 3% in the first quarter, 2% in the second and third quarters and 1% in the fourth quarter. Excluding the impact of the inclement weather, the Company estimates same-store sales growth during the fourth quarter would have been approximately 2%. The Company estimates same-store sales based on a comparison of current period sales to the prior period's sales, adjusted for acquisitions. Sales for the Company's Manufacturing operations increased 9% during the year ended March 31, 1996 compared to the prior year, primarily as a result of an increase in the volume of lower margin exports and increased demand for carbon products and nitrous oxide. The increase in Distribution gross profit of $72.6 million over 1995 was attributable to increases associated with acquisitions of $62.7 million and same-store gross profit growth of $9.9 million. The majority of the $9.9 million same-store gross profit growth was derived from volume growth in gas and increases in cylinder rent. Higher gas volumes were partially attributable to the success of gas marketing programs, principally small bulk and specialty gases. On a same-store basis, distribution gross margins increased an estimated 0.3% compared to 1995 primarily due to improved rent gross margins combined with slightly higher margins in gases and hardgoods. Increased volumes of lower margin bulk gases partially offset the gas margin improvements. 23 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Selling, distribution and administrative expenses decreased as a percentage of sales to 33.4% in 1996 compared to 34.3% in 1995. The decrease was a result of acquisition consolidation efforts and lower operating costs, such as a reduction in business insurance costs through improved claims management and reduced incident rates. In addition, certain operating costs, such as occupancy costs, are relatively fixed and do not increase proportionately with the increase in same-store sales. Partially offsetting these improvements were normal salary increases and slightly higher distribution costs. Operating income increased 28% in 1996 compared to 1995: (in thousands)
1996 1995 Increase ____ ____ __________ Distribution $86,130 $66,521 $19,609 Manufacturing 6,855 6,079 776 ______ ______ ______ $92,985 $72,600 $20,385 ====== ====== ======
Distribution operating income as a percentage of net distribution sales increased to 10.7% for the year ended March 31, 1996 compared to 10.2% in 1995. The increase in distribution operating income in 1996 was the result of the increase in gross profits from higher same-store sales, improved gross profit margins and operating income provided by acquisitions. Manufacturing operating income increased $776 thousand in 1996 compared to 1995 due to strong demand for carbon products and nitrous oxide, and lower production and delivery costs related to calcium carbide and nitrous oxide business, partially offset by an increase in lower margin sales of carbon products. Interest expense, net, increased $7.2 million in 1996 compared to 1995 primarily as a result of the increase in average outstanding debt associated with the acquisition of industrial gas distributors since April 1, 1994, interest costs associated with the repurchase of Company common stock and slightly higher interest rates, partially offset by an increase in positive cash flow. 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 41.8% of pre-tax earnings in 1996 compared to 43.2% in 1995. The decrease in the effective income tax rate was primarily due to an increase in pre-tax earnings relative to permanent differences and as a result of the implementation of certain tax planning strategies. Net earnings increased 26% to $39.7 million or $.60 per share in 1996 from $31.5 million or $.48 per share in 1995. 24 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 $81.2 million ($106.5 million excluding the special charges and loss related to the sale of a medical home- care business) for the year ended March 31, 1997. Depreciation, depletion and amortization represented $62.5 million of cash flows from operating activities. Cash flows from working capital components increased $1.7 million as a result of a decrease in prepaid expenses and other current assets, an increase in accounts payable and an increase in accrued expenses and other current liabilities partially offset by an increase in accounts receivable associated with higher same-store sales and an increase in inventory levels to meet increased hardgoods and gas sales volumes. The increase in other assets and liabilities, net, primarily related to amounts paid in connection with securing product-supply agreements and a decrease in deferred interest related to interest rate swap agreements. Days' sales outstanding and distribution hardgoods days' supply of inventory improved slightly compared to March 31, 1996 levels. Total inventories have increased primarily as a result of an increase in distribution inventories of approximately $3 million to support sales growth and gases of approximately $9 million associated with specialty gas sales initiatives. Cash used by investing activities totaled $276.0 million in fiscal 1997, which was primarily comprised of capital expenditures of $74.4 million and acquisitions and investments totaling $202.7 million. The Company's use of cash for capital expenditures was attributable to the continued assimilation of certain acquisitions requiring capital expenditures for 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. Approximately 60% of fiscal 1997's capital expenditures were for the purchase of cylinders, bulk tanks and machinery and equipment. The Company estimates that its Distribution maintenance capital expenditures are approximately 2% of net sales. The Company considers the replacement of existing capital assets to be maintenance capital expenditures. The Company has undertaken initiatives to develop further its industrial gas customer base to include customers which require large-volume supplies of gases, such as nitrogen. For these customers, the Company plans to enter into long-term supply contracts in conjunction with air separation plants which will be built near customers' facilities. The Company has entered into agreements with two customers which require the construction of two air separation plants which will begin production late in calendar 1997. Capital costs incurred during fiscal 1998 associated with these plants are estimated to total $40 million. Financing activities provided cash of $194.8 million with total debt out- standing increasing by $257.1 million from March 31, 1996. Funds from financing activities were used primarily for the purchase of distributors, equity investments, capital expenditures and the repurchase of Airgas common stock. 25 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 March 31, 1997, the Company had approximately $282 million in borrowings under the facility and approximately $76 million committed under letters of credit, resulting in unused availability under the facility of approximately $142 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%. In March 1997, the Company issued $75 million of unsecured notes due March 2004 at a fixed rate of 7.14%. The proceeds from the medium-term note issuances were used to repay bank debt. The Company has a Canadian credit facility totalling C$50 million (US$37 million) with various commercial banks which matures on November 14, 1998. At March 31, 1997, the Company had approximately C$41 million (US$30 million) in borrowings outstanding under the facility, resulting in unused availability under the facility of approximately C$9 million (US$7 million). The Company also has unsecured line of credit agreements with various commercial banks. At March 31, 1997, these agreements totaled $50 million, under which the Company had no borrowings outstanding. At March 31, 1997, the effective interest rate related to outstanding borrowings under all credit lines was approximately 6.07%. 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 23 interest rate swap agreements during the period from June 1992 through March 31, 1997. The swap agreements are with major financial institutions and aggregate $358 million in notional principal amount at March 31, 1997. Approximately $208 million of the notional principal amount of the swap agreements require fixed interest payments based on an average effective rate of 6.49% for remaining periods ranging between 1 and 8 years. Five swap agreements require floating rates ($149.5 million notional amount at 5.72% at March 31, 1997). 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 March 31, 1997, approximately $18.7 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 its common stock, including approximately 2.4 million treasury shares. 26 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In June 1997, the Company closed the acquisition of CIC, which was merged into a newly-formed subsidiary of the Company in exchange for a combination of the Company's common stock and cash. Subsequent to March 31, 1997, the Company has acquired six businesses, including CIC, with aggregate annual sales of approximately $69 million for an aggregate purchase price of approximately $82 million. In addition, the Company has signed letters of intent for nine companies with annual sales of approximately $107 million and an aggregate purchase price of approximately $56 million. In December 1996, the Board of Directors authorized the repurchase of up to 1,600,000 shares of Airgas Common Stock, and on April 16, 1997, the Board of Directors authorized the repurchase of up to 1,000,000 additional shares. The Company purchased 800,000 shares of Airgas common stock during the year ended March 31, 1997. Subsequent to March 31, 1997, the Company repurchased 1,154,000 shares, leaving a total of 646,000 shares available under the repurchase programs. The Company's treasury shares will be used to fund acquisitions and employee benefit programs and will be acquired in open-market transactions, from time-to-time, depending on market conditions. The Company has primarily financed its repurchase program with borrowings and funds provided by operating activities. The cash used for the Company's repurchase program during 1997 totalled $15.7 million. The Company does not currently pay dividends. Other New Accounting Pronouncements In the first quarter of fiscal 1997, Airgas 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.(See Note 3 to the consolidated financial statements of the Company under Item 8.) 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. Airgas has elected to continue to use existing accounting rules under APB 25. Accordingly, Airgas has presented the required pro forma disclosure provisions for its fiscal year ended March 31, 1997. (See Note 11 to the consolidated financial statements of the Company under Item 8.) As the Company will continue to account for stockbased compensation using the intrinsic value method, this statement does 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 27 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. 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. In February 1997, the Financial Accounting Standards Board issued FASB Statement No. 128 "Earnings Per Share." SFAS No. 128 establishes new standards for computing and presenting earnings per share, effective for financial statements issued for periods ending after December 15, 1997, including interim periods. All prior periods will be restated to reflect the new Basic and Diluted earnings per share amounts. The Company's Basic earnings per share is essentially net income divided by the weighted shares outstanding, and the Diluted earnings per share is not expected to be materially different than currently reported earnings per share amounts. The Company will adopt SFAS No. 128 in the first quarter of fiscal 1998. 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 CIC); 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; the Company's ability to recover assets in connection with the fraudulent breach of contract related to refrigerant R-12 purchases; and the effects of, and changes in the economy, monetary and fiscal policies, laws and regulations, inflation and 28 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and financial statement schedule of the Company are set forth at pages F-1 to F-33 of the report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. The biographical information relating to the Company's directors appearing in the Proxy Statement relating to the Company's 1997 Annual Meeting of Stockholders is incorporated herein by reference. Biographical information relating to the Company's executive officers is set forth in Item 1 of Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION. The information under "Board of Directors and Committees," "Executive Compensation" and "Certain Transactions" appearing in the Proxy Statement relating to the Company's 1997 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is set forth in the section headed "Security Ownership" appearing in the Company's Proxy Statement relating to the Company's 1997 Annual Meeting of Stockholders and such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under "Certain Transactions" appearing in the Proxy Statement relating to the Company's 1997 Annual Meeting of Stockholders is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) and (2): The response to this portion of Item 14 is submitted as a separate section of this report beginning on page F-1. All other schedules have been omitted as inapplicable, or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)(3) Exhibits. The exhibits required to be filed as part of this annual report on Form 10-K are listed in the attached Index to Exhibits. (b) Reports on Form 8-K. On January 24,1997, the Company filed a current report on Form 8-K to 29 announce, under Item 5, that its earnings for the third quarter ended December 31, 1996. On February 5, 1997, the Company filed a current report on Form 8-K, to announce, under Item 5, that it named Thomas C. Deas, Jr., as its Chief Financial Officer, effective February 24, 1997. On March 18, 1997, the Company filed a current report on Form 8-K to announce, under Item 5, certain organizational changes and management appointments. (c) Index to Exhibits and Exhibits filed as a part of this report. 3.1 Amended and Restated Certificate of Incorporation of Airgas, Inc. dated as of August 7, 1995 (Incorporated by reference to Exhibit 3.1 to the Company's September 30, 1995 Quarterly Report on Form 10-Q). 3.2 Airgas, Inc. By-Laws Amended and Restated November 29, 1994. (Incorporated by reference to Exhibit 3.2 to the Company's March 31, 1996 report on Form 10-K). **4.1 Eighth Amended and Restated Loan Agreement dated September 27, 1996 between Airgas, Inc. and certain banks and Nationsbank of North Carolina, N.A. ($500,000,000 credit facility). 4.2 Indenture dated as of August 1, 1996 of Airgas, Inc. to Bank of New York, Trustee. (Incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-4 No. 333-23651 dated March 20, 1997). 4.3 Form of Airgas, Inc. Medium-Term Note (Fixed Rate). (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-4 No. 333-23651 dated March 20, 1997). 4.4 Form of Airgas, Inc. Medium-Term Note (Floating Rate). (Incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-4 No. 333-23651 dated March 20, 1997). There are no other instruments with respect to long-term debt of the Company that involve indebtedness or securities authorized thereunder exceeding 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to file a copy of any instrument or agreement defining the rights of holders of long- term debt of the Company upon request of the Securities and Exchange Commission. 4.5 Form of Rights Agreement, dated as of August 1, 1988, between Airgas, Inc. and The Philadelphia National Bank, which includes as Exhibit a thereto the Form of Rights Certificate: (Incorporated by reference to Exhibit (1) (2) to the Company's Form 8-A dated August 11, 1988.) 4.6 Rights Agreement, dated as of April 1, 1997, between Airgas, Inc. and The Bank of New York, N.A., as Rights Agent, which includes as Exhibit A thereto the Form of Right Certificate. (Incorporated by reference to Exhibit 1.1 to the Company's Form 8-A filed on April 28, 1997.) 4.7 First Amendment to the Rights Agreement Dated as of August 1, 1988, dated as of April 1, 1997, between Airgas, Inc. and The Bank of New York. (Incorporated by reference to Exhibit 1.2 to the Company's Form 8-A filed on April 28, 1997.) 30 * 10.1 Agreement between the Company and Peter McCausland, dated January 8, 1991, and form of Common Stock Purchase Warrant. (Incorporated by reference to Exhibit 10.16 to the Company's March 31, 1992 report on Form 10-K). * 10.2 Amended and Restated 1984 Stock Option Plan, as amended effective May 22, 1995 (Incorporated by reference to Exhibit 10.1 to the Company's September 30, 1995 Quarterly Report on Form 10-Q). * 10.3 1989 Non-Qualified Stock Option Plan for Directors (Non-Employees), as amended. (Incorporated by reference to Exhibit 10.7 to the Company's March 31, 1992 report on Form 10-K). * 10.4 Amendment to the 1989 Non-Qualified Stock Option Plan for Directors (Non-Employees) as amended through August 7, 1995 (Incorporated by reference to Exhibit 10.2 to the Company's September 30, 1995 Quarterly Report on Form 10-Q). * 10.5 1994 Employee Stock Purchase Plan. (Incorporated by reference to exhibit 10.19 to the Company's March 31, 1993 report on Form 10-K). * 10.6 Amended and Restated Joint Venture Agreement dated March 31, 1992 between American Carbide and Carbon Corporation and Elkem Metals Company. (Incorporated by reference to Exhibit 10.5 to the Company's March 31, 1992 report on Form 10-K). * 10.7 Airgas, Inc. Management Incentive Plan (Incorporated by reference to Exhibit 10.3 to the Company's September 30, 1995 Quarterly Report on Form 10-Q). * 10.8 Joint Venture Agreement dated June 28, 1996 between Airgas, Inc. and National Welders Supply Company, Inc. and J.A. Turner, III, and Linerieux B. Turner and Molo Limited Partnership, Turner (1996) Limited partnership, Charitable Remainder Unitrust for James A. Turner, Jr. and Foundation for the Carolinas (Incorporated by reference to Exhibit 2.1 to the Company's June 28, 1996 Report on Form 8-K). */** 10.9 Letter dated July 24, 1992 between Airgas, Inc. (on behalf of the Nominating and Compensation Committee) and Peter McCausland regarding the severance agreement between the Company and Peter McCausland. 31 **(11) Statement re: computation of earnings per share. **(21) Subsidiaries of the Company. **(23.1) Consent of KPMG Peat Marwick LLP (Form 10-K) **(23.2) Consent of KPMG Peat Marwick LLP (Form 11-K - 401 (K) Plan) **(23.3) Consent of KPMG Peat Marwick LLP (Form 11-K - Employee Stock Purchase Plan) **(23.4) Consent of Arthur Andersen LLP **(23.5) Report of Independent Public Accountants - Arthur Andersen LLP **(27) Financial data schedule **(99.1) Form 11-K for the Registrant's 401(K) Plan **(99.2) Form 11-K for the Registrant's Employee Stock Purchase Plan _____________ * A management contract or compensatory plan required to be filed by Item 14(c) of this Report. ** Previously filed 32 Signatures __________ Pursuant to the requirements of Section 13 or 15(d) 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. Airgas, Inc. By: /s/ SCOTT M. MELMAN _______________________________ Vice President - Administration Date: _____________ 33 AIRGAS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page Reference In Report on Form 10-K _________ Independent Auditors' Report . . . . . . . . . . . . . . . . . . F-2 Statement of Management's Financial Responsibility . . . . . . . F-3 Consolidated Balance Sheets at March 31, 1997 and 1996 . . . . . F-4 Consolidated Statements of Earnings for the Years Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . F-6 Consolidated Statements of Cash Flows for the Years Ended March 31, 1997, 1996 and 1995. . . . . . . . . .. . . . . . . . F-7 Notes to Consolidated Financial Statements. . . . . . . . . . . . F-8 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts . . . . . . F-33 All other schedules for which provision is made in the applicable accounting regulations promulgated by the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. F-1 34 INDEPENDENT AUDITORS' REPORT The Board of Directors Airgas, Inc.: We have audited the consolidated financial statements of Airgas, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We did not audit the financial statements of National Welders Supply Company, Inc. (National Welders), (a 45% percent-owned investee company). The Company's investment in National Welders at December 31, 1997 was $49,800,000, and its equity in earnings of National Welders was $935,000 for the year ended 1997. The financial statements of National Welders were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for National Welders, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Airgas, Inc. and subsidiaries as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth thereon. Philadelphia, Pennsylvania KPMG PEAT MARWICK LLP May 8, 1997 F-2 35 STATEMENT OF MANAGEMENT'S FINANCIAL RESPONSIBILITY Management has prepared and is responsible for the integrity and objectivity of the consolidated financial statements and related financial information in this Annual Report. The statements are prepared in conformity with generally accepted accounting principles. The financial statements reflect management's informed judgment and estimation as to the effect of events and transactions that are accounted for or disclosed. Management maintains a system of internal control at each business unit. This system, which undergoes periodic evaluation, is designed to provide reasonable assurance that assets are safeguarded and records are adequate for the preparation of reliable financial data. In determining the extent of the system of internal control, management recognizes that the cost should not exceed the benefits derived. The evaluation of these factors requires estimates and judgment by management. The Company's financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. Their Independent Auditors' Report, which is based on an audit made in accordance with generally accepted auditing standards is presented on the previous page. In performing their audit, KPMG Peat Marwick LLP considers the Company's internal control structure to the extent they deem necessary in order to plan their audit, determine the nature, timing and extent of tests to be performed and issue their report on the consolidated financial statements. The Audit Committee of the Board of Directors meets with the independent auditors and management to satisfy itself that they are properly discharging their responsibilities. The auditors have direct access to the Audit Committee. Airgas, Inc. /s/ Thomas C. Deas, Jr. /s/ Peter McCausland ________________________ _______________________ Thomas C. Deas, Jr. Peter McCausland Vice President, Chairman, President and Chief Financial Officer Chief Executive Officer May 8, 1997 F-3 36 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, ________________ (In thousands, except per share amounts) 1997 1996 ________________________________________ ____ ____ ASSETS Current Assets Trade receivables, less allowances for doubtful accounts of $4,443 in 1997 and $3,396 in 1996 . . . . .$ 151,053 $120,811 Inventories (Note 5) . . . . . . . . . . . . . . . . . . 129,372 86,162 Prepaid expenses and other current assets. . . . . . . . 31,574 11,601 _______ _______ Total current assets. . . . . . . . . . . . . . . . 311,999 218,574 _______ _______ Plant and Equipment, at cost (Note 6). . . . . . . . . . 736,083 586,328 Less accumulated depreciation. . . . . . . . . . . . . . (183,922) (147,451) _______ _______ Plant and equipment, net . . . . . . . . . . . . . . . 552,161 438,877 _______ _______ Other Non-current Assets (Note 7) . . . . . . . . . . . 132,257 60,948 Goodwill, net of accumulated amortization of $29,503 in 1997 and $19,552 in 1996. . . . . . . . . 294,614 165,243 _______ _______ $1,291,031 $883,642 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt (Note 9) . . . . . . .$ 25,158 $ 12,179 Accounts payable, trade. . . . . . . . . . . . . . . . . 74,329 52,528 Accrued expenses and other current liabilities (Note 8). 87,663 72,279 _______ _______ Total current liabilities . . . . . . . . . . . . . 187,150 136,986 _______ _______ Long-Term Debt (Note 9). . . . . . . . . . . . . . . . . 629,931 385,832 Deferred Income Taxes (Note 15). . . . . . . . . . . . . 104,266 88,400 Other Non-current Liabilities (Note 9) . . . . . . . . . 29,565 34,490 Minority Interest in Subsidiaries (Note 21). . . . . . . 3,462 1,725 Commitments and Contingencies (Note 19) Stockholders' Equity (Note 10) Preferred stock, no par value, 200,000 shares authorized, no shares issued or outstanding in 1997 and 1996 - - Common Stock, par value $.01 per share, 200,000 shares authorized, 68,762 and 66,314 shares issued in 1997 and 1996, respectively . . . . . . . . . . . . . . 688 663 Capital in Excess of Par Value . . . . . . . . . . . . . 155,543 91,512 Retained Earnings. . . . . . . . . . . . . . . . . . . . 196,626 173,360 Cumulative Translation Adjustments . . . . . . . . . . . (468) (410) Treasury Stock, 800 and 2,355 common shares at cost in 1997 and 1996, respectively. . . . . . . . . . . . . (15,732) (28,916) _______ _______ Total stockholders' equity. . . . . . . . . . . . . 336,657 236,209 _______ _______ $1,291,031 $883,642 ======= ======= See accompanying notes to consolidated financial statements. F-4 37 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Years Ended March 31, (In thousands, except per share amounts) ______________________________ _______________________________________ 1997 1996 1995 ____ ____ ____ Net Sales Distribution . . . . . . . . . . . . . . . .$1,018,704 $801,552 $654,381 Direct Industrial. . . . . . . . . . . . . . 99,216 -- -- Manufacturing . . . . . . . . . . . . . . . 40,974 36,592 33,602 ________ _______ _______ Total net sales . . . . . . . . . . . . 1,158,894 838,144 687,983 ________ _______ _______ Costs and Expenses Cost of products sold (excluding depreciation, depletion and amortization) Distribution . . . . . . . . . . . . . . . 512,309 395,370 320,800 Direct Industrial. . . . . . . . . . . . . 72,543 -- -- Manufacturing. . . . . . . . . . . . . . . 26,531 24,121 22,076 Selling, distribution and administrative expenses . . . . . . . . . . . . . . . . . 371,310 279,906 235,639 Depreciation, depletion and amortization . . 62,491 45,762 36,868 Special charges (Note 3) . . . . . . . . . . 31,425 -- -- ________ _______ _______ Total costs and expenses. . . . . . . . 1,076,609 745,159 615,383 ________ _______ _______ Operating Income Distribution. . . . . . . . . . . . . . . . 102,571 86,130 66,521 Distribution - special charges. . . . . . . (31,425) -- -- Direct Industrial . . . . . . . . . . . . . 3,076 -- -- Manufacturing. . . . . . . . . . . . . . . . 8,063 6,855 6,079 ________ _______ _______ Total operating income . . . . . . . . 82,285 92,985 72,600 Interest expense, net (Note 13). . . . . . . (39,752) (24,862) (17,625) Other income, net (Note 14). . . . . . . . . 1,672 782 1,067 Equity in earnings of unconsolidated affiliates (Note 12) . . . . . . . . . . . 958 -- -- Minority interest (Note 21). . . . . . . . . (817) (663) (669) _________ _______ _______ Earnings before income taxes. . . . . 44,346 68,242 55,373 Income taxes (Note 15) . . . . . . . . . . . 21,080 28,522 23,894 _________ _______ _______ Net earnings. . . . . . . . . . . . .$ 23,266 $ 39,720 $ 31,479 ========= ======= ======= Earnings Per Share (Notes 4 and 10). . . . .$ .34 $ .60 $ .48 ========= ======= ======= Weighted average shares. . . . . . . . . . . 68,640 66,215 65,525 ========= ======= ======= See accompanying notes to consolidated financial statements. F-5 38 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended March 31, 1997, 1996 and 1995 _________________________________________ Shares of Capital in Common Stock Common Excess of (In thousands) $.01 Par Value Stock Par Value ______________ ______________ ______ __________ Balance--April 1, 1994. . . . . . . . . 65,794.2 $658 $56,001 Net earnings . . . . . . . . . . . . . . Foreign currency translation adjustment. Retirement of treasury stock . . . . . . (3,754.4) (37) (1,445) Purchase of treasury stock (Note 10) . . Issuance of stock in connection with acquisitions . . . . . . . . . . . 123.2 1 1,436 Stock warrants and options exercised . . 538.9 5 1,265 Tax benefit associated with exercise of stock options and warrants (Note 15) 1,859 Shares issued in connection with Employee Stock Purchase Plan (Note 11). 300.2 3 2,704 ________ ___ ______ Balance--March 31, 1995. . . . . . . . . 63,002.1 $630 $61,820 Net earnings . . . . . . . . . . . . . . Foreign currency translation adjustment. Purchase of treasury stock (Note 10) . . Issuance of stock in connection with acquisitions . . . . . . . . . . . 843.7 9 11,435 Stock warrants and options exercised . . 1,841.6 17 3,705 Tax benefit associated with exercise of stock options and warrants (Note 15) 7,613 Shares issued upon acquisition of minority interests (Note 21) 258.1 3 3,547 Shares issued in connection with Employee Stock Purchase Plan (Note 11). 368.2 4 3,392 ________ ___ ______ Balance--March 31, 1996. . . . . . . . . 66,313.7 $663 $91,512 Net earnings . . . . . . . . . . . . . . Foreign currency translation adjustment. Purchase of treasury stock (Note 10) . . Reissuance of treasury stock . . . . . . Issuance of stock in connection with acquisitions . . . . . . . . . . . 1,102.9 11 49,556 Stock warrants and options exercised . . 872.6 9 3,370 Tax benefit associated with exercise of stock options and warrants (Note 15) 4,229 Shares issued upon acquisition of minority interests (Note 21). . . . . . . . . . 76.5 1 1,724 Shares issued in connection with Employee Stock Purchase Plan (Note 11). 395.9 4 5,152 ________ ___ ______ Balance--March 31, 1997 . . . . . . . . 68,761.6 $688 $155,543 ======== === ====== COLUMNS CONTINUED ON NEXT PAGE F-6 39 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Continued) Years Ended March 31, 1997, 1996 and 1995 _________________________________________ Cumulative Retained Translation Treasury (In thousands) Earnings Adjustments Stock ______________ _________ ___________ ________ Balance--April 1, 1994. . . . . . . . . .$102,161 $(471) $(1,482) Net earnings. . . . . . . . . . . . . . . 31,479 Foreign currency translation adjustment . 2 Retirement of treasury stock. . . . . . . 1,482 Purchase of treasury stock (Note 10). . . (5,969) Issuance of stock in connection with acquisitions. . . . . . . . . . . . Stock warrants and options exercised. . . Tax benefit associated with exercise of stock options and warrants (Note 15). Shares issued in connection with Employee Stock Purchase Plan (Note 11) . _______ ____ ______ Balance--March 31, 1995 . . . . . . . . .$133,640 $(469) $(5,969) Net earnings. . . . . . . . . . . . . . . 39,720 Foreign currency translation adjustment . 59 Purchase of treasury stock (Note 10). . . (22,947) Issuance of stock in connection with acquisitions. . . . . . . . . . . . Stock warrants and options exercised. . . Tax benefit associated with exercise of stock options and warrants (Note 15). Shares issued upon acquisition of minority interests (Note 21). . . . . . . . . . . Shares issued in connection with Employee Stock Purchase Plan (Note 11) . ________ ____ ______ Balance--March 31, 1996 . . . . . . . . .$173,360 $(410) $(28,916) Net earnings. . . . . . . . . . . . . . . 23,266 Foreign currency translation adjustment . (58) Purchase of treasury stock (Note 10). . . (15,732) Reissuance of treasury stock. . . . . . . 28,916 Issuance of stock in connection with acquisitions. . . . . . . . . . . . Stock warrants and options exercised. . . Tax benefit associated with exercise of stock options and warrants (Note 15). Shares issued upon acquisition of minority interests (Note 21). . . . . . . . . . . Shares issued in connection with Employee Stock Purchase Plan (Note 11) . ________ ____ _______ Balance--March 31, 1997 . . . . . . . . $196,626 $(468) $(15,732) ======== ==== ======= See accompanying notes to consolidated financial statements. F-6, Continued 40 AIRGAS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended March 31, 1997 1996 1995 ____ ____ ____ Cash Flows From Operating Activities Net earnings . . . . . . . . . . . . . . . . . . $ 23,266 $39,720 $31,479 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . 62,491 45,762 36,868 Depreciation and amortization - special charges 3,930 -- -- Deferred income taxes. . . . . . . . . . . . . (170) 10,868 11,549 Equity in earnings of unconsolidated affiliates. (2,314) (1,428) (840) Gain on sale of investment in CBI Industries, Inc. -- -- (560) Gain on divestiture of medical home-care business. (770) -- -- (Gain)/Loss on sale of plant and equipment. . . 1,386 (12) 110 Minority interest in earnings . . . . . . . . . 817 663 669 Stock issued for employee benefit plan expense 5,156 3,396 2,707 Changes in assets and liabilities, excluding effects of business acquisitions and divestiture: Trade receivables, net. . . . . . . . . . . (6,661) (5,300) (1,179) Inventories, net. . . . . . . . . . . . . . (12,090) (2,509) (1,874) Prepaid expenses and other current assets . 3,687 (960) 198 Accounts payable, trade. . . . . . . . . . 10,534 (1,461) 2,934 Accrued expenses and other current liabilities. 6,247 4,485 1,332 Other assets and liabilities, net . . . . . (14,262) (1,202) (3,441) _______ ______ ______ Net cash provided by operating activities. 81,247 92,022 79,952 _______ ______ ______ Cash Flows From Investing Activities Capital expenditures . . . . . . . . . . . . . . (74,358) (41,236) (36,712) Proceeds from sale of plant and equipment. . . . 3,551 3,968 2,563 Proceeds from divestiture of medical business. . 6,586 -- -- Business acquisitions, net of cash acquired. . . (168,666)(142,776) (79,202) Business acquisitions, holdback settlements. . . (7,943) (7,381) (3,643) Investment in unconsolidated affiliates. . . . . (33,995) (3,448) (3,497) Purchase of investment in CBI Industries, Inc. . -- -- (17,026) Proceeds from sale of investment in CBI Industries, Inc. . . . . . . . . . . . . . . . -- -- 17,892 Dividends from joint venture . . . . . . . . . . 1,729 1,037 550 Other, net . . . . . . . . . . . . . . . . . . . (2,949) (121) (439) ________ ______ ______ Net cash used by investing activities. . . . (276,045)(189,957) (119,514) Cash Flows From Financing Activities ________ _______ ______ Proceeds from borrowings . . . . . . . . . . . . 916,677 692,414 394,193 Repayment of debt. . . . . . . . . . . . . . . . (707,401)(594,931) (359,253) Financing costs. . . . . . . . . . . . . . . . . (2,261) (136) (230) Repurchase of treasury stock, net. . . . . . . . (14,419) (22,947) (5,969) Exercise of options and warrants . . . . . . . . 3,162 3,722 1,270 Net overdraft. . . . . . . . . . . . . . . . . . (960) 4,068 4,591 Other financing activities . . . . . . . . . . . -- 15,745 4,960 ________ ______ ______ Net cash provided by financing activities. . 194,798 97,935 39,562 ________ ______ ______ Cash Increase (Decrease) . . . . . . . . . . . . -- -- -- Cash--Beginning of year. . . . . . . . . . . . . -- -- -- _______ ______ ______ Cash--End of Year. . . . . . . . . . . . . . . . $ -- $ -- $ -- ======= ====== ====== For supplemental cash flow disclosures see Note 20. See accompanying notes to consolidated financial statements. F-7 41 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The consolidated financial statements include the accounts of Airgas, Inc. and 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 excess of the cost of these affiliates over the Company's share of their net assets at the acquisition date is being amortized over 40 years. Intercompany accounts and transactions are eliminated in consolidation. The Company has made estimates and assumptions relating to the reporting of assets and liabilities and disclosure of contingent assets and liabilities to prepare these statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (b) Inventories Inventories are stated at the lower of cost or market with cost for approximately 87% and 81% of the inventories at March 31, 1997 and 1996, respectively, determined by the first-in, first-out (FIFO) method. Cost for the remainder of inventories was determined using the last-in, first-out (LIFO) method. (c) Plant and Equipment Plant and equipment are stated at cost. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets. Depletion of the cost of carbon dioxide production facilities, well equipment and leases are computed on the unit-of-production method. During 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. As discussed in Note 3, the Company recorded a write-down related to certain machinery and equipment, goodwill and other intangible assets of two non-core, distribution product-line businesses. F-8 42 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) (d) Other Assets Costs related to the acquisition of long-term debt are deferred and amortized over the term of the related debt. Costs and payments pursuant to noncompetition arrangements entered into in connection with business acquisitions are amortized over the terms of the arrangements which are principally over 5 years. The Company assesses the recoverability of noncompetition arrangements by determining whether the amortization of the asset balance can be recovered through projected undiscounted future cash flows over its remaining life. (e) Goodwill Goodwill represents costs in excess of net assets of businesses acquired and is amortized on a straight-line basis over the expected periods to be benefited, which currently ranges from 20 to 40 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows. Approximately 94% of the Company's goodwill is assigned a useful life of 40 years. In assessing the recoverability of goodwill the Company evaluates the performance of the underlying business which gives rise to such goodwill. The assets acquired in connection with acquisitions relate to long life assets primarily cylinders, which management believes have a useful life in excess of 40 years. The long life assets acquired continue to contribute a significant portion of the Company's recurring net sales, operating income and cash flow. (f) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Foreign-Currency Translation The functional currency of the Company's foreign operations is the applicable local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using average exchange rates during each reporting period. The gains or losses, net of applicable deferred income taxes, resulting from such translations are included in stockholders' equity. Gains and losses arising from foreign currency transactions are reflected in the consolidated statements of earnings as incurred. F-9 43 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) (h) Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk are limited due to the Company's large number of customers and their dispersion across many industries. Credit terms granted to customers are generally net 30 days. (i) Revenue Recognition Sales are recorded upon shipment to the customer. (j) Financial Instruments In hedging interest rate exposure, the Company enters into interest rate swap agreements. These instruments are not entered into for trading purposes and the Company has the ability and intent to hold these instruments to maturity. The Company only uses non-leveraged instruments. When interest rates change, the difference to be paid or received is accrued and recognized as interest expense over the life of the agreement. The fair values of the Company's financial instruments are estimated based on quoted market prices for the same or similar issues. The carrying amounts for accounts receivable and accounts payable approximate fair value because of the short-term maturity of these financial instruments. (k) Insurance Coverage The Company has established insurance programs to cover workers' compensation, business automobile, general and products liability. These programs have self-insured retentions of $1,000,000 per occurrence for workers' compensation, general and products liability, and a self-insured retention limit of $500,000 per occurrence for business automobile liability, with certain maximum aggregate policy limits per claim year. Losses are accrued based upon the Company's estimates of the aggregate liability for claims incurred, claims incurred but not reported and based on Company experience. The Company does not deem its self-insured retention exposure to be material. (l) Reclassifications Certain reclassifications have been made to previously issued financial statements to conform to the current presentation. (2) ACQUISITIONS During 1997, the Company acquired IPCO Safety Products Company ("IPCO") and Rutland Tool & Supply Co., Inc. ("Rutland"), to form the base for the Company's Direct Industrial segment, ADI. Also, in connection with its carbon dioxide business, the Company acquired Shell Land & Energy Company's ("Shell") interest in unitized leases producing carbon dioxide, including Shell's 183 mile pipeline ("Northeast Jackson Dome"). The Company also made certain related acquisitions of carbon dioxide distributors. In June 1997, the Company acquired Carbonic Industries Corporation ("CIC"), in a merger. Acquisitions have been recorded using the purchase method of accounting, and, accordingly, results of their operations have been included in the F-10 44 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (2) ACQUISITIONS - (Continued) Company's consolidated financial statements since the effective dates of the respective acquisitions. Also, as discussed in Note 21, the Company has accounted for the acquisition of subsidiary minority interests in 1997, 1996 and 1995 using the purchase method of accounting. 1997 - During 1997, the Company purchased 24 businesses. The largest of these acquisitions and their effective dates included IPCO (April 1, 1996), American Welding Supply (June 1, 1996), Rutland (September 1, 1996), Findley Welding Supply (October 1, 1996), and Northeast Jackson Dome (December 1, 1996). The aggregate purchase price for these acquisitions amounted to approximately $233 million. The purchase price for the remaining 19 businesses amounted to approximately $76 million. 1996 - During 1996, the Company purchased 42 businesses. The largest of these acquisitions and their effective dates included Tech-Weld, Inc. (April 3, 1995), Trinity Welding Supply, Inc. (May 1, 1995), Red-D-Arc, Limited (June 29, 1995), Capital Welding Supply, Inc. (August 1, 1996), Langdon Oxygen Company (October 5, 1995), Acetylene Gas Company (January 1, 1996), Iatech Sales Co. (January 1, 1996), Welders Equipment Company (February 1, 1996) and Braun Welding Supply, Inc. (March 1, 1996). The aggregate purchase price for these acquisitions amounted to approximately $164 million. The purchase price for the remaining 33 businesses amounted to approximately $73 million. 1995--During 1995, the Company purchased 25 businesses. The largest of these acquisitions and their effective dates included The Jimmie Jones Company (August 1, 1994) and Post Welding Supply (November 1, 1994). The aggregate purchase price for these acquisitions amounted to approximately $83 million. The purchase price for the remaining 23 businesses amounted to approximately $44 million. In connection with the above business acquisitions, the total purchase price, fair value of assets acquired, cash paid and liabilities assumed were as follows: Years Ended March 31, ___________________________ (In thousands) 1997 1996 1995 ______________ ____ ____ ____ Cash paid . . . . . . . . . . . . . . . . . . $168,666 $142,776 $ 79,202 Issuance of Airgas common stock . . . . . . . 78,671 11,443 775 Notes issued to sellers . . . . . . . . . . . 30,104 24,242 11,340 Notes payable and capital leases assumed. . . 2,103 4,073 9,067 Other liabilities assumed and accrued acquisition costs. . . . . . . . . . . . . . 29,733 54,223 22,935 ______ ______ ______ Total purchase price allocated to assets acquired. . . . . . . . . . . . . . . . . . $309,277 $236,757 $123,319 ======= ======= ======= Included in the 1997 aggregate purchase price is the issuance of approximately 3.4 million shares of the Company's common stock(which includes approximately 2.4 million shares which were issued out of treasury stock), issued in connection with the September 1996 acquisition of Rutland. In connection with three acquisitions, the Company is required to issue shares of Airgas common stock if the Airgas common stock price at certain dates F-11 45 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (2) ACQUISITIONS - (Continued) during fiscal 1999 is less than a previously established price. Shares of the Company become issuable if the Airgas common stock price falls below a range of $12.96 to $14.13 per share. At March 31, 1997, based on the Airgas common stock price, no shares were contingently issuable. Subsequently issued common stock will reduce additional paid in capital and increase common stock for the par value of the additional number of shares of common stock. The purchase price for business acquisitions and minority interests were allocated to the assets acquired and liabilities assumed based on their estimated fair values. Costs in excess of net assets acquired (goodwill) for 1997, 1996 and 1995 amounted to $144.0 million,$81.3 million and $40.8 million respectively. The following presents unaudited estimated pro forma operating results as if the 1997 and 1996 acquisitions had been consummated on April 1, 1995. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of April 1, 1995 or of results which may occur in the future. Years Ended March 31, _____________________ (In thousands except per share amounts) 1997 1996 _______________________________________ ____ ____ Net sales . . . . . . . . . . . . . . . . . . . $1,221,584 $1,158,591 Net earnings. . . . . . . . . . . . . . . . . . 21,463 34,404 Earnings per share: . . . . . . . . . . . . . . .31 .49 Subsequent to March 31, 1997, the Company has acquired six businesses, including CIC, with aggregate annual sales of approximately $69 million for an aggregate purchase price of approximately $82 million. In addition, the Company has signed letters of intent for nine companies with aggregate annual sales of $107 million for an aggregate purchase price of approximately $56 million. (3) SPECIAL CHARGES On December 23, 1996, the Company announced it was the victim of a fraudulent breach of contract by a third-party supplier of refrigerant gas. In connection with the fraud, the Company recorded a non-recurring pre-tax charge during the fourth quarter of $26.4 million (approximately $17 million after tax) for product losses and costs associated with the Company's investigation into the fraud. The Company believes there will be recoveries, including cash in bank accounts frozen under restraining orders, net assets of the refrigerant supplier which breached the contract and insurance proceeds under Airgas' and the refrigerant supplier's policies. The Company will continue to pursue vigorously all possible sources of recovery. (See Note 19 for further discussion of legal proceedings pending against the supplier). The Company has decided to divest its ownership of a breathing air services subsidiary and to restructure its welding machine rental operations. The Company recorded a pre-tax, non-cash charge of approximately $5 million (approximately $3.2 million after tax) related to the write-down of certain machinery and equipment, goodwill and other intangible assets of two non-core, distribution product-line businesses. The write-down was based on an evaluation of the estimated fair value of the assets associated with these two non-core businesses which indicated that these assets were impaired. Fair F-12 46 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (3) SPECIAL CHARGES - (Continued) value was based on the estimated future undiscounted cash flows to be generated from the sale of these assets. The sale of the breathing air subsidiary is expected to be completed in the first quarter of fiscal 1998. (4) EARNINGS PER SHARE Primary and fully diluted earnings per share amounts were determined using the Treasury Stock method. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes new standards for computing and presenting earnings per share, effective for financial statements issued for periods ending after December 15, 1997, including interim periods. All prior periods will be restated to reflect the new Basic and Diluted earnings per share amounts. The Company's Basic earnings per share is essentially net income divided by the weighted shares outstanding, and the Diluted earnings per share is not expected to be materially different than currently reported earnings per share amounts. The Company will adopt SFAS No. 128 in the first quarter of fiscal 1998. (5) INVENTORIES Inventories consist of: March 31, _______________________ (In thousands) 1997 1996 ______________ ____ ____ Finished goods. . . . . . . . . . . . . . . . . . .$129,218 $85,626 Raw materials . . . . . . . . . . . . . . . . . . . 1,526 1,879 ______ ______ 130,744 87,505 Less reduction to LIFO cost . . . . . . . . . . . . (1,372) (1,343) ______ ______ $129,372 $86,162 ====== ====== (6) PLANT AND EQUIPMENT The major classes of plant and equipment, at cost, are as follows: March 31, _______________________ (In thousands) 1997 1996 ______________ ____ ____ Land and land improvements . . . . . . . . . . . . $ 21,676 $ 20,066 Buildings and leasehold improvements . . . . . . . 66,659 58,153 Cylinders. . . . . . . . . . . . . . . . . . . . . 365,253 321,770 Machinery and equipment, including bulk tanks. . . 241,275 151,098 Transportation equipment . . . . . . . . . . . . . 39,264 33,724 Construction in progress . . . . . . . . . . . . . 1,956 1,517 _______ _______ $ 736,083 $586,328 ======= ======= Depreciation, depletion and amortization of plant and equipment charged to operations amounted to $39.1 million, $32.0 million and $26.3 million in 1997, 1996 and 1995, respectively. F-13 47 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (7) OTHER NON-CURRENT ASSETS Other non-current assets include: March 31, _______________________ (In thousands) 1997 1996 ______________ ____ ____ Investment in unconsolidated affiliates (Note 12). $ 64,992 $ 9,332 Noncompete agreements and other intangible assets, at cost, net of accumulated amortization of $59.8 million in 1997 and $46.7 million in 1996 . . . . . . . . . . . . 54,794 47,530 Other assets. . . . . . . . . . . . . . . . . . . . 12,471 4,086 _______ ______ $132,257 $60,948 ======= ====== (8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities include: March 31, _______________________ (In thousands) 1997 1996 ______________ ____ ____ Cash overdraft. . . . . . . . . . . . . . . . . . . $ 14,746 $15,706 Insurance payable and related reserves. . . . . . . 5,224 5,297 Customer cylinder deposits. . . . . . . . . . . . . 8,185 7,058 Other accrued expenses and current liabilities. . . 59,508 44,218 ______ ______ $ 87,663 $72,279 ====== ====== The cash overdraft is attributable to the float of the Company's outstanding checks. F-14 48 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (9) INDEBTEDNESS (a) Long-term debt consists of the following: March 31, _______________________ (In thousands) 1997 1996 ______________ ____ ____ Revolving credit borrowings . . . . . . . . . . . . $311,877 $314,804 Medium-term notes . . . . . . . . . . . . . . . . . 225,000 -- Acquisition and investment notes. . . . . . . . . . 87,426 50,392 All other notes, at various rates and maturities. . 30,786 32,815 _______ _______ Total long-term debt. . . . . . . . . . . . . . . . 655,089 398,011 Less current installments . . . . . . . . . . . . . (25,158) (12,179) _______ _______ Long-term debt, excluding current installments. . . $629,931 $385,832 ======= ======= 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 March 31, 1997, under the revolving credit facility, $175 million of LIBOR-based borrowings were outstanding with effective interest rates of 5.99%, and $107 million of money market based borrowings were outstanding with effective interest rates of 5.88%. 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%. In March 1997, the Company issued $75 million of unsecured notes due March 2004 at a fixed rate of 7.14%. The proceeds from the medium-term note issuances were used to repay bank debt. The Company has a C$50 million Canadian credit facility (US$37 million) with various commercial banks which matures on November 14, 1998. At March 31, 1997, the Company had approximately C$41 million (US$30 million) in borrowings outstanding under the facility with an effective interest rates of 4.8%, resulting in unused availability under the facility of approximately C$9 million (US$7 million). The Company also has unsecured line of credit agreements with various commercial banks. At March 31, 1997, these agreements totaled $50 million, under which the Company had no borrowings outstanding. F-15 49 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (9) INDEBTEDNESS - (Continued) Acquisition notes represent notes issued to sellers of businesses acquired and are repayable in periodic installments including interest at an average rate of 7.5%. Some acquisition notes require balloon payments which are included in the aggregate maturity schedule. Certain of the Company's credit facility agreements contain restrictive covenants which include the maintenance of a minimum equity level, maintenance of certain financial ratios and restrictions on additional borrowings and dividend payments. The aggregate maturities of long-term debt for the five years ending March 31, 2003 and thereafter are as follows (in thousands): Years Ending March 31, Aggregate Maturity ______________________ __________________ 1998 . . . . . . . . . . . . . . . . . . . $ 25,158 1999 . . . . . . . . . . . . . . . . . . . 45,142 2000 . . . . . . . . . . . . . . . . . . . 17,713 2001 . . . . . . . . . . . . . . . . . . . 6,750 2002 . . . . . . . . . . . . . . . . . . . 349,021 2003 and thereafter. . . . . . . . . . . . 211,305 _________ $ 655,089 ========= The fair value of long-term debt as of March 31, 1997 was approximately $656 million based on current rates offered to the Company by financial institutions for similar type instruments. (b) Swap Agreements In managing interest rate exposure, principally under the Company's floating rate revolving credit facilities, the Company has entered into 23 interest rate swap agreements during the period from June 1992 through March 31, 1997, including two forward starting swaps. The interest rate swap agreements are with major financial institutions having a total notional principal amount of $358 million at March 31, 1997. F-16 50 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (9) INDEBTEDNESS - (Continued) Approximately $208 million of the swap agreements require fixed interest payments based on an average effective rate of 6.49% for remaining periods ranging between 1 and 8 years. Five swap agreements require floating rates ($149.5 million notional amount at 5.72% at March 31, 1997). The effect of the swap agreements was to increase interest expense $1.4 million and $1.3 million in 1997 and 1996, respectively. 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 March 31, 1997, approximately $18.7 million of such payments were included in other non-current liabilities. The Company continually monitors its positions and the credit ratings of its counterparties, and does not anticipate nonperformance by the counterparties. The fair market value of these swaps was $807 thousand below their carry value at March 31, 1997. The aggregate maturities of the Company's interest rate swaps by type of swap for the five years ending March 31, 2002 and thereafter are as follows (in thousands): Notional Principal Amounts __________________________ Years Ending March 31, Pay-Fixed Receive-Fixed ______________________ _________ _____________ 1998 . . . . . . . . . . . . . $ 30,000 $ 0 1999 . . . . . . . . . . . . . 12,500 7,500 2000 . . . . . . . . . . . . . 26,113 12,000 2001 . . . . . . . . . . . . . 66,113 0 2002 . . . . . . . . . . . . . 27,500 50,000 2003 and thereafter. . . . . . 46,113 80,000 _______ ______ $208,339 $149,500 ======= ====== (10) STOCKHOLDERS' EQUITY (a) Common Stock On March 22, 1996, the Company's Board of Directors declared a two-for-one stock split to stockholders of record on April 1, 1996, payable on April 15, 1996. All earnings per share data reflects this two-for-one stock split. (b) Preferred Stock and Redeemable Preferred Stock The Company is authorized to issue 20 million shares of preferred stock. Of the 20 million shares authorized, 200,000 shares have been designated as Series A Junior Participating Preferred Stock and 200,000 shares have been designated as Series B Junior Participating Preferred Stock (see Note 10(e) for further discussion). At March 31, 1997 and 1996, no shares of the preferred stock were outstanding. The preferred stock may be issued from time to time by the Board of Directors in one or more series, and the Board of Directors is authorized to fix the dividend rights and terms, conversion rights, voting rights, rights and terms of redemption, liquidation preferences, and any other rights, preferences, privileges and restrictions of any series of Preferred Stock, and the number of shares constituting each such series and designation thereof. F-17 51 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (10) STOCKHOLDERS' EQUITY - (Continued) Additionally, the Company is authorized to issue 30,000 shares of redeemable preferred stock. At March 31, 1997 and 1996, no shares were outstanding. (c) Treasury Stock In December 1996, the Board of Directors authorized the repurchase of up to 1,600,000 shares of Airgas common stock, and on April 16, 1997, the Board of Directors authorized the repurchase of up to 1,000,000 additional shares. The Company purchased 800,000 shares of Airgas common stock through March 31, 1997 Subsequent to March 31, 1997 and through May 30, 1997, the Company repurchased 1,154,000 shares, leaving a total of 646,000 shares available under the repurchase program. The Company has reissued 1,102,865 shares of Treasury stock in 1997 in connection with its acquisition program. When treasury shares are reissued, the Company uses an average cost method and the excess of the repurchase cost over the reissuance price is treated as a charge to additional- paid-in-capital. The Company's treasury shares will be used to fund acquisitions and employee benefit programs and will be acquired in open market transactions, from time-to-time, depending on market conditions. (d) Stock Purchase Warrants The Company and the Chairman of the Company were parties to a Stock and Warrant Issuance Agreement, as amended (the "Warrant Agreement"), which was entered into in connection with the Company's acquisition of US Airgas, Inc., of which the Chairman was the majority shareholder, in May 1986. Pursuant to the Warrant Agreement, the Chairman received warrants to purchase a total of 14,127,432 shares of the Company's common stock. Subsequent to the grant dates, the Chairman transferred warrants to purchase 2,976,800 shares of common stock to employees of the Company and to certain other individuals. As of May 1, 1996, all warrants had been exercised or had expired. The following table summarizes the activity of the stock purchase warrants during the three years ended March 31, 1997. Number Price Per of Shares Share __________ _________ March 31, 1995 Outstanding, beginning of year . . . . . . . . 1,624,280 $ 1.68 -$ 2.19 Exercised. . . . . . . . . . . . . . . . . . . (114,800) 1.76 - 2.19 March 31, 1996 Outstanding, beginning of year . . . . . . . . 1,509,480 1.76 - 2.19 Exercised. . . . . . . . . . . . . . . . . . . (1,252,568) 1.76 - 2.19 Cancelled. . . . . . . . . . . . . . . . . . . (12,712) March 31, 1997 Outstanding, beginning of year . . . . . . . . 244,200 1.76 - 2.19 Exercised. . . . . . . . . . . . . . . . . . . (244,200) $ 1.76 -$ 2.19 Outstanding, end of year . . . . . . . . . . . 0 (e) Shareholder Rights Plan Effective April 1, 1997, the Board of Directors adopted a new stockholder rights plan(the "Plan"). Pursuant to the Plan, the Board declared a dividend distribution of one right for each share of common stock outstanding on April 29, 1997. Each right entitles the holder to purchase from the company one one- thousandth of a share Series B Junior Participating Preferred Stock at an initial exercise price of $100 per share. F-18 52 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (10) STOCKHOLDERS' EQUITY - (Continued) Rights become exercisable only following the acquisition by a person or group of 15 percent (or 20 percent in the case of the Chairman and certain of his affiliates) or more of the Company's common stock or after the announcement of a tender offer or exchange offer to acquire 15 percent (or 20 percent in the case of the Chairman and certain of his affiliates) or more of the outstanding common stock. If such a person or group acquires 15 percent or more (or 20 percent or more, as the case may be) of the common stock, each right (other than such person's or group's rights, which will become void) will entitle the holder to purchase, at the exercise price, common stock having a market value equal to twice the exercise price. In certain circumstances, the rights may be redeemed by the Company. If not redeemed, they will expire on April 1, 2007. On August 1, 1988, the Company Board of Directors adopted a preferred share purchase rights plan (the "1988 Plan") that entitled Company stockholders to purchase from the Company a unit consisting of one-hundredth of a share of Series A Junior Participating Preferred Shares, or a combination of securities and assets of equivalent value, at a purchase price of $65.00 per unit, subject to adjustment. The 1988 Plan will expire in August 1998. In view of, among other things, the impending expiration of the 1988 Plan, the Board adopted the Plan. Pending its expiration in 1998, the Board amended the 1988 Plan to provide that it will not take effect if the Plan is triggered. (11) STOCK-BASED COMPENSATION In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", effective for fiscal years beginning after December 15, 1995. This statement establishes financial accounting and reporting standards for stock-based employee compensation plans, which include the Company's stock option plans and employee stock purchase plan. The Company has elected to continue to account for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued", as permitted by SFAS 123. Accordingly, no compensation expense has been recognized for its stock option plans and its stock purchase plan. However, pro forma information regarding net income and earnings per share is required by SFAS 123. Had compensation expense for the Company's stock-based compensation plans been determined based on the fair value at the grant date in accordance with SFAS 123, the Company's pro forma net income and earnings per share for 1997 and 1996 would be as follows (in thousands, except per share data): F-19 53 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Years Ended March 31, _____________________ 1997 1996 _______ ________ Net income As reported $23,266 $39,720 Pro forma $20,028 $37,925 Earnings per share As reported $ .34 $ .60 Pro forma $ .29 $ .57 At March 31, 1997, the Company had three stock-based compensation plans, which are described below. (a) 1984 Stock Option Plan The Company has a stock option plan for officers and key employees. Under the 1984 Stock Option Plan, the Company has reserved 14,080,000 shares. Options are granted on terms and conditions determined by a committee of the Board of Directors. At March 31, 1997, 3,161,941 options were available for issuance with 785,685 options granted in fiscal 1997 with an exercise price equal to the market price at the date of grant. Options are generally granted in May each year, vest 25% annually and have a maximum term of ten years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted- average assumptions used for 1997 and 1996 option grants, respectively: expected volatility of 38.5% for both periods, risk-free interest rate of 6.42% and 6.46%, and expected life of 4.37 years for both periods. The weighted average fair value of the options granted during 1997 and 1996 was $8.95 and $5.11, respectively. The following table summarizes the activity of the plan during the three years ended March 31, 1997: Number Price Per of Shares Share __________ _________ March 31, 1995 Outstanding, beginning of year . . . . . . . . 5,250,900 $ 1.46 -$ 8.57 Granted. . . . . . . . . . . . . . . . . . . . 1,004,600 11.32 - 14.71 Exercised. . . . . . . . . . . . . . . . . . . (424,060) 1.46 - 7.89 Expired. . . . . . . . . . . . . . . . . . . . (2,500) 3.30 - 6.32 March 31, 1996 Outstanding, beginning of year . . . . . . . . 5,828,940 1.83 - 14.71 Granted. . . . . . . . . . . . . . . . . . . . 974,020 11.44 - 17.31 Exercised. . . . . . . . . . . . . . . . . . . (589,010) 1.83 - 11.32 Expired. . . . . . . . . . . . . . . . . . . . (14,490) 3.30 - 13.32 March 31, 1997 Outstanding, beginning of year . . . . . . . . 6,199,460 1.83 - 17.31 Granted. . . . . . . . . . . . . . . . . . . . 785,685 11.44 - 23.25 Exercised. . . . . . . . . . . . . . . . . . . (530,390) 1.83 - 17.31 Expired. . . . . . . . . . . . . . . . . . . . (173,080) 3.30 - 22.00 Outstanding, end of year . . . . . . . . . . . 6,281,675 $ 1.83 -$23.25 Options for 4,077,069 and 3,497,340 shares were exercisable at March 31, 1997 and 1996, respectively. F-20 54 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (b) Board of Directors Stock Option Plan The Company also maintains a stock option plan covering directors who are not employees, which has 800,000 shares reserved. At March 31, 1997, 368,000 options for issuance, with 32,000 options granted in fiscal 1997. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for fiscal 1997 and 1996 option grants, respectively: expected volatility of 37.8% for both periods, risk-free interest rate of 6.42% and 6.46%, and expected life of 5.35 years for both periods. The weighted average fair value of the stock options granted during 1997 and 1996 was $8.68 and $6.10, respectively. The following table summarizes the activity of the plan during the three years ended March 31, 1997: Number Price Per of Shares Share __________ ____________ March 31, 1995 Outstanding, beginning of year . . . . . . . . 272,000 $ 2.10 -$ 8.57 Granted. . . . . . . . . . . . . . . . . . . . 40,000 13.82 March 31, 1996 Outstanding, beginning of year . . . . . . . . 312,000 2.10 - 13.82 Granted. . . . . . . . . . . . . . . . . . . . 40,000 13.50 March 31, 1997 Outstanding, beginning of year . . . . . . . . 352,000 2.10 - 13.82 Granted. . . . . . . . . . . . . . . . . . . . 32,000 19.25 Exercised. . . . . . . . . . . . . . . . . . . (98,000) 2.09 - 13.82 Outstanding, end of year . . . . . . . . . . . 286,000 $ 2.09 - $19.25 Options for 286,000 and 352,000 shares were exercisable at March 31, 1997 and 1996, respectively. The following table summarizes information about options outstanding and exercisable for the 1984 Stock Option Plan and the Board of Directors Stock Option Plan at March 31, 1997: Options Outstanding ____________________________________ Range of Weighted Average Number Exercise Remaining Life Outstanding Prices ________________ ___________ _________ 4.15 692,370 $ 1.83 - $ 1.83 2.50 1,024,800 1.95 - 2.36 4.25 32,000 2.89 - 3.30 5.12 956,450 3.30 - 3.30 5.36 47,700 3.48 - 4.16 6.12 823,840 6.31 - 6.31 6.73 854,015 6.32 - 11.32 8.15 669,245 11.44 - 13.50 6.81 678,750 13.69 - 17.31 9.18 788,505 18.06 - 23.25 ____ _________ _________________ 5.91 6,567,675 $1.83 - $23.25 ==== ========= ================= F-21 55 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Number of Options Weighted Average Exercisable Exercise Price __________________ __________________ 692,370 $ 1.83 1,024,800 2.24 32,000 2.97 956,450 3.30 47,700 4.05 593,700 6.31 505,155 9.59 188,144 13.34 290,500 15.19 32,250 19.24 _________ ______ 4,363,069 $5.30 ========= ====== (c) 1994 Employee Stock Purchase Plan Under the 1994 Employee Stock Purchase Plan (the "ESPP Plan"), the Company has established an employee stock purchase plan to encourage and assist employees to acquire equity interest in the Company. The ESPP Plan is authorized to issue up to 2,000,000 shares of Airgas, Inc. common stock. Generally, employees may elect to have up to 15% of their annual gross earnings withheld to purchase Airgas, Inc. common stock at 85 to 95 percent of the market price of the common stock, depending on base salary levels. Market value under the ESPP Plan is either the employees' enrollment date market value or the quarterly purchase date market value, whichever is lower. An employee may lock-in a purchase price for up to 27 months. The ESPP Plan is designed to comply with the requirement of Section 423 of the Internal Revenue Code. Under the ESPP Plan, the Company issued 395,889, 368,194, and 300,204 shares at an average purchase price of $13.02, $9.22 and $9.02 per share during 1997, 1996, and 1995, respectively. Compensation cost under SFAS No. 123 is estimated for the fair value of the employees' option to purchase shares of common stock, which was estimated using the Black-Scholes model with the following assumptions for fiscal 1997 and 1996, respectively: expected volatility of 38% for both periods, risk-free interest rate of 6.2% and 5.7%, and expected term of 27 months for both periods. The weighted average fair value of the purchase options granted in fiscal 1997 and 1996 was $6.51 and $4.57, respectively. (12) INVESTMENT IN UNCONSOLIDATED AFFILIATES On June 28, 1996, based on the terms of a joint venture agreement, the Company acquired 47% of the voting capital stock of National Welders Supply Company, Inc.("National Welders"), for a payment in cash and notes of approximately $47.6 million. National Welders is a premier distributor of industrial, medical and specialty gases and related equipment based in Charlotte, North Carolina. The purpose of the joint venture is to carry on the business of National Welders, enhanced by its association with the Company and its acquisition opportunities in the area currently served by National Welders. F-22 56 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) At March 31, 1997, the Company's investment in all other unconsolidated affiliates totaled approximately $15 million and consists of a 55% interest in Elkem-American Carbide Company (U.S.), a 25.5% interest in Bhoruka Gases, Ltd. (India) and a 25.5% interest in Superior Air Products, Ltd. (India). The Company accounted for these investments by the equity method of accounting. The Company's share of earnings from all unconsolidated affiliates was $2.3 million, $1.4 million and $840 thousand for the years ended March 31, 1997, 1996 and 1995, respectively. Equity in earnings from Elkem American Carbide Company of $1.4 million, $1.2 million and $840 thousand in 1997, 1996, and 1995 are included in Manufacturing net sales. As of March 31, 1997, the investment in unconsolidated affiliates includes goodwill of approximately $30 million which is being amortized into income over 40 years. A summary of financial information for its investments in unconsolidated affiliates for the fiscal year ended March 31, 1997 is as follows: (In thousands) March 31, 1997 ______________ Current Assets $ 45,936 Non-Current Assets 132,240 _________ Total Assets 178,176 ========= Current Liabilities 27,543 Non-Current Liabilities 92,598 Mandatory Redeemable Preferred Stock 57,577 Stockholders' Equity 458 _________ Total Liabilities and Stockholders' Equity $178,176 ========= Year ended March 31, 1997 _________________ Net Sales $134,972 Cost of Sales 95,334 ________ Gross Profit 39,638 ======== Operating Income 7,742 ======== Income before taxes 8,691 ======== Net income 6,243 Preferred stock dividends and equity adjustments $ (3,929) ________ Company share of net income $ 2,314 ======== F-23 57 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (13) INTEREST EXPENSE, NET Interest expense, net, consists of: Years Ended March 31, ___________________________ (In thousands) 1997 1996 1995 ______________ ____ ____ ____ Interest expense. . . . . . . . . . . . . . . $ 41,777 $25,854 $18,476 Interest and finance charge income. . . . . . (2,025) (992) (851) ______ ______ ______ $ 39,752 $24,862 $17,625 ====== ====== ====== (14) OTHER INCOME, NET Other income, net, consists of: Years Ended March 31, ___________________________ (In thousands) 1997 1996 1995 ______________ ______ ____ ____ Gain on sale of investment in CBI Industries, Inc. . . . . . . . . . . . . . . $ -- $ -- $ 560 Gain on sale of medical home-care business. . 770 -- -- Other income,net . . . . . . . . . . . . . . 902 782 507 ______ _____ ___ $ 1,672 $ 782 $1,067 ====== ===== === (15) INCOME TAXES Pre-tax earnings were derived from the following sources: Years Ended March 31, ___________________________ (In thousands) 1997 1996 1995 ______________ ____ ____ ____ United States . . . . . . . . . . . . . . . . $ 44,199 $66,810 $54,239 Foreign . . . . . . . . . . . . . . . . . . . 147 1,432 1,134 ______ ______ ______ $ 44,346 $68,242 $55,373 ====== ====== ====== Income tax expense consisted of: Years Ended March 31, ___________________________ (In thousands) 1997 1996 1995 ______________ ____ ____ ____ Current: Federal . . . . . . . . . . . . . . . . . $ 17,337 $14,657 $ 9,997 Foreign . . . . . . . . . . . . . . . . . 1,224 699 573 State . . . . . . . . . . . . . . . . . . 2,689 2,298 1,775 ______ ______ ______ 21,250 17,654 12,345 ______ ______ ______ Deferred: Federal . . . . . . . . . . . . . . . . . . (1,483) 9,660 9,829 Foreign . . . . . . . . . . . . . . . . . . 634 34 47 State . . . . . . . . . . . . . . . . . . . 679 1,174 1,673 ______ ______ ______ (170) 10,868 11,549 ______ ______ ______ $ 21,080 $28,522 $23,894 ====== ====== ====== F-24 58 (15) INCOME TAXES - (Continued) Significant differences between taxes computed at the federal statutory rate and the provision for income taxes were: Years Ended March 31, ___________________________ 1997 1996 1995 ____ ____ ____ Taxes at U.S. federal statutory rate . . . . . . 35.0% 35.0% 35.0% Increase in income taxes resulting from: State income taxes, net of federal benefit . . . 3.2% 3.3 4.0 Amortization of non-deductible goodwill. . . . . 2.6% 1.8 1.8 Special charges (Note 3) . . . . . . . . . . . . 3.7% -- -- Sale of medical home-care business . . . . . . . 1.7% -- -- Other, net . . . . . . . . . . . . . . . . . . . 1.3% 1.7 2.4 ____ ____ ____ 47.5% 41.8% 43.2% ==== ==== ==== The tax effects of cumulative temporary differences that gave rise to the significant portions of the deferred tax liability and deferred tax asset were as follows: March 31, _______________________ (In thousands) 1997 1996 ______________ ____ ____ Deferred Tax Assets: ____________________ Inventories . . . . . . . . . . . . . . . . . . $ 2,666 $ 1,396 Accounts receivable . . . . . . . . . . . . . . 1,123 553 Deferred rental income. . . . . . . . . . . . . 581 809 Insurance reserves. . . . . . . . . . . . . . . 1,793 1,339 Special charges . . . . . . . . . . . . . . . . 9,586 -- Other reserves. . . . . . . . . . . . . . . . . 3,028 2,487 AMT credit carryforwards. . . . . . . . . . . . -- 2,184 Intangible assets . . . . . . . . . . . . . . . 1,207 -- Other . . . . . . . . . . . . . . . . . . . . . 1,874 1,151 ______ ______ 21,858 9,919 ______ ______ Deferred Tax Liabilities: _________________________ Property and equipment. . . . . . . . . . . . . (106,331) (91,371) Intangible assets . . . . . . . . . . . . . . . -- (605) Other. . . . . . . . . . . . . . . . . . . . . (5,385) (3,412) _______ ______ (111,716) (95,388) ______ ______ Net Deferred Tax Liability . . . . . . . . . . . $(89,858) $(85,469) ====== ====== The Company has recorded tax benefits amounting to $4.2 million, $7.6 million, and $1.9 million in 1997, 1996 and 1995, respectively, resulting from the exercise of stock options and warrants. This benefit has been recorded in capital in excess of par value. F-25 59 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (15) INCOME TAXES - (Continued) The Internal Revenue Service is currently conducting an examination of the Company's federal income tax returns for the years ended March 31, 1993 and 1994. Management believes that the results of this examination will not have a material effect on the Company's earnings, financial condition, or liquidity. (16) BENEFIT PLANS (a) Pension and Profit Sharing Plans The Company has a defined contribution 401(k) plan covering substantially all full-time employees. Under the terms of the plan, the Company makes matching contributions up to two percent of participants' wages plus additional discretionary profit sharing contributions based upon the profitability of the Company. Amounts expensed under the plan for 1997, 1996 and 1995 were $5.9 million, $5.1 million and $4.7 million, respectively. During 1993, the Company authorized termination of two defined benefit pension plans effective December 31, 1992. At December 31, 1996, the plans' projected benefit obligations approximate the plans' net assets available for benefits. The settlement of the vested benefit obligations by the purchase of nonparticipating annuity contracts or lump-sum payments for covered employees is not expected to result in a significant gain or loss. Certain subsidiaries of the Company participate in multi-employer pension plans which provide defined benefits to union employees. Contributions are made to the plans in accordance with negotiated labor contracts. The Company has not taken any action to terminate or withdraw from these plans. Management believes that the Company's liability, if any, for multi-employer plan withdrawal liability will not have a material effect on the Company's financial position, results of operations, or liquidity. Amounts expensed under these plans for 1997, 1996 and 1995 were $751 thousand, $482 thousand and $418 thousand respectively. F-26 60 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (16) BENEFIT PLANS - (Continued) (b) Other Employee Benefits The Company sponsors a multi-employer post retirement medical benefit plan for certain employees of one subsidiary under a collective bargaining agreement. The net postretirement benefit expense related to this plan was $106 thousand, $98 thousand and $88 thousand for the years ended March 31, 1997, 1996 and 1995, respectively. The Company's unfunded accumulated postretirement benefit obligation("APBO") was $962 thousand and $896 thousand at March 31, 1997, and 1996, respectively. In determining the APBO, the discount rate used to estimate the actuarial present value of other postretirement benefits was 7.75% and 7.50% at March 31, 1997 and 1996, respectively. The assumed rate of increase in the health care cost trend rate for employees less than age 65 was 6.75% and 8.25% for March 31, 1997 and 1996, declining gradually to 5.25%, respectively, over the next four years. For employees 65 and older, the assumed rate of increase was 5.71% and 6.16% for March 31, 1997 and 1996, declining gradually to 5.25%, respectively, over the next four years. A 1% increase in the healthcare cost trend rate would have increased net postretirement benefit expense approximately $21 thousand and the APBO approximately $142 thousand at March 31, 1997. (17) RELATED PARTIES A member of the Company's board of directors is the president and CEO of National Welders (See Note 12). During the years ended March 31, 1997, 1996 and 1995, National Welders paid $1.1 million, $987 thousand and $914 thousand, respectively, to a joint venture of the Company for the purchase of calcium carbide. In addition, National Welders paid $574 thousand, $604 thousand and $546 thousand to the Company for other gas purchases in 1997, 1996 and 1995, respectively. F-27 61 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (18) LEASES The Company leases certain distribution facilities and equipment under long-term operating leases with varying terms. Most leases contain renewal options and in some instances, purchase options. Rentals under these long-term leases for the years ended March 31, 1997, 1996 and 1995, amounted to $24.0 million, $17.8 million and $14.5 million, respectively. At March 31, 1997, the Company had a contingent guarantee of $3.8 million related to equipment under such leases. Additionally, the Company leases certain operating facilities at market rates from employees of the Company who were previous owners of businesses acquired. The Company has entered into certain operating leases for real estate with a trust established by a commercial bank. The trust is committed to purchase real estate properties up to an aggregate amount of $25 million. The trust holds title to the properties and leases the properties to the Company. The rental payments are based on LIBOR plus an applicable margin and the cost of the property acquired by the trust. The Company has entered into interest rate swap agreements in a notional principal amount of $10 million to hedge the effects of fluctuations in the Libor based rental rate. At the expiration of the leases in 1999, the Company has the option to purchase the real properties at fair value or assist in the sale of the properties to a third party. The Company intends to repay the commercial bank in the first quarter of fiscal 1998 funds advanced under the existing trust of approximately $10.9 million related to the construction of air separation plants. Excluding the air separation plants, the Company has guaranteed a portion of the debt outstanding against these properties in the event the proceeds of a sale are not sufficient to cover the trust's investment in the properties. At March 31, 1997, the Company had a contingent guarantee of approximately $10.7 million related to these leased facilities. At March 31, 1997, future minimum lease payments under noncancelable operating leases are as follows: (in thousands) ____________ 1998 . . . . . . . . . . . . . . . . . . $26,016 1999 . . . . . . . . . . . . . . . . . . 20,547 2000 . . . . . . . . . . . . . . . . . . 16,447 2001 . . . . . . . . . . . . . . . . . . 12,551 2002 . . . . . . . . . . . . . . . . . . 8,989 2003 and thereafter. . . . . . . . . . . 15,137 ______ $99,687 ====== (19) COMMITMENTS AND CONTINGENCIES The Company is involved in various legal and regulatory 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 consolidated financial position, results of operations or liquidity. F-28 62 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (19) COMMITMENTS AND CONTINGENCIES - (Continued) 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 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. On February 24, 1997, the court entered an order denying the Company's motion to dismiss for forum non conveniens. The Company has filed a petition for writ of mandamus with the Alabama Supreme court requesting that the lower court's order be vacated or set aside. The Company believes that Praxair's claims are without merit and intends to defend vigorously against such claims. On September 9, 1996, the Company filed suit against Praxair in the Court of Common Pleas of Philadelphia County, Pennsylvania. The complaint alleges breach of contract, fraud, conversion and misappropriation of trade secrets with respect to an agreement between Praxair and the Company, pursuant to which Praxair induced the Company to provide Praxair valuable information and conclusions developed by the Company concerning CBI Industries, Inc. ("CBI") in exchange for Praxair's promise not to acquire CBI without the Company's participation. The Company has alleged that it became entitled, pursuant to such agreement, to acquire certain of CBI's assets having a value in excess of $800 million. The Company is seeking compensatory and punitive damages. On January 2, 1997, the court entered an order overruling Praxair's preliminary objections to the Company's complaint and ordering Praxair to file an answer to the complaint. Praxair has since filed an answer and asserted various defenses. On December 23, 1996, the Company had reported that it had been a victim of a fraudulent breach of contract by a supplier. On February 12, 1997, the Company filed a lawsuit in the United States District Court for the Southern District of Georgia against Discount Auto Parts, Inc. ("Discount"), an employee of Discount, and certain other businesses and individual defendants, alleging that Discount and the other defendants engaged in racketeering activity involving the fraudulent sale of smuggled and counterfeit R-12 refrigerant gas. The Company's complaint alleges that the racketeering activity of the defendants caused damages to the Company in an amount not less than $20 million. The complaint seeks treble damages under the Federal RICO and Georgia RICO statutes, as well as monetary damages under other counts alleging fraud, conspiracy and related wrongful conduct. (See Note 3 for discussion of special charges recorded in connection with the fraud. F-29 63 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (20) CASH FLOWS Cash paid for interest expense and income taxes was as follows: Years Ended March 31, ___________________________ (In thousands) 1997 1996 1995 ______________ ______ ____ ____ Interest . . . . . . . . . . . . . . . . . . . $ 38,993 $25,107 $19,011 Income taxes (net of refunds). . . . . . . . . 13,254 10,325 11,411 ====== ====== ====== The total purchase price, fair value of assets acquired, cash paid and liabilities assumed for business acquisitions is presented in Note 2. During 1997 and 1996 the Company entered into capital lease obligations for approximately $567 thousand and $912 thousand, respectively. (21) MINORITY INTEREST IN SUBSIDIARIES Minority interests in subsidiaries represent the minority shareholders' proportionate share of the equity and the results of operations of certain subsidiaries. The Company sold minority interests in certain of its subsidiaries to employees based on the estimated fair market value of the subsidiary shares. These sales of subsidiary shares were accounted for as capital transactions and, therefore, no gain or loss was recorded. Under the terms of exchange rights agreements between the Company and minority shareholders, the Company, under certain circumstances, may require or permit exchange of the minority interests of a subsidiary for common stock of the Company. The agreements provide the minority shareholders with the right to exchange their subsidiary shares for common stock of the Company at certain exchange dates designated by the Board of Directors. Each exchange will be based on the fair value of the subsidiary's shares and the market price of the Company's common stock as of a valuation date designated by the Board of Directors. On December 31, 1996 and August 31, 1995, in connection with optional exchanges, certain minority shareholders elected to exchange their minority interests for an aggregate of 76,556 and 258,116 shares of common stock, respectively. The market price of the Company's common stock on December 31, 1996 and August 31, 1995 was $22.00 and $13.75 per share, respectively. The acquisition of the minority interests has been recorded using the purchase method of accounting. (22) SUMMARY BY BUSINESS SEGMENT The Company's operations are conducted principally in North America through three related business segments: 1) the distribution of industrial, medical and specialty gases, and related equipment (the "Distribution" segment); 2) the distribution of industrial, safety and environmental supplies and metal working and industrial tools and supplies (the "ADI" segment); and 3) the manufacture of products for the industrial gas and metals industries (the "Manufacturing" segment). The Distribution segment operates through the Company's subsidiaries which have locations in 41 states, Canada and Mexico. ADI distributes products to its customers utilizing outbound telemarketing, direct mail and catalogs. The Manufacturing segment's products include nitrous oxide, a gas with applications in the medical, food packaging and certain high technology electronic industries and calcium carbide, carbon products for the F-30 64 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) production of acetylene gas and for the non-ferrous metal industry, and carbon dioxide, which is used in refrigeration, food processing, beverage carbonation, chemical processing, crude oil recovery, metal fabrication and agricultural fumigations. Total export sales amounted to approximately $7.5 million and $4.3 million in 1997 and 1996, respectively. (In thousands) Distribution ADI Manufacturing Total ______________ ____________ _____ ___________ _____ 1997 Net sales . . . . . . . . . . . .$1,018,704 $ 99,216 $ 40,974 $1,158,894 Intersegment Sales . . . . . . . . -- 967 1,464 2,431 Operating income . . . . . . . . . 71,146 3,076 8,063 82,285 Assets . . . . . . . . . . . . . . 1,084,939 138,059 68,033 1,291,031 Depreciation and amortization. . . 58,059 2,984 1,448 62,491 Additions to plant and equipment excluding business acquisitions . 69,934 669 3,755 74,358 1996 Net sales . . . . . . . . . . . .$ 801,552 $ -- $ 36,592 $ 838,144 Intersegment Sales . . . . . . . . -- -- 997 997 Operating income . . . . . . . . . 86,130 -- 6,855 92,985 Assets . . . . . . . . . . . . . . 846,129 -- 37,513 883,642 Depreciation and amortization. . . 44,386 -- 1,376 45,762 Additions to plant and equipment excluding business acquisitions. . 39,755 -- 1,481 41,236 1995 Net sales. . . . . . . . . . . . . $ 654,381 $ -- $ 33,602 $ 687,983 Intersegment sales . . . . . . . . -- -- 862 862 Operating income . . . . . . . . . 66,521 -- 6,079 72,600 Assets . . . . . . . . . . . . . . 613,320 -- 32,317 645,637 Depreciation and amortization. . . 35,548 -- 1,320 36,868 Additions to plant and equipment excluding business acquisitions. . 35,961 -- 751 36,712 F-31 65 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (22) SUMMARY BY BUSINESS SEGMENT - (continued) Corporate operating expenses are allocated between the Company's Distribution, ADI and Manufacturing business segments based on relative sales dollars. (23) SUPPLEMENTARY INFORMATION (UNAUDITED) Summary By Quarter This table summarizes the unaudited results of operations for each quarter of 1997 and 1996: (In thousands, except per share data) First Second Third Fourth (c) _____________________________________ _____ ______ _____ __________ 1997 Net sales . . . . . . . . . . . . . . . $274,098 $278,712 $297,203 $308,881 Operating income (loss) . . . . . . . . 27,321 29,008 29,379 (3,423) Net earnings (loss) . . . . . . . . . . 11,150 11,310 10,960 (10,154) Net earnings (loss) per share (a) . . . $ .17 .17 .16 (.15) 1996 Net sales . . . . . . . . . . . . . . . $194,272 $199,030 $208,549 $236,293 Operating income. . . . . . . . . . . . 22,037 22,144 22,984 25,820 Net earnings. . . . . . . . . . . . . . 9,454 9,335 9,817 11,114 Net earnings per share (a), (b):. . . . $ .15 $ .14 $ .15 $ .17 __________________ (a) Earnings per share calculations for each of the quarters are based on the weighted average number of shares outstanding in each period. Therefore, the sum of the quarters do not necessarily equal the full year earnings per share. (b) See Notes 4 and 10 to the Company's consolidated financial statements for information regarding earnings per share calculations and adjustment for the stock split effective April 15, 1996. (c) See Note 3 to the Company's consolidated financial statements for information regarding a special charge of approximately $31.4 million recorded in the fourth quarter of fiscal 1997. F-32 66 SCHEDULE II CONSOLIDATED AIRGAS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS For the Years Ended March 31, 1997, 1996 and 1995 (In thousands of dollars) Column A Column B Column C ________ ________ ________ Additions _________ Charged Balance at Charged to (Credited) Beginning Cost and to Other Description of Period Expense Accounts ____________ _________ __________ ____________ 1997 Accounts Receivable -- Allowance for doubtful accounts . . $ 3,396 $ 3,860 $ 1,081 (1) Inventory reserves. . . . . . . . . 6,217 298 2,490 Insurance reserves. . . . . . . . . 5,297 27,821 (1,750) 1996 Accounts Receivable -- Allowance for doubtful accounts . . $ 4,161 $ 2,719 $ 1,313 (1) Inventory reserves. . . . . . . . . 5,490 (241) 968 Insurance reserves. . . . . . . . . 6,304 19,510 262 1995 Accounts Receivable -- Allowance for doubtful accounts . . $ 4,207 $ 3,102 $ 1,033 (1) Inventory reserves. . . . . . . . . 4,666 (193) 1,017 Insurance reserves. . . . . . . . . 5,341 17,038 132 (COLUMNS CONTINUED ON NEXT PAGE) F-33 67 SCHEDULE II CONSOLIDATED AIRGAS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS For the Years Ended March 31, 1997, 1996 and 1995 (In thousands of dollars) (Columns Continued) Column A Column D Column E ________ ________ ________ Balance at End of Description Deductions Period ____________ ______________ ________ 1997 Accounts Receivable -- Allowance for doubtful accounts . . . $ (3,894) $ 4,443 Inventory reserves. . . . . . . . . . -- (2) 9,005 Insurance reserves. . . . . . . . . . (26,144) 5,224 1996 Accounts Receivable -- Allowance for doubtful accounts . . . $ (4,797) (2) $ 3,396 Inventory reserves. . . . . . . . . . -- 6,217 Insurance reserves. . . . . . . . . . (20,779) 5,297 1995 Accounts Receivable -- Allowance for doubtful accounts . . . $ (4,181) (2) $ 4,161 Inventory reserves. . . . . . . . . . -- 5,490 Insurance reserves. . . . . . . . . . (16,207) 6,304 ________ (1) Includes collections on accounts previously written-off and allowances for doubtful accounts of businesses acquired less the allowance for doubtful accounts of businesses sold. (2) Write-off of uncollectible accounts. F-33, Continued EX-27 2 ART. 5 FDS FOR 1997 10-K
5 1000 12-MOS MAR-31-1997 MAR-31-1997 0 0 151,053 4,443 129,372 311,999 736,083 183,922 1,291,031 25,158 629,931 688 0 0 335,969 1,291,031 1,158,894 1,158,894 611,383 611,383 0 0 39,752 44,345 21,080 23,266 0 0 0 23,266 .34 .34
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