-----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, P7isSEu5aFqaOq95KDTgz3GyCiP738sX7N1Ww3J+EjVJRmzX862+ZBU3axJqskPH AtwT1LNZny0abHGx1cIv6g== /in/edgar/work/0000804212-00-500009/0000804212-00-500009.txt : 20001110 0000804212-00-500009.hdr.sgml : 20001110 ACCESSION NUMBER: 0000804212-00-500009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001109 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: 757600 BUSINESS ADDRESS: STREET 1: 259 N. RADNOR-CHESTER ROAD STREET 2: SUITE 100 CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 6106875253 MAIL ADDRESS: STREET 1: 259 N. RADNOR-CHESTER ROAD STREET 2: SUITE 100 CITY: RADNOR STATE: PA ZIP: 19087 10-Q 1 form10q.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: September 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 November 3, 2000: 66,635,111 shares 2 AIRGAS, INC. FORM 10-Q September 30, 2000 INDEX PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Earnings for the Three and Six Months Ended September 30, 2000 and 1999 (Unaudited)............ 3 Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and March 31, 2000............. 4 Consolidated Statements of Cash Flows for the Six Months Ended September 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....................................... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................... 26 Item 4. Submission of Matters to a Vote of Security Holders............. 26 Item 6. Exhibits and Reports on Form 8-K................................ 27 SIGNATURES............................................................... 28 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 Six Months Ended September 30, September 30, 2000 1999 2000 1999 Net sales Distribution $371,059 $346,973 $745,798 $692,940 Gas Operations 39,038 40,316 73,297 73,842 Total net sales 410,097 387,289 819,095 766,782 Costs and expenses Cost of products sold (excluding depreciation and amortization) Distribution 198,650 186,647 401,399 375,079 Gas Operations 14,437 16,200 26,884 29,035 Selling, distribution and administrative expenses 141,653 129,185 281,668 256,146 Depreciation 15,990 16,525 32,314 32,304 Amortization 6,321 6,428 12,741 12,815 Total costs and expenses 377,051 354,985 755,006 705,379 Operating income Distribution 26,598 26,408 52,723 52,668 Gas Operations 6,448 5,896 11,366 8,735 Total operating income 33,046 32,304 64,089 61,403 Interest expense, net (16,306) (14,435) (32,071) (28,218) Other income, net 405 15,183 457 15,405 Equity in earnings of unconsolidated affiliates 487 725 1,851 1,725 Earnings before income taxes and the cumulative effect of an accounting change 17,632 33,777 34,326 50,315 Income tax expense 7,229 14,865 14,107 21,728 Earnings before the cumulative effect of an accounting change 10,403 18,912 20,219 28,587 Cumulative effect of an accounting change, net of taxes -- -- -- (590) Net earnings $ 10,403 $ 18,912 $ 20,219 $ 27,997 Basic earnings per share: Earnings per share before the cumulative effect of an accounting change $ .16 $ .27 $ .31 $ .41 Cumulative effect per share of an accounting change -- -- -- (.01) Net earnings per share $ .16 $ .27 $ .31 $ .40 Diluted earnings per share: Earnings per share before the cumulative effect of an accounting change $ .16 $ .27 $ .30 $ .40 Cumulative effect per share of an accounting change -- -- -- (.01) Net earnings per share $ .16 $ .27 $ .30 $ .39 Weighted average shares outstanding: Basic 65,400 69,700 65,200 69,800 Diluted 66,600 71,200 66,900 71,200 Comprehensive income $ 10,360 $ 18,965 $ 20,032 $ 28,199 See accompanying notes to consolidated financial statements.
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AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) September 30, March 31, 2000 2000 ASSETS Current Assets Trade receivables, less allowances for doubtful accounts of $7,417 at September 30, 2000 and $6,194 at March 31, 2000 $ 220,603 $ 211,989 Inventories, net 161,507 159,438 Deferred income tax asset, net 13,463 13,752 Prepaid expenses and other current assets 22,622 23,611 Total current assets 418,195 408,790 Plant and equipment, at cost 1,097,513 1,074,365 Less accumulated depreciation (349,129) (320,597) Plant and equipment, net 748,384 753,768 Goodwill, net of accumulated amortization of $75,487 at September 30, 2000 and $68,471 at March 31, 2000 439,025 445,498 Other non-current assets 118,783 131,275 Total assets $1,724,387 $1,739,331 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable, trade $ 67,691 $ 78,276 Accrued expenses and other current liabilities 113,504 121,249 Current portion of long-term debt 68,662 20,071 Total current liabilities 249,857 219,596 Long-term debt 795,599 857,422 Deferred income taxes 167,494 160,808 Other non-current liabilities 26,055 28,998 Commitments and contingencies -- -- Stockholders' Equity Preferred stock, no par, 20,000 shares authorized, no shares issued or outstanding at September 30, 2000 and March 31, 2000 -- -- Common stock, par value $.01 per share, 200,000 shares authorized, 73,431 and 73,144 shares issued at September 30, 2000 and March 31, 2000, respectively 734 731 Capital in excess of par value 189,176 193,893 Retained earnings 347,592 327,373 Accumulated other comprehensive loss (783) (596) Treasury stock, 516 and 1,126 common shares at cost at September 30, 2000 and March 31, 2000, respectively (3,982) (8,435) Employee benefits trust, 6,280 and 4,822 common shares at cost at September 30, 2000 and March 31, 2000, respectively (47,355) (40,459) Total stockholders' equity 485,382 472,507 Total liabilities and stockholders' equity $1,724,387 $1,739,331 See accompanying notes to consolidated financial statements.
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AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Six Months Ended Six Months Ended September 30, 2000 September 30, 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 20,219 $ 27,997 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 45,055 45,119 Deferred income taxes 6,900 6,750 Equity in earnings of unconsolidated affiliates (1,851) (1,725) Gain on divestitures (526) (14,369) (Gain) loss on sales of plant and equipment (58) 7 Minority interest in earnings -- (51) Stock issued for employee stock purchase plan 2,800 2,707 Other non-cash charges -- 1,027 Changes in assets and liabilities, excluding effects of business acquisitions and divestitures: Trade receivables, net (8,372) (1,618) Inventories, net (1,944) (697) Prepaid expenses and other current assets 1,740 (139) Accounts payable, trade (10,651) (14,274) Accrued expenses and other current liabilities 1,200 3,792 Other assets and liabilities, net (3,859) (3,302) Net cash provided by operating activities 50,653 51,224 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (30,959) (30,841) Proceeds from sales of plant and equipment 1,346 955 Proceeds from divestitures 7,000 46,596 Business acquisitions, net of cash acquired (1,839) (23,377) Business acquisitions, holdback settlements (1,878) (830) Investment in unconsolidated affiliates -- (30) Dividends from unconsolidated affiliates 1,487 1,897 Other, net 2,302 (358) Net cash used in investing activities (22,541) (5,988) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 62,000 77,985 Repayment of debt (75,232) (102,461) Purchase of treasury stock (11,214) (15,345) Proceeds from exercise of stock options 837 904 Cash overdraft (4,503) (6,319) Net cash used in financing activities (28,112) (45,236) Change in Cash $ -- $ -- Cash - beginning of period -- -- Cash - end of period $ -- $ -- Cash paid during the period for: Interest $ 32,985 $ 29,067 Income taxes, net of refunds $ 1,315 $ 5,427 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 acquisitions, divestitures, an accounting change and special charges, 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) DIVESTITURES In May 2000, the Company completed the sale of its equity investment in 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 provided for under the Company's 1998 special charges. In August 2000, the Company completed the sale of Superior Air Products Limited ("SAPL"). Proceeds from the sale were $6.4 million. The investment was sold for a gain of approximately $500 thousand, which was recorded in "Other income, net." The Company's combined equity in the earnings of these unconsolidated affiliates was insignificant for both of the six-month periods ended September 30, 2000 and 1999. With the completion of the SAPL sale in the quarter ended September 30, 2000, the Company reversed its remaining accrued liability of $1.3 million that was originally established in the 1998 special charges. The special charge reversal of the remaining accrued divestiture liability reflects the difference between the Company's original loss estimates and actual results. 7 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (3) DIVESTITURES - (Continued) In August 1999, the Company completed the divestiture of its operations in Poland and Thailand. The divestiture resulted in a non- recurring gain of $14.4 million ($7.6 million after-tax, or $.11 per diluted share) which was recognized in "Other income, net." Cash proceeds from the sale were $46.2 million. The operations in Poland and Thailand had combined sales and operating losses in fiscal 2000 of $7.1 million and $29 thousand, respectively. (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 and six months ended September 30, 2000 and 1999:
Three Months Ended Six Months Ended September 30, September 30, (In thousands) 2000 1999 2000 1999 Weighted average common shares outstanding: Basic 65,400 69,700 65,200 69,800 Stock options 400 1,300 400 1,200 Contingently issuable shares 800 200 1,300 200 Diluted 66,600 71,200 66,900 71,200
Contingently issuable shares represent additional shares of Company common stock required to be issued in connection with a fiscal 1998 acquisition. In the fiscal 2001 third quarter, the Company will issue approximately 800 thousand shares in connection with the acquisition. The number of issuable shares is based on the spread between the average closing market value of the Company's common stock for the ten business days ended October 1, 2000 ($6.09 per share) and $13.10 per share. (5) INVENTORIES
Inventories consist of: (Unaudited) September 30, March 31, (In thousands) 2000 2000 Finished goods $160,443 $158,549 Raw materials 1,064 889 $161,507 $159,438
Inventories determined by the LIFO inventory method totaled $19.8 million and $22.6 million at September 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 September 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) September 30, March 31, (In thousands) 2000 2000 Investments in unconsolidated affiliates $ 65,029 $ 72,959 Non-compete agreements and other intangible assets, at cost, net of accumulated amortization of $103.2 million at September 30, 2000 and $97.5 million at March 31, 2000 42,762 48,136 Other assets 10,992 10,180 $118,783 $131,275
(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include: (Unaudited) September 30, March 31, (In thousands) 2000 2000 Cash overdraft $ 14,457 $ 18,960 Accrued payroll and employee benefits 21,612 24,441 Insurance reserves 12,805 11,475 Other accrued expenses and current liabilities 64,630 66,373 $113,504 $121,249
The cash overdraft is attributable to the float of the Company's outstanding checks. 9 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (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 287 -- -- Purchase of treasury stock -- 1,419 -- Sale of treasury stock to Trust -- (2,029) 2,029 Reissuance of stock held by Trust -- -- (571) Balance-September 30, 2000 73,431 516 6,280 Issuance of common stock for stock option exercises. Sale of common stock from treasury to the Employee Benefits Trust. Reissuance of common stock from the Employee Benefits Trust for employee benefit programs.
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 -- -- 20,219 -- -- -- 20,219 Common stock issuance 3 834 -- -- -- -- -- Foreign currency translation adjustments -- -- -- (187) -- -- (187) Purchase of treasury stock -- -- -- -- (11,214) -- -- Sale of treasury stock to Trust -- (4,404) -- -- 15,667 (11,263) -- Reissuance of common stock from Trust -- (1,567) -- -- -- 4,367 -- Tax benefit from stock option exercises -- 420 -- -- -- -- -- Balance-September 30, 2000 $734 $189,176 $347,592 $(783) $(3,982) $(47,355) $20,032 Issuance of common stock for stock option exercises. Sale of common stock from treasury to the Employee Benefits Trust. Reissuance of common stock from the Employee Benefits Trust for employee benefit programs.
10 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (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. In August, 2000, the Company's motion for summary judgment was denied, and the Company anticipates that additional discovery and pretrial motions will take nine to twelve more months and may result in additional costs. The Company believes that Praxair's North Carolina claims are without merit and intends to defend vigorously against such claims. In 1997, the Company announced it was the victim of a fraudulent breach of contract by a third party supplier of refrigerant gases and recorded a non-recurring special charge related to product losses and costs associated with the Company's efforts to investigate the fraud and pursue recoveries. During the quarter ended September 30, 2000, the Company recorded a non-recurring special charge of $1.3 million related to the estimated legal fees and costs of pursuing additional recoveries from its insurance carriers. All steps preparatory for trial have been concluded, and the Company expects that a trial date will be set imminently. 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. (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. 11 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (10) SUMMARY BY BUSINESS SEGMENT Information related to the Company's operations by business segment for the three months ended September 30, 2000 and 1999 follows:
Three Months Ended Three Months Ended September 30, 2000 September 30, 1999 (In thousands) Gas Gas Distribution Operations Combined Distribution Operations Combined Gas and rent $ 160,307 $ 38,220 $ 198,527 $ 145,314 $ 39,369 $ 184,683 Hardgoods 210,752 818 211,570 201,659 947 202,606 Total net sales 371,059 39,038 410,097 346,973 40,316 387,289 Intersegment sales -- 7,944 7,944 -- 7,726 7,726 Gross profit 172,409 24,601 197,010 160,326 24,116 184,442 Gross profit margin 46.5% 63.0% 48.0% 46.2% 59.8% 47.6% Operating income 26,598 6,448 33,046 26,408 5,896 32,304 Earnings before income taxes 13,527 4,105 17,632 15,267 18,510 33,777 Assets 1,500,827 223,560 1,724,387 1,458,402 221,887 1,680,289
12 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (10) SUMMARY BY BUSINESS SEGMENT - (Continued) Information related to the Company's operations by business segment for the six months ended September 30, 2000 and 1999 follows:
Six Months Ended Six Months Ended September 30, 2000 September 30, 1999 (In thousands) Gas Gas Distribution Operations Combined Distribution Operations Combined Gas and rent $ 318,904 $ 71,714 $ 390,618 $ 288,095 $ 71,895 $ 359,990 Hardgoods 426,894 1,583 428,477 404,845 1,947 406,792 Total net sales 745,798 73,297 819,095 692,940 73,842 766,782 Intersegment sales -- 16,313 16,313 -- 16,385 16,385 Gross profit 344,399 46,413 390,812 317,861 44,807 362,668 Gross profit margin 46.2% 63.3% 47.7% 45.9% 60.7% 47.3% Operating income 52,723 11,366 64,089 52,668 8,735 61,403 Earnings before income taxes and cumulative effect of an accounting change 27,892 6,434 34,326 30,931 19,384 50,315 Assets 1,500,827 223,560 1,724,387 1,458,402 221,887 1,680,289
13 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 SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999 INCOME STATEMENT COMMENTARY Net Sales Net sales increased 5.9% in the quarter ended September 30, 2000 ("current quarter") compared to the quarter ended September 30, 1999 ("prior year quarter"). Total Company same-store sales increased 4.4% in the current quarter versus the prior year quarter. The Company estimates same-store sales based on a comparison of current period sales to the prior period sales, adjusted for acquisitions and divestitures.
Three Months Ended (In thousands) September 30, Net Sales 2000 1999 Increase(Decrease) Distribution $371,059 $346,973 $24,086 6.9% Gas Operations 39,038 40,316 (1,278) (3.2%) $410,097 $387,289 $22,808 5.9%
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 $24.1 million primarily from net acquisition and divestiture activity and same-store sales growth. Acquisition and divestiture activity accounted for a net sales increase of $12.8 million as the acquisition of five distributors since July 1, 1999 were partially offset by a divestiture during fiscal 2000. The most significant of the five acquisitions was that of Mallinckrodt Inc.'s Puritan-Bennett ("Puritan-Bennett") medical gas business in the fourth quarter of fiscal 2000. Distribution same-store sales growth of $11.3 million (4.0%) resulted from gas and rent sales growth of $7.2 million (5.5%) and hardgoods sales growth of $4.1 million (2.8%). 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 and specialty gases and welder equipment rental. The Company also believes price increases during the first and second fiscal quarters contributed to gas and rent sales growth. Hardgoods same-store sales growth was driven by an increase in sales of safety and tool products. The growth in hardgoods sales represented a second consecutive positive same-store sales comparison for the product category. The strength in certain strategic product categories, such as safety, medical and specialty gases, and tools are helping sales growth even though several of the Company's core welding and metal fabrication customer segments are still relatively weak. The Company believes that the Distribution segment's positive sales momentum will continue into the fiscal third quarter driven by higher volumes of strategic products and price increases implemented during the current fiscal year. 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 decreased $1.3 million compared to the prior year quarter primarily from net divestiture activity, partially offset by same-store sales growth. Lower sales resulting from the divestiture of operations in Poland and Thailand in the prior year were partially offset by the nitrous oxide production business that was acquired with Puritan-Bennett. Gas Operations' same-store sales increased $2.8 million (8.7%) driven by selected price increases and higher volumes of dry ice, liquid carbon dioxide, and specialty gases. The Company anticipates that sales of the Gas Operations segment will decline in 14 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the third and fourth quarters of fiscal 2001 compared to the first and second quarters of fiscal 2001 as a result of the seasonal impact of cooler temperatures, which reduce the demand for dry ice and liquid carbon dioxide. Gross Profits Gross profits increased 6.8% and gross profit margins increased 40 basis points to 48.0% during the current quarter compared to the prior year quarter.
Three Months Ended (In thousands) September 30, Gross Profits 2000 1999 Increase Distribution $172,409 $160,326 $12,083 7.5% Gas Operations 24,601 24,116 485 2.0% $197,010 $184,442 $12,568 6.8%
The increase in Distribution gross profits of $12.1 million resulted from net acquisition and divestiture activity of $8.6 million and growth in same-store gross profits of $3.5 million (2.9%). The increase in same-store gross profits resulted primarily from higher sales volumes of gas and rent and price increases implemented during the first and second fiscal quarters. Hardgoods gross profits have also been helped by lower product costs resulting from centralized purchasing initiatives and increased sales of higher margin private label products. Distribution's gross profit margin of 46.5% in the current quarter increased 30 basis points from 46.2% in the prior year quarter primarily as a result of the acquisition of Puritan-Bennett. The increase in Gas Operations gross profits of $485 thousand resulted from same-store gross profit growth, partially offset by net divestiture activity. Same-store gross profits grew $1.8 million (8.6%) primarily due to higher sales volumes of dry ice and price increases during the first and second fiscal quarters. Gross profits decreased $1.3 million as a result of net divestiture activity. Gas Operations' gross profit margin of 63.0% increased 320 basis points from 59.8% in the prior year quarter primarily due to the divestiture of lower margin foreign operations. 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 $12.5 million (9.7%) compared to the prior year quarter primarily from net acquisition and divestiture activity and higher costs associated with personnel, insurance and fuel. As a percentage of net sales, operating expenses increased 110 basis points to 34.5% compared to 33.4% in the prior year quarter. Depreciation and amortization amounted to $22.3 million in the current quarter compared to $23.0 million in the prior year quarter. During the current quarter, with the sale of a business in India, the Company completed the divestiture of businesses originally provided for under the fiscal 1998 special charge associated with the Company's "Repositioning Airgas for Growth" restructuring plan. The Company reversed the remaining divestiture accrual of $1.3 million that represented the difference between the Company's original loss estimates and actual results. The special charge reversal was offset by a charge recorded in September 2000 to establish a liability for legal fees and costs related to litigation that resulted from a 1997 refrigerant loss. 15 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Income Operating income increased 2.3% and operating margins declined 20 basis points to 8.1% during the current quarter compared to the prior year quarter.
Three Months Ended (In thousands) September 30, Operating Income 2000 1999 Increase Distribution $26,598 $26,408 $ 190 0.7% Gas Operations 6,448 5,896 552 9.4% $33,046 $32,304 $ 742 2.3%
The Distribution segment's operating income margin decreased 40 basis points to 7.2% 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. The Company believes that continued sales growth and the impact of price increases will help to offset increases in operating expenses during the third and fourth quarters of fiscal 2001. The Gas Operations segment's operating income margin increased 190 basis points to 16.5% compared to 14.6% in the prior year quarter primarily from net divestiture activity. Interest Expense, net Interest expense, net, totaled $16.3 million representing an increase of $1.9 million (13.0%) compared to the prior year quarter. The increase in interest expense resulted from higher average debt levels and a 75 basis point increase in weighted-average interest rates. The net increase in debt was primarily attributable to the fourth quarter fiscal 2000 acquisition of Puritan-Bennett as well as common stock repurchases. At September 30, 2000, the Company's ratio of fixed to variable rate debt was 61% to 39%, respectively. 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. Other Income, net Other income, net, totaled $405 thousand in the current quarter compared to $15.2 million in the prior year quarter. The prior year quarter included a $14.4 million gain from the divestiture of operations in Poland and Thailand. Income Tax Expense The effective income tax rate was 41.0% of pre-tax earnings in the current quarter compared to 44.0% in the prior year quarter. The effective income tax rate in the prior year quarter was impacted by higher foreign tax rates on the gain from the divestiture of operations in Poland and Thailand. Net Earnings Net earnings for the quarter ended September 30, 2000 were $10.4 million, or $.16 per diluted share, compared to $18.9 million, or $.27 per diluted share, in the prior year quarter. Excluding the gain on the divestiture of operations in Poland and Thailand, net earnings in the prior year quarter were $11.4 million, or $.16 per diluted share. 16 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 1999 INCOME STATEMENT COMMENTARY Net Sales Net sales increased 6.8% for the six months ended September 30, 2000 ("current period") compared to the six months ended September 30, 1999 ("prior year period"). Total Company same-store sales increased 3.7% in the current period versus the prior year period.
Six Months Ended (In thousands) September 30, Net Sales 2000 1999 Increase(Decrease) Distribution $745,798 $692,940 $52,858 7.6% Gas Operations 73,297 73,842 (545) (0.7%) $819,095 $766,782 $52,313 6.8%
Distribution sales increased $52.9 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 $30.9 million, primarily resulting from the fourth quarter fiscal 2000 acquisition of Puritan-Bennett. Same-store sales growth of $22.0 million (3.4%) was the result of gas and rent sales growth of $12.4 million (4.4%) and hardgoods sales growth of $9.6 million (2.7%). Gas and rent same-store sales growth was attributable to sales initiatives such as national accounts and higher volumes of strategic products, particularly medical and specialty gases and welder equipment rental. Gas and rent sales growth was also helped by price increases implemented during the current period. Hardgoods same-store sales growth resulted from an increase in safety and tool product sales from cross-selling initiatives. Gas Operations sales decreased $545 thousand in the current period as a result of net divestiture activity largely offset by same-store sales growth. Sales in the current period were $4.7 million lower primarily due to the divestiture of operations in Poland and Thailand in the prior year period. Gas Operations same-store sales increased $4.2 million (6.5%) primarily from higher volumes of dry ice and liquid carbon dioxide. Unseasonably warm weather in certain regions helped increase dry ice volumes during the current period. Gross Profits Gross profits increased 7.8% and gross profit margins increased 40 basis points to 47.7% in the current period compared to the prior year period.
Six Months Ended (In thousands) September 30, Gross Profits 2000 1999 Increase Distribution $344,399 $317,861 $26,538 8.3% Gas Operations 46,413 44,807 1,606 3.6% $390,812 $362,668 $28,144 7.8%
The increase in Distribution gross profits of $26.5 million resulted from net acquisition and divestiture activity of $20.1 million and growth in same-store gross profits of $6.4 million (2.3%). The increase in same-store gross profits was driven by higher sales volumes of gas and rent and price increases implemented during the current period. Hardgoods gross profits have been helped by lower costs from centralized purchasing initiatives and continued sales growth of higher margin private label products. The Distribution segment's gross profit 17 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS margin of 46.2% in the current period increased 30 basis points from 45.9% in the prior year period primarily from the acquisition of Puritan-Bennett. The increase in Gas Operations gross profits of $1.6 million resulted from same-store gross profit growth, partially offset by net divestiture activity. Same-store gross profit growth of $3.2 million (7.8%) resulted primarily from higher sales volumes of dry ice and liquid carbon dioxide and price increases implemented during the current period. Net divestiture activity partially offset the same- store gross profit growth by $1.6 million. Gas Operations gross profit margin of 63.3% increased 260 basis points from 60.7% in the prior year period driven by the divestiture of lower margin foreign operations and the addition of higher margin nitrous oxide business acquired with Puritan-Bennett. Operating Expenses Operating expenses increased $25.5 million (10.0%) compared to the prior year period primarily from net acquisition and divestiture activity and higher costs associated with personnel, insurance and fuel. As a percentage of net sales, operating expenses increased 100 basis points to 34.4% compared to 33.4% in the prior year quarter. Depreciation and amortization was flat at $45.1 million in both the current and prior year periods. Operating Income Operating income increased 4.4% and operating margins declined 20 basis points to 7.8% in the current period compared to the prior year period.
Six Months Ended (In thousands) September 30, Operating Income 2000 1999 Increase Distribution $52,723 $52,668 $ 55 0.1% Gas Operations 11,366 8,735 2,631 30.1% $64,089 $61,403 $2,686 4.4%
The Distribution segment's operating income margin decreased 50 basis points to 7.1% in the current period compared to 7.6% in the prior year period primarily as a result of higher operating expenses, partially offset by gross profits from same-store sales growth and acquisitions. The Gas Operations segment's operating income margin increased 370 basis points to 15.5% primarily from the divestiture of lower margin foreign operations. Interest Expense, net Interest expense, net, totaled $32.1 million representing an increase of $3.9 million (13.7%) compared to the prior year period. The increase in interest expense resulted from higher average debt levels and a 70 basis point increase in weighted-average interest rates. The net increase in debt was primarily attributable to the fourth quarter fiscal 2000 acquisition of Puritan-Bennett as well as common stock repurchases. 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. 18 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Income, net Other income, net, totaled $457 thousand in the current period compared to $15.4 million in the prior year period. The prior year period included a $14.4 million gain from the divestiture of operations in Poland and Thailand. Income Tax Expense The effective income tax rate was 41.1% of pre-tax earnings in the current period compared to 43.2% in the prior year period. The effective income tax rate in the prior year period was affected by higher foreign tax rates on the gain from the divestiture of operations in Poland and Thailand. 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. Net Earnings Net earnings for the six month period ended September 30, 2000 were $20.2 million, or $.30 per diluted share, compared to $28 million, or $.39 per diluted share, in the prior year period. Excluding the charge for the cumulative effect of an accounting change and a gain on the divestiture of the Company's operations in Poland and Thailand, net earnings in the prior year period were $21 million, or $.30 per diluted share, 19 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Cash Flows Cash flows from operating activities totaled $50.7 million for the six months ended September 30, 2000 compared to $51.2 million in the prior year period. Adjustments to reconcile net income to net cash provided by operating activities included depreciation and amortization of $45.1 million and deferred income taxes of $6.9 million from temporary differences. Additionally, working capital components used cash of $18 million primarily for an increase in trade receivables and inventories and lower accounts payable. Trade receivables increased $8.4 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 51 days from 48 days at March 31, 2000. Inventories used cash of $1.9 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 associated with payment terms. Cash used in investing activities totaled $22.5 million during the current period. Investing activities primarily included capital expenditures that used cash of $31 million and divestiture proceeds that provided cash of $7 million. Capital expenditures in the current period were flat compared to the same period last year. Capital expenditures associated with the purchase of cylinders, bulk tanks, rental welders and machinery and equipment totaled approximately $23 million, or approximately 75% of total capital expenditures, and facilitate strategic product sales growth. Management continues to focus on improving asset utilization and controlling capital spending. Capital expenditures for fiscal 2001 are expected to amount to less than the fiscal 2000 total of $65 million. Financing activities used cash of $28.1 million. Activities that used cash during the period primarily included net repayment of debt of $13.2 million, repurchase of the Company's common stock in the amount of $11.2 million and the decrease in the cash overdraft of $4.5 million. 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. Capital expenditures, current debt maturities and any future acquisitions are expected to be funded through the use of cash flow from operations, revolving credit facilities, potential sales of non- core businesses and other financing alternatives, including asset-based financing. The Company believes that the sales of non-core businesses have the potential to generate $70 to $85 million in after-tax cash proceeds over the next 12 months. The Company believes that its sources of financing are adequate for its anticipated needs and 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. 20 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 $66 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 September 30, 2000, the Company had borrowings under the credit agreement of approximately $554 million and $41 million Canadian (US $27 million). The Company also had commitments under letters of credit supported by the credit agreement of approximately $51 million. Based on restrictions related to cash flow to funded debt coverage, the Company had additional borrowing capacity under the credit facilities of approximately $83 million at September 30, 2000. At September 30, 2000, the effective interest rate on borrowings under the credit facilities was 7.20% on U.S. borrowings and 6.03% on Canadian borrowings. At September 30, 2000, the Company had the following medium-term notes outstanding: $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 September 30, 2000, long-term debt of the Company included acquisition notes and other long-term debt instruments of approximately $58 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 September 30, 2000, the Company was party to 21 interest rate swap agreements. The swap agreements are with major financial institutions and aggregate $535 million in notional principal amount at September 30, 2000. Seventeen swap agreements with approximately $405 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 six years. Four swap agreements with $130 million in notional principal amount require variable interest payments based on an average rate of 6.91% at September 30, 2000. Under the terms of three swap agreements, the Company has elected to receive the discounted value of the counterparties' interest payments up-front. At September 30, 2000, approximately $2.1 million of such payments was included in other current liabilities and $900 thousand 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. At September 30, 2000, the Company's ratio of fixed to variable rate debt was 61% to 39%. 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. In April 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 three and six-month periods ended September 30, 2000 was not material. At September 30, 2000, approximately 500 thousand shares remain under the share repurchase authorization. 21 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER New Accounting Pronouncements In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Statement 140 replaces FASB Statement 125, revises the standards for accounting for securitizations and other transfers of financial assets and requires certain additional disclosures. Statement 140 is effective for applicable transactions occurring after March 31, 2001. Statement 140 disclosures are required for fiscal years ending after December 15, 2000. The Company will evaluate the impact of Statement 140 upon the consideration of potential financing alternatives. In June 2000, the 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 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 within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements regarding: the Company's expectations regarding the continuation of the Distribution segment's positive same-store sales momentum into the fiscal third quarter; the impact of higher volumes of strategic products and price increases and their effect on sales growth; the seasonal impact on sales of the Gas Operations segment in the fiscal third and fourth quarters of fiscal 2001; the Company's belief that continued sales growth and the impact of price increases will help to offset increases in operating expenses in the third and fourth quarters of fiscal 2001; operating expense trends; the funding of future acquisitions, capital expenditures and current debt maturities through the use of cash flow from operations, revolving credit facilities, potential sales of assets and other financing alternatives; the identification of acquisitions candidates; future debt repayment; future sources of financing; the Company's belief that the sales of non-core businesses have the potential to generate $70 to $85 million in after-tax proceeds over the next 12 months; the level of fiscal 2001 capital expenditures; and performance of counterparties under interest rate swap agreements. These forward-looking statements involve risks and uncertainties. Factors that could cause actual results to differ materially from those predicted in any forward-looking statement include, but are not limited to: underlying market conditions; growth and continued improvement in same-store sales; the success of marketing initiatives on sales of strategic products; the Company's ability to control operating expenses and the potential impact of higher operating expenses in future periods; the impact of seasonality on sales of the Gas Operations segment; the market acceptance and success of private label products; the ability of the Company to improve margins through sales of strategic and private label products; adverse changes in customer buying patterns; the market acceptance of price increases; the ability of price increases and sales growth to offset any increases in operating expenses; the success of centralized purchasing and distribution initiatives in lowering product costs; the ability to generate sufficient cash flow from operations or other sources to repay debt, fund future acquisitions or capital expenditure requirements; the ability to identify economically attractive or willing acquisition candidates; the ability to identify alternate sources of financing; the ability to consummate sales of businesses; the ability to negotiate sales prices of businesses on terms economically favorable to the Company; the ability to identify means to improve asset utilization; the ability to control capital spending; the ability to manage interest 22 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS rate exposure; the effects of competition from independent distributors and vertically integrated gas producers on products, pricing and sales growth; 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. 23 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 September 30, 2000, the ratio of fixed versus floating debt was 61% to 39%. 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 September 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] 24
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 $207 Interest expense $ 7 $ 15 $ 13 $ 13 $ 8 $ 8 $ 3 $ 67 Average interest rate 7.41% 7.42% 7.49% 7.49% 7.75% 7.75% 7.75% Acquisition notes $ 7 $ 16 $ 1 $ 22 $ -- $ 2 $ -- $ 48 $ 46 Interest expense $ -- $ 1 $ -- $ 2 $ -- $ -- $ -- $ 3 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 $ -- $ -- $581 $ -- $ -- $ -- $ -- $581 $581 Interest expense $ 21 $ 42 $ 28 $ -- $ -- $ -- $ -- $ 91 Interest rate 7.14% 7.14% 7.14% Other notes $ -- $ 7 $ -- $ -- $ 1 $ -- $ -- $ 8 $ 8 Average interest rate 10.50% 10.50% 7.50% 7.50% 7.50% US denominated Swaps: 15 Swaps Receive Variable/Pay Fixed $ 55 $177 $128 $ -- $ 40 $ -- $ -- $400 $ (3) Variable Receive rate (3 month LIBOR)= 6.69% Weighted average pay rate = 6.32% 4 Swaps Receive Fixed/Pay Variable $ -- $ 50 $ -- $ 30 $ -- $ -- $ 50 $130 $ 1 Weighted average receive rate = 6.99% Variable pay rate (6 month LIBOR)= 6.91% Canadian $ denominated Swaps: 2 Swaps Receive Variable/Pay Fixed $ 3 $ 2 $ -- $ -- $ -- $ -- $ -- $ 5 $ -- (3 month CAD BA ) = 5.88% Weighted average pay rate = 7.11% Other LIBOR based agreements: Operating leases with trust $ -- $ 1 $ 1 $ 43 $ -- $ -- $ -- $ 45 $ 45 Variable rate (3 month LIBOR plus 130 basis points)=7.99% Fiscal 2001 financial instrument maturities and related interest expense relate to the period October 1, 2000 through March 31, 2001. The variable rate of long-term debt obligations is based on the London Interbank Offered Rate ("LIBOR") as of September 30, 2000. For future periods, the variable interest rate is assumed to remain at 7.14% with the principal balance of long-term debt obligations held constant at $581 million. However, the variable rate and borrowing levels of long-term debt may fluctuate materially from those presented above. The variable receive rate for Canadian dollar denominated interest rate swaps is the rate on Canadian Bankers' acceptances ("CAD BA").
25 Limitations of the tabular presentation As the table incorporates only those interest rate risk exposures that exist as of September 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 and financial position. 26 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. In August, 2000, the Company's motion for summary judgment was denied, and the Company anticipates that additional discovery and pretrial motions will take nine to twelve more months and may result in additional costs. The Company believes that Praxair's North Carolina claims are without merit and intends to defend vigorously against such claims. In 1997, the Company announced it was the victim of a fraudulent breach of contract by a third party supplier of refrigerant gases and recorded a non-recurring special charge related to product losses and costs associated with the Company's efforts to investigate the fraud and pursue recoveries. During the quarter ended September 30, 2000, the Company recorded a non-recurring special charge of $1.3 million related to the estimated legal fees and costs of pursuing additional recoveries from its insurance carriers. All steps preparatory for trial have been concluded, and the Company expects that a trial date will be set imminently. 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 4. Submission of Matters to a Vote of Security Holders The annual meeting of the stockholders of the Company was held on August 3, 2000, where the following actions were taken: (a) The stockholders voted to elect James W. Hovey, Paula A. Sneed, and David M. Stout to the Board of Directors. The votes cast for each Director were as follows: No. of Shares For Withheld/Against James W. Hovey 64,504,997 2,940,272 Paula A. Sneed 64,505,052 2,940,217 David M. Stout 64,511,314 2,933,955 In addition to the Board members elected at the annual meeting, the following are directors whose terms in office as directors continued after the meeting: W. Thacher Brown, Frank B. Foster, III, Peter McCausland, John A. H. Shober, Lee M. Thomas, and Robert L. Yohe. (b) The stockholders voted to ratify the selection of KPMG LLP as the Company's independent auditors. The votes cast in regard to the action were as follows: No. of Shares For Withheld/Against Abstain 65,732,665 919,630 792,974 27 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 September 30, 2000. b. Reports on Form 8-K On July 28, 2000, the Company filed a Form 8-K pursuant to Item 5, reporting its earnings for the first quarter ended June 30, 2000. On September 19, 2000, the Company filed a Form 8-K pursuant to Item 5, announcing that Glenn Fischer, formerly president of BOC Gases - - North America, would be named president and chief operating officer effective November 1, 2000. 28 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: November 9, 2000 /s/ Roger F. Millay Roger F. Millay Senior Vice President - Finance and Chief Financial Officer EX-11 2 ex11.txt EXHIBIT 11 EXHIBIT 11 AIRGAS, INC. EARNINGS PER SHARE CALCULATIONS
Three Months Ended Six Months Ended September 30, September 30, (In thousands, except per share amounts) 2000 1999 2000 1999 Weighted Average Shares Outstanding: Basic shares outstanding 65,400 69,700 65,200 69,800 Stock options - incremental shares 400 1,300 400 1,200 Contingently issuable shares 800 200 1,300 200 ------ ------ ------ ------ Diluted shares outstanding 66,600 71,200 66,900 71,200 ====== ====== ====== ====== Net earnings $10,403 $18,912 $20,219 $27,997 ====== ====== ====== ====== Basic earnings per share $ .16 $ .27 $ .31 $ .40 Diluted earnings per share $ .16 $ .27 $ .30 $ .39
EX-27 3 ex27.xfd EXHIBIT 27
5 This schedule contains summary financial information extracted from consolidated balance sheet and consolidated statement of earnings of this quarterly report on Form 10-Q and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS Apr-01-2000 Mar-31-2001 Sep-30-2000 0 0 228,020 7,417 161,507 418,195 1,097,513 349,129 1,724,387 249,857 795,599 0 0 734 484,648 1,724,387 819,095 819,095 428,283 755,006 0 0 32,071 34,326 14,107 20,219 0 0 0 20,219 0.31 0.30
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