-----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, MXNvmGo+r+VvJX29fDC81pF98FsfpL7TNfFeQm77KZX5RpuE+ztfmcukz8n2Y5AM OKgoGeMLB1W+QNFjZWTMOA== 0000804212-01-500017.txt : 20010614 0000804212-01-500017.hdr.sgml : 20010614 ACCESSION NUMBER: 0000804212-01-500017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRGAS INC CENTRAL INDEX KEY: 0000804212 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-CHEMICALS & ALLIED PRODUCTS [5160] IRS NUMBER: 560732648 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09344 FILM NUMBER: 1659837 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-K 1 form10-k.txt FORM 10-K FISCAL YEAR ENDED 3-31-01 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File No. 1-9344 AIRGAS, INC. (Exact name of registrant as specified in its charter) Delaware 56-0732648 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 259 North Radnor-Chester Road, Suite 100 Radnor, Pennsylvania 19087-5283 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (610) 687-5253 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12 (b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - -------------------------------------- ----------------------- Common Stock, par value $.01 per share New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the 64,026,119 shares of voting stock held by non-affiliates of the Registrant was approximately $696 million computed by reference to the closing price of such stock on the New York Stock Exchange on June 8, 2001. For purposes of this calculation, only executive officers and directors were deemed to be affiliates. The number of shares of common stock outstanding as of June 8, 2001 was 68,419,425. DOCUMENTS INCORPORATED BY REFERENCE The Company's Proxy Statement for the Annual Meeting of Stockholders to be held August 2, 2001 is partially incorporated by reference into Part III. Those portions of the Proxy Statement included in response to Item 402(k) and Item 402(l) of Regulation S-K are not incorporated by reference into Part III. 2 AIRGAS, INC. TABLE OF CONTENTS PART I ITEM NO. PAGE - -------- ---- 1. Business.................................................. 3 General................................................ 3 Distribution........................................... 3 Gas Operations......................................... 4 Airgas Growth Strategies............................... 5 Regulatory and Environmental Matters................... 6 Insurance.............................................. 6 Employees.............................................. 6 Patents, Trademarks and Licenses....................... 6 Executive Officers of the Company...................... 7 2. Properties................................................ 8 3. Legal Proceedings......................................... 9 4. Submission of Matters to a Vote of Security Holders....... 9 PART II 5. Market for the Company's Common Stock and Related Stockholder Matters....................................... 10 6. Selected Financial Data................................... 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 13 7A. Quantitative and Qualitative Disclosures About Market Risk 28 8. Financial Statements and Supplementary Data............... 31 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 31 PART III 10. Directors and Executive Officers of the Company............ 31 11. Executive Compensation..................................... 31 12. Security Ownership of Certain Beneficial Owners and Management................................................. 31 13. Certain Relationships and Related Transactions............. 31 PART IV 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K................................................... 32 Signatures...................................................... 35 3 PART I ITEM 1. BUSINESS. GENERAL Airgas, Inc. and subsidiaries ("Airgas" or the "Company") is the largest U.S. distributor of industrial, medical and specialty gases (delivered in "packaged" or cylinder form), and welding, safety and related products ("hardgoods"). Airgas also produces dry ice, liquid carbon dioxide, nitrous oxide and specialty gases for distribution throughout the United States. Airgas' integrated network of approximately 700 locations includes branches, retail stores, packaged gas fill plants, specialty gas labs, production facilities and distribution centers. Airgas also distributes its products and services to its diversified customer base through eBusiness, catalog and telemarketing channels. Sales were $1.63 billion, $1.54 billion and $1.56 billion in fiscal years 2001, 2000 and 1999, respectively. The Company's two operating segments are Distribution and Gas Operations. Financial information by business segment can be found in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A"), and Note 22 to the Company's Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." Descriptions of the operating segments are as follows: DISTRIBUTION The Distribution segment accounts for approximately 90% of consolidated sales and reflects the distribution of industrial, medical and specialty gases, and hardgoods. The Distribution segment also includes the equity affiliate earnings related to the Company's joint venture with National Welders Supply Company, Inc., which is a producer and distributor of industrial, medical and specialty gases and hardgoods. Principal Products and Services The Distribution segment's principal products and services include packaged and small bulk gases, gas cylinder and welding equipment rental and hardgoods. Gas sales include industrial, medical and specialty gases such as: nitrogen, oxygen, argon, helium, acetylene, carbon dioxide, nitrous oxide, hydrogen, welding gases, ultra high purity grades and special application blends. Rent is derived from gas cylinders, cryogenic liquid containers, bulk storage tanks and through the rental of welding equipment. Gas and rent represented approximately 44%, 42%, and 40% of the Distribution segment's sales in each of the fiscal years 2001, 2000, and 1999, respectively. Hardgoods consist of welding supplies and equipment, safety products, and industrial tools and supplies. In each of the fiscal years 2001, 2000, and 1999, hardgoods sales represented approximately 56%, 58%, and 60% of the Distribution segment's sales, respectively (see Note 22 of the Company's Consolidated Financial Statements for additional information regarding segment sales). Principal Markets and Methods of Distribution The Company believes the market for industrial, medical and specialty gases in the United States is approximately $9.4 billion annually. The industry has three principal modes of distribution: on- site supply, bulk or merchant supply and cylinder ("packaged gas") supply. In the U.S. market, on-site supply accounts for approximately 25% of sales, bulk or merchant supply accounts for approximately 35% of sales, and packaged gas supply accounts for the remaining 40% or $3.8 billion in sales. Airgas' market focus has been on the packaged gas segment of the market and on small bulk customers. Generally, packaged gas distributors also distribute welding products. The Company believes the U.S. market for welding products to be approximately $3.9 billion annually. 4 Airgas is the largest distributor of packaged gases and welding products in the United States with approximately a 15% market share. The Company's competitors in this market are approximately 900 independent distributors that serve approximately 50% of the market through a fragmented distribution network. Large distributors, including vertically integrated gas producers such as Praxair, Inc. ("Praxair"), Air Products and Chemicals, Inc. ("Air Products"), Liquid Air Corporation of America ("Air Liquide"), and BOC Gases Group ("BOC Gases"), serve the remaining 35% of the packaged gas market. The Company also sells safety equipment. The United States market for safety equipment is approximately $6 billion, of which Airgas' share is approximately 4%. Customer Base The Company's customer base is broad and includes many major industries. The Company estimates the following industry segments account for the indicated percentages of the Company's total sales: o Manufacturing (49%) - principally producers of fabricated metal products (15%), industrial and transportation equipment (9%), chemical products (5%), and primary metal products (5%); o Service Sector (11%) - principally medical and health services (7%); o Wholesale Trade (10%), o Agriculture and Mining (8%); o Construction (7%); and o All Other (15%). Suppliers The Company purchases industrial, medical and specialty gases pursuant to requirements contracts from national and regional producers of industrial gases. The Company also manufactures certain gases, including acetylene, nitrous oxide, nitrogen, oxygen and argon. The Company believes, that if a contractual arrangement with any supplier of gases or other raw materials was terminated, it would be able to locate alternative sources of supply without disruption of service. The Company purchases hardgoods from major manufacturers and suppliers. For certain products, the Company has negotiated national purchasing arrangements. GAS OPERATIONS The Gas Operations segment produces and distributes certain gas products, principally dry ice, carbon dioxide, nitrous oxide and specialty gases. The Company also operates two air separation plants that produce oxygen, nitrogen and argon which are sold to on- site customers and to the Distribution segment. A description of the businesses included in the Gas Operations segment are as follows: Dry Ice The Company is a producer and distributor of dry ice in the United States. Customers include food processors, food service, pharmaceutical and biotech industries, wholesale trade and grocery and other retail outlets. The dry ice business generally experiences a higher level of sales in the first and second quarters of the fiscal year due to weather-related demand. The Company's carbon dioxide requirements (dry ice is the solid form of carbon dioxide) are purchased from the vertically integrated producers of carbon dioxide and from internal production sources. 5 Carbon Dioxide The Company is a producer and distributor of liquid carbon dioxide. Carbon dioxide requirements are met by eight Company-owned production facilities and a 50%-owned joint venture as well as purchased from vertically integrated gas producers of carbon dioxide. The joint venture also produces and sells liquid carbon dioxide to other producers of industrial gases. The Company believes the United States bulk supply market for liquid carbon dioxide is approximately $400 million annually. The largest customer segments include chemical producers and oil and gas extraction. The Company primarily competes with three major carbon dioxide companies, Praxair, BOC Gases and Air Liquide, which produce over 80% of the merchant carbon dioxide volumes in the United States. Specialty and Other Gases The Company operates six "A" labs, full scale testing and blending facilities, which blend various special application gas mixes, ultra high purity grade gases, pure hydrocarbon mixtures, EPA protocol gases, and vehicle emission standard gases. Gas mixtures are used in process control, final product qualification and emissions monitoring. Specialty gases produced are primarily sold to the Distribution segment (see Note 22 of the Company's Consolidated Financial Statements for disclosure related to segment sales). The third-party customer base for these products consists primarily of environmental-related businesses, manufacturers of electronics, governmental entities, petroleum refiners, and pharmaceutical and automotive businesses. Gas Operations also provides technical support to 27 "B" labs, limited scale testing and blending facilities, which are operated by the Distribution segment. The "A" and "B" labs perform testing and certification services for gas purity. Nitrous Oxide The Company is a manufacturer of nitrous oxide gas. Nitrous oxide is used as an anesthetic in the medical and dental fields, as a propellant in the packaged food business and is utilized in the manufacturing process of certain high technology electronics industries. The Company's market focus includes bulk customers as well as sales to the Distribution segment. The Company purchases the raw materials utilized in its nitrous oxide production pursuant to contracts with major manufacturers and suppliers. Suppliers The Company believes that, if a contractual arrangement with any Gas Operations segment supplier was terminated, it would not have a material adverse effect on operations. However, two of the Company's 15 dry ice production facilities are located on property owned by BOC Gases. If the current arrangements with BOC Gases were terminated, the Company's dry ice production capabilities may be reduced. AIRGAS GROWTH STRATEGIES The Company's strategic objectives are to establish itself as the low-cost supplier in the industry and drive market-leading sales growth by leveraging its national distribution infrastructure. To meet these objectives, the Company has established the following strategic initiatives: o increasing market penetration by growing the strategic account business, increasing cross-selling to existing customers, strengthening sales leadership training and leveraging the market presence of Puritan Medical Products (a subsidiary of the Company); o migrating customers to the appropriate distribution channel by leveraging the Company's safety telesales capabilities, launching the second generation eBusiness capability and providing sales training on channel management; 6 o improving supply chain efficiencies through optimizing the routing and scheduling of trucks, more efficient cylinder filling and management, controlling procurement and enhancing the operations of the Company's five distribution centers; and o redesigning key business processes to standardize, centralize and implement a matrix organization structure. These strategic objectives are designed to facilitate organic sales and earnings growth. The Company will also continue to supplement its internal growth strategies through core business acquisitions and exiting low-return, non-core businesses. REGULATORY AND ENVIRONMENTAL MATTERS The Company's subsidiaries are subject to federal and state laws and regulations adopted for the protection of the environment and the health and safety of employees and users of the Company's products. The Company has programs for the operation and design of its facilities to achieve compliance with applicable environmental regulations. The Company believes that it is in compliance, in all material respects, with such laws and regulations. Expenditures for environmental purposes during fiscal 2001 were not material. INSURANCE The Company has established insurance programs to cover workers' compensation, business automobile, general and product liability. These programs have self-insured retention of $500,000 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. EMPLOYEES On March 31, 2001, the Company employed approximately 7,600 employees of whom approximately 5% were covered by collective bargaining agreements. The Company believes it has good relations with its employees and has not experienced a significant strike or work stoppage in over ten years. PATENTS, TRADEMARKS AND LICENSES The Company holds trademark registrations for "Airgas," "Red-D- Arc," "RED-D-ARC WELDERENTAL," "Gold Gas," "Stainless Mix," "Steelmix," "Alummix," "Powersource," and "VAWELD." The Company has trademarks pending for "RADNOR," "RADNOR Industrial Products," "RADNOR Safety Products," and "RADNOR Welding Products," its private- label product brands. The Company believes that its businesses as a whole are not materially dependent upon any single patent, trademark or license. 7 EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows: Name Age Position - ---- --- -------------------------------------- Peter McCausland (1) 51 Chairman of the Board and Chief Executive Officer Glenn M. Fischer 50 President and Chief Operating Officer Roger F. Millay 43 Senior Vice President - Finance and Chief Financial Officer Andrew R. Cichocki 38 Senior Vice President - Business Operations and Planning Robert A. Dougherty 43 Senior Vice President - Information Services and Chief Information Officer Christopher E. Giangrasso 40 Senior Vice President - Human Resources Gordon L. Keen, Jr. 56 Senior Vice President - Law and Corporate Development Michael L. Molinini 50 Senior Vice President - Hardgoods Operations Ted R. Schulte 50 Senior Vice President - Gas Operations Patrick M. Visintainer 37 Senior Vice President - Sales Alfred B. Crichton 53 Division President - West B. Shaun Powers 49 Division President - East __________________ (1) Member of the Board of Directors Mr. McCausland has been Chairman of the Board and Chief Executive Officer of the Company since May 1987. Mr. McCausland has also served as President from June 1986 to August 1988, from April 1993 to November 1995, and from April 1997 to December 1998. In May 1997, Mr. McCausland was elected to the board of directors of Hercules Inc., a worldwide manufacturer of chemical specialty products. He also serves on the Board of Trustees of the Eisenhower Exchange Fellowships. Mr. Fischer has been President and Chief Operating Officer since November 2000. Prior to joining Airgas, Mr. Fischer served as President of BOC Gases - North America from 1997 to 2000. Prior to that time, Mr. Fischer served as Executive Vice President of BOC Gases - Americas from 1995 to 1997. Mr. Millay has been Senior Vice President - Finance and Chief Financial Officer since November 1999. Prior to joining Airgas, Mr. Millay served as Senior Vice President and Chief Financial Officer of Transport International Pool, a division of General Electric Capital Corporation, from May 1995 to October 1999. Mr. Cichocki has been Senior Vice President - Business Operations and Planning since January 1999. Prior to that time, Mr. Cichocki served as Vice President - Corporate Development from April 1997 to December 1998 and as Assistant Vice President - Corporate Development from August 1992 to March 1997. Mr. Dougherty has been Senior Vice President - Information Services and Chief Information Officer since joining Airgas in January 2001. Prior to joining Airgas, Mr. Dougherty served as Vice President and Chief Information Officer from August 1998 to December 2000 and as Director of Information Systems from November 1993 to July 1998 of Subaru of America, Inc. Mr. Giangrasso has been Senior Vice President - Human Resources since May 2001. Prior to joining Airgas, Mr. Giangrasso served as Vice President, Human Resources of Aramark Corporation from October 1995 to January 2001. Mr. Keen has been Senior Vice President - Law and Corporate Development since April 1997. Prior to that time, Mr. Keen served as Vice President - Corporate Development from January 1992 to March 1997. 8 Mr. Molinini has been Senior Vice President - Hardgoods Operations since August 2000. Prior to that time, Mr. Molinini served as Vice President - Hardgoods Operations from August 1999 to July 2000 and as Vice President - Airgas Direct Industrial from April 1997 to July 1999. Prior to joining Airgas, Mr. Molinini served as Vice President of Marketing of National Welders Supply Company since 1991. Mr. Schulte has been Senior Vice President - Gas Operations since August 2000. Prior to that time, Mr. Schulte served as Vice President - Gas Operations from November 1998 to July 2000 and as President of Airgas Carbonic from November 1997 to October 1998. Prior to joining Airgas, Mr. Schulte served as Senior Vice President of Energetic Solutions, the US subsidiary of ICI Explosives, from June 1997 to October 1997 and as Vice President Industrial Gas Sales of Arcadian Corporation from 1992 through June 1997. Mr. Visintainer has been Senior Vice President - Sales since January 1999. Prior to that time, Mr. Visintainer served as Vice President - Sales and Marketing from February 1998 to December 1998 and as President of one of the Company's subsidiaries from April 1996 to January 1998. Until March 1996, he was employed by BOC Gases and served in various field positions including National Sales Manager - Industrial/Special Gases and National Accounts Manager. Mr. Crichton has been Division President - West since February 1993. Prior to that time, Mr. Crichton served in various leadership positions since joining the Company in 1988 and has more than 30 years of industry experience. Mr. Powers has been Division President - East since joining Airgas in April 2001. Prior to joining Airgas, Mr. Powers served as Senior Vice President of Industrial Gases at AGA from October 1995 to March 2001. Mr. Powers' career also includes 17 years with Air Products and Chemicals, Inc. where he served in various leadership positions. ITEM 2. PROPERTIES. The principal executive offices of the Company are located in leased space in Radnor, Pennsylvania. The Company's Distribution segment operates a network of approximately 560 branch stores, 27 "B" gas laboratories, 15 acetylene manufacturing facilities, five regional distribution centers, 130 cylinder fill plants and various customer call centers. The Distribution segment conducts business in 44 states. The Company owns approximately 25% of these facilities. The remaining facilities are primarily leased from third parties. Facilities leased from employees are on terms consistent with commercial rental rates prevailing in the surrounding rental market. The Company's Gas Operations' segment consists of businesses, located throughout the United States, which operate approximately 40 branch locations, eight liquid carbon dioxide and 15 dry ice production facilities, two air separation plants, six "A" gas laboratories, and six nitrous oxide production facilities. The Company owns approximately 20% of these facilities. The remaining facilities are leased from third parties. During fiscal 2001, the Company's production facilities operated at approximately 80% of capacity. The Company believes that its facilities are adequate for its present needs and that its properties are generally in good condition, well maintained and suitable for their intended use. 9 ITEM 3. 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 anticipates that additional discovery and pretrial motions will be completed by the end of the calendar year, and that a trial on the merits will begin in April 2002. The Company believes that Praxair's North Carolina claims are without merit and intends to defend vigorously against such claims. In the fourth quarter of fiscal 2001, the Company recorded a charge of $6.9 million for the anticipated costs of defending the Praxair lawsuit. 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 special charge related to product losses and costs associated with the Company's efforts to investigate the fraud and pursue recoveries. In March 2001, the Company reached a final settlement with its insurance carriers resulting in additional insurance recoveries of $4 million. The insurance settlement net of associated legal expenses was reflected in special charge recoveries in the Consolidated Statement of Earnings under Item 8. Financial Statements and Supplementary Data. In fiscal 2000, the Company recorded a $7.5 million charge representing an estimate of the overall costs associated with the defense and settlement of certain class action lawsuits pertaining to hazardous material charges paid to the Company by customers. In the fourth quarter of fiscal 2001, a settlement agreement and approving court orders covering all such class actions against the Company became final, and the Company reversed $1.1 million of the previously accrued defense and settlement costs. The Company is involved in various legal and regulatory proceedings that have arisen in the ordinary course of its business and have not been fully 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. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 2001. 10 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's common stock (the "common stock") is listed on the New York Stock Exchange (ticker symbol: ARG). The following table sets forth, for each quarter during the last two fiscal years, the high and low closing price per share for the common stock as reported by the New York Stock Exchange:
High Low ---- --- Fiscal 2001 First Quarter $ 8.31 $ 4.63 Second Quarter 6.81 5.13 Third Quarter 8.44 5.88 Fourth Quarter 9.70 6.75 Fiscal 2000 First Quarter $12.31 $ 8.31 Second Quarter 13.75 10.00 Third Quarter 11.50 8.44 Fourth Quarter 9.88 6.06 ______________________
The closing sale price of the Company's common stock as reported by the New York Stock Exchange on June 8, 2001, was $10.87 per share. As of June 8, 2001, there were approximately 15,900 shareholders of record of the Company's common stock. The present policy of the Company is to retain earnings to provide funds for the operation and expansion of its business and not to pay cash dividends on its common stock. Any payment of future dividends and the amounts thereof will depend upon the Company's earnings, financial condition, loan covenants, capital requirements and other factors deemed relevant by management and the Company's Board of Directors. 11 ITEM 6. SELECTED FINANCIAL DATA. Selected financial data for the Company are presented in the table below and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 and the Company's consolidated financial statements included in Item 8 herein.
(In thousands, except per share amounts): Years Ended March 31, ------------------------------------------------------------ 2001 (1) 2000 (2) 1999 (3) 1998 (4) 1997 (5) OPERATING RESULTS: Net sales $1,628,901 $1,542,334 $1,561,218 $1,447,990 $1,158,894 Depreciation & amortization 86,754 89,308 87,926 76,670 62,491 Operating income 107,949 106,731 112,996 118,948 82,285 Interest expense, net 60,207 57,560 60,298 53,290 39,752 Income taxes 20,718 31,551 34,437 29,989 21,080 Net earnings 28,223 38,283 51,924 40,540 23,266 Basic earnings per share $ .43 $ .55 $ .74 $ .59 $ .35 Diluted earnings per share $ .42 $ .54 $ .72 $ .57 $ .34 BALANCE SHEET DATA: Working capital $ 52,255 $ 189,194 $ 165,416 $ 141,276 $ 124,849 Total assets 1,582,725 1,739,331 1,698,472 1,641,474 1,291,031 Current portion of long-term debt 72,945 20,071 19,645 12,150 25,158 Long-term debt 620,664 857,422 847,841 830,845 629,931 Other non-current liabilities 22,446 28,998 23,585 36,842 29,601 Stockholders' equity (6) $ 496,849 $ 472,507 $ 470,945 $ 426,873 $ 336,657 ____________________________
(1) As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the notes to the Company's Consolidated Financial Statements, the results for fiscal 2001 include: (a) net special charges of $3.6 million ($2.3 million after-tax), (b) litigation charges, net, of $5.3 million ($3.4 million after-tax), and (c) asset impairments associated with two equity affiliates of $700 thousand after-tax. The decrease in working capital was partially attributable to a trade receivables securitization program entered into during fiscal 2001 and the classification of $50 million of medium-term notes maturing September 2001 as a component of "Current Liabilities." Cash proceeds of approximately $73.2 million from the program were used to reduce long- term debt. (2) As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the notes to the Company's Consolidated Financial Statements, the results for fiscal 2000 include: (a) special charge recoveries of $2.8 million ($1.7 million after-tax), (b) divestiture gains of $17.5 million ($8.6 million after-tax), (c) a litigation charge of $7.5 million ($4.8 million after-tax), (d) an inventory write-down of $3.8 million ($2.2 million after-tax), and (e) an after-tax charge of $590 thousand representing a change in accounting principle. 12 (3) As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the notes to the Company's Consolidated Financial Statements, the results for fiscal 1999 include: (a) special charge recoveries of $1.0 million ($575 thousand after-tax), (b) divestiture gains of $25.5 million ($15 million after-tax), and (c) a $1.8 million after-tax non- recurring gain relating to insurance proceeds recorded by an equity affiliate. (4) The results for fiscal 1998 include: (a) fourth quarter special charges of $22.4 million ($14.3 million after-tax) which consisted of severance, exit costs for the closure of duplicate facilities, the impairment write-down of property, equipment and related goodwill and a write-down related to the divestiture of several non-core businesses, offset by a one-time net gain related to an acquisition break-up fee of $3 million ($1.9 million after-tax), (b) a non-recurring gain of $14.5 million ($9.4 million after-tax) from the partial recovery of refrigerant losses, and (c) a non-recurring gain on the sale of a non-core business. (5) In fiscal 1997, the Company recorded special charges totaling $31.4 million ($20.2 million after-tax) related to the fraudulent breach of contract by a third-party supplier of refrigerant gas and an after-tax loss on the sale of a non-core business. (6) The Company has not paid any dividends on its common stock. 13 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 7. RESULTS OF OPERATIONS: 2001 COMPARED TO 2000 OVERVIEW The Company's net sales for the fiscal year ended March 31, 2001 were $1.63 billion compared to $1.54 billion in the prior year. Despite a slowing U.S. economy, the Company experienced positive same- store sales growth of 3.1%, continuing the same-store sales growth that began in the prior year fiscal fourth quarter. The Company's successful strategy of leveraging its distribution network to sign new strategic accounts, pursue cross-selling opportunities and promote strategic products had a favorable impact on net sales. In addition, net sales were positively affected by the prior year acquisition of Mallinckrodt Inc.'s Puritan-Bennett medical gas subsidiary ("Puritan Medical Products"). The Company also implemented price increases during fiscal 2001 that helped to offset rising costs related to purchased gases, salaries and wages, insurance, and distribution. Excluding the effect of the items outlined below, net earnings were $.52 per diluted share in both fiscal 2001 and 2000. Net earnings, as reported, for fiscal 2001 were $28.2 million, or $.42 per diluted share, compared to $38.3 million, or $.54 per diluted share, in fiscal 2000. As discussed in the "Income Statement Commentary" below, fiscal 2001 net earnings were affected by the following: o net special charges of $3.6 million ($2.3 million after-tax), o litigation charges, net, of $5.3 million ($3.4 million after-tax), and o asset impairments associated with two equity affiliates of $700 thousand after-tax. Fiscal 2000 net earnings were affected by the following: o special charge recoveries of $2.8 million ($1.7 million after-tax), o divestiture gains of $17.5 million ($8.6 million after-tax), o a litigation charge of $7.5 million ($4.8 million after-tax), o an inventory write-down of $3.8 million ($2.2 million after-tax), and o an after-tax charge of $590 thousand representing a change in accounting principle. Additionally in fiscal 2001, the Company reduced total debt by $183.9 million. The ability to reduce debt is indicative of the strong cash flow characteristics of the Company's business. Debt reduction resulted from cash flow from operations, divestitures and a securitization of trade receivables. Operations provided approximately $61 million, divestitures provided approximately $50 million, principally the divestiture of the Jackson Dome carbon dioxide reserves and associated pipeline ("Jackson Dome pipeline"), and the trade receivables securitization program provided approximately $73 million. 14 INCOME STATEMENT COMMENTARY Net Sales Net sales increased 5.6% in fiscal 2001 compared to 2000, driven by same-store sales growth of 3.1% and prior year acquisitions included for a full year in 2001. The Company estimates same-store sales based on a comparison of current period sales to prior period sales, adjusted for acquisitions and divestitures.
(In thousands) 2001 2000 Increase ---------- ---------- --------------- Distribution $1,487,422 $1,409,949 $77,473 5.5% Gas Operations 141,479 132,385 9,094 6.9% ---------- ---------- ------- $1,628,901 $1,542,334 $86,567 5.6% ========== ========== =======
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 $77.5 million as a result of net acquisition and divestiture activity and same-store sales growth. Fiscal 2001 sales increased $43.8 million from seven distributor acquisitions since April 1, 1999, partially offset by a divestiture during fiscal 2000. The most significant of the acquisitions was that of Puritan Medical Products in the fourth quarter of fiscal 2000. Distribution same-store sales growth of $33.7 million (2.7%) resulted from gas and rent sales growth of $28.8 million (5.1%) and hardgoods sales growth of $4.9 million (1.0%). Gas and rent same-store sales growth was primarily attributable to higher volumes of strategic products and continued success of certain sales initiatives, such as strategic accounts. Growth in strategic product sales resulted from expansion of the rental welder fleet and improvements in certain gas product sales including medical and specialty gases. Price increases implemented during fiscal 2001 also contributed to gas and rent sales growth. Hardgoods same-store sales growth was driven principally by an increase in safety sales resulting from the successful cross-selling of safety products through the Company's distribution network. Although hardgoods same-store sales growth was positive in fiscal 2001, hardgoods sales slowed in the fiscal third quarter with further contraction in the fourth quarter resulting from the slowing U.S. industrial economy. The Gas Operations segment's sales primarily include dry ice and carbon dioxide that are used for cooling, the production of food and beverages, chemical products, and oil and gas extraction. In addition, the segment includes businesses that produce and distribute specialty gases and nitrous oxide. Sales increased $9.1 million in fiscal 2001 compared to the prior year primarily from same-store sales growth (7.2%). Gas Operations' same-store sales growth resulted from higher volumes of liquid carbon dioxide, dry ice and nitrous oxide. Sales growth was also driven by price increases that were implemented during the fourth quarter of fiscal 2001 to help offset the impact of higher energy and distribution costs. The reduction in sales from the divestiture of the Jackson Dome pipeline in fiscal 2001 and the divestiture of operations in Poland and Thailand in fiscal 2000 were offset by nitrous oxide production businesses that were acquired with Puritan Medical Products. 15 Gross Profits
Gross profits increased 7.7% in fiscal 2001 compared to 2000. (In thousands) 2001 2000 Increase -------- -------- ---------------- Distribution $689,999 $649,827 $40,172 6.2% Gas Operations 91,702 75,910 15,792 20.8% -------- -------- ------- $781,701 $725,737 $55,964 7.7% ======== ======== =======
Distribution gross profits increased $40.2 million resulting from net acquisition and divestiture activity and same-store gross profits growth. Acquisition and divestiture activity accounted for a net increase in gross profits of $29.0 million, primarily from the acquisition of Puritan Medical Products in the fourth quarter of fiscal 2000. Same-store gross profits increased $11.2 million (2.4%) compared to the prior year. Same-store gross profit growth consisted of a $14.4 million (3.7%) increase in gas and rent, partially offset by a decrease in hardgoods gross profits of $3.2 million. Same-store gross profits of gas and rent increased resulting from higher sales volumes and price increases implemented during fiscal 2001. An expanded rental welder fleet also contributed to the increase in gross profits. The Distribution segment's gross profit margin of 46.4% in fiscal 2001 increased 30 basis points from 46.1% in the prior year primarily as a result of a shift in sales mix to higher margin gases. The shift in sales mix was driven principally by higher margin medical gases contributed by Puritan Medical Products. The decline in hardgoods same-store gross profits resulted from general weakness in certain manufacturing and industrial hardgoods markets served by the Company. The decline in hardgoods gross profits was partially mitigated by lower costs from centralized purchasing initiatives and continued growth of higher margin private label products. Private label products reached an annual run rate of $45 million in fiscal 2001 representing a 40% increase over the prior year. The Gas Operations segment's gross profits increased $15.8 million primarily from same-store gross profit growth and net acquisition activity. Same-store gross profit growth of $10.5 million (13.4%) resulted primarily from higher sales volumes and price increases of dry ice, liquid carbon dioxide and nitrous oxide. Gross profits increased $1.5 million from net acquisition activity, primarily consisting of the prior year acquisition of Puritan Medical Products's nitrous oxide production businesses. In addition, the prior year was adversely affected by an inventory write-down of $3.8 million related to certain specialty gas inventories. Gas Operations' gross profit margin was 64.8% compared to 57.3% in the prior year. The gross profit margin in the prior year reflects the impact of the specialty gas inventory write-down. 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 $50.8 million (9.5%) compared to the prior fiscal year primarily from net acquisition and divestiture activity and higher costs associated with personnel, distribution and insurance. On a same-store basis, operating expenses are estimated to have increased approximately $32 million in fiscal 2001 compared to fiscal 2000. Personnel costs were affected by rising salaries and wages driven by a competitive labor market. Higher distribution costs resulted primarily from increases in the price of fuel and energy. Insurance costs were driven by rising medical costs related to workers' compensation and health insurance. The Company implemented a cost reduction plan in the fourth quarter of fiscal 2001. The cost reduction plan focused on a reduction in workforce, the closure of 30 branch locations and the planned disposition of certain non-core businesses. As a percentage of net sales, operating expenses increased to 35.8% from 34.5% in fiscal 2000. 16 Fiscal 2001 operating expenses included legal expenses of $7.5 million. Fiscal 2001 legal expenses reflect litigation charges of $5.3 million, net. The net litigation charges consist primarily of a fourth quarter charge of $6.9 million related to a lawsuit brought by a competitor, Praxair, Inc. The charge reflects an estimate of the future costs associated with the defense of the lawsuit. The charge was partially offset by the final settlement and reversal of $1.1 million of liabilities established in fiscal 2000 associated with the defense and settlement of class-action lawsuits related to hazardous materials charges. Legal expenses for fiscal 2000 of $9.6 million included a $7.5 million litigation charge representing the Company's original estimate of the costs to defend against and settle the class- action lawsuits. Fiscal 2001 operating expenses also included $2.2 million of consulting expenses related to a project focused on improving certain operational and administrative processes. The project was initiated during the second half of fiscal 2001 and is expected to continue through fiscal 2003. Project expenses and anticipated benefits through fiscal 2003 will be dependent on the ultimate scope and timing of the project. Net of anticipated benefits, the Company estimates that the project will be dilutive to fiscal 2002 earnings by approximately $0.05 per diluted share and accretive to earnings in fiscal 2003. Depreciation expense of approximately $63 million remained relatively flat compared to fiscal 2000. Amortization expense of $23.8 decreased $1.9 million (-7.2%) compared to fiscal 2000 primarily from the expiration of non-compete agreements related to prior acquisitions. Special Charges (Recoveries) Special charges in fiscal 2001 included a charge of $8.5 million related to a cost reduction plan implemented by the Company to improve operating results at certain business units as well as to mitigate rising operating expenses. The fourth quarter 2001 cost reduction charge included severance costs for a reduction in workforce of 275 employees, exit costs for the closure of 30 branch locations and losses associated with the anticipated divestiture of certain non-core businesses. The non-core businesses to be divested generated annual sales of approximately $10 million in fiscal 2001 and were included in the Company's Distribution segment. As a result of the cost reduction plan, the Company estimates cost savings in fiscal 2002 of approximately $10 million. The charge was partially offset by $4.9 million of special charge recoveries primarily consisting of a favorable insurance settlement associated with the fiscal 1997 special charge. Special charge recoveries in fiscal 2000 consist of $2.8 million primarily from a favorable insurance settlement related to the fiscal 1997 special charge. Operating Income Operating income increased 1.1% in fiscal 2001 compared to 2000. Excluding special (charges) recoveries, operating income increased 7.4%.
(In thousands) 2001 2000 Increase/(Decrease) -------- -------- ------------------- Distribution $ 92,186 $ 94,671 $ (2,485) (2.6%) Gas Operations 19,406 9,231 10,175 110% Special (Charges) Recoveries (3,643) 2,829 (6,472) -- -------- -------- -------- $107,949 $106,731 $ 1,218 1.1% ======== ======== ========
The Distribution segment's operating income margin of 6.2% in fiscal 2001 decreased from 6.7% in fiscal 2000 primarily due to higher operating expenses, partially offset by gross profits from same-store sales growth and acquisitions. 17 The Gas Operations segment's operating income margin of 13.7% in fiscal 2001 increased from 7.0% in fiscal 2000. Fiscal 2001 results benefited from higher gross profits from same-store sales growth and price increases. The prior year was adversely affected by a $3.8 million inventory write-down of certain specialty gas inventories. Gas Operations' operating income margin was 9.8% in fiscal 2000, excluding the impact of the inventory write-down. Interest Expense Interest expense, net, totaled $60.2 million and represents an increase of $2.6 million (4.6%) compared to fiscal 2000. The increase in interest expense resulted from higher average debt levels, partially offset by lower weighted-average interest rates. The increase in the average debt level in fiscal 2001 was primarily due to the fourth quarter of fiscal 2000 acquisition of Puritan Medical Products as well as common stock repurchases during fiscal 2001. As discussed in "Liquidity and Capital Resources" and in Item 7A "Quantitative and Qualitative Disclosures About Market Risk", the Company manages interest rate exposure of certain borrowings through participation in interest rate swap agreements. Discount on Securitization of Trade Receivables In December 2000, the Company entered into a trade receivables securitization agreement with two commercial banks. Net proceeds received by the Company through March 31, 2001 were $73.2 million and were used to reduce borrowings under the Company's revolving credit facilities. The discount on the securitization of trade receivables of $1.3 million in fiscal 2001 represents the difference between the carrying value of the receivables and the proceeds from their sale. The amount of the discount varies on a monthly basis depending on the amount of receivables sold and market rates. Other Income, net Other income, net, totaled $242 thousand in fiscal 2001 compared to $17.9 million in fiscal 2000. Fiscal 2000 includes a $14.9 million gain from the divestitures of operations in Poland and Thailand. Equity in Earnings of Unconsolidated Affiliates Equity in earnings of unconsolidated affiliates of $2.3 million decreased $1.1 million compared to fiscal 2000. The decrease in fiscal 2001 was primarily due to fourth quarter after-tax charges of $700 thousand related to asset impairments associated with two equity affiliates. Income Tax Expense The effective income tax rate was 42.3% of pre-tax earnings in fiscal 2001 compared to 44.8% in 2000. Excluding the tax effect related to certain gains and special charges in both periods, the effective income tax rate was 41.1% of pre-tax earnings in fiscal 2001 compared to 41.5% in 2000. Cumulative Effect of an Accounting Change Fiscal 2000 includes a charge to net earnings of $590 thousand related to the adoption of Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." The charge primarily resulted from the write-off of start-up costs capitalized in prior fiscal years in connection with the Company's two air separation units. 18 Net Earnings Net earnings in fiscal 2001 were $28.2 million, or $.42 per diluted share, compared to $38.3 million, or $.54 per diluted share, in fiscal 2000. 19 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: 2000 COMPARED TO 1999 OVERVIEW The Company's net sales for the fiscal year ended March 31, 2000 were $1.54 billion compared to $1.56 billion in the prior year. Net sales in fiscal 2000 were impacted by continued slowness in certain manufacturing and industrial markets served by the Company. The Company believes these markets hit a cyclical low in the first quarter of fiscal 2000. The Company experienced improved same-store sales comparisons in each of the last three quarters of fiscal 2000. In the fiscal fourth quarter, year over year same-store sales improved by 1.8%. Net earnings for fiscal 2000 were $38.3 million, or $.54 per diluted share, compared to $51.9 million, or $.72 per diluted share, in fiscal 1999. Net earnings for fiscal years 2000 and 1999 were impacted by special charges, non-recurring divestiture gains and other charges as described below. Fiscal 2000 includes: o special charge recoveries of $2.8 million ($1.7 million after-tax), o divestiture gains $17.5 million ($8.6 million after-tax), o a litigation charge of $7.5 million ($4.8 million after-tax), o an inventory write-down of $3.8 million ($2.2 million after-tax), and o an after-tax charge of $590 thousand representing a change in accounting principle. Fiscal 1999 includes: o special charge recoveries of $1.0 million ($575 thousand after-tax), o divestiture gains of $25.5 million ($15 million after-tax), and o a $1.8 million after-tax non-recurring gain relating to insurance proceeds recorded by an equity affiliate. Excluding the effect of these items, net earnings were $.52 per diluted share in fiscal 2000 and $.48 per diluted share in fiscal 1999. During fiscal 2000, the Company completed the divestiture of its operations in Poland and Thailand. Through the date of disposition, the operations in Poland and Thailand had combined sales and operating losses in fiscal 2000 of $12.7 million and $550 thousand, respectively. The operations in Poland and Thailand were reported in the Gas Operations segment. During fiscal 2000, the Company acquired six distributors of industrial gas and related equipment with aggregate annual sales of approximately $97 million, including the acquisition of Puritan Medical Products. Puritan Medical Products, with historical annual sales of approximately $70 million, distributes medical gases through a network of locations in the United States and Canada. 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 share repurchase authorization was substantially completed during the first quarter of fiscal 2001. 20 INCOME STATEMENT COMMENTARY Net Sales Net sales decreased 1.2% in fiscal 2000 compared to 1999.
(In thousands) 2000 1999 Increase/(Decrease) ---------- ---------- ------------------- Distribution $1,409,949 $1,406,184 $ 3,765 0.3% Gas Operations 132,385 155,034 (22,649) (14.6%) ---------- ---------- -------- $1,542,334 $1,561,218 $(18,884) (1.2%) ========== ========== ========
For fiscal 2000, Distribution sales increased $3.8 million as a result of net acquisition and divestiture activity of $23.1 million, offset by a same-store sales decline of $19.3 million (-1.7%). Fiscal 2000 sales increased $37.3 million from seventeen distributor acquisitions since April 1, 1998, offset primarily by the divestiture of four businesses. The decrease in same-store sales resulted from a $32.5 million (-4.2%) decline in hardgoods sales, partially offset by gas and rent same-store sales growth of $13.2 million (1.9%). Lower sales of hardgoods resulted from general slowness in certain manufacturing and industrial markets served by the Company including: metal fabrication, oil exploration and extraction, agriculture, mining and shipbuilding. Gas and rent same-store sales growth was primarily attributable to the Company's expansion of its rental welder fleet and improvements in certain gas product sales including bulk, refrigerant and medical gases. The Distribution segment experienced improving same-store sales comparisons in each of the last three quarters of fiscal 2000. In the fiscal fourth quarter, year over year same-store sales improved by 1.2%. The Gas Operations segment's sales decreased $22.6 million in fiscal 2000 compared to the prior year as a result of the decrease in sales resulting from the net acquisition and divestiture activity of $27.6 million, partially offset by same-store sales growth of $5.0 million (3.5%). Sales decreased $35.7 million primarily due to the divestiture of the Company's calcium carbide and carbon operations in December 1998 and the divestiture of operations in Poland and Thailand in August 1999. The decrease in sales resulting from divestitures was partially offset by the acquisition of four dry ice companies since April 1, 1998, which contributed sales of $8.1 million in fiscal 2000. Gas Operations' same-store sales growth resulted from higher liquid carbon dioxide, dry ice and nitrous oxide volumes. Pricing in fiscal 2000 generally remained stable for these products compared to the prior year. Gross Profits Gross profits increased 0.4% in fiscal 2000 compared to 1999.
(In thousands) 2000 1999 Increase/(Decrease) -------- -------- ------------------- Distribution $649,827 $637,616 $12,211 1.9% Gas Operations 75,910 85,547 (9,637) (11.3%) -------- -------- ------- $725,737 $723,163 $ 2,574 0.4% ======== ======== =======
Distribution gross profits increased $12.2 million resulting from acquisitions, which contributed gross profits of $20.9 million, partially offset by divestitures which had gross profits of $7.8 million in the prior year. Same-store gross profits declined $900 thousand (-0.5%) compared to the prior year. The decline in same-store gross profits consisted of a decrease in hardgoods gross profits of $10.6 million (-5.0%), partially offset by gas and rent gross profit growth of $9.7 million (1.9%). The decrease in hardgoods same-store gross profits resulted primarily from lower sales volumes in certain manufacturing and industrial markets. Same- store gross profits of gas and rent increased as a result of higher gas volumes and increased rent primarily from an expanded rental 21 welder fleet. The overall Distribution gross profit margin of 46.1% in fiscal 2000 increased 80 basis points from 45.3% in the prior year primarily as a result of a shift in sales mix more heavily weighted towards higher margin gas and rental revenues. Gas and rent comprised 42.0% of distribution sales in fiscal 2000 compared to 40.5% in fiscal 1999. Although a competitive hardgoods environment has somewhat increased pricing pressures to the Company's customers, hardgoods margins have been helped by lower product costs resulting from centralized hardgoods purchasing initiatives and sales growth of higher margin private label products. The decrease in Gas Operations gross profits of $9.6 million resulted from divestitures and an inventory write-down, partially offset by acquisitions and same-store gross profit growth. Gross profits decreased $13.4 million from divestitures and $3.8 million from an inventory write-down related to certain specialty gases. The gross profit decline was partially offset by the acquisition of four dry ice businesses that contributed $5.0 million to fiscal 2000 gross profits and by same-store gross profit growth of $2.6 million (2.9%). Gas Operations' gross profit margin, excluding the impact of divestitures, decreased to 57.5% in fiscal 2000 compared to 60.2% in fiscal 1999 primarily due to the inventory write-down and increased sales volume of lower margin liquid carbon dioxide. Operating Expenses Operating expenses increased $9.3 million (1.8%) compared to the prior fiscal year primarily from acquisitions with estimated operating expenses of $17 million and a fiscal 2000 fourth quarter litigation charge of $7.5 million, partially offset by divestitures with operating expenses of $11 million in the prior year and the impact of cost reductions initiated during the third and fourth quarters of fiscal 1999. The litigation charge represents an estimate of the overall costs associated with the defense and settlement of certain lawsuits related to the Company's hazardous materials fees. Operating cost reductions related to such areas as headcount and administrative functions helped control operating costs and expenses during fiscal 2000. On a same-store basis, operating expenses decreased approximately $4 million in fiscal 2000 as compared to fiscal 1999. Although cost control and reductions resulted in lower operating expenses on a same-store basis in fiscal 2000, the Company experienced higher operating expenses in the fourth quarter of fiscal 2000 primarily due to higher salary and wage costs, insurance and fuel costs. As a percentage of net sales, operating expenses, excluding the fourth quarter litigation charge, increased 50 basis points to 34% compared to fiscal 1999. Depreciation and amortization totaled $89.3 million in fiscal 2000 representing an increase of $1.4 million (1.6%) compared to fiscal 1999. Depreciation and amortization expense increased primarily as a result of net acquisition and divestiture activity and capital projects completed during the previous 24 months, partially offset by a decrease from a change in depreciable lives of bulk gas storage tanks. Depreciation and amortization expense relative to sales was 5.8% for the current period compared to 5.6% in the prior year. Special Charges (Recoveries) Special charge recoveries in fiscal 2000 primarily consist of recoveries of $2.8 million from an insurance settlement related to a fiscal 1997 loss. Special charge recoveries in fiscal 1999 include $1 million from adjustments to reflect differences between the original loss estimates and the actual losses related to the divestiture of two non-core businesses during fiscal 1999. 22 Operating Income Operating income decreased 5.5% in fiscal 2000 compared to 1999. Excluding special (charges) recoveries, operating income decreased 7.2%.
(In thousands) 2000 1999 Increase/(Decrease) -------- -------- -------------------- Distribution $ 94,671 $ 98,447 $(3,776) (3.8%) Gas Operations 9,231 13,549 (4,318) (31.9%) Special (Charges) Recoveries 2,829 1,000 1,829 -- -------- -------- ------- $106,731 $112,996 $(6,265) (5.5%) ======== ======== =======
The Distribution segment's operating income margin of 6.7% in fiscal 2000 decreased from 7.0% in fiscal 1999 primarily due to the fourth quarter litigation charge as discussed under "Operating Expenses." Excluding the litigation charge, the Distribution segment's operating income margin was 7.2% in fiscal 2000. Gas Operations' operating income margin of 7.0% in fiscal 2000 decreased from 8.7% in fiscal 1999 primarily due to divestitures with higher operating margins and the inventory write-down of certain specialty gases. Interest Expense Interest expense, net, totaled $57.6 million and represents a decrease of $2.7 million (-4.5%) compared to fiscal 1999. The decrease in interest expense was primarily attributable to lower average debt levels and lower average interest rates. The decrease in the average debt level in fiscal 2000 was primarily due to proceeds from divestitures and the sale-leaseback of certain equipment. In the fourth quarter of fiscal 2000, as a result of increasing market interest rates, the Company experienced higher interest costs. Other Income, net Other income, net, totaled $17.8 million in fiscal 2000 compared to $26.7 million in fiscal 1999. Fiscal 2000 included a $14.9 million gain from the divestitures of operations in Poland and Thailand. Fiscal 1999 included a $25.5 million gain from the divestiture of the Company's calcium carbide and carbon products operations. Equity in Earnings of Unconsolidated Affiliates Equity in earnings of unconsolidated affiliates of $3.4 million decreased from $7.0 million in fiscal 1999 primarily as a result of a $1.8 million insurance gain recorded by National Welders Supply in fiscal 1999 and lower earnings at both National Welders Supply and the Company's liquid carbon dioxide joint venture. Income Tax Expense The effective income tax rate was 44.8% of pre-tax earnings in fiscal 2000 compared to 39.9% in 1999. Excluding the tax effect related to gains from divestitures and special charges in both periods, the effective income tax rate was 41.5% of pre-tax earnings in fiscal 2000 compared to 39.5% in 1999. The increase in the effective income tax rate was primarily from a decrease in earnings of unconsolidated equity affiliates and income tax from foreign divestitures. 23 Cumulative Effect of an Accounting Change In 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. Net Earnings Net earnings in fiscal 2000 were $38.3 million, or $.54 per diluted share, compared to $51.9 million, or $.72 per diluted share, in fiscal 1999. 24 LIQUIDITY AND CAPITAL RESOURCES Cash Flows Net cash provided by operating activities totaled $199.0 million in fiscal 2001 compared to $100.1 million in fiscal 2000. Net earnings, adjusted for non-cash items, were $125 million in both fiscal 2001 and the prior year. The fiscal 2001 trade receivables securitization program, described below, provided cash of $73.2 million. Working capital components provided cash of $7 million compared to a use of cash of $17.6 million in fiscal 2000, representing a net improvement in cash flow of $24.6 million. Cash flow provided by operating activities was primarily used to reduce borrowings under the Company's revolving credit facilities and to fund capital expenditures. Cash used in investing activities totaled $10.9 million during fiscal 2001. Investing activities primarily included capital expenditures that used cash of $65.9 million and divestiture proceeds that provided cash of $49.6 million. Capital expenditures in fiscal 2001 were flat compared to fiscal 2000. Capital expenditures associated with the purchase of cylinders, bulk tanks, rental welders and machinery and equipment totaled $47.2 million, or 72% of total capital expenditures, and helped facilitate strategic product sales growth. Fiscal 2001 divestitures primarily consisted of the sale of the Company's Jackson Dome pipeline. The proceeds from divestitures were used to reduce borrowings under the Company's revolving credit facilities. Financing activities used cash of $188.2 million. Activities that used cash during the period primarily included the net repayment of debt of $183.9 million and the repurchase of the Company's common stock for $11.2 million. The Company's stock repurchase program was completed in the first quarter of fiscal 2001. Cash on hand at the end of each fiscal year is zero. On a daily basis depository accounts are swept of all available funds. The funds are deposited into a concentration account through which all cash on hand is used to repay debt under the Company's revolving credit facilities. 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 and subordinated debt facilities. 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. Financial Instruments The Company has unsecured revolving credit facilities totaling $665 million and $76.5 million Canadian (US $49 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 March 31, 2001, the Company had borrowings under the credit agreement of approximately $390 million and $39 million Canadian (US $25 million). The Company also had commitments under letters of credit supported by the credit agreement of approximately $52 million. Based on restrictions related to cash flow to funded debt coverage, the Company had additional borrowing capacity under the credit facilities of approximately $189 million at March 31, 2001. At March 31, 2001, the effective interest rate on borrowings under the credit facilities was 5.79% on U.S. borrowings and 5.17% on Canadian borrowings. Based on the maturity date related to the revolving credit facilities, the Company anticipates refinancing its credit facilities within the next twelve months. Interest rates of the renegotiated credit facilities will be at prevailing market rates, which may be higher than rates under the Company's existing credit facilities. 25 At March 31, 2001, 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%. The medium-term notes due September 2001 are expected to be refinanced with borrowings under the Company's revolving credit facilities. Additionally, at March 31, 2001, long- term debt of the Company included acquisition notes and other long- term debt instruments of approximately $54 million with interest rates ranging from 6.0% to 9.0%. Acquisition notes of $7 million will mature in September 2001 and are expected to be refinanced with borrowings under the Company's revolving credit facilities. 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 March 31, 2001, the Company was party to 17 interest rate swap agreements. The swap agreements are with major financial institutions and aggregate $477 million in notional principal amount at March 31, 2001. Thirteen swap agreements with approximately $347 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 four years. Four swap agreements with $130 million in notional principal amount require variable interest payments based on an average rate of 5.51% at March 31, 2001. Under the terms of one swap agreement, the Company has elected to receive the discounted value of the counterparties' interest payments up-front. At March 31, 2001, approximately $1.0 million of such payments were included in other current liabilities and $400 thousand of such payments were 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. After considering the effect of interest rate swap agreements, the Company's ratio of fixed to variable interest rates was 60% to 40%. Trade Receivables Securitization In December 2000, the Company entered into a $150 million three- year trade receivables securitization agreement with two commercial banks. The revolving period securitization helps diversify the Company's funding sources at an efficient all-in cost of funds. During fiscal 2001, the Company sold $284.9 million of trade receivables and remitted to the bank conduits, pursuant to a servicing agreement, $211.7 million in collections on those receivables. Net proceeds from the securitization were $73.2 million, which were used to repay borrowings under the Company's revolving credit facilities. In April 2001, the Company completed the second and final tranche of the $150 million trade receivables securitization program. Proceeds from the second tranche of $64.3 million were used to reduce borrowings under the Company's revolving credit facilities. The transaction has been accounted for as a sale under the provisions of Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under the agreement, eligible trade receivables are sold to bank conduits through a bankruptcy-remote special purpose entity, which is consolidated for financial reporting purposes. The difference between the proceeds from the sale and the carrying value of the receivables is recognized as "Discount on securitization of trade receivables" in the accompanying Consolidated Statements of Earnings under Item 8. and varies on a monthly basis depending on the amount of receivables sold and market rates. The Company retains a subordinated interest in the receivables sold, which is recorded at the receivables' previous carrying value. In accordance with a servicing agreement, the Company will continue to service, administer and collect the trade receivables on behalf of the bank conduits. The servicing fees charged to the bank conduits approximate the costs of collections, which approximates fair value. 26 Operating Lease with Trust In fiscal 2000, the Company renewed a lease of real estate with a trust established by a commercial bank. The lease was amended to include the sale-leaseback of certain equipment. The trust holds title to the properties and equipment included in the leases. The rental payments are based on LIBOR plus an applicable margin and the cost of the property acquired by the trust. At March 31, 2001, the non-cancelable lease obligation of the real estate and equipment lease was $44 million, a $2 million reduction compared to the prior year. The lease has a five-year term and has been accounted for as an operating lease. The Company has guaranteed a residual value of the real estate and the equipment at the end of the lease term of approximately $30 million. A gain of approximately $12 million on the equipment portion of the transaction has been deferred until the expiration of the Company's guarantee of the residual value. Employee Benefits Trust In fiscal 1999, the Company established a grantor trust (the "Trust") to fund certain future obligations of the Company's employee benefit and compensation plans. The Company, pursuant to a Common Stock Purchase Agreement, may sell shares of common stock to the Trust. Such common stock consists of shares the Company has purchased or will purchase on the open market or in private transactions. The common stock may also consist of shares issued directly to the Trust. During fiscal 2001, the Trust purchased approximately 2 million shares of common stock, previously held as treasury stock, from the Company, for $11.3 million (based on the average market closing price for the five days preceding each transaction). The Company holds promissory notes from the Trust in the amount of each purchase. Shares held by the Trust serve as collateral for the promissory notes and are available to fund certain employee benefit plan obligations as the promissory notes are repaid. The shares held by the Trust are not considered outstanding for earnings per share purposes until they are released from serving as collateral for the promissory notes. Approximately 1.2 million shares were issued from the Trust during fiscal 2001 for employee benefit programs. An independent third-party financial institution serves as the Trustee. The Trustee votes or tenders shares held by the Trust in accordance with instructions received from the participants in the employee benefit and compensation plans funded by the Trust. Inflation While the U.S. inflation rate has been relatively modest for several years, rising costs continue to affect the Company's business. The Company strives to minimize the effects of inflation through cost containment and price increases under highly competitive conditions. OTHER New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement standardizes the accounting for derivative instruments by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. SFAS 133, as amended by SFAS 138, is effective for fiscal years beginning after June 15, 2000. Management has evaluated the impact of SFAS 133, as amended, in connection with the Company's use of derivatives in managing interest rate risk. The Company's exposure to derivatives is limited to interest rate swap agreements, which are highly effective in managing the Company's interest rate exposure. A high correlation exists between the terms of the interest rate swaps and the underlying debt obligations of the Company. As such, fluctuations in the fair value of the swaps are offset by an equal and opposite fluctuation in the carrying value of the underlying debt obligations. Consequently, the implementation of SFAS 133, as amended, is not expected to have a material impact on the net earnings of the Company. 27 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 strategy of leveraging its distribution network to sign new strategic accounts, pursue cross-selling opportunities and promote strategic products; the success of sales initiatives, including strategic products and accounts, in continuing sales growth; the effect of price increases on sales growth; the Company's expectation that continued sales growth and the impact of price increases will help to offset increases in product costs and operating expenses; the ability of the cost reduction plan to offset higher operating expenses; the Company's expectation that it will realize cost savings in fiscal 2002 as a result of the cost reduction plan; the ability of lower costs from centralized purchasing initiatives and growth of higher margin private label products to offset lower gross profits from sales of hardgoods; the estimate of future legal expenses related to the Praxair, Inc. lawsuit; the ultimate outcome of the Praxair, Inc. lawsuit; the timing, scope, success and effect on diluted earnings per share of the project designed to improve certain operational and administrative processes; 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 sources of financing and the refinancing of the Company's credit facilities and other debt instruments over the next twelve months; the effect on the Company of higher interest rates; 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 and accounts; the Company's inability to control operating expenses and the potential impact of higher operating expenses in future periods; the market acceptance and success of private label products; the inability of the Company to improve margins through sales of strategic and private label products; the inability of cost reduction plans to improve operating margins and mitigate rising product costs and operating expenses; adverse changes in customer buying patterns; market acceptance of price increases; the inability of price increases and sales growth to offset any increases in operating expenses; the impact of higher than anticipated consulting expenses on future results; an economic downturn (including adverse changes in the specific markets for the Company's products); the inability of centralized purchasing and distribution initiatives in lowering product costs; the inability to generate sufficient cash flow from operations or other sources to fund future acquisitions, capital expenditures, and current debt maturities; the inability to identify and successfully integrate acquisition candidates; the inability to obtain financing at favorable rates; the ability to manage interest 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; higher than estimated legal fees related to the Praxair, Inc. lawsuit; an unfavorable outcome of the Praxair, Inc. lawsuit; 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. 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Company manages its exposure to changes in market interest rates. The interest rate exposure arises primarily from the interest payment terms of the Company's borrowing agreements. Interest rate swap agreements are used to adjust the interest rate risk exposures that are inherent in its portfolio of funding sources. The Company has not, and will not establish any interest risk positions for purposes other than managing the risk associated with its portfolio of funding sources. The Company maintains the ratio of fixed to variable rate debt within parameters established by management under policies approved by the Board of Directors. After the effect of interest rate swap agreements, the ratio of fixed to variable rate debt was 60% to 40% at March 31, 2001. Counterparties to interest rate swap agreements are major financial institutions. The Company has established counterparty credit guidelines and only enters into transactions with financial institutions with long-term credit ratings of `A' or better. In addition, the Company monitors its position and the credit ratings of its counterparties, thereby minimizing the risk of non-performance by the counterparties. The table below summarizes the Company's market risks associated with long-term debt obligations, interest rate swaps and LIBOR-based agreements as of March 31, 2001. For long-term debt obligations, the table presents cash flows related to payments of principal and interest by fiscal year of maturity. For interest rate swaps and LIBOR-based agreements, the table presents the notional amounts underlying the agreements 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. 29
Fiscal Year of Maturity ____________________________________________________________________ (In millions) Fair 2002 2003 2004 2005 2006 Thereafter Total Value ____________________________________________________________________ Fixed Rate Debt: - --------------- Medium-term notes $ 50 $ -- $ 75 $ -- $ -- $100 $225 $219 Interest expense $ 15 $ 13 $ 13 $ 8 $ 8 $ 4 $ 61 Average interest rate 7.42% 7.49% 7.49% 7.75% 7.75% 7.75% Acquisition and other notes $ 16 $ 2 $ 22 $ -- $ 5 $ 1 $ 46 $ 45 Interest expense $ 1 $ -- $ 2 $ -- $ -- $ -- $ 3 Average interest rate 7.41% 7.41% 7.41% 7.41% 7.41% Variable Rate Debt: - ------------------ Revolving credit facilities $ -- $415 $ -- $ -- $ -- $ -- $415 $415 Interest expense $ 24 $ 24 $ -- $ -- $ -- $ -- $ 48 Interest rate (a) (b) 5.75% 5.75% Other notes $ 7 $ -- $ -- $ 1 $ -- $ -- $ 8 $ 8 Average interest rate 9.00% 7.27% Interest Rate Swaps: - ------------------- US $ denominated Swaps: 12 Swaps Receive Variable/ Pay Fixed $177 $128 $ -- $ 40 $ -- $ -- $345 $ 8 Variable Receive rate (3 month LIBOR) = 5.32% Weighted average pay rate = 6.34% 4 Swaps Receive Fixed/ Pay Variable $ 50 $ -- $ 30 $ -- $ -- $ 50 $130 $ (6) Weighted average receive rate = 6.99% Variable pay rate (6 month LIBOR) = 5.51% Canadian $ denominated Swaps: 1 Swap Receive Variable/ Pay Fixed $ 2 $ -- $ -- $ -- $ -- $ -- $ 2 $ -- (3 month CAD BA (b)) = 4.61% Pay rate = 5.98% Other Off-Balance Sheet LIBOR-based agreements: - ----------------------- Operating leases with trust (c) $ 1 $ 1 $ 1 $ 41 $ -- $ -- $ 44 $ 44 Lease expense $ 3 $ 3 $ 3 $ 1 $ -- $ -- $ 10 Trade receivable securitization (d) $ -- $ -- $ 73 $ -- $ -- $ -- $ 73 $ 73 Discount on securitization $ 4 $ 4 $ 3 $ -- $ -- $ -- $ 11 (a) The variable rate of U.S. revolving credit facilities is based on the London Interbank Offered Rate ("LIBOR") as of March 31, 2001. For future periods, the variable interest rate is assumed to remain at 5.75% with the principal balance of long-term debt obligations held constant at $415 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"). (c) The operating lease terminates October 8, 2004, but may be renewed subject to provisions of the lease agreement. (d) The three-year agreement expires on December 19, 2003, but the initial term is subject to renewal provisions of the trade receivables securitization agreement.
30 Limitations of the tabular presentation As the table incorporates only those interest rate risk exposures that exist as of March 31, 2001, 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 financial position and results of operations. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements, supplementary information and financial statement schedule of the Company are set forth at pages F-1 to F-37 of the report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. The biographical information relating to the Company's directors appearing in the Proxy Statement relating to the Company's 2001 Annual Meeting of Stockholders is incorporated herein by reference. Biographical information relating to the Company's executive officers set forth in Item 1 of Part I of this Form 10-K Report is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information under "Board of Directors and Committees," "Executive Compensation" and "Certain Transactions" appearing in the Proxy Statement relating to the Company's 2001 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is set forth in the section headed "Security Ownership" appearing in the Company's Proxy Statement relating to the Company's 2001 Annual Meeting of Stockholders and such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under "Certain Transactions" appearing in the Proxy Statement relating to the Company's 2001 Annual Meeting of Stockholders is incorporated herein by reference. 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) and (2): The response to this portion of Item 14 is submitted as a separate section of this report beginning on page F-1. All other schedules have been omitted as inapplicable, or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)(3) Exhibits. The exhibits required to be filed as part of this annual report on Form 10-K are listed in the attached Index to Exhibits. (b) Reports on Form 8-K. On January 9, 2001, the Company filed a current report on Form 8- K pursuant to Item 5, updating its earnings outlook for its third quarter ended December 31, 2000. On January 26, 2001, the Company filed a current report on Form 8-K pursuant to Item 5, reporting its earnings for the third quarter and nine months ended December 31, 2000. (c) Index to Exhibits and Exhibits filed as a part of this report. EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of Airgas, Inc. dated as of August 7, 1995 (Incorporated by reference to Exhibit 3.1 to the Company's September 30, 1995 Quarterly Report on Form 10-Q). 3.2 Airgas, Inc. By-Laws Amended and Restated through August 2, 1999. (Incorporated by reference to Exhibit 3 to the Company's September 30, 1999 Quarterly Report on Form 10-Q). 4.1 Ninth Amended and Restated Credit Agreement dated as of December 5, 1997 among Airgas, Inc., Airgas Canada, Inc., Red-D-Arc Limited and Airgas Ontario Inc., Nationsbank, N.A. as U.S. Agent and Canadian Imperial Bank of Commerce as Canadian Agent. (Incorporated by reference to Exhibit 4.1 to the Company's December 31, 1997 Quarterly Report on Form 10-Q). 4.2 First Amendment, dated April 13, 1998, to the Ninth Amended and Restated Credit Agreement dated as of December 5, 1997 among Airgas, Inc., Airgas Canada, Inc., Red-D-Arc Limited and Airgas Ontario Inc., Nationsbank, N.A. as U.S. Agent and Canadian Imperial Bank of Commerce as Canadian Agent. (Incorporated by reference to Exhibit 4.1 to the Company's June 30, 1998 Quarterly Report on Form 10-Q). 4.3 Indenture dated as of August 1, 1996 of Airgas, Inc. to Bank of New York, Trustee. (Incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-4 No. 333-23651 dated March 20, 1997). 33 EXHIBIT NO. DESCRIPTION - ----------- ----------- 4.4 Form of Airgas, Inc. Medium-Term Note (Fixed Rate). (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-4 No. 333-23651 dated March 20, 1997). 4.5 Form of Airgas, Inc. Medium-Term Note (Floating Rate). (Incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-4 No. 333-23651 dated March 20, 1997). There are no other instruments with respect to long-term debt of the Company that involve indebtedness or securities authorized thereunder exceeding 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to file a copy of any instrument or agreement defining the rights of holders of long-term debt of the Company upon request of the Securities and Exchange Commission. 4.6 Rights Agreement, dated as of April 1, 1997, between Airgas, Inc. and The Bank of New York, N.A., as Rights Agent, which includes as Exhibit B thereto the Form of Right Certificate. (Incorporated by reference to Exhibit 1.1 to the Company's Form 8-A filed on April 28, 1997). 4.7 First Amendment, dated November 12, 1998, to the Rights Agreement dated as of April 1, 1997, between Airgas, Inc. and The Bank of New York. (Incorporated by reference to Exhibit 4 to the Company's December 31, 1998 Quarterly Report on Form 10-Q). * 10.1 Amended and Restated 1984 Stock Option Plan, as amended effective May 22, 1995. (Incorporated by reference to Exhibit 10.1 to the Company's September 30, 1995 Quarterly Report on Form 10-Q). * 10.2 1989 Non-Qualified Stock Option Plan for Directors (Non-Employees), as amended. (Incorporated by reference to Exhibit 10.7 to the Company's March 31, 1992 report on Form 10-K). * 10.3 Amendment to the 1989 Non-Qualified Stock Option Plan for Directors (Non-Employees) as amended through August 7, 1995 (Incorporated by reference to Exhibit 10.2 to the Company's September 30, 1995 Quarterly Report on Form 10-Q). * 10.4 1994 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.19 to the Company's March 31, 1993 Report on Form 10-K). * 10.5 1998 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-8 No. 333-60999 dated August 7, 1998). * 10.6 Airgas, Inc. Management Incentive Plan (Incorporated by reference to Exhibit 10.3 to the Company's September 30, 1995 Quarterly Report on Form 10-Q). * 10.7 Joint Venture Agreement dated June 28, 1996 between Airgas, Inc. and National Welders Supply Company, Inc. and J.A. Turner, III, and Linerieux B. Turner and Molo Limited Partnership, Turner (1996) Limited partnership, Charitable Remainder Unitrust for James A. Turner, Jr. and Foundation for the Carolinas (Incorporated by reference to Exhibit 2.1 to the Company's June 28, 1996 Report on Form 8-K). 34 EXHIBIT NO. DESCRIPTION - ----------- ----------- * 10.8 Letter dated July 24, 1992 between Airgas, Inc. (on behalf of the Nominating and Compensation Committee) and Peter McCausland regarding the severance agreement between the Company and Peter McCausland. * 10.9 1997 Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Company's September 30, 1997 Quarterly Report on Form 10-Q). * 10.10 1997 Directors' Stock Option Plan (Incorporated by reference to Exhibit 10.2 to the Company's September 30, 1997 Quarterly Report on Form 10-Q). * 10.11 Employee Benefits Trust Agreement, dated March 30, 1999, between Airgas, Inc. and First Union National Bank, as Trustee, which includes as Exhibit 1 thereto the Common Stock Purchase Agreement, dated March 30, 1999, between Airgas, Inc. and First Union National Bank, as Trustee, and Exhibit 2 thereto the Promissory Note, dated March 31, 1999, between Airgas, Inc. and First Union National Bank, as Trustee. (Incorporated by reference to Exhibit 10.12 to the Company's March 31, 1999 Report on Form 10-K). *10.12 Employee Benefits Trust Amendment Letter, dated March 7, 2000, between Airgas, Inc. and First Union National Bank, as Trustee. *10.13 Change of Control Agreement between Airgas, Inc. and William A. Rice, Jr. dated March 17, 1999. Fourteen other Executive Officers, including Peter McCausland, are parties to substantially identical agreements. (Incorporated by reference to Exhibit 10.13 to the Company's March 31, 1999 Report on Form 10-K). *10.14 2000 Management Incentive Plan for Corporate Employees dated April 1, 1999. (Incorporated by reference to Exhibit 10.14 to the Company's March 31, 1999 Report on Form 10-K). *10.15 2000 Management Incentive Plan for Business Unit Employees dated April 1, 1999. (Incorporated by reference to Exhibit 10.15 to the Company's March 31, 1999 Report on Form 10-K). *10.16 2001 Management Incentive Plan for Business Unit Employees dated May 23, 2000. (Incorporated by reference to Exhibit 10.18 to the Company's March 31, 2000 Report on Form 10-K). *10.17 2001 Management Incentive Plan for Corporate Office Employees dated May 23, 2000. (Incorporated by reference to Exhibit 10.19 to the Company's March 31, 2000 Report on Form 10-K). *10.18 Airgas, Inc. Fiscal Year 2002 Executive Bonus Plan dated April 1, 2001. 11 Statement re: computation of earnings per share. 21 Subsidiaries of the Company. 23.1 Consent of KPMG LLP. _____________ * A management contract or compensatory plan required to be filed by Item 14(c) of this Report. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: June 8, 2001 Airgas, Inc. (Registrant) By: /s/ Peter McCausland _________________________ Peter McCausland Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Peter McCausland Director, Chairman of the Board, June 8, 2001 ____________________________ and Chief Executive Officer (Peter McCausland) /s/ Roger F. Millay Senior Vice President - Finance June 8, 2001 ____________________________ and Chief Financial Officer (Roger F. Millay) (Principal Financial Officer) /s/ Jeffrey P. Cornwell Vice President and Corporate June 8, 2001 ____________________________ Controller (Jeffrey P. Cornwell) (Principal Accounting Officer) /s/ W. Thacher Brown Director June 8, 2001 ____________________________ (W. Thacher Brown) /s/ Frank B. Foster, III Director June 8, 2001 ____________________________ (Frank B. Foster, III) /s/ James W. Hovey Director June 8, 2001 ____________________________ (James W. Hovey) 36 /s/ John A.H. Shober Director June 8, 2001 ____________________________ (John A.H. Shober) Director June__, 2001 ____________________________ (Paula A. Sneed) /s/ David M. Stout Director June 8, 2001 ____________________________ (David M. Stout) /s/ Lee M. Thomas Director June 7, 2001 ____________________________ (Lee M. Thomas) /s/ Robert L. Yohe Director June 8, 2001 ____________________________ (Robert L. Yohe) F-1 AIRGAS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page Reference In Report On Form 10-K --------- Financial Statements: Independent Auditors' Report........................................ F-2 Statement of Management's Financial Responsibility.................. F-3 Consolidated Statements of Earnings for the Years Ended March 31, 2001, 2000 and 1999...................................... F-4 Consolidated Balance Sheets as of March 31, 2001 and 2000........... F-5 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 2001, 2000 and 1999...................................... F-6 Consolidated Statements of Cash Flows for the Years Ended March 31, 2001, 2000 and 1999...................................... F-7 Notes to Consolidated Financial Statements.......................... F-8 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts..................... F-37 All other schedules for which provision is made in the applicable accounting regulations promulgated by the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. F-2 INDEPENDENT AUDITORS' REPORT The Board of Directors Airgas, Inc.: We have audited the consolidated financial statements of Airgas, Inc. and subsidiaries (the Company) listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Airgas, Inc. and subsidiaries as of March 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Philadelphia, Pennsylvania May 8, 2001 F-3 STATEMENT OF MANAGEMENT'S FINANCIAL RESPONSIBILITY Management has prepared and is responsible for the integrity and objectivity of the consolidated financial statements and related financial information in this Annual Report on Form 10-K. The statements are prepared in conformity with accounting principles generally accepted in the United States of America. The financial statements reflect management's informed judgment and estimation as to the effect of events and transactions that are accounted for or disclosed. Management maintains a system of internal control at each business unit. This system is designed to provide reasonable assurance that assets are safeguarded and records properly reflect transactions executed in accordance with management's authorization. The Company also maintains a staff of internal auditors who review and evaluate the system of internal control. In determining the extent of the system of internal control, management recognizes that the cost should not exceed the benefits derived. The evaluation of these factors requires estimates and judgment by management. The Company's financial statements have been audited by KPMG LLP, independent auditors. Their Independent Auditors' Report, which is based on an audit made in accordance with auditing standards generally accepted in the United States of America, is presented on the previous page. In performing their audit, KPMG LLP considers the Company's internal control structure to the extent they deem necessary in order to plan their audit, determine the nature, timing and extent of tests to be performed and issue their report on the consolidated financial statements. The Audit Committee of the Board of Directors meets with the independent auditors, the internal auditors and management to satisfy itself that they are properly discharging their responsibilities. The auditors have direct access to the Audit Committee. Airgas, Inc. /s/ Roger F. Millay /s/ Peter McCausland ________________________ _______________________ Roger F. Millay Peter McCausland Senior Vice President - Finance and Chairman and Chief Financial Officer Chief Executive Officer May 8, 2001 F-4
AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Years Ended March 31, ------------------------------------ (In thousands, except per share amounts) 2001 2000 1999 ---- ---- ---- NET SALES Distribution................................. $1,487,422 $1,409,949 $1,406,184 Gas Operations............................... 141,479 132,385 155,034 ---------- ---------- ---------- Total net sales......................... 1,628,901 1,542,334 1,561,218 COSTS AND EXPENSES Cost of products sold (excluding depreciation and amortization) Distribution............................... 797,423 760,122 768,568 Gas Operations............................. 49,777 56,475 69,487 Selling, distribution and administrative expenses.................................... 583,355 532,527 523,241 Depreciation................................. 62,938 63,635 61,901 Amortization................................. 23,816 25,673 26,025 Special charges (recoveries), net (Note 3)... 3,643 (2,829) (1,000) --------- --------- --------- Total costs and expenses................ 1,520,952 1,435,603 1,448,222 OPERATING INCOME Distribution................................. 92,186 94,671 98,447 Gas Operations............................... 19,406 9,231 13,549 Special (charges) recoveries, net ........... (3,643) 2,829 1,000 --------- --------- --------- Total operating income.................. 107,949 106,731 112,996 Interest expense, net (Note 15).............. (60,207) (57,560) (60,298) Discount on securitization of trade receivables (Note 11)....................... (1,303) -- -- Other income, net (Note 2)................... 242 17,862 26,621 Equity in earnings of unconsolidated affiliates (Note 14)........................ 2,260 3,391 7,042 --------- --------- --------- Earnings before income taxes and the cumulative effect of an accounting change 48,941 70,424 86,361 Income taxes (Note 16)....................... 20,718 31,551 34,437 --------- --------- --------- Earnings before the cumulative effect of an accounting change......... 28,223 38,873 51,924 Cumulative effect of an accounting change, net of taxes........................ -- (590) -- --------- --------- --------- NET EARNINGS................................. $ 28,223 $ 38,283 $ 51,924 ========= ========= ========= Basic earnings per share: Earnings per share before the cumulative effect of an accounting change.......... $ .43 $ .56 $ .74 Cumulative effect per share of an accounting change....................... -- (.01) -- --------- --------- --------- Net earnings per share................... $ .43 $ .55 $ .74 ========= ========= ========= Diluted earnings per share: Earnings per share before the cumulative effect of an accounting change.......... $ .42 $ .55 $ .72 Cumulative effect per share of an accounting change....................... -- (.01) -- --------- --------- --------- Net earnings per share................... $ .42 $ .54 $ .72 ========= ========= ========= Weighted average shares outstanding: Basic (Note 4)............................... 66,000 69,200 70,000 ========= ========= ========= Diluted (Note 4)............................. 67,200 70,600 71,700 ========= ========= ========= Comprehensive income.......................... $ 27,666 $ 38,597 $ 51,793 ========= ========= ========= See accompanying notes to consolidated financial statements.
F-5
AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, -------------------------- (In thousands, except per share amounts) 2001 2000 ---- ---- ASSETS Current Assets Trade receivables, less allowances for doubtful accounts of $7,402 in 2001 and $6,194 in 2000 (Note 11).......... $ 143,129 $ 211,989 Inventories, net (Note 5)................................ 155,024 159,438 Deferred income tax asset, net (Note 16)................. 10,143 13,752 Prepaid expenses and other current assets................ 25,549 23,611 ---------- ---------- Total current assets................................ 333,845 408,790 Plant and equipment, at cost (Note 6).................... 1,073,252 1,074,365 Less accumulated depreciation............................ (368,606) (320,597) ---------- ---------- Plant and equipment, net............................ 704,646 753,768 Goodwill, net of accumulated amortization of $82,565 in 2001 and $68,471 in 2000................................ 432,825 445,498 Other non-current assets (Note 7)........................ 111,409 131,275 ---------- ---------- Total assets $1,582,725 $1,739,331 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable, trade.................................. $ 76,337 $ 78,276 Accrued expenses and other current liabilities (Note 8).. 132,308 121,249 Current portion of long-term debt (Note 9)............... 72,945 20,071 ---------- ---------- Total current liabilities........................... 281,590 219,596 Long-term debt, excluding current portion (Note 9)....... 620,664 857,422 Deferred income tax liability, net (Note 16)............. 161,176 160,808 Other non-current liabilities............................ 22,446 28,998 Commitments and contingencies (Notes 19 and 20).......... -- -- Stockholders' Equity (Note 12) Preferred stock, no par value, 20,000 shares authorized, no shares issued or outstanding in 2001 and 2000........ -- -- Common stock, par value $.01 per share, 200,000 shares authorized, 74,361 and 73,144 shares issued in 2001 and 2000, respectively...................................... 744 731 Capital in excess of par value........................... 188,629 193,893 Retained earnings........................................ 355,596 327,373 Accumulated other comprehensive loss..................... (1,153) (596) Treasury stock, 516 and 1,126 common shares at cost in 2001 and 2000, respectively............................. (3,982) (8,435) Employee benefits trust, 5,701 and 4,822 common shares at cost in 2001 and 2000, respectively..................... (42,985) (40,459) ---------- ---------- Total stockholders' equity.......................... 496,849 472,507 ---------- ---------- Total liabilities and stockholders' equity.......... $1,582,725 $1,739,331 ========== ========== See accompanying notes to consolidated financial statements.
F-6
AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended March 31, 2001, 2000 and 1999 ---------------------------------------------------------------------------- Shares of Accumulated Common Capital in Other Employee Stock $.01 Common Excess of Retained Comprehensive Treasury Benefits (In thousands) Par Value Stock Par Value Earnings Income (Loss) Stock Trust ---------- ------ ---------- -------- ------------- -------- --------- Balance - March 31, 1998... 71,356.8 $714 $192,358 $237,166 $ (779) $(2,586) $ -- Net earnings............... 51,924 Foreign currency translation adjustment.... (131) Purchase of treasury stock (Note 12)................. (16,579) Shares issued in connection with acquisitions (Note 2) 53.2 (425) Reissuance of treasury stock for stock options exercised (Note 12)................. (5,877) 7,798 Tax benefit associated with exercise of stock options (Note 16)................. 1,648 Shares issued in connection with Employee Stock Purchase Plan (Note 13)... 613.7 6 5,708 Shares of treasury stock sold to Employee Benefits Trust (Note 12)........... (3,237) 10,238 (7,001) -------- ---- -------- -------- ----- ------- -------- Balance - March 31, 1999... 72,023.7 $720 $190,175 $289,090 $(910) $(1,129) $ (7,001) Net earnings............... 38,283 Foreign currency translation adjustment................ 314 Purchase of treasury stock (Note 12)..... (45,996) Reissuance of treasury stock for stock options exercised (Note 12)................. (247) 424 Shares issued in connection with stock options exercised (Note 13)....... 544.4 5 1,429 Tax benefit associated with exercise of stock options (Note 16)................. 1,638 Shares issued in connection with Employee Stock Purchase Plan (Note 13)... 575.7 6 4,080 Shares issued from Employee Benefits Trust for Employee Stock Purchase Plan (Note 12)............ (348) 1,976 Shares of treasury stock sold to Employee Benefits Trust (Note 12)........... (2,834) 38,266 (35,434) -------- ---- -------- -------- ----- ------- -------- Balance - March 31, 2000... 73,143.8 $731 $193,893 $327,373 $(596) $(8,435) $(40,459) Net earnings............... 28,223 Foreign currency translation adjustment.... (557) Purchase of treasury stock (Note 12)...... (11,214) Shares issued in connection with a prior year acquisition agreement..... 787.6 8 (8) Shares issued in connection with stock options exercised (Note 13)....... 429.5 5 1,455 Tax benefit associated with exercise of stock options (Note 16)................. 800 Shares issued from Employee Benefits Trust for Employee Stock Purchase Plan (Note 12).. (3,107) 8,737 Shares of treasury stock sold to Employee Benefits Trust (Note 12)........... (4,404) 15,667 (11,263) -------- ---- -------- -------- ------- ------- -------- Balance - March 31, 2001... 74,360.9 $744 $188,629 $355,596 $(1,153) $(3,982) $(42,985) ======== ==== ======== ======== ======= ======= ======== See accompanying notes to consolidated financial statements.
F-7
AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended March 31, ----------------------------------- (In thousands) 2001 2000 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings....................................... $ 28,223 $ 38,283 $ 51,924 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................... 86,754 89,308 87,926 Deferred income taxes........................... 5,152 13,123 16,045 Equity in earnings of unconsolidated affiliates. (2,260) (3,391) (7,911) Gains on divestitures.................... ...... (1,173) (17,712) (25,468) (Gain)/loss on sale of plant and equipment...... 502 (915) (222) Stock issued for employee stock purchase plan... 5,630 5,715 5,750 Other non-cash charges.......................... 2,281 458 (1,000) Changes in assets and liabilities, excluding effects of business acquisitions and divestitures: Securitization of trade receivables............. 73,200 -- -- Trade receivables, net.......................... (4,122) (14,480) (10,477) Inventories, net................................ 4,531 1,392 (3,829) Prepaid expenses and other current assets....... (1,757) (5,954) (2,236) Accounts payable, trade......................... (2,005) (7,966) 1,052 Accrued expenses and other current liabilities.. 10,337 9,434 5,607 Other assets and liabilities, net............... (6,288) (7,203) (15,098) ------- ------- ------- Net cash provided by operating activities...... 199,005 100,092 102,063 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures............................... (65,910) (65,211) (101,638) Proceeds from sale of plant and equipment.......... 2,854 37,454 3,279 Proceeds from divestitures......................... 49,629 55,596 53,682 Business acquisitions, net of cash acquired........ (1,006) (99,204) (47,246) Business acquisitions, holdback and other settlements................................. (4,752) (2,289) (4,839) Investment in unconsolidated affiliates............ -- (30) (3,180) Dividends and fees from unconsolidated affiliates.. 3,668 3,973 4,533 Other, net......................................... 4,665 4,250 (1,467) ------- ------- ------- Net cash used in investing activities.......... (10,852) (65,461) (96,876) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings........................... 157,238 168,569 449,833 Repayment of debt.................................. (341,122) (159,638) (426,995) Purchase of treasury stock......................... (11,214) (47,125) (15,285) Exercise of stock options.......................... 1,460 1,562 1,943 Cash overdraft..................................... 5,485 2,001 (14,662) Other financing activities......................... -- -- (21) ------- ------- ------- Net cash used in financing activities.......... (188,153) (34,631) (5,187) ------- ------- ------- CHANGE IN CASH .................................... $ -- $ -- $ -- Cash - Beginning of year........................... -- -- -- ------- ------- ------- Cash - End of year................................. $ -- $ -- $ -- ======= ======= ======= For supplemental cash flow disclosures see Note 21. See accompanying notes to consolidated financial statements.
F-8 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The consolidated financial statements include the accounts of Airgas, Inc. and subsidiaries (the "Company"). Unconsolidated affiliates are accounted for on the equity method and generally consist of 20-50% owned operations where control does not exist or is considered temporary. The excess of the cost of these affiliates over the Company's share of their net assets at the acquisition date is being amortized primarily over 40 years. Intercompany accounts and transactions are eliminated in consolidation. The Company has made estimates and assumptions relating to the reporting of assets and liabilities and disclosure of contingent assets and liabilities to prepare these statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. (b) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method for approximately 88% and 86% of the inventories at March 31, 2001 and 2000, respectively. Cost for the remainder of inventories is determined using the last-in, first-out (LIFO) method. (c) Plant and Equipment Plant and equipment are stated at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets. (d) Goodwill Goodwill represents costs in excess of net assets of businesses acquired and is amortized on a straight-line basis over the expected periods to be benefited, which is principally 40 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows. In making such determination with respect to goodwill, the Company evaluates the performance of underlying businesses that give rise to such assets. The assets acquired in connection with these acquisitions continue to generate a significant portion of the Company's net sales, total operating income and cash flow. (e) Other Intangible Assets Costs related to the issuance of long-term debt are deferred and amortized over the term of the related debt. Costs and payments pursuant to non-competition arrangements entered into in connection with business acquisitions are amortized over the terms of the arrangements, which are principally over five years. The Company assesses the recoverability of non-competition arrangements by determining whether the amortization of the asset balance can be recovered through projected undiscounted future cash flows of the related business over its remaining life. F-9 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) (f) Commitments and Contingencies The Company's policy is to accrue future legal fees associated with outstanding litigation. Liabilities for loss contingencies arising from claims, assessments, litigation and other sources are recorded when it is probable that a liability has been incurred and the amount of the claim, assessment or damages can be reasonably estimated. (g) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. (h) Foreign Currency Translation The functional currency of the Company's foreign operations is the applicable local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using average exchange rates during each reporting period. The gains or losses, net of applicable deferred income taxes, resulting from such translations are included in stockholders' equity as a component of "Accumulated other comprehensive loss." Gains and losses arising from foreign currency transactions are reflected in the consolidated statements of earnings as incurred. (i) Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk are limited due to the Company's large number of customers and their dispersion across many industries throughout North America. Credit terms granted to customers are generally net 30 days. (j) Financial Instruments In managing interest rate risk exposure, the Company enters into interest rate swap agreements. An interest rate swap is a contractual exchange of interest payments between two parties. A standard interest rate swap involves the payment of a fixed rate times a notional amount by one party in exchange for a floating rate times the same notional amount from another party. As interest rates change, the difference to be paid or received is accrued and recognized as interest expense over the life of the agreement. These instruments are not entered into for trading purposes and the Company has the ability and intent to hold these instruments to maturity. The fair value of the interest rate swap agreements is not recognized in the financial statements. Counterparties to the Company's interest rate swap agreements are major financial institutions. The carrying amounts for trade receivables and accounts payable approximate fair value based on the short-term maturity of these financial instruments. F-10 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) (k) Employee Benefits Trust The Company established a grantor trust (the "Trust") to fund future obligations of the Company's employee benefit and compensation plans. Shares are purchased by the Trust from the Company at fair market value and are reflected as a reduction of stockholders' equity in the Company's Consolidated Balance Sheets under the caption "Employee benefits trust." Shares are transferred from the Trust to fund compensation and employee benefit obligations based on the original cost of the shares to the Trust. The satisfaction of compensation and employee benefit plan obligations is based on the fair value of shares transferred. Differences between the original cost of the shares to the Trust and the fair market value of shares transferred is charged or credited to capital in excess of par value. (l) Revenue Recognition Revenue from sales of gas and hardgoods products is recognized when products are delivered to customers. Rental fees on cylinders, bulk gas storage tanks and other equipment are recognized when earned. Under long-term lease agreements in which rental fees are collected in advance, revenues are deferred and recognized over the terms of the lease agreements. (m) Shipping and Handling Fees and Costs The Company recognizes delivery and freight charges to customers as elements of net sales. Costs of third party freight are recognized as cost of sales while costs of deliveries by company vehicles and personnel are recognized as elements of selling, distribution and administrative expenses and depreciation expense. (n) Accounting and Disclosure Changes The Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), as required, in the fourth quarter of fiscal 2001. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The adoption of SAB 101 did not result in a change to the Company's method of revenue recognition. The Company adopted Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"), as required, in fiscal 2001. SFAS 140 replaces SFAS 125, revises the standards for accounting for securitizations and other transfers of financial assets, and requires certain additional disclosures. The adoption of SFAS 140 did not have an impact on the results of operations, financial position and liquidity of the Company. The Company adopted Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" ("SOP 98-5"), as required, in the first quarter of fiscal year 2000 resulting in a charge to net earnings of $590 thousand. 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 Statements 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. F-11 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) ACQUISITIONS & DIVESTITURES (a) Acquisitions Acquisitions have been recorded using the purchase method of accounting, and, accordingly, results of their operations have been included in the Company's consolidated financial statements since the effective dates of the respective acquisitions. 2001 - During fiscal 2001, the Company purchased one business for approximately $2 million. 2000 - During fiscal 2000, the Company purchased six businesses. The largest of these acquisitions and their effective dates included Brown Welding Supply, LLC. (July 1, 1999), Oxygen Sales & Service, Inc. (August 1, 1999) and Puritan-Bennett Corporation (January 21, 2000). The aggregate purchase price for these acquisitions amounted to approximately $105 million. The purchase price for the remaining 3 businesses amounted to approximately $4 million. 1999 - During fiscal 1999, the Company purchased 15 businesses. The largest of these acquisitions and their effective dates included Abel Carbonic Products, Inc. (May 1, 1998), Gas House Welding Supply, Inc. (July 1, 1998), Carbonic Products, Inc. (September 1, 1998) and Pacific Dry Ice, Inc. (September 1, 1998). The aggregate purchase price for these acquisitions amounted to approximately $49 million. The purchase price for the remaining 11 businesses amounted to approximately $17 million. In connection with the above acquisitions, the total purchase price, cash paid and liabilities assumed were as follows:
Years Ended March 31, ---------------------------- (In thousands) 2001 2000 1999 ---- ---- ---- Cash paid................................ $1,006 $ 99,204 $47,246 Issuance of common stock................. -- -- -- Notes issued to sellers.................. -- 1,399 2,361 Notes payable and capital leases assumed. -- 561 553 Other liabilities assumed and accrued acquisition costs....................... 536 7,762 15,475 ------ -------- ------- Total purchase price..................... $1,542 $108,926 $65,635 ====== ======== =======
The purchase price for business acquisitions and minority interests was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Such allocations have been based on preliminary estimates of fair value at the date of acquisition, which may be revised at a later date. Costs in excess of net assets acquired (goodwill) for fiscal 2001, 2000 and 1999 amounted to $600 thousand, $33 million and $29.3 million, respectively. F-12 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) ACQUISITIONS & DIVESTITURES - (Continued) The following presents unaudited estimated pro forma operating results as if the fiscal 2001 and 2000 acquisitions had been consummated on April 1, 1999. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of April 1, 1999 or of results which may occur in the future.
Years Ended March 31, --------------------- (In thousands, except per share amounts) 2001 2000 ---- ---- Net sales....................................... $1,629,263 $1,607,011 Net earnings.................................... 28,232 42,192 Pro forma - diluted earnings per share.......... .42 .60 As reported - diluted earnings per share........ .42 .54
(b) Divestitures In January 2001, the Company divested its Jackson Dome carbon dioxide reserves and associated pipeline for proceeds of approximately $42 million resulting in an insignificant gain. The Jackson Dome Carbon dioxide reserve and associated pipeline was reflected in the operating results of the Gas Operations segment. In May 2000, the Company completed the sale of its equity investment in Bhoruka Gases Ltd., a regional industrial gas distributor in India. Proceeds from the sale, including a note receivable, were $1.1 million. The investment was sold for a loss of $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 Ltd., also located in India. Proceeds from the sale were $6.4 million and resulted in an insignificant gain. The equity investments in India were reflected in the operating results of the Distribution segment. During fiscal 2000, the Company completed the sale of its operations in Poland and Thailand and sold a non-core medical equipment distribution business. Proceeds from the sales amounted to $55.6 million and resulted in a gain of $17.5 million, which was recognized in "Other income, net." The operations in Poland and Thailand were reflected in the operating results of the Distribution segment. During fiscal 1999, the Company sold certain beverage service operations, its eastern Canadian industrial gas distribution business and its calcium carbide and carbon products operations. Proceeds from the sales amounted to $53.7 million. The beverage service and Canadian operations were sold at a loss, which was provided for in the 1998 Special Charges (Note 3). The Company's calcium carbide and carbon products operations were sold for a gain of $25.5 million, included in "Other income, net." The beverage service operations and the Canadian industrial gas distribution business were reflected in the operating results of the Distribution segment, while the calcium carbide and carbon products operations were reflected in the Gas Operations segment. F-13 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) ACQUISITIONS & DIVESTITURES - (Continued) The following table sets forth selected financial data related to the fiscal 2001, 2000 and 1999 divested operations:
Years Ended March 31, --------------------------- (In thousands) 2001 2000 1999 ---- ---- ---- Sales............................ $4,270 $23,018 $67,729 Gross profits.................... 4,108 14,809 33,732 Depreciation and amortization.... 1,076 2,729 5,251 Operating income................. 2,816 935 7,008
(3) SPECIAL CHARGES (a) 2001 Special Charges During the fourth quarter of fiscal 2001, the Company recorded net special charges of $3.6 million. The net special charges (the "2001 Special Charges") include a charge of $8.5 million related to a cost reduction plan focused on improving results at certain business units partially offset by special charge recoveries of $4.9 million principally consisting of a favorable insurance settlement related to a 1997 Special Charge associated with the fraudulent breach of contract by a third-party supplier of refrigerant gases. The cost reduction plan included severance costs from a workforce reduction of 275 employees; facility exit costs, primarily non-cancelable lease obligations, for the closure of 30 branch locations; and impairment write-downs associated with the planned divestiture of certain non- core businesses. The major components of the fiscal 2001 Special Charges were as follows:
(In thousands) 2001 -------- Severance costs........... $ 3,880 Facility exit costs....... 2,464 Impairment write-down..... 2,188 ------- 2001 Special Charges.... 8,532 Special charge recoveries. (4,889) ------- Special Charges, net.... $ 3,643 =======
Accrued liabilities associated with the cost reduction plan at March 31, 2001 were as follows:
(In thousands) Severance Facility exit costs costs Divestitures Total --------- ------------- ------------ -------- 2001 Special Charges..... $ 3,880 $ 2,464 $ 2,188 $ 8,532 Cash payments............ (913) (34) -- (947) Incurred losses.......... (240) -- (2,188) (2,428) ------- ------- ------- ------- March 31, 2001 liability. $ 2,727 $ 2,430 $ -- $ 5,157 ======= ======= ======= =======
F-14 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) SPECIAL CHARGES - (Continued) (b) 1998 Special Charges In fiscal 1998, the Company recorded special charges (the "1998 Special Charges") associated with a repositioning plan which included the consolidation of subsidiaries into larger regional companies; the consolidation of certain warehouse facilities into regional distribution centers; the standardization and integration of information systems; the building of a national information, procurement and logistics infrastructure to support expanded product lines and distribution channels; and the divestiture of several non- core businesses. At March 31, 2000, accrued liabilities related to the 1998 Special Charges were $3.8 million. During fiscal 2001, the Company completed the sale of its equity investments in India, which were the final divestitures contemplated under the 1998 Special Charges. After completing the activities contemplated by the repositioning plan, the remaining accrued liabilities were reversed with the adjustment reflected in income as special charge recoveries. (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 years ended March 31, 2001, 2000 and 1999:
Years Ended March 31, ------------------------ (In thousands) 2001 2000 1999 ---- ---- ---- Weighted average common shares outstanding: Basic...................................... 66,000 69,200 70,000 Stock options........................... 600 1,000 1,400 Contingently issuable shares............ 600 400 300 ------ ------ ------ Diluted.................................... 67,200 70,600 71,700 ====== ====== ======
Contingently issuable shares represent the required issuance of Company common stock in connection with a prior year acquisition. During fiscal 2001, the Company issued approximately 800 thousand shares in connection with the acquisition. The number of issuable shares was determined 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. The contingent shares included in the diluted weighted average shares calculation have been weighted based on the number of contingent shares issuable as of the end of each quarter during the fiscal years presented. Additional common stock issued in connection with the prior year acquisition reduced capital in excess of par value and increased common stock for the par value of the additional shares issued. F-15 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) INVENTORIES, NET
Inventories, net, consist of: March 31, --------------------- (In thousands) 2001 2000 ---- ---- Finished goods................ $154,385 $158,549 Raw materials................. 639 889 -------- -------- $155,024 $159,438 ======== ========
Net inventories determined by the LIFO inventory method totaled $19.1 million and $22.6 million at March 31, 2001 and March 31, 2000, respectively. If the FIFO inventory method had been used for these inventories, they would have been $1.5 million and $1.4 million higher at March 31, 2001 and 2000, respectively. (6) PLANT AND EQUIPMENT
The major classes of plant and equipment, at cost, are as follows: March 31, ------------------ Depreciable (In thousands) Lives (Yrs) 2001 2000 ----------- ---- ---- Land and land improvements.............. -- $ 24,739 $ 25,099 Buildings and leasehold improvements.... 25 103,002 101,606 Cylinders............................... 30 486,909 475,144 Machinery and equipment, including bulk tanks............................. 7 to 30 318,757 337,684 Computers and furniture and fixtures.... 3 to 10 76,679 72,192 Transportation equipment................ 3 to 15 54,950 55,528 Construction in progress................ -- 8,216 7,112 ---------- ---------- $1,073,252 $1,074,365 ========== ==========
(7) OTHER NON-CURRENT ASSETS
Other non-current assets include: March 31, ------------------ (In thousands) 2001 2000 ---- ---- Investments in unconsolidated affiliates (Note 14) $ 63,262 $ 72,959 Non-compete agreements and other intangible assets, at cost, net of accumulated amortization of $107,200 in 2001 and $97,500 in 2000.............. 38,335 48,136 Other assets....................................... 9,812 10,180 -------- -------- $111,409 $131,275 ======== ========
F-16 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include: March 31, ------------------ (In thousands) 2001 2000 ---- ---- Cash overdraft.................................... $ 24,445 $ 18,960 Accrued payroll and employee benefits............. 24,989 24,441 Insurance reserves................................ 15,596 11,475 Other accrued expenses and current liabilities.... 67,278 66,373 -------- -------- $132,308 $121,249 ======== ========
The cash overdraft is attributable to the float of the Company's outstanding checks. (9) INDEBTEDNESS (a) Long-term Debt
Long-term debt consists of: March 31, ------------------ (In thousands) 2001 2000 ---- ---- Revolving credit borrowings.................. $414,983 $583,700 Medium-term notes............................ 225,000 225,000 Acquisition and other notes.................. 53,626 68,793 -------- -------- Total long-term debt......................... 693,609 877,493 Less current portion of long-term debt....... (72,945) (20,071) -------- -------- Long-term debt, excluding current portion.... $620,664 $857,422 ======== ========
The Company has unsecured revolving credit facilities totaling $665 million and $76.5 million Canadian (US$49 million). The Company may borrow under these facilities until the maturity date of December 5, 2002. The agreement contains covenants, which include the maintenance of a minimum equity level, maintenance of certain financial ratios, restrictions on additional borrowings and limitations on dividends. At March 31, 2001, the Company had borrowings under the agreement of $390 million and $39 million Canadian (US$25 million). The Company also had commitments under letters of credit supported by the agreement of approximately $52 million. Based on restrictions related to cash flow to funded debt coverage, the Company had additional borrowing capacity under the agreement of approximately $189 million. The variable rates of the U.S. and Canadian revolving credit facilities are based on LIBOR and on Canadian Bankers' acceptance rates, respectively. At March 31, 2001, the effective interest rates related to outstanding borrowings under the lines were 5.79% on U.S. borrowings and 5.17% on Canadian borrowings. F-17 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) INDEBTEDNESS - (Continued) At March 31, 2001, 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 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%. The medium term notes due September 2001 are expected to be refinanced with borrowings under the Company's revolving credit facilities. The Company also has a shelf registration with a capacity of approximately $175 million for the issuance of debt and other types of securities. Acquisition and other notes principally represent notes issued to sellers of businesses acquired and are repayable in periodic installments including interest at an average effective rate of 7.6%. The aggregate maturities of long-term debt are as follows:
(In thousands) Years Ending March 31, Aggregate Maturity - ---------------------- ------------------ 2002............... $ 72,945 2003............... 416,860 2004............... 97,158 2005............... 517 2006............... 5,444 Thereafter......... 100,685 -------- $693,609 ========
(b) Swap Agreements In managing interest rate exposure, the Company participates in 17 interest rate swap agreements with a total notional principal amount of $477 million at March 31, 2001. Counterparties to the interest rate swap agreements are major financial institutions. The Company monitors its positions and the credit ratings of its counterparties, and does not anticipate nonperformance by the counterparties. Thirteen swap agreements with approximately $347 million in notional principal amount require fixed interest payments based on an average effective rate of 6.3% for remaining periods ranging between one and three years. Four swap agreements with approximately $130 million in notional principal amount require variable interest payments based on an average effective rate of 5.5% at March 31, 2001. Under the terms of one of the swap agreements, the Company has elected to receive the discounted value of the counterparty's interest payments up front. At March 31, 2001, approximately $1.0 million of such payments were included in other current liabilities and $400 thousand of such payments were included in other non-current liabilities. The effect of the swap agreements was to increase interest expense $1.6 million, $3.2 million and $1.1 million in 2001, 2000 and 1999, respectively. F-18 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) INDEBTEDNESS - (Continued) The aggregate maturities of the Company's interest rate swaps by type of swap for the five years ending March 31, 2006 and thereafter are as follows:
(In thousands) Notional Principal Amounts -------------------------- Years Ending March 31, Pay-Fixed Receive-Fixed --------- ------------- 2002............... $179,086 $ 50,000 2003............... 127,500 -- 2004............... -- 30,000 2005............... 40,000 -- 2006............... -- -- Thereafter......... -- 50,000 -------- -------- $346,586 $130,000 ======== ========
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS Summarized below are the carrying and fair values of the Company's financial instruments at March 31, 2001 and 2000. The fair value of the Company's financial instruments is based on estimates using standard pricing models that take into account the present value of future cash flows as of the balance sheet date. The computation of fair values of these instruments is generally performed by the Company. The carrying amounts reported in the balance sheet for trade receivables and payables, accrued liabilities, accrued income taxes, and short-term borrowings approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the table below.
2001 2001 2000 2000 (In thousands) Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- Financial Instruments: Revolving credit borrowings.... $414,983 $414,983 $583,700 $583,700 Medium-term notes.............. 225,000 218,661 225,000 185,931 Acquisition and other notes.... 53,626 53,013 68,793 62,605 Prepaid interest rate swap agreements.................... 1,441 3,411 4,519 5,573 Interest rate swap agreements.. -- (273) -- (2,322)
(11) TRADE RECEIVABLES SECURITIZATION In December 2000, the Company entered into a $150 million three- year trade receivables securitization agreement with two commercial banks. The revolving period securitization helps diversify the Company's funding sources at an efficient all-in cost of funds. During fiscal 2001, the Company sold $284.9 million of trade receivables and remitted to the bank conduits, pursuant to a servicing agreement, $211.7 million in collections on those receivables. Net proceeds from the securitization were $73.2 million, which were used to repay borrowings under the Company's revolving credit facilities. F-19 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) TRADE RECEIVABLES SECURITIZATION - (Continued) The transaction has been accounted for as a sale under the provisions of Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under the agreement, eligible trade receivables are sold to bank conduits through a bankruptcy-remote special purpose entity, which is consolidated for financial reporting purposes. The difference between the proceeds from the sale and the carrying value of the receivables is recognized as "Discount on securitization of trade receivables" in the accompanying Consolidated Statements of Earnings and varies on a monthly basis depending on the amount of receivables sold and market rates. The Company retains a subordinated interest in the receivables sold, which is recorded at the receivables' previous carrying value. A subordinated retained interest of approximately $26 million at March 31, 2001 is included in "Trade receivables" in the accompanying Consolidated Balance Sheet. In accordance with a servicing agreement, the Company will continue to service, administer and collect the trade receivables on behalf of the bank conduits. The servicing fees charged to the bank conduits approximate the costs of collections. The Company also maintains an allowance for doubtful accounts on trade receivables that it retains. In April 2001, the Company completed the second and final tranche of the $150 million trade receivables securitization program. Proceeds from the second tranche of $64.3 million were used to reduce borrowings under the Company's revolving credit facilities. The three-year trade receivables securitization agreement expires on December 19, 2003, but the initial term is subject to renewal provisions. (12) STOCKHOLDERS' EQUITY (a) Common Stock The Company is authorized to issue up to 200 million shares of common stock with a par value of $.01 per share. At March 31, 2001, the number of shares of common stock outstanding was 68,144,341, excluding 516 thousand shares of common stock held as treasury stock and 5.7 million shares of common stock held in a grantor trust as described under Note 12(d). (b) Preferred Stock and Redeemable Preferred Stock The Company is authorized to issue up to 20 million shares of preferred stock. Of the 20 million shares authorized, 200 thousand shares have been designated as Series A Junior Participating Preferred Stock and 200 thousand shares have been designated as Series B Junior Participating Preferred Stock (see Note 12(e) for further discussion). At March 31, 2001 and 2000, no shares of the preferred stock were issued or outstanding. The preferred stock may be issued from time to time by the Company's Board of Directors in one or more series. The Board of Directors is authorized to fix the dividend rights and terms, conversion rights, voting rights, rights and terms of redemption, liquidation preferences, and any other rights, preferences, privileges and restrictions of any series of preferred stock, and the number of shares constituting each such series and designation thereof. Additionally, the Company is authorized to issue 30 thousand shares of redeemable preferred stock. At March 31, 2001 and 2000, no shares were issued or outstanding. F-20 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) STOCKHOLDERS' EQUITY - (Continued) (c) Treasury Stock In March 1999, the Company's Board of Directors authorized the repurchase of up to seven million shares, or approximately 10%, of the Company's outstanding common stock. The authorization provided for the repurchase of shares in the open market or in privately negotiated transactions depending on market conditions and other factors. In accordance with the March 1999 and previous share repurchase authorizations, the Company acquired 1.4 million, 5.3 million, and 1.4 million shares of common stock in fiscal 2001, 2000 and 1999, respectively. In fiscal 2001, the Company reissued 2 million shares of common stock to the Company's Employee Benefits Trust (the "Trust"), as discussed in Note 12(d). In fiscal 2000, the Company reissued 4.2 million shares of common stock to the Trust and 48 thousand shares for stock option exercises. In fiscal 1999, the Company reissued 826 thousand shares of common stock to the Trust and 598 thousand for stock option exercises. When treasury shares are reissued, the Company uses an average cost method with the excess of the repurchase cost over the reissuance price accounted for as a charge to capital in excess of par value. During fiscal 2001, the Company completed the stock repurchase program. (d) Shares in Employee Benefits Trust In March 1999, the Company established a grantor trust (the "Trust") to fund certain future obligations of the Company's employee benefit and compensation plans. The Company, pursuant to a Common Stock Purchase Agreement, may sell shares of common stock to the Trust. Such common stock consists of shares the Company has purchased or will purchase on the open market or in private transactions. The common stock may also consist of shares issued directly to the Trust. The Company holds promissory notes from the Trust in the amount of each purchase. Shares held by the Trust serve as collateral for the promissory notes and are available to fund employee benefit plan obligations as the promissory notes are repaid. The shares held by the Trust are not considered outstanding for earnings per share purposes until they are released from serving as collateral for the promissory notes. An independent third-party financial institution serves as the Trustee. The Trustee votes or tenders shares held by the Trust in accordance with instructions received from the participants in the employee benefit and compensation plans to be funded by the Trust. In fiscal 2001 and 2000, the Trust purchased 2 million and 4.2 million shares of common stock, previously held as treasury stock, from the Company, for approximately $11 million and $35 million, respectively. Approximately 1.2 million and 230 thousand shares were issued from the Trust for employee benefit programs during fiscal 2001 and 2000, respectively. (e) Stockholder Rights Plan Effective April 1, 1997, the Company's Board of Directors adopted a new stockholder rights plan (the "1997 Rights Plan"). Pursuant to the 1997 Rights Plan, the Board of Directors declared a dividend distribution of one right for each share of common stock. Each right entitles the holder to purchase from the Company one one- thousandth of a share Series B Junior Participating Preferred Stock at an initial exercise price of $100 per share. Rights become exercisable only following the acquisition by a person or group of 15 percent (or 20 percent in the case of the Chairman and certain of his affiliates) or more of the Company's common stock or after the announcement of a tender offer or exchange offer to acquire 15 percent (or 20 percent in the case of the Chairman and certain of his affiliates) or more of the outstanding common stock. If such a person or group acquires 15 percent or more (or 20 percent or more, as the case may be) of the common stock, each right (other than such person's or group's rights, which will become void) will entitle the holder to purchase, at the exercise price, common stock having a market value equal to twice the exercise price. In certain circumstances, the rights may be redeemed by the Company. If not redeemed, they will expire on April 1, 2007. F-21 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) STOCK-BASED COMPENSATION The Company has elected to continue to account for its stock- based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation expense has been recognized for its stock option plans and its stock purchase plan. However, pro forma information regarding net earnings and earnings per share is required. Had compensation expense for the Company's stock-based compensation plans been determined based on the fair value at the grant date, the Company's pro forma net earnings and earnings per share for fiscal 2001, 2000 and 1999 would be as follows:
Years Ended March 31, ---------------------- (In thousands, except per share amounts) 2001 2000 1999 ---- ---- ---- Net earnings As reported........... $28,223 $38,283 $51,924 Pro forma............. $22,142 $32,602 $46,636 Diluted earnings As reported........... $ .42 $ .54 $ .72 per share Pro forma............. $ .33 $ .46 $ .65
The pro forma impact only takes into account options granted since April 1, 1995 and is likely to have a greater impact in future years as additional options are granted and amortized ratably over the vesting period. The Company's stock-based compensation plans are described below. (a) Employee Stock Option Plans The Company has a stock plan under which officers and key employees may be granted options. In May 1997, the Company adopted the 1997 Stock Option Plan (the "1997 Plan"). Options under the 1997 Plan vest 25% annually and have a maximum term of ten years. Under the 1997 Plan, at March 31, 2001, 2000 and 1999, 3.7 million, 5.4 million and 6.3 million options, respectively, were available for issuance. In fiscal 2001, 2000 and 1999, 1.7 million, 1.1 million and 1.7 million options, respectively, were granted with an exercise price equal to market price at the date of grant. Options under the 1997 Plan are generally granted in May of each year. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for fiscal 2001, 2000 and 1999 option grants, respectively: expected volatility of 51.1%, 44.2% and 42.6%, risk-free interest rate of 6.5%, 5.6% and 5.5%, and expected life of 5.6, 4.9 and 4.8 years. The weighted average fair value of the options granted during fiscal 2001, 2000 and 1999 was $3.13, $5.19 and $5.82, respectively. F-22 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) STOCK-BASED COMPENSATION - (Continued) The following table summarizes the activity of the employee stock option plans during the three years ended March 31, 2001:
Exercise Number Price Per of Shares Share --------- -------------- March 31, 1999 - -------------- Outstanding, beginning of year.. 6,359,107 $1.83 - $23.25 Granted......................... 1,665,007 8.13 - 15.94 Exercised....................... (557,647) 1.83 - 15.63 Expired......................... (256,947) 6.31 - 22.00 March 31, 2000 - -------------- Outstanding, beginning of year.. 7,209,520 1.83 - 23.25 Granted......................... 1,126,845 6.06 - 12.50 Exercised....................... (576,772) 1.83 - 11.32 Expired......................... (489,932) 6.31 - 22.00 March 31, 2001 - -------------- Outstanding, beginning of year.. 7,269,661 1.83 - 23.25 Granted......................... 1,734,215 4.63 - 8.25 Exercised....................... (397,494) 1.83 - 8.50 Expired......................... (300,421) 5.21 - 22.00 Outstanding, end of year........ 8,305,961 $1.83 - $23.25
Options for 4.9 million, 4.6 million and 4.4 million shares were exercisable at March 31, 2001, 2000 and 1999, respectively. (b) Board of Directors Stock Option Plans The Company also maintains stock option plans covering directors who are not employees. In May 1997, the Company adopted the 1997 Directors' Stock Option Plan (the "1997 Directors' Plan"). The 1997 Directors' Plan reserved 500 thousand shares for issuance. Options under the 1997 Directors' Plan are exercisable in full on the date of grant. Under the 1997 Directors' Plan, at March 31, 2001, 253,500 options were available for issuance. During fiscal 2001, 2000 and 1999, 100,000, 62,500 and 48,000 options, respectively, were granted with an exercise price equal to the market price at the date of grant and have a maximum term of ten years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for fiscal 2001, 2000 and 1999 option grants, respectively: expected volatility of 51.1%, 44.8% and 42.2%, risk-free interest rate of 6.1%, 5.8% and 5.5%, and expected life of 5.6, 5.4 and 5.5 years. The weighted average fair value of the stock options granted during fiscal 2001, 2000 and 1999 was $2.85, $6.01 and $6.36, respectively. F-23 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) STOCK-BASED COMPENSATION - (Continued) The following table summarizes the activity of the Board of Directors stock option plans during the three years ended March 31, 2001:
Exercise Number Price Per of Shares Share --------- --------------- March 31, 1999 - -------------- Outstanding, beginning of year.. 306,000 $2.09 - $19.25 Granted......................... 48,000 13.50 Exercised....................... (40,000) 2.09 - 4.16 March 31, 2000 - -------------- Outstanding, beginning of year.. 314,000 2.09 - 19.25 Granted......................... 62,500 12.25 Exercised....................... (16,000) 2.20 March 31, 2001 - -------------- Outstanding, beginning of year.. 360,500 2.09 - 19.25 Granted......................... 100,000 5.25 Exercised....................... (32,000) 2.09 - 2.14 Outstanding, end of year......... 428,500 $2.09 - $19.25
Options for 428,500, 360,500 and 314,000 shares were exercisable at March 31, 2001, 2000 and 1999, respectively. The following table summarizes information about options outstanding and exercisable for the employee and Board of Directors stock option plans at March 31, 2001:
Options Outstanding - --------------------------------------------------------- Exercise Weighted Average Number Price Remaining Life-Years Outstanding Per Share - -------------------- ----------- --------------- 1.97 1,032,888 $ 1.83 - $ 5.25 9.13 1,466,940 5.44 - 5.50 4.07 1,006,202 5.63 - 7.89 6.08 1,013,810 7.91 - 11.32 8.12 1,002,100 11.44 - 11.50 4.57 875,205 12.25 - 14.71 6.68 1,539,323 14.81 - 15.94 4.97 797,993 16.63 - 23.25 ---- --------- --------------- 5.96 8,734,461 $ 1.83 - $23.25 ==== ========= ===============
F-24 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) STOCK-BASED COMPENSATION - (Continued) Options Exercisable --------------------------------------------- Number of Options Weighted Average Exercisable Exercise Price Per Share ----------------- ------------------------ 1,030,138 $ 3.36 748,402 6.66 686,718 9.92 251,665 11.46 856,830 13.62 943,886 15.75 796,433 20.40 --------- ------- 5,314,072 $11.47 ========= ======= (c) Employee Stock Purchase Plans In August 1998, the Company established the Airgas, Inc. 1998 Employee Stock Purchase Plan (the "1998 Plan") to encourage and assist employees in acquiring an equity interest in the Company. The 1998 Plan replaced the previous 1994 Employee Stock Purchase Plan. The 1998 Plan is authorized to issue up to 3 million shares of common stock. Effective January 1, 1999, eligible employees may elect to have up to 15% of their annual gross earnings withheld to purchase common stock at 85% of the market value. Market value under the 1998 Plan is defined as either the closing share price on the New York Stock Exchange as of the employees' enrollment date or the closing price on the last business day of a fiscal quarter, whichever is lower. An employee may lock-in a purchase price for up to 27 months. The 1998 Plan is designed to comply with the requirements of Sections 421 and 423 of the Internal Revenue Code. During fiscal 2001, the Company issued 1.2 million shares, provided from the Employee Benefits Trust, to fund purchases made by employees under the 1998 Plan at an average purchase price of $4.86 per share. During fiscal 2000, the Company issued 806 thousand shares from the Employee Benefits Trust and treasury stock for the 1998 Plan at an average purchase price of $7.09 per share. The 1994 Employee Stock Purchase Plan (the "1994 Plan") was authorized to issue up to 2 million shares of common stock at terms generally consistent with the 1998 Plan. The Company issued 614 thousand shares under the 1994 Plan at an average purchase price of $9.30 during fiscal 1999. During fiscal 2000, the Company terminated the 1994 Plan. Compensation expense under SFAS 123 is estimated for the fair value of the employees' option to purchase shares of common stock, which was estimated using the Black-Scholes model with the following assumptions for fiscal 2001, 2000 and 1999, respectively: expected volatility of 63%, 51%, and 46% risk-free interest rate of 5.4%, 6.0%, and 4.8%, and expected term of 27 months for each period. The weighted average fair value of the purchase options granted in fiscal 2001, 2000 and 1999 was $3.47, $3.94 and $4.79, respectively. F-25 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) INVESTMENTS IN UNCONSOLIDATED AFFILIATES The Company's investments in unconsolidated affiliates totaled approximately $63 million at March 31, 2001, and $73 million at March 31, 2000. The Company's investments include a 47% joint venture interest in the voting capital stock of National Welders Supply Company, Inc. ("National Welders"). National Welders is a distributor of industrial, medical and specialty gases and related equipment based in Charlotte, North Carolina. The investment in National Welders totaled approximately $55 million at March 31, 2001 and 2000. The Company's other investments in unconsolidated affiliates totaled approximately $8 million at March 31, 2001 and approximately $18 million at March 31, 2000. The decrease compared to March 31, 2000 primarily relates to the fiscal 2001 divestiture of the Company's investments in India, as described in Note 2(b). At March 31, 2001, the Company's other investments primarily consist of a 50% joint venture interest in AC Industries. On December 31, 1998, the Company divested its calcium carbide and carbon products manufacturing operations to Elkem Metals Company L.P. ("Elkem"), a subsidiary of Elkem ASA. In conjunction with the sale, the Company terminated its 55% interest in a joint venture, which marketed calcium carbide throughout the United States. The Company accounts for investments in unconsolidated affiliates by the equity method of accounting. The Company's share of earnings from all unconsolidated affiliates was $2.3 million, $3.4 million, and $7.9 million for the years ended March 31, 2001, 2000 and 1999, respectively. Equity in earnings from Elkem of $900 thousand in 1999 is included in Gas Operations' net sales. The investments in unconsolidated affiliates include goodwill of approximately $28 million and $29 million as of March 31, 2001 and 2000, respectively, which is primarily being amortized to earnings over 40 years. A summary of unaudited financial information for investments in unconsolidated affiliates for the years ended March 31, 2001 and 2000 were as follows:
March 31, ----------------- (In thousands) 2001 2000 ---- ---- Current assets................ $ 44,731 $ 52,828 Non-current assets............ 121,852 142,461 -------- -------- Total assets............. $166,583 $195,289 ======== ======== Current liabilities........... $ 29,441 $ 31,431 Non-current liabilities....... 91,798 105,945 Stockholders' equity.......... 45,344 57,913 -------- -------- Total liabilities and stockholders' equity.... $166,583 $195,289 ======== ========
F-26 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) INVESTMENTS IN UNCONSOLIDATED AFFILIATES - (Continued)
Years Ended March 31, ---------------------------- (In thousands) 2001 2000 1999 ---- ---- ---- Net sales................. $182,630 $193,335 $200,017 Cost of sales............. 118,244 126,249 137,406 -------- -------- -------- Gross profit.............. 64,386 67,086 62,611 Operating income.......... 11,649 15,182 16,995 Earnings before taxes..... 13,086 13,571 17,266 -------- -------- -------- Net earnings.............. 9,162 9,428 13,463 Preferred stock dividends and equity adjustments... (6,902) (6,037) (5,553) Equity in earnings of Elkem JV................. -- -- (868) -------- -------- -------- Equity in earnings of unconsolidated affiliates $ 2,260 $ 3,391 $ 7,042 ======== ======== ========
(15) INTEREST EXPENSE, NET
Interest expense, net, consists of: Years Ended March 31, -------------------------- (In thousands) 2001 2000 1999 ---- ---- ---- Interest expense...................... $61,434 $58,712 $62,588 Interest and finance charge income.... (1,227) (1,152) (2,290) ------- ------- ------- $60,207 $57,560 $60,298 ======= ======= =======
(16) INCOME TAXES
Pre-tax earnings were derived from the following sources: Years Ended March 31, --------------------------- (In thousands) 2001 2000 1999 ---- ---- ---- United States............ $46,021 $69,028 $83,548 Foreign.................. 2,920 1,396 2,813 ------- ------- ------- $48,941 $70,424 $86,361 ======= ======= =======
F-27 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (16) INCOME TAXES - (Continued)
Income tax expense (benefit) consists of: Years Ended March 31, --------------------------- (In thousands) 2001 2000 1999 ---- ---- ---- Current: Federal.............. $12,286 $16,554 $15,220 Foreign.............. 1,135 408 599 State................ 2,145 1,466 2,573 ------- ------- ------- 15,566 18,428 18,392 Deferred: Federal.............. 6,173 10,325 13,870 Foreign.............. 594 847 446 State................ (1,615) 1,951 1,729 ------- ------- ------- 5,152 13,123 16,045 ------- ------- ------- $20,718 $31,551 $34,437 ======= ======= =======
Significant differences between taxes computed at the federal statutory rate and the provision for income taxes were: Years Ended March 31, --------------------------- 2001 2000 1999 ---- ---- ---- Taxes at U.S. federal statutory rate 35.0% 35.0% 35.0% Increase in income taxes resulting from: State income taxes, net of federal benefit................ 1.1% 2.1% 2.3% Amortization of non-deductible goodwill 4.9% 4.7% 4.6% Divestitures........................... -- 2.6% 0.4% Equity accounting for unconsolidated affiliates............................ (1.1%) (1.1%) (3.1%) Other, net............................. 2.4% 1.5% 0.7% ----- ----- ----- 42.3% 44.8% 39.9% ===== ===== =====
F-28 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (16) INCOME TAXES - (Continued) The tax effects of cumulative temporary differences that gave rise to the significant portions of the deferred tax assets and liabilities were as follows:
March 31, -------------------- (In thousands) 2001 2000 ---- ---- Deferred Tax Assets: - -------------------- Inventories...................... $ 5,852 $ 5,912 Accounts receivable.............. 406 1,088 Deferred rental income........... 528 385 Insurance reserves............... 4,391 3,567 Special charges (Note 3)......... 5,396 4,011 Litigation settlement and other reserves.................. 1,649 4,348 Intangible assets................ (71) 649 Other............................ 11,523 7,638 Valuation allowance.............. (4,263) (1,840) ------- ------- 25,411 25,758 ------- ------- Deferred Tax Liabilities: - ------------------------- Plant and equipment.............. (160,000) (156,320) Other............................ (16,444) (16,494) -------- -------- (176,444) (172,814) -------- -------- Net deferred tax liability....... $(151,033) $(147,056) ======== ========
Current tax assets and current tax liabilities have been netted for presentation purposes. Non-current tax assets and non-current tax liabilities have also been netted. Deferred tax assets and liabilities are reflected in the Company's consolidated balance sheets as follows:
March 31, -------------------- (In thousands) 2001 2000 ---- ---- Current deferred tax assets,net.......... $ 10,143 $ 13,752 Non-current deferred tax liability, net.. (161,176) (160,808) -------- -------- Net deferred tax liability............... $(151,033) $(147,056) ======== ========
The Company has recorded tax benefits amounting to $800 thousand, $1.6 million, and $1.6 million in fiscal 2001, 2000 and 1999, respectively, resulting from the exercise of stock options. This benefit has been recorded in capital in excess of par value. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances, at March 31, 2001. Valuation allowances primarily relate to state tax net operating loss carry forwards. F-29 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (17) BENEFIT PLANS The Company has a defined contribution 401(k) plan (the "plan") covering substantially all full-time employees. Under the terms of the plan, the Company makes matching contributions up to two percent of participants' wages plus additional discretionary profit sharing contributions based upon the profitability of the Company. Amounts expensed under the plan for fiscal 2001, 2000, and 1999 were $5.8 million, $5.9 million and $4.7 million, respectively. Certain subsidiaries of the Company participate in multi-employer pension and post-retirement plans which provide defined benefits to union employees. Contributions are made to the plans in accordance with negotiated labor contracts. The Company has not taken any action to terminate or withdraw from these plans. Management believes that the Company's liability, if any, for multi-employer plan withdrawal liability will not have a material effect on the Company's financial condition, results of operations or liquidity. Amounts expensed under the pension plans for fiscal 2001, 2000 and 1999 were $543 thousand, $526 thousand and $611 thousand, respectively. (18) RELATED PARTIES During the years ended March 31, 2001, 2000 and 1999, National Welders, an unconsolidated equity affiliate, paid $3.8 million, $3.5 million, and $1.4 million, respectively, to the Company for gas products, hardgoods and services. In addition, National Welders sold gas products and hardgoods to the Company in the amounts of $787 thousand, $330 thousand, and $552 thousand in fiscal 2001, 2000 and 1999, respectively. The Company paid $7.9 million, $9.1 million, and $8.4 million to AC Industries, an unconsolidated equity affiliate, for the purchase of liquid carbon dioxide during the years ended March 31, 2001, 2000 and 1999, respectively. In addition, the Company had a net payable balance to AC Industries totaling $1.2 million, $695 thousand, and $1.3 million, at March 31, 2001, 2000 and 1999, respectively. (19) LEASES The Company leases certain distribution facilities and equipment under long-term operating leases with varying terms. Most leases contain renewal options and in some instances, purchase options. Rentals under these long-term leases for the years ended March 31, 2001, 2000, and 1999, amounted to $43.7 million, $38.5 million, and $35.4 million, respectively. Certain operating facilities are leased at market rates from employees of the Company who were previous owners of businesses acquired. The Company also has several capital leases assumed as part of prior acquisitions. Outstanding lease obligations and the related capital assets are not material to the consolidated balance sheets at March 31, 2001 and 2000. In fiscal 2000, the Company renewed a lease of real estate with a trust established by a commercial bank. The lease was amended to include the sale-leaseback of certain equipment. The trust holds title to the properties and equipment included in the leases. The rental payments are based on LIBOR plus an applicable margin and the cost of the property acquired by the trust. At March 31, 2001, the non-cancelable lease obligation of the real estate and equipment lease totaled approximately $44 million. The lease has a five-year term and has been accounted for as an operating lease. The Company has guaranteed a residual value of the real estate and the equipment at the end of the lease term of approximately $30 million. A gain of approximately $12 million on the equipment portion of the transaction has been deferred until the expiration of the Company's guarantee of the residual value. F-30 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (19) LEASES - (Continued) At March 31, 2001, future minimum lease payments under noncancelable operating leases are as follows: (In thousands) -------------- 2002............ $ 32,010 2003............ 26,752 2004............ 20,736 2005............ 55,619 2006............ 11,467 Thereafter...... 17,960 ------- $164,544 ======= (20) COMMITMENTS AND CONTINGENCIES (a) Legal 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 anticipates that additional discovery and pretrial motions will be completed by the end of the calendar year, and that a trial on the merits will begin in April 2002. The Company believes that Praxair's North Carolina claims are without merit and intends to defend vigorously against such claims. In the fourth quarter of fiscal 2001, the Company recorded a charge of $6.9 million for the anticipated costs of defending the Praxair lawsuit. 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 special charge related to product losses and costs associated with the Company's efforts to investigate the fraud and pursue recoveries. In March 2001, the Company reached a final settlement with its insurance carriers resulting in additional insurance recoveries of $4 million. The insurance settlement net of associated legal expenses was reflected in special charge recoveries in the Consolidated Statement of Earnings. In fiscal 2000, the Company recorded a $7.5 million charge representing an estimate of the overall costs associated with the defense and settlement of certain class action lawsuits pertaining to hazardous material charges paid to the Company by customers. In the fourth quarter of fiscal 2001, a settlement agreement and approving court orders covering all such class actions against the Company became final, and the Company reversed $1.1 million of the previously accrued defense and settlement costs. The Company is involved in various legal and regulatory proceedings that have arisen in the ordinary course of its business and have not been fully 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. F-31 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (20) COMMITMENTS AND CONTINGENCIES - (Continued) (b) Insurance Coverage The Company has established insurance programs to cover workers' compensation, business automobile, general and products 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. (21) SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest expense and income taxes was as follows:
Years Ended March 31, ------------------------ (In thousands) 2001 2000 1999 ---- ---- ---- Interest....................... $65,167 $57,934 $63,316 Income taxes (net of refunds).. 8,109 16,269 10,452
Significant non-cash transactions were as follows:
Years Ended March 31, -------------------------- (In thousands) 2001 2000 1999 ---- ---- ---- Acquisition related transactions (also see Note 2): Debt assumed................. $ -- $ 561 $ 553 Liabilities assumed.......... 536 7,762 15,475 Debt issued.................. -- 1,399 2,361
F-32 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (22) SUMMARY BY BUSINESS SEGMENT The Company aggregates its operations, based on products and services, into two reportable segments, Distribution and Gas Operations. The Distribution segment accounts for approximately 90% of consolidated sales. The segment's principal products and services are packaged and small bulk gases, gas cylinder and welding equipment rental and hardgoods. Gas sales include industrial, medical and specialty gases such as: nitrogen, oxygen, argon, helium, acetylene, carbon dioxide, nitrous oxide, hydrogen, welding gases, ultra high purity grades and special application blends. Rent is derived from gas cylinders, cryogenic liquid containers, bulk storage tanks and through the rental of welding equipment. Hardgoods consist of welding supplies and equipment, safety products, and industrial tools and supplies. The Gas Operations segment produces and distributes certain gas products, principally dry ice, carbon dioxide, nitrous oxide and specialty gases. The Company also operates two air separation plants that produce oxygen, nitrogen and argon which are sold to on- site customers and to the Distribution segment. Until their divestiture in fiscal 2000, the segment also reflected the Company's operations in Poland and Thailand. Additionally, until its divestiture in fiscal 1999, the segment reflected the manufacture and sale of calcium carbide and carbon products. The Company's operations are principally in the United States. The Company's customer base is diverse and sales are not dependent on a single or small group of customers. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (Note 1). Additionally, Corporate operating results are allocated to each segment pro rata based on sales dollars; Corporate assets have been allocated to the Distribution segment; intercompany sales are recorded on the same basis as sales to third parties; and intercompany transactions are eliminated in consolidation. Certain reclassifications have been made to the prior periods segment disclosures to conform to the current presentation. F-33 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (22) SUMMARY BY BUSINESS SEGMENT - (Continued)
(In thousands) Distribution Gas Operations Combined ------------ -------------- -------- FISCAL 2001 Gas and rent..................................... $ 647,525 $ 138,383 $ 785,908 Hardgoods........................................ 839,897 3,096 842,993 --------- --------- --------- Total net sales............................. 1,487,422 141,479 1,628,901 Intersegment sales............................... -- 31,805 31,805 Gross profit..................................... 689,999 91,702 781,701 Gross profit margin.............................. 46.4% 64.8% 48.0% Depreciation and amortization expense............ 72,552 14,202 86,754 Operating income, excluding special (charges) recoveries............................ 92,186 19,406 111,592 Special (charges) recoveries, net................ (6,279) 2,636 (3,643) --------- --------- --------- Operating income............................ 85,907 22,042 107,949 Interest expense................................. 47,921 13,513 61,434 Interest income and finance charges.............. 307 920 1,227 Discount on securitization of trade receivables.. 941 362 1,303 Equity earnings of unconsolidated affiliates..... 1,386 874 2,260 Earnings before income taxes and the cumulative effect of an accounting change.................. 37,464 11,477 48,941 Assets........................................... 1,408,363 174,362 1,582,725 Investment in equity method investees............ 56,671 6,591 63,262 Capital expenditures............................. 56,228 9,682 65,910
F-34 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (22) SUMMARY BY BUSINESS SEGMENT - (Continued)
(In thousands) Distribution Gas Operations Combined ------------ -------------- -------- FISCAL 2000 Gas and rent..................................... $ 592,449 $ 128,703 $ 721,152 Hardgoods........................................ 817,500 3,682 821,182 --------- --------- --------- Total net sales............................. 1,409,949 132,385 1,542,334 Intersegment sales............................... -- 18,253 18,253 Gross profit..................................... 649,827 75,910 725,737 Gross profit margin.............................. 46.1% 57.3% 47.1% Depreciation and amortization expense............ 76,483 12,825 89,308 Operating income, excluding special (charges) recoveries............................. 94,671 9,231 103,902 Special (charges) recoveries, net................ 577 2,252 2,829 --------- --------- --------- Operating income............................ 95,248 11,483 106,731 Interest expense................................. 46,484 12,228 58,712 Interest income and finance charges.............. 337 815 1,152 Equity earnings of unconsolidated affiliates..... 1,658 1,733 3,391 Earnings before income taxes and the cumulative effect of an accounting change.................. 49,459 20,965 70,424 Assets........................................... 1,512,666 226,665 1,739,331 Investment in equity method investees............ 57,339 15,620 72,959 Capital expenditures............................. 56,361 8,850 65,211 Other significant non-cash transactions: - ---------------------------------------- Acquisitions..................................... 9,722 -- 9,722 Capitalized interest............................. 114 77 191
F-35 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (22) SUMMARY BY BUSINESS SEGMENT - (Continued)
(In thousands) Distribution Gas Operations Combined ------------ -------------- -------- FISCAL 1999 Gas and rent..................................... $ 569,406 $ 128,740 $ 698,146 Hardgoods........................................ 836,778 4,227 841,005 Other............................................ -- 22,067 22,067 --------- --------- --------- Total net sales............................. 1,406,184 155,034 1,561,218 Intersegment sales............................... -- 14,656 14,656 Gross profit..................................... 637,616 85,547 723,163 Gross profit margin.............................. 45.3% 55.2% 46.3% Depreciation and amortization expense............ 74,958 12,968 87,926 Operating income, excluding special (charges) recoveries............................. 98,447 13,549 111,996 Special (charges) recoveries, net................ 1,000 -- 1,000 --------- --------- --------- Operating income............................ 99,447 13,549 112,996 Interest expense................................. 49,995 12,593 62,588 Interest income and finance charges.............. 1,339 951 2,290 Equity earnings of unconsolidated affiliates..... 4,525 2,517 7,042 Earnings before income taxes and cumulative effect of an accounting change.................. 54,455 31,906 86,361 Assets........................................... 1,451,792 246,680 1,698,472 Investment in equity method investees............ 57,680 43,154 100,834 Capital expenditures............................. 86,114 15,524 101,638 Other significant non-cash transactions: - ---------------------------------------- Acquisitions..................................... 6,762 11,627 18,389 Capitalized interest............................. 271 -- 271
F-36 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (23) SUPPLEMENTARY INFORMATION (UNAUDITED) This table summarizes the unaudited results of operations for each quarter of fiscal 2001 and 2000:
(In thousands, except per share amounts) First Second Third Fourth ----- ------ ----- ------ 2001 - ---- Net sales............................... $408,998 $410,097 $394,970 $414,836 Operating income........................ 31,043 33,046 26,242 17,618 Net earnings............................ 9,816 10,403 6,676 1,328 Basic earnings per share (a),(b)........ $ .15 $ .16 $ .10 $ .02 Diluted earnings per share (a),(b)...... $ .15 $ .16 $ .10 $ .02 2000 - ---- Net sales............................... $379,493 $387,289 $369,434 $406,118 Operating income........................ 29,099 32,304 29,004 16,324 Net earnings............................ 9,085 18,912 9,760 526 Basic earnings per share (a),(c)........ $ .13 $ .27 $ .14 $ .01 Diluted earnings per share (a),(c)...... $ .13 $ .27 $ .14 $ .01 (a) Earnings per share calculations for each of the quarters are based on the weighted average number of shares outstanding in each period. Therefore, the sum of the quarters does not necessarily equal the full year earnings per share. (b) As discussed in the Notes to the Company's consolidated financial statements, net earnings for fiscal 2001 include: (1) fourth quarter net special charges of $2.3 million after tax, or $.03 per diluted share; (2) litigation charges, net of recoveries, of $3.4 million after tax, ($3.6 million of the net after tax litigation charges, or $.06 per diluted share, were recognized in the fourth quarter); and (3) fourth quarter asset impairments associated with two equity affiliates of $700 thousand after tax, or $.01 per diluted share. (c) As discussed in the Notes to the Company's consolidated financial statements, net earnings for fiscal 2000 include: (1) in the first quarter, a charge of $590 thousand after-tax, or $.01 per diluted share, representing a change in accounting principle; (2) in the second quarter, a divestiture gain of $7.8 million after tax, or $.11 per diluted share; (3) in the third quarter, a special charge recovery of $1.7 million after tax, or $.02 per diluted share, and an inventory write-down of $2.2 million after-tax, or $.03 per diluted share; and (4) in the fourth quarter, a litigation charge of $4.8 million after-tax, or $.07 per diluted share, and a divestiture gain of $800 thousand after-tax, or $.01 per diluted share.
F-37
SCHEDULE II AIRGAS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the Years Ended March 31, 2001, 2000 and 1999 (In thousands of dollars) Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions -------------------- Charged Balance at Charged to (Credited) Balance Beginning Costs and to Other at End of Description of Period Expenses Accounts Deductions Period - ----------- ---------- ---------- ---------- ---------- --------- 2001 Accounts receivable - allowances for doubtful accounts........... $ 6,194 $ 8,730 $ 820 (1) $ (8,342) (2) $ 7,402 Inventory reserves............... 7,319 -- 240 (1,215) 6,344 Insurance reserves............... 11,475 40,991 577 (37,447) (3) 15,596 Restructuring reserves........... 3,793 8,532 (644) (6,524) 5,157 Deferred tax asset valuation allowance....................... 1,840 2,423 4,263 Litigation reserve............... 7,500 8,288 (8,653) 7,135 2000 Accounts receivable - allowances for doubtful accounts........... $ 6,092 $ 6,303 $1,078 (1) $ (7,279) (2) $ 6,194 Inventory reserves............... 6,207 885 227 -- 7,319 Insurance reserves............... 9,584 44,492 -- (42,601) (3) $11,475 Restructuring reserves........... 5,087 (577) (4) -- (717) 3,793 Deferred tax asset valuation allowance....................... 1,672 168 -- -- 1,840 Litigation reserve............... -- 7,500 -- -- 7,500 1999 Accounts receivable - allowances for doubtful accounts........... $ 5,676 $ 5,850 $1,071 (1) $ (6,505) (2) $ 6,092 Inventory reserves............... 8,354 -- 14 (2,161) 6,207 Insurance reserves............... 7,248 36,155 245 (34,064) (3) 9,584 Restructuring reserves........... 10,429 (1,000) -- (4,342) 5,087 Deferred tax asset valuation allowance....................... 1,329 343 -- -- 1,672 (1) Includes collections on accounts previously written-off and allowances for doubtful accounts of businesses acquired less the allowance for doubtful accounts of businesses sold. (2) Write-off of uncollectible accounts. (3) Payments of insurance premiums and claims. (4) Represents a change in estimate.
EX-10 2 exh10-18.txt AIRGAS, INC. FISCAL YEAR 2002 EXECUTIVE BONUS PLAN Exhibit 10.18 Fiscal Year 2002 Executive Bonus Plan Airgas, Inc. April 2001 Purpose of this Document - ------------------------ The purpose of this document is to allow employees at the Manager level and above at Airgas, Inc. to understand the mechanics, measures, and other design features of the Fiscal Year 2002 Executive Bonus Plan, and serve as a guide in the implementation and administration of the plan. Included are payout schedules, specific definitions and terminology, and basic plan governance. Airgas, Inc. Fiscal Year 2002 Executive Bonus Plan - -------------------------------------------------- PURPOSE OF THE PLAN The purpose of the Airgas, Inc. Fiscal Year 2002 Executive Bonus Plan (the "Plan") is to align Management's efforts with the strategic goals of the Company through competitive annual incentive opportunities. This plan will be effective from April 1, 2001 to March 31, 2002 (the "Plan Year"). ELIGIBILITY Participation in the plan is determined by the function manager (e.g., CFO, CIO, Senior Vice President, Legal, and Corporate Development). TARGET AWARDS Participants in the Executive Bonus Plan will be eligible for an annual cash incentive award (the "Award") based on the achievement of predetermined goals. An annual incentive or bonus target is generally determined based on the participant's position in the organization, and can vary according to the judgement of the Executive Committee. PERFORMANCE MEASUREMENT Final Award payments are determined by adjusting the target award upward or downward based on achievement relative to a variety of performance measures, including: corporate financial goals, individual accountabilities, the Project One initiative, and operating company metrics (where appropriate). Depending upon an individual's position and responsibilities, these various performance measures, assessed based on different weightings, will determine the Award. Participants at the corporate level will not be measured on the financial performance of any operating company. CORPORATE PERFORMANCE Assessment of corporate performance is based on achievement relative to Airgas Consolidated Financials for the Plan Year. For upcoming Plan Year, the only consolidated financial measure will be Earnings Per Share (EPS), which was chosen by the Executive Committee so that all employees' efforts are focused on a measurement that has a significant impact on the Airgas, Inc. stock price. Performance against this measure will be determined based on achievement relative to predetermined targets for the Plan Year, as set forth by the Executive Committee. Earnings per share, for the purposes of the Plan, is defined below: Net Profit (After Bonus Accruals) After Taxes (Excludes Any Large, Non-Recurring, One-Time Charges at the Discretion of the Executive Committee) EPS = ----------------------------------------------------- Weighted Average Shares Outstanding During the year INDIVIDUAL ACCOUNTABILITIES Individual performance is measured based on achievement relative to at least one "line-of-sight" goal in the Plan Year. Prior to each Plan Year, each participant will meet with his/her manager to develop a set of key objectives that are important to the participant's personal development needs, as well as the goals that support the company's strategic initiatives. All accountabilities should be clearly measurable and represent "stretch" goals that are attainable yet challenging. No more than five key individual objectives will be established, and no single individual objective will have a weighting of less than 20% of the total for individual accountabilities. The maximum achievement percentage for any single accountability or group of accountabilities is 100%. PROJECT ONE INITIATIVE Performance relative to the Project One initiative will be measured based on an individual's achievement relative to specific Project One objectives that are relevant to that individual. Project One, representing "the way forward to success", includes short- and long-term programs designed to support the implementation of a series of key strategic initiatives in support of management's vision of "One Airgas". These initiatives are to: o Increase market penetration; o Migrate customers to the appropriate channels to meet their needs; o Improve supply chain efficiencies; o Redesign key business processes; and o Focus on people. Prior to each Plan Year, each participant will meet with his/her manager to develop a specific set of objectives that are relevant to the individual's responsibilities, and related to the Project One initiative. The maximum achievement percentage for any single Project One goal or group of goals is 100%. OPERATING COMPANY METRICS Assessment of operating company performance is based on achievement relative to financial performance goals set for the operating company in which the individual works. For the upcoming Plan Year, financial performance at the operating company level will be based on three measures: o Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA); o Sales; and o Working Capital (accounts receivable and hardgoods inventory only: target equals days sales outstanding plus hardgoods days supply). These three measures will be used to assess performance at all operating companies, with the following weights: EBITDA Sales Working Capital ------ ----- --------------- 33.3% 33.3% 33.3% Performance against these measures will be determined based on achievement relative to predetermined targets for the Plan Year, as set forth by the Executive Committee. WEIGHTING OF PERFORMANCE GOALS Project One Executive Steering Committee: At the discretion of their immediate supervisors, Award payments for members of the Project One Executive Steering Committee will be awarded based on the relative achievement of these goals carrying the following weights: EPS Project One --- ----------- 65% 35% Corporate Employees: For corporate employees, Award payments will be awarded based on the relative achievement of these goals carrying the following weights: Individual EPS Accountabilities Project One --- ---------------- ----------- 65% 25% 10% Operating Company Presidents: For operating company presidents, Award payments will be awarded based on the relative achievement of these goals carrying the following weights: Operating Company EPS Metrics Project One --- --------- ----------- 25% 50% 25% Operating Company Management: For operating company management, Award payments will be awarded based on the relative achievement of these goals carrying the following weights: Operating Company Individual EPS Metrics Accountabilities Project One --- --------- ---------------- ----------- 25% 50% 15% 10% Project One Team Members: For full-time members of the Project One team, Award payments will be awarded based on the relative achievement of these goals carrying the following weights: EPS Project One --- ----------- 30% 70% DETERMINING INCENTIVE PAYOUTS Achievement relative to these specific goals determines the extent to which a participant receives an Award. For quantitative goals, such as corporate and operating company financial measures, performance is assessed relative to threshold, target, and maximum levels. Prior to the Plan Year, the Executive Committee will approve tables that identify corresponding incentive payout levels related to threshold, target, and maximum performance levels for quantitative goals. Levels of performance between these levels will be interpolated. See the performance tables below. For individual accountabilities and Project One goals, a maximum achievement percentage for any single goal or group of goals is 100%, and anything short of full achievement of such goals will be given an achievement percentage between 0% and 100%. Prior to the Plan Year, the participant and his or her manager will agree on the performance framework. PAY FOR PERFORMANCE RELATIONSHIP The following graphs indicate the relationship between the achievement of a particular financial goal and the payout for that goal associated with that level of achievement. The weighting of these financial goals in determining an overall incentive payout depends on the participant's position and level of responsibility. EPS SALES Achievement Payout% Achievement Payout% - --------------------- --------------------- $0.50 20% 97% 25% $0.51 36% 98% 50% $0.52 52% 99% 75% $0.53 68% 100% 100% $0.54 84% 101% 110% $0.55 100% 102% 120% $0.56 115% 103% 130% $0.57 130% 104% 140% $0.58 145% 105% 150% $0.59 155% $0.60 160% WORKING CAPITAL EBITDA Achievement Payout% Achievement Payout% - --------------------- ---------------------- 103% 25% 90% 25% 102% 50% 91% 30% 101% 75% 92% 35% 100% 100% 93% 40% 99% 110% 94% 45% 98% 120% 95% 50% 97% 130% 96% 60% 96% 140% 97% 70% 95% 150% 98% 80% 94% 160% 99% 90% 93% 170% 100% 100% 92% 180% 101% 110% 91% 190% 102% 125% 90% 200% 103% 140% 104% 155% 105% 170% 106% 185% 107% 200% FUNDING The Plan will be self-funding, as corporate profitability targets will be established net of target Award payments under the Plan. Therefore, achievement of corporate profitability targets will ensure that the Plan has funded itself. EXECUTIVE BONUS PLAN PAYMENT At the end of the Plan Year, after all financial results have been finalized, including corporate and operating performance, the actual award payment will be determined. The Award will be paid in cash no later than 75 days following the end of the fiscal year. ADMINISTRATION OF THE PLAN The Executive Committee of Airgas, Inc. shall have full power to administer and interpret the Plan and, in its sole discretion, may establish or amend rules of general application for the administration of the plan. The Executive Committee may amend or terminate the Plan at any time. PARTIAL YEAR ELIGIBILITIY Employees who are eligible for the Plan for a portion of the year will receive a prorated Award based on the base salary earned while they are eligible for the Plan. o New hires - New employees will immediately be eligible for the Plan. - Base salary will be accumulated from the date of hire to the end of the Plan Year, unless eligibility ceases prior to that date. o Transfers-For employees who transfer from one job or employee status to another, eligibility will depend on their award eligibility before and after transferring. - If an employee transfers from a position that is not bonus eligible to a position that is eligible for an Award under the Plan, the annual incentive award will be prorated based on the time in the bonus eligible position. All calculations are done using year-end financial data. - If an employee transfers from a position that is eligible for an Award under the Plan to a position that is not bonus eligible, the annual incentive award will be prorated based on the length of time in the bonus eligible position. All calculations are done using year-end financial data. - If an employee transfers from one position that is eligible for an Award under the plan to another position that is eligible for an award under the plan, participation in the Plan will continue uninterrupted. However, if the transfer involves a move that will change the weightings used to determine an individual's annual incentive award, the bonus calculation will be based on the pro-rated time spent in each position. All calculations will be done using year-end data. Accountabilities must be separately established and assessed for each position separately. o Promotions - If an employee is promoted during the fiscal year, new accountabilities must be established to reflect the new position. o Terminations - Employees who are not employed by Airgas, Inc. on the date the annual incentive award is paid will receive no payment, unless it is contractually stated in a separation agreement and except for the following circumstances. - Employees who retire or die during the plan year will be eligible for a prorated annual incentive award. The annual incentive award will be calculated from the date when they become eligible, normally the beginning of the Plan Year to the date of retirement or death. o Leave of absence - If an employee is on a leave of absence at the end of the fiscal year, he or she will be eligible for an Award provided that he or she returns to work as an active employee. Any Award paid will be prorated based upon the length of time the employee was actively working during the fiscal year. The calculation will be made using year-end financial data. The Award payment will be made in the next regularly scheduled payroll cycle at the end of the associate's first month of employment following his or her return from leave of absence. - If an employee is on a leave of absence during the fiscal year, and returns during the year, he or she will be eligible for an Award. Any Award paid will be prorated based upon the length of time an associate was actively working during the fiscal year. The calculation will be made using year-end financial data. TAX CONSIDERATIONS AND WITHHOLDING Participants will be required to report taxable income in the year the award is received. The company will withhold taxes in the appropriate amount on all payouts. BANKRUPTCY In the event Airgas, Inc. declares bankruptcy, the Executive Committee, at its discretion, may immediately discontinue the Plan. In the event that the Plan is discontinued, all participants will forfeit the right to any payments under the Plan. FUTURE EMPLOYMENT Payment of an annual incentive award under this plan does not imply contractual agreement to extend or continue employment of an employee beyond receipt of the annual incentive award. EX-11 3 exh11.txt COMPUTATION OF EARNINGS PER SHARE Exhibit 11
AIRGAS, INC. AND SUBSIDIARIES EARNINGS PER SHARE CALCULATIONS For the Years Ended March 31, 2001, 2000 and 1999 Years Ended March 31, 2001 2000 1999 Weighted Average Shares Outstanding: - ------------------------------------ Basic shares outstanding 66,000,000 69,200,000 70,000,000 Net common stock equivalents 1,200,000 1,400,000 1,700,000 ---------- ---------- ---------- Diluted shares outstanding 67,200,000 70,600,000 71,700,000 ========== ========== ========== Net earnings $28,223,000 $38,283,000 $51,924,000 =========== =========== =========== Basic earnings per share $ .43 $ .55 $ .74 =========== =========== =========== Diluted earnings per share $ .42 $ .54 $ .72 =========== =========== ===========
EX-21 4 exh21.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21 Airgas, Inc. and Subsidiaries Corporation Name Domicile - ---------------- -------- Airgas- Gulf States, Inc. DE Airgas- Intermountain, Inc. DE Airgas- Michigan, Inc. DE Airgas- Mid America, Inc. DE Airgas- Mid South, Inc. DE Airgas- Mountain States, Inc. DE Airgas- Nor Pac, Inc. DE Airgas- North Central, Inc. DE Airgas- East, Inc. DE Airgas- Northern California & Nevada, Inc. DE Airgas- South, Inc. DE Airgas- Southwest, Inc. DE Airgas- West, Inc. CA Airgas Canada, Inc. Canada Airgas Carbonic, Inc. DE Airgas Data,LLC. DE Airgas Direct Industrial Vessel, LLC. DE Airgas International, Inc. VI Airgas Realty, Inc. DE Airgas Safety, Inc. DE Airgas Specialty Gases, Inc. TX ATNL, Inc. DE Cylinder Leasing Corp. DE FORAIR, Inc. DE Forgas, Inc. DE Nitrous Oxide Corp. DE Radnor Funding Corp. DE Red-D-Arc, Inc. NV Red-D-Arc Limited Canada RSCI,Inc. DE Rutland Tool & Supply Co., Inc. CA EX-23 5 exh23.txt CONSENT OF KPMG LLP EXHIBIT 23 Consent of Independent Auditors The Board of Directors Airgas, Inc.: We consent to incorporation by reference in the Registration Statements (Nos. 33-39433, 33-48388, 33-57893, 33-61301, 33- 61899, 33-63201, 33-64633, 333-08113, 333-37863, 333-46739, 333-60995, 333-61989 and 333-46266) on Form S-3 and (Nos. 33- 21780, 33-25419, 33-33954, 33-64056, 33-64058, 33-64112, 333- 28261, 333-42023 and 333-60999) on Form S-8 of Airgas, Inc. of our report dated May 8, 2001, relating to the consolidated balance sheets of Airgas, Inc. and subsidiaries as of March 31, 2001 and 2000, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2001, and the related schedule, which report is included in the March 31, 2001, Annual Report on Form 10-K of Airgas, Inc. /s/ KPMG LLP Philadelphia, PA June 12, 2001 -----END PRIVACY-ENHANCED MESSAGE-----