-----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, WZ3lXxZ6gDiwMbVKectVUOR5rAZSLjuFvBlXpNNqSFsi2GB1++SdX/RITC5MFW4S z911THQY3je2LOY4dEmdcg== /in/edgar/work/20000804/0000804212-00-000009/0000804212-00-000009.txt : 20000921 0000804212-00-000009.hdr.sgml : 20000921 ACCESSION NUMBER: 0000804212-00-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRGAS INC CENTRAL INDEX KEY: 0000804212 STANDARD INDUSTRIAL CLASSIFICATION: [5160 ] IRS NUMBER: 560732648 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09344 FILM NUMBER: 686797 BUSINESS ADDRESS: STREET 1: 259 RADNOR-CHESTER 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-Q 1 0001.txt FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2000 Commission file number: 1-9344 AIRGAS, INC. (Exact name of registrant as specified in its charter) Delaware 56-0732648 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 259 North Radnor-Chester Road, Suite 100 Radnor, PA 19087-5283 (Address of principal executive offices) (ZIP code) (610) 687-5253 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by 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 Common Stock outstanding at August 1, 2000: 66,270,003 shares 2 AIRGAS, INC. FORM 10-Q June 30, 2000 INDEX PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Earnings for the Three Months Ended June 30, 2000 and 1999 (Unaudited)....... 3 Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and March 31, 2000.................. 4 Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2000 and 1999 (Unaudited)....... 5 Notes to Consolidated Financial Statements (Unaudited).............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................... 20 Item 6. Exhibits and Reports on Form 8-K................................ 20 SIGNATURES............................................................... 21 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (Dollars in thousands, except per share amounts)
Three Months Ended Three Months Ended June 30, 2000 June 30, 1999 Net sales Distribution $ 374,739 $ 345,967 Gas Operations 34,259 33,526 Total net sales 408,998 379,493 Costs and expenses Cost of products sold (excluding depreciation and amortization) Distribution 202,749 188,432 Gas Operations 12,447 12,835 Selling, distribution and administrative expenses 140,015 126,961 Depreciation and amortization 22,744 22,166 Total costs and expenses 377,955 350,394 Operating income Distribution 26,125 26,260 Gas Operations 4,918 2,839 Total operating income 31,043 29,099 Interest expense, net (15,765) (13,783) Other income, net 52 222 Equity in earnings of unconsolidated affiliates 1,364 1,000 Earnings before income taxes and the cumulative effect of an accounting change 16,694 16,538 Income tax expense 6,878 6,863 Earnings before the cumulative effect of an accounting change 9,816 9,675 Cumulative effect of an accounting change, net of taxes -- (590) Net earnings $ 9,816 $ 9,085 Basic earnings per share: Earnings per share before the cumulative effect of an accounting change $ .15 $ .14 Cumulative effect per share of an accounting change -- (.01) Net earnings per share $ .15 $ .13 Diluted earnings per share: Earnings per share before the cumulative effect of an accounting change $ .15 $ .14 Cumulative effect per share of an accounting change -- (.01) Net earnings per share $ .15 $ .13 Weighted average shares outstanding: Basic 65,100 69,800 Diluted 67,300 71,100 Comprehensive income $ 9,672 $ 9,234 See accompanying notes to consolidated financial statements.
4 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts)
(Unaudited) June 30, March 31, 2000 2000 ASSETS Current Assets Trade receivables, less allowances for doubtful accounts of $7,061 at June 30, 2000 and $6,194 at March 31, 2000 $ 217,486 $ 211,989 Inventories, net 167,728 159,438 Deferred income tax asset, net 13,752 13,752 Prepaid expenses and other current assets 24,639 23,611 Total current assets 423,605 408,790 Plant and equipment, at cost 1,085,964 1,074,365 Less accumulated depreciation (335,286) (320,597) Plant and equipment, net 750,678 753,768 Goodwill, net of accumulated amortization of $71,939 at June 30, 2000 and $68,471 at March 31, 2000 442,141 445,498 Other non-current assets 127,792 131,275 Total assets $1,744,216 $1,739,331 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable, trade $ 73,013 $ 78,276 Accrued expenses and other current liabilities 119,803 121,249 Current portion of long-term debt 18,702 20,071 Total current liabilities 211,518 219,596 Long-term debt 867,304 857,422 Deferred income taxes 164,245 160,808 Other non-current liabilities 27,935 28,998 Commitments and contingencies -- -- Stockholders' Equity Preferred stock, no par, 20,000 shares authorized, no shares issued or outstanding at June 30, 2000 and March 31, 2000 -- -- Common stock, par value $.01 per share, 200,000 shares authorized, 73,347 and 73,144 shares issued at June 30, 2000 and March 31, 2000, respectively 733 731 Capital in excess of par value 189,487 193,893 Retained earnings 337,189 327,373 Accumulated other comprehensive loss (740) (596) Treasury stock, 516 and 1,126 common shares at cost at June 30, 2000 and March 31, 2000, respectively (3,982) (8,435) Employee benefits trust, 6,561 and 4,822 common shares at cost at June 30, 2000 and March 31, 2000, respectively (49,473) (40,459) Total stockholders' equity 473,214 472,507 Total liabilities and stockholders' equity $1,744,216 $1,739,331 See accompanying notes to consolidated financial statements.
5 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
Three Months Ended Three Months Ended June 30, 2000 June 30, 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 9,816 $ 9,085 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 22,744 22,166 Deferred income taxes 3,450 3,375 Equity in earnings of unconsolidated affiliates (1,364) (1,000) Gains on sale of plant and equipment (47) (59) Minority interest in earnings -- (65) Stock issued for employee stock purchase plan 1,442 1,282 Other non-cash charges -- 1,027 Changes in assets and liabilities, excluding effects of business acquisitions and divestitures: Trade receivables, net (5,206) (117) Inventories, net (8,153) (1,137) Prepaid expenses and other current assets (572) 1,436 Accounts payable, trade (5,482) (13,577) Accrued expenses and other current liabilities (2,451) 503 Other assets and liabilities, net (1,971) (2,774) Net cash provided by operating activities 12,206 20,145 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (15,006) (14,421) Proceeds from sale of plant and equipment 520 458 Proceeds from divestitures 577 -- Business acquisitions, net of cash acquired (1,034) -- Business acquisitions, holdback settlements -- (250) Investment in unconsolidated affiliates -- (30) Dividends from unconsolidated affiliates 800 880 Other, net 1,548 88 Net cash used in investing activities (12,595) (13,275) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 16,000 4,947 Repayment of debt (7,487) (1,562) Purchase of treasury stock (11,214) (8,608) Proceeds from exercise of stock options 532 665 Cash overdraft 2,558 (2,312) Net cash provided (used) by financing activities 389 (6,870) Change in Cash $ -- $ -- Cash - beginning of period -- -- Cash - end of period $ -- $ -- Cash paid during the period for: Interest $ 13,462 $ 10,847 Income taxes, net of refunds $ 680 $ 633 See accompanying notes to consolidated financial statements.
6 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION The consolidated financial statements include the accounts of Airgas, Inc. and its subsidiaries (the "Company"). Unconsolidated affiliates are accounted for on the equity method and generally consist of 20 - 50% owned operations where control does not exist or is considered temporary. The excess of the cost of these affiliates over the Company's share of their net assets at the acquisition date is being amortized over 20 to 40 years. Intercompany accounts and transactions are eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These statements do not include all disclosures required for annual financial statements. These financial statements should be read in conjunction with the more complete disclosures contained in the Company's audited consolidated financial statements for the fiscal year ended March 31, 2000. The consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the Company's financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature except for the impact of an acquisition, a divestiture and the accounting change which are discussed in the notes to the accompanying financial statements. The interim operating results are not necessarily indicative of the results to be expected for an entire year. Certain reclassifications have been made to previously issued financial statements to conform to the current presentation. (2) ACCOUNTING CHANGE In the first quarter of fiscal 2000, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98- 5"), as required, resulting in a charge to net earnings of $590 thousand, or $.01 per diluted share. In accordance with SOP 98-5, the charge has been reflected on a separate line entitled "Cumulative effect of an accounting change, net of taxes," on the consolidated statement of earnings. The charge primarily resulted from the write- off of start-up costs capitalized in connection with the Company's two air separation units constructed during fiscal 1998 and 1999. (3) ACQUISITIONS AND DIVESTITURES During the three months ended June 30, 2000, the Company acquired one distributor of industrial gas and related equipment with annual sales of approximately $2 million. In May 2000, the Company completed the sale of one of its equity investments in India, Bhoruka Gases, Ltd. Proceeds from the sale, including a note receivable, were $1.1 million. The investment was sold for a loss of approximately $1.7 million, which had been previously provided for by the Company. During the quarter, the Company also announced an agreement to sell its remaining equity investment in India. The sale of Superior Air Products Limited is expected to close during the second quarter of fiscal 2001. Proceeds from the sale are expected to be approximately $7 million. The sale of Superior Air Products Limited will complete the divestitures previously provided for by the Company. 7 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (4) EARNINGS PER SHARE Basic earnings per share is calculated by dividing net earnings by the weighted average number of shares of the Company's common stock outstanding during the period. Outstanding shares consist of issued shares less treasury stock and common stock held by the Employee Benefits Trust. Diluted earnings per share is calculated by dividing net earnings by the weighted average common shares outstanding adjusted for the dilutive effect of common stock equivalents related to stock options and contingently issuable shares. The table below reconciles basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three months ended June 30, 2000 and 1999:
Three Months Ended June 30, (In thousands) 2000 1999 Weighted average common shares outstanding: Basic 65,100 69,800 Stock options 400 1,200 Contingently issuable shares 1,800 100 Diluted 67,300 71,100
Contingently issuable shares represent additional shares of Company common stock required to be issued in connection with a fiscal 1998 acquisition. Additional shares are required to be issued to the extent that the average closing market value of the Company's common stock for the ten business days ended October 1, 2000 is less than $13.10 per share. (5) INVENTORIES Inventories consist of:
(Unaudited) June 30, March 31, (In thousands) 2000 2000 Finished goods $166,447 $158,549 Raw materials 1,281 889 $167,728 $159,438
Inventories determined by the LIFO inventory method totaled $21.5 million and $22.6 million at June 30, 2000 and March 31, 2000, respectively. If the FIFO inventory method had been used for these inventories, they would have been $1.4 million higher at both June 30, 2000 and March 31, 2000. 8 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (6) OTHER NON-CURRENT ASSETS Other non-current assets include:
(Unaudited) June 30, March 31, (In thousands) 2000 2000 Investments in unconsolidated affiliates $ 71,173 $ 72,959 Non-compete agreements and other intangible assets, at cost, net of accumulated amortization of $100.3 million at June 30, 2000 and $97.5 million at March 31, 2000 45,637 48,136 Other assets 10,982 10,180 $127,792 $131,275
(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities include:
(Unaudited) June 30, March 31, (In thousands) 2000 2000 Cash overdraft $ 21,518 $ 18,960 Accrued payroll and employee benefits 16,680 24,441 Insurance reserves 12,490 11,475 Accrued interest 11,516 8,969 Other accrued expenses and current liabilities 57,599 57,404 $119,803 $121,249 The cash overdraft is attributable to the float of the Company's outstanding checks.
(8) STOCKHOLDERS' EQUITY Changes in stockholders' equity were as follows:
Employee Shares of Common Treasury Benefits (In thousands of shares) Stock $.01 Par Value Stock Trust Balance-April 1, 2000 73,144 1,126 4,822 Common Stock issuance (a) 203 -- -- Purchase of treasury stock -- 1,419 -- Sale of treasury stock to Trust (b) -- (2,029) 2,029 Reissuance of stock held by Trust (c) -- -- (290) Balance-June 30, 2000 73,347 516 6,561 (a) Issuance of common stock for stock option exercises. (b) Sale of common stock from treasury to the Employee Benefits Trust. (c) Reissuance of common stock from the Employee Benefits Trust for employee benefit programs.
9 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Accumulated Capital in Other Employee Compre- Common Excess of Retained Comprehensive Treasury Benefits hensive (In thousands of dollars) Stock Par Value Earnings Loss Stock Trust Income Balance-April 1, 2000 $731 $193,893 $327,373 $(596) $(8,435) $(40,459) $ -- Net earnings -- -- 9,816 -- -- -- 9,816 Common stock issuance (a) 2 530 -- -- -- -- -- Foreign currency translation adjustments -- -- -- (144) -- -- (144) Purchase of treasury stock -- -- -- -- (11,214) -- -- Sale of treasury stock to Trust (b) -- (4,404) -- -- 15,667 (11,263) -- Reissuance of common stock from Trust (c) -- (807) -- -- -- 2,249 -- Tax benefit from stock option exercises -- 275 -- -- -- -- -- Balance-June 30, 2000 $733 $189,487 $337,189 $(740) $(3,982) $(49,473) $9,672 (a) Issuance of common stock for stock option exercises. (b) Sale of common stock from treasury to the Employee Benefits Trust. (c) Reissuance of common stock from the Employee Benefits Trust for employee benefit programs.
(9) COMMITMENTS AND CONTINGENCIES (a) Litigation In July 1996, Praxair, Inc. ("Praxair") filed suit against the Company in the Circuit Court of Mobile County, Alabama. The complaint alleged tortious interference with business or contractual relations with respect to Praxair's Right of First Refusal contract with the majority shareholders of National Welders Supply Company, Inc. ("National Welders") in connection with the Company's formation of a joint venture with National Welders. In June 1998, Praxair filed a motion to dismiss its own action in Alabama and commenced another action in the Superior Court of Mecklenburg County, North Carolina, alleging substantially the same tortious interference by the Company. The North Carolina action also alleges breach of contract against National Welders and certain shareholders of National Welders and unfair trade practices and conspiracy against all the defendants. In the North Carolina action, Praxair seeks compensatory damages in excess of $10 thousand, punitive damages and other unspecified relief. The Company believes that Praxair's North Carolina claims are without merit and intends to defend vigorously against such claims. A hearing on the Company's motion for summary judgment took place in May, 2000, and the court's ruling on the action is expected shortly. The Company is optimistic that the ruling will be favorable. However, if the court does not grant the motion in whole, the Company will face a possible lengthy trial after yet more discovery. The Company is involved in various legal and regulatory proceedings that 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 condition, results of operations or liquidity. 10 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (b) Insurance Coverage The Company has established insurance programs to cover workers' compensation, business automobile, general and product liability. These programs have self-insured retention of $500 thousand per occurrence. Estimated losses are accrued based upon the Company's experience for the aggregate liability for claims incurred and claims incurred but not reported. The Company believes its insurance reserves are adequate. 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 that exceed its liability insurance coverage of $100 million, such suits could have a material adverse effect on the Company's financial position, results of operations or liquidity. (10) SUMMARY BY BUSINESS SEGMENT Information related to the Company's operations by business segment for the three months ended June 30, 2000 and 1999 is as follows:
Three Months Ended Three Months Ended June 30, 2000 June 30, 1999 (In thousands) Gas Gas Distribution Operations Combined Distribution Operations Combined Gas and rent $ 158,597 $ 33,494 $ 192,091 $ 142,780 $ 32,526 $ 175,306 Hardgoods 216,142 765 216,907 203,187 1,000 204,187 Total net sales 374,739 34,259 408,998 345,967 33,526 379,493 Intersegment sales -- 8,369 8,369 -- 8,659 8,659 Gross profit 171,990 21,812 193,802 157,535 20,691 178,226 Gross profit margin 45.9% 63.7% 47.4% 45.5% 61.7% 47.0% Operating income 26,125 4,918 31,043 26,260 2,839 29,099 Earnings before income taxes and cumulative effect of an accounting change 14,357 2,337 16,694 15,680 858 16,538 Assets 1,515,438 228,778 1,744,216 1,443,901 245,125 1,689,026
11 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS: THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999 INCOME STATEMENT COMMENTARY Net Sales Net sales increased 7.8% in the quarter ended June 30, 2000 ("current quarter") compared to the quarter ended June 30, 1999 ("prior year quarter"). Total same-store sales increased 2.9% in the current quarter versus the prior year quarter.
Three Months Ended (In thousands) June 30, Net Sales 2000 1999 Increase Distribution $374,739 $345,967 $28,772 8.3% Gas Operations 34,259 33,526 733 2.2% $408,998 $379,493 $29,505 7.8%
The Distribution segment's principal products and services include industrial, medical and specialty gases; equipment rental; and hardgoods. Industrial gases consist of packaged and small bulk gases. Equipment rental fees are generally charged on cylinders, cryogenic liquid containers, bulk tanks and welding equipment. Hardgoods consist of welding supplies and equipment, safety products, and industrial tools and supplies. Distribution sales increased $28.8 million primarily as a result of net acquisition and divestiture activity and same-store sales growth. Acquisition and divestiture activity accounted for a net sales increase of $18.6 million as the acquisition of seven distributors since July 1, 1999 were partially offset by divestitures during fiscal 2000. The most significant of the seven acquisitions was that of Puritan-Bennett Corporation ("Puritan- Bennett") in the fourth quarter of fiscal 2000, which contributed $15.2 million of sales in the current quarter. Distribution same-store sales growth of $10.2 million (2.8%) was the result of gas and rent sales growth of $5.0 million (3.3%) and hardgoods sales growth of $5.2 million (2.5%). The Distribution segment's sales growth resulted from continued success in sales initiatives such as national accounts and strategic products. Growth in gas and rent same-store sales was primarily attributable to higher volumes of strategic products, including medical, bulk and specialty gases and welder equipment rental. Although difficult to estimate, the Company believes the implementation of price increases to customers in the current quarter also contributed to the increase in net sales of gas and rent. Hardgoods same-store sales growth was driven by an increase in safety and tool product sales. The growth in hardgoods sales represented the first positive same-store sales comparison for the product category since the quarter ended June 30, 1998. Gas Operations' sales primarily include dry ice and carbon dioxide that are used for cooling, food and beverage applications, chemical products, and oil and gas extraction. In addition, the segment includes businesses that produce and distribute specialty gases and nitrous oxide. Sales increased $733 thousand compared to the prior year quarter as a result of same-store sales growth, partially offset by net acquisition and divestiture activity. Gas Operations' same- store sales increased $1.4 million (4.3%) primarily from higher volumes of dry ice, liquid carbon dioxide, and nitrous oxide. Unseasonably warm weather helped drive dry ice volumes. The divestiture of foreign operations in Poland and Thailand during fiscal 2000 was largely offset by nitrous oxide business acquired with Puritan-Bennett. Net acquisition and divestiture activity resulted in a sales decline of $668 thousand. The Company estimates same-store sales based on a comparison of current period sales to the prior period sales, adjusted for acquisitions and divestitures. Future same-store sales growth is dependent on the economy, competition and the Company's ability to implement price increases and sell additional products and services to existing and new customers. 12 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Profits Gross profits increased 8.7% during the current quarter compared to the prior year quarter.
Three Months Ended (In thousands) June 30, Gross Profits 2000 1999 Increase Distribution $171,990 $157,535 $14,455 9.2% Gas Operations 21,812 20,691 1,121 5.4% $193,802 $178,226 $15,576 8.7%
The increase in Distribution gross profits of $14.5 million resulted from net acquisition and divestiture activity of $11.7 million and growth in same-store gross profits of $2.8 million (1.6%). Acquisitions contributed gross profits of $14.1 million, partially offset by fiscal 2000 divestitures with gross profits of $2.4 million in the prior year quarter. The increase in same-store gross profits resulted primarily from improvements in gas and rent. Competitive pricing pressures on hardgoods have been partially mitigated by lower costs from centralized purchasing initiatives and continued growth in sales of higher margin private label products. Distribution's gross profit margin of 45.9% in the current quarter increased 40 basis points from 45.5% in the prior year quarter as a result of the acquisition of Puritan-Bennett. The acquisition of Puritan-Bennett improved the sales mix by increasing higher margin gas and rent to 42% of sales in the current quarter compared to 41% in the prior year quarter. Excluding the acquisition of Puritan-Bennett, Distribution margins were off 50 basis points. The increase in Gas Operations' gross profits of $1.1 million resulted from same-store gross profit growth, partially offset by net acquisition and divestiture activity. Same-store gross profit growth of $1.4 million (7.0%) was primarily due to improved gross margins from higher sales volumes that leveraged fixed manufacturing costs. Gross profits decreased $300 thousand as a result of net acquisition and divestiture activity. Gas Operations' gross profit margin of 63.7% increased 200 basis points from 61.7%. Operating Expenses Selling, distribution and administrative expenses ("operating expenses") consist of personnel and related costs, distribution and warehouse costs, occupancy expenses and other selling, general and administrative expenses. Operating expenses increased $13.1 million (10.3%) compared to the prior year quarter primarily from net acquisition and divestiture activity and higher costs associated with personnel, insurance and fuel costs. As a percentage of net sales, operating expenses increased 70 basis points to 34.2% compared to 33.5% in the prior year quarter. Depreciation and amortization totaled $22.7 million in the current quarter compared to $22.2 million in the prior year quarter. The increase is primarily due to acquisitions and capital expenditures completed since April 1, 1999, partially offset by divestitures. 13 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Income Operating income increased 6.7% during the current quarter compared to the prior year quarter.
Three Months Ended (In thousands) June 30, Operating Income 2000 1999 Increase(Decrease) Distribution $26,125 $26,260 $ (135) (0.5%) Gas Operations 4,918 2,839 2,079 73.2% $31,043 $29,099 $1,944 6.7%
The Distribution segment's operating income margin decreased 60 basis points to 7.0% in the current quarter compared to 7.6% in the prior year quarter primarily as a result of higher operating expenses, partially offset by an increase in gross profits from same-store sales growth and acquisitions. Gas Operations' operating income increased $2.1 million compared to the prior year quarter primarily from the acquisition of Puritan- Bennett's nitrous oxide business, the divestiture of foreign operations, and higher sales volumes associated with liquid carbon dioxide and dry ice. Excluding divestitures in the prior year quarter, Gas Operations' operating income margin increased to 14.4% in the current quarter compared to 13.7% in the prior year quarter. Interest Expense Interest expense, net, totaled $15.8 million representing an increase of $2.0 million (14.4%) compared to the prior year quarter. The increase in interest expense resulted from higher average debt levels and a 70 basis point increase in weighted-average interest rates. At June 30, 2000, the Company's ratio of fixed to variable rate debt was 47% to 53%, respectively. The net increase in debt was primarily attributable to the fiscal 2000 acquisition of Puritan- Bennett. As discussed in "Liquidity and Capital Resources" and in Item 3 "Quantitative and Qualitative Disclosures About Market Risk," the Company manages interest rate exposure of certain borrowing instruments through participation in interest rate swap agreements. Equity in Earnings of Unconsolidated Affiliates Equity in earnings of unconsolidated affiliates of $1.4 million increased $400 thousand from $1 million in the prior year quarter primarily due to higher joint venture earnings of National Welders Supply. Income Tax Expense The effective income tax rate was 41.2% of pre-tax earnings in the current quarter compared to 41.5% in the prior year quarter. The decrease in the effective income tax rate in the current quarter was primarily the result of higher earnings of unconsolidated equity affiliates. Cumulative Effect of an Accounting Change In the first quarter of fiscal 2000, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," resulting in a charge to net earnings of $590 thousand. The charge primarily resulted from the write-off of start-up costs capitalized in connection with the Company's two air separation units constructed during fiscal 1998 and 1999. 14 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Earnings Net earnings for the quarter ended June 30, 2000 were $9.8 million, or $.15 per diluted share, compared to $9.1 million, or $.13 per diluted share, in the prior year quarter. Net earnings in the prior year quarter were $9.7 million, or $.14 per diluted share, excluding the charge for the cumulative effect of an accounting change. LIQUIDITY AND CAPITAL RESOURCES Cash Flows Cash flows from operating activities totaled $12.2 million for the three months ended June 30, 2000 compared to $20.1 million in the prior year quarter. Adjustments to reconcile net income to net cash provided by operating activities included depreciation and amortization of $22.7 million and deferred income taxes of $3.5 million from temporary differences. Additionally, working capital components used cash of $21.9 million primarily for an increase in trade receivables and inventories and lower accounts payable and accrued expenses. Trade receivables increased $5.2 million primarily due to higher sales volumes and a build in receivables related to the Puritan-Bennett acquisition. Trade receivables days' sales outstanding increased to 50 days from 48 days at March 31, 2000. Inventories used cash of $8.2 million with hardgoods days' supply of inventory increasing to 86 days from 80 days at March 31, 2000. The higher level of hardgoods days' supply of inventory is primarily due to an increase in safety and welding product inventories in connection with centralized purchasing and distribution initiatives. The lower level of accounts payable was due to the timing of payments to vendors. After-tax cash flow (net earnings, excluding the charge from the fiscal 2000 accounting change, plus depreciation, amortization and deferred income taxes) increased 2.3% to $36.0 million compared to $35.2 million in the prior year quarter. Cash used in investing activities totaled $12.6 million during the current quarter and primarily consisted of capital expenditures. Capital expenditures during the current quarter totaled $15 million compared to $14.4 million in the same quarter last year. Capital expenditures of cylinders, bulk tanks, rental welders and machinery and equipment totaled approximately $10 million, or 67% of total capital expenditures, and facilitate strategic product sales growth. Management continues to focus on improving asset utilization and controlling capital spending. Financing activities provided cash of $389 thousand. Debt financing, net of repayments, and an increase in the cash overdraft provided cash of $11.1 million, which was largely used for the repurchase of the Company's common stock. The cash overdraft represents the float of the Company's outstanding checks. The Company will continue to look for appropriate acquisitions of distributors while it focuses on reducing its financial leverage. Future acquisitions, capital expenditures and costs associated with eCommerce are expected to be funded through the use of cash flow from operations, debt, common stock for certain acquisition candidates, funds from the divestiture of certain businesses and other available sources. The Company believes that its sources of financing are adequate for its anticipated needs. The Company also believes that it could arrange additional sources of financing for unanticipated requirements. The cost and terms of any future financing arrangement depend on the market conditions and the Company's financial position at that time. The Company does not currently pay dividends. 15 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Instruments The Company has unsecured revolving credit facilities totaling $725 million and $100 million Canadian (US$68 million) under a credit agreement with a final maturity date of December 5, 2002. The credit agreement contains covenants that include the maintenance of certain financial ratios, restrictions on additional borrowings and limitations on dividends. At June 30, 2000, the Company had borrowings under the credit agreement of approximately $569 million and $43 million Canadian (US$29 million). The Company also had commitments under letters of credit supported by the credit agreement of approximately $54 million. Based on restrictions related to cash flow to funded debt coverage, the Company had additional borrowing capacity under the credit facilities of approximately $140 million at June 30, 2000. At June 30, 2000, the effective interest rate on borrowings under the credit facilities was 6.95% on U.S. borrowings and 6.26% on Canadian borrowings. At June 30, 2000, the Company had the following long-term debt outstanding under medium-term notes: $50 million of unsecured notes due September 2001 bearing interest at a fixed rate of 7.15%; $75 million of unsecured notes due March 2004 bearing interest at a fixed rate of 7.14%; and $100 million of unsecured notes due September 2006 bearing interest at a fixed rate of 7.75%. Additionally, at June 30, 2000, long-term debt of the Company included acquisition notes and other long-term debt instruments of approximately $63 million with interest rates ranging from 6% to 10.5%. The Company also has a shelf registration with a capacity of approximately $175 million for the issuance of debt and other types of securities. The Company manages its exposure to changes in market interest rates. At June 30, 2000, the Company was party to 21 interest rate swap agreements. The swap agreements are with major financial institutions and aggregate $539 million in notional principal amount at June 30, 2000. Sixteen swap agreements with approximately $359 million in notional principal amount require fixed interest payments based on an average effective rate of 6.33% for remaining periods ranging between one and five years. Five swap agreements with $180 million in notional principal amount require variable interest payments based on an average rate of 6.22% at June 30, 2000. Under the terms of five swap agreements, the Company has elected to receive the discounted value of the counterparties' interest payments up-front. At June 30, 2000, approximately $2.3 million of such payments was included in other current liabilities and $1.6 million was included in other non-current liabilities. The Company monitors its positions and the credit ratings of its counterparties, and does not anticipate non-performance by the counterparties. Share Repurchase Program In March 1999, the Company's Board of Directors authorized the repurchase of up to seven million shares of the Company's outstanding common stock. The shares may be repurchased in the open market or in privately negotiated transactions depending on market conditions and other factors. The Company has financed its repurchase program with borrowings and funds provided by operating activities. During the three month period ended June 30, 2000, the Company repurchased 1.4 million shares at an average cost of $7.90 per share. The effect of the share repurchases on earnings per share for the quarter ended June 30, 2000 was not material. At June 30, 2000, approximately 500 thousand shares remain under the share repurchase authorization. Employee Benefits Trust During the quarter ended June 30, 2000, the Employee Benefits Trust purchased approximately 2 million shares of common stock from the Company at fair market value. 16 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER New Accounting Pronouncements In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities (an amendment of FASB Statement No. 133)." Management has evaluated the impact of Statement 138 as it amends Statement 133, and believes that it will not have a material impact on the net earnings of the Company. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation- an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 is generally effective for transactions occurring after July 1, 2000 but applies to option repricings and certain other transactions after December 15, 1998. The Company believes that FIN 44 will not have a material impact on the net earnings of the Company. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). The implementation date of SAB 101 has been delayed and will be effective for the Company in the fourth quarter of fiscal 2001. The Company is currently evaluating the impact of SAB 101 on its financial position and results of operations. Forward-looking Statements This report contains statements that are forward looking, as that term is defined by Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in rules, regulations and releases. These statements include, but are not limited to, statements regarding: same-store sales trends, gross profit trends, operating expense trends, future acquisitions, future debt repayment, future sources of financing, asset utilization, the level of fiscal 2001 capital expenditures, price increases, increased sales, performance of counterparties under interest rate swap agreements, the level of competition and general economic conditions in the industrial markets served by the Company. Airgas intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors, and the making of such statements should not be regarded as a representation by Airgas or any other person that the results expressed therein will be achieved. Important factors that could cause actual results to differ materially from those contained in any forward-looking statement include, but are not limited to, underlying market conditions, growth and continued improvement in same-store sales, the Company's ability to reduce costs and control operating expenses, the potential impact of higher operating expenses in future periods, the ability to manage interest rate exposure, the success of higher margin private label products, the success of centralized purchasing and distribution initiatives in reducing inventory levels and lowering product costs, the success and timing of intended divestitures, 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, the outcome and costs associated with the defense and settlement of certain lawsuits, uncertainties regarding accidents or litigation which may arise in the ordinary course of business and the effects of, and changes in, the economy, monetary and fiscal policies, laws and regulations, inflation and monetary fluctuations and fluctuations in interest rates, both on a national and international basis. The Company does not undertake to update any forward-looking statement made herein or that may be made from time to time by or on behalf of the Company. 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk The Company's primary market risk exposure is from changes in interest rates. The Company's policy is to manage interest rate risk exposure through the use of a combination of fixed and floating rate debt and interest rate swap agreements. The Company maintains the ratio of fixed to variable rate debt within parameters established by management under policies approved by the Board of Directors. At June 30, 2000, the ratio of fixed versus floating debt was 47% to 53%. In addition, the Company monitors its positions and the credit ratings of its counterparties, thereby minimizing the risk of non-performance by the counterparties. The Company does not enter into derivative financial instruments for trading purposes. The table below summarizes the Company's market risks associated with long-term debt obligations and interest rate swaps as of June 30, 2000. For long-term debt obligations, the table presents cash flows related to payments of principal and interest by expected fiscal year of maturity. For interest rate swaps, the table presents the notional amounts underlying the interest rate swaps by year of maturity. The notional amounts are used to calculate contractual payments to be exchanged and are not actually paid or received. Fair values were computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the period. [Continued on following page] 18
Expected Fiscal Year of Maturity ______________________________________________________________________________ (In millions) Fair 2001 2002 2003 2004 2005 2006 Thereafter Total Value Fixed Rate Debt: Medium-term notes $ -- $ 50 $ -- $ 75 $ -- $ -- $100 $225 $191 Interest expense $ 13 $ 15 $ 13 $ 13 $ 8 $ 8 $ 3 $ 73 Average interest rate 7.41% 7.42% 7.49% 7.49% 7.75% 7.75% 7.75% Acquisition notes $ 11 $ 16 $ 1 $ 22 $ -- $ 2 $ 1 $ 53 $ 47 Interest expense $ 1 $ 1 $ -- $ 2 $ -- $ -- $ -- $ 4 Average interest rate 7.45% 7.45% 7.45% 7.45% 7.45% 7.45% 7.45% Other notes $ 1 $ 1 $ -- $ -- $ -- $ -- $ -- $ 2 $ 2 Average interest rate 7.55% 7.55% Variable Rate Debt: Revolving credit facilities $ -- $ -- $598 $ -- $ -- $ -- $ -- $598 $598 Interest expense $ 31 $ 42 $ 28 $ -- $ -- $ -- $ -- $101 Interest rate (a) 6.95% 6.95% 6.95% Other notes $ -- $ 7 $ -- $ -- $ 1 $ -- $ -- $ 8 $ 8 Average interest rate 10.50% 10.50% 7.50% 7.50% 7.50% US denominated Swaps: 14 Swaps Receive Variable/Pay Fixed $ 59 $177 $ 78 $ -- $ 40 $ -- $ -- $354 $ (2) Variable Receive rate (3 month LIBOR)= 6.60% Weighted average pay rate = 6.29% 5 Swaps Receive Fixed/Pay Variable $ 50 $ 50 $ -- $ 30 $ -- $ -- $ 50 $180 $ -- Weighted average receive rate = 6.74% Variable pay rate (6 month LIBOR)=6.22% Canadian $ denominated Swaps: 2 Swaps Receive Variable/Pay Fixed $ 3 $ 2 $ -- $ -- $ -- $ -- $ -- $ 5 $ -- (3 month CAD BA (b)) =5.76% Weighted average pay rate = 7.11% Other LIBOR based agreements: Operating leases with trust $ 1 $ 1 $ 1 $ 43 $ -- $ -- $ -- $ 46 $ 46 Variable rate (3 month LIBOR plus 130 basis points) = 7.90% (a) The variable rate of long-term debt obligations is based on the London Interbank Offered Rate ("LIBOR") as of June 30, 2000. For future periods, the variable interest rate is assumed to remain at 6.95% with the principal balance of long-term debt obligations held constant at $598 million. However, the variable rate and borrowing levels of long-term debt may fluctuate materially from those presented above. (b) The variable receive rate for Canadian dollar denominated interest rate swaps is the rate on Canadian Bankers' acceptances ("CAD BA").
19 Limitations of the tabular presentation As the table incorporates only those interest rate risk exposures that exist as of June 30, 2000, it does not consider those exposures or positions that could arise after that date. In addition, actual cash flows of financial instruments in future periods may differ materially from prospective cash flows presented in the table due to future fluctuations in variable interest rates and Company debt levels. Foreign Currency Rate Risk Canadian subsidiaries of the Company are funded in part with local currency debt. The Company does not otherwise hedge its exposure to translation gains and losses relating to foreign currency net asset exposures. The Company considers its exposure to foreign currency exchange fluctuations to be immaterial to its consolidated results of operations. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings In July 1996, Praxair, Inc. ("Praxair") filed suit against the Company in the Circuit Court of Mobile County, Alabama. The complaint alleged tortious interference with business or contractual relations with respect to Praxair's Right of First Refusal contract with the majority shareholders of National Welders Supply Company, Inc. ("National Welders") in connection with the Company's formation of a joint venture with National Welders. In June 1998, Praxair filed a motion to dismiss its own action in Alabama and commenced another action in the Superior Court of Mecklenburg County, North Carolina, alleging substantially the same tortious interference by the Company. The North Carolina action also alleges breach of contract against National Welders and certain shareholders of National Welders and unfair trade practices and conspiracy against all the defendants. In the North Carolina action, Praxair seeks compensatory damages in excess of $10 thousand, punitive damages and other unspecified relief. The Company believes that Praxair's North Carolina claims are without merit and intends to defend vigorously against such claims. A hearing on the Company's motion for summary judgment took place in May, 2000, and the court's ruling on the action is expected shortly. The Company is optimistic that the ruling will be favorable. However, if the court does not grant the motion in whole, the Company will face a possible lengthy trial after yet more discovery. The Company is involved in various legal and regulatory proceedings that 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 condition, results of operations or liquidity. Item 6. Exhibits and Reports on Form 8-K a. Exhibits The following exhibits are being filed as part of this Quarterly Report on Form 10-Q: Exhibit No. Description 11 Calculation of earnings per share 27 Financial Data Schedule as of June 30, 2000. b. Reports on Form 8-K On April 28, 2000, the Company filed a Form 8-K pursuant to Item 5, announcing its earnings outlook for the fourth quarter ended March 31, 2000. On May 12, 2000, the Company filed a Form 8-K pursuant to Item 5, reporting its earnings for the fourth quarter and fiscal year ended March 31, 2000. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Airgas, Inc. (Registrant) Date: August 4, 2000 /s/ Roger F. Millay Roger F. Millay Senior Vice President - Finance and Chief Financial Officer EX-11 2 0002.txt EXHIBIT 11 EXHIBIT 11 AIRGAS, INC. EARNINGS PER SHARE CALCULATIONS
Three Months Ended June 30, (In thousands, except per share amounts) 2000 1999 Weighted Average Shares Outstanding: Basic shares outstanding 65,100,000 69,800,000 Stock options - incremental shares 400,000 1,200,000 Contingently issuable shares 1,800,000 100,000 Diluted shares outstanding 67,300,000 71,100,000 Net earnings $9,816,000 $9,085,000 Basic earnings per share $.15 $.13 Diluted earnings per share $.15 $.13
EX-27 3 0003.txt ART. 5 FDS FOR THE THREE MONTHS ENDED JUNE 30, 2000
5 1000 3-MOS MAR-31-2001 JUN-30-2000 0 0 224,547 7,061 167,728 423,605 1,085,964 335,286 1,744,216 211,518 867,304 733 0 0 472,481 1,744,216 408,998 408,998 215,196 377,955 0 0 15,765 16,694 6,878 9,816 0 0 0 9,816 .15 .15
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