1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: December 31, 1999 Commission file number: 1-9344 AIRGAS, INC. (Exact name of registrant as specified in its charter) Delaware 56-0732648 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 259 North Radnor-Chester Road, Suite 100 Radnor, PA 19087-5283 (Address of principal executive offices) (ZIP code) (610) 687-5253 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock outstanding at February 4, 2000: 69,568,816 shares 2 AIRGAS, INC. FORM 10-Q December 31, 1999 INDEX PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Earnings for the Three and Nine Months Ended December 31, 1999 and 1998 (Unaudited)..3 Consolidated Balance Sheets as of December 31, 1999 (Unaudited) and March 31, 1999......................4 Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 1999 and 1998 (Unaudited)............5 Notes to Consolidated Financial Statements (Unaudited)......................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................14 Item 3. Quantitative and Qualitative Disclosures About Market Risk.........25 PART II - OTHER INFORMATION Item 1. Legal Proceedings..................................................28 Item 6. Exhibits and Reports on Form 8-K...................................28 SIGNATURES..................................................................29 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (Dollars in thousands, except per share amounts) Three Months Ended Nine Months Ended December 31, December 31, 1999 1998 1999 1998 Net sales Distribution $339,761 $339,623 $1,032,701 $1,054,384 Gas Operations 29,673 40,700 103,515 123,304 Total net sales 369,434 380,323 1,136,216 1,177,688 Costs and expenses Cost of products sold (excluding depreciation and amortization) Distribution 180,126 183,922 555,205 574,062 Gas Operations 15,471 17,792 44,506 55,299 Selling, distribution and administrative expenses 125,676 130,932 381,822 393,085 Depreciation and amortization 21,986 22,504 67,105 65,849 Special charges (recoveries) (2,829) - (2,829) (1,000) Total costs and expenses 340,430 355,150 1,045,809 1,087,295 Operating income Distribution 26,622 20,634 79,290 75,246 Gas Operations (447) 4,539 8,288 14,147 Special (charges) recoveries 2,829 - 2,829 1,000 Total operating income 29,004 25,173 90,407 90,393 Interest expense, net (13,949) (15,701) (42,167) (46,227) Other income, net 1,234 24,358 16,639 25,189 Equity in earnings of unconsolidated affiliates 663 2,862 2,388 4,838 Earnings before income taxes and the cumulative effect of an accounting change 16,952 36,692 67,267 74,193 Income tax expense 7,192 14,604 28,920 30,350 Earnings before the cumulative effect of an accounting change 9,760 22,088 38,347 43,843 Cumulative effect of an accounting change, net of taxes - - (590) - Net earnings $ 9,760 $22,088 $37,757 $43,843 Basic earnings per share: Earnings per share before the cumulative effect of an accounting change $ .14 $ .32 $ .55 $ .63 Cumulative effect per share of an accounting change -- -- (.01) -- Net earnings per share $ .14 $ .32 $ .54 $ .63 Diluted earnings per share: Earnings per share before the cumulative effect of an accounting change $ .14 $ .31 $ .54 $ .61 Cumulative effect per share of an accounting change -- -- (.01) -- Net earnings per share $ .14 $ .31 $ .53 $ .61 Weighted average shares outstanding: Basic 69,200 69,700 69,600 70,000 Diluted 70,800 71,600 71,000 71,700 Comprehensive income $ 9,887 $22,038 $38,086 $43,657 See accompanying notes to consolidated financial statements. 4 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) December 31, March 31, 1999 1999 ASSETS Current Assets Trade receivables, less allowances for doubtful accounts of $6,507 at December 31, 1999 and $6,092 at March 31, 1999 $ 193,287 $ 195,708 Inventories, net 158,095 154,424 Deferred income tax asset, net 7,937 7,549 Prepaid expenses and other current assets 23,393 21,161 Total current assets 382,712 378,842 Plant and equipment, at cost 1,020,721 993,496 Less accumulated depreciation (311,277) (275,637) Plant and equipment, net 709,444 717,859 Goodwill, net of accumulated amortization of $65,036 at December 31, 1999 and $54,986 at March 31, 1999 424,700 428,349 Other non-current assets 133,200 173,422 Total assets $1,650,056 $1,698,472 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable, trade $ 69,103 $ 85,486 Accrued expenses and other current liabilities 101,492 108,295 Current portion of long-term debt 2,434 19,645 Total current liabilities 173,029 213,426 Long-term debt 801,022 847,841 Deferred income taxes 152,653 142,675 Other non-current liabilities 31,830 23,585 Commitments and contingencies -- -- Stockholders' Equity Preferred stock, no par, 20,000 shares authorized, no shares issued or outstanding at December 31, 1999 and March 31, 1999 -- -- Common stock, par value $.01 per share, 200,000 shares authorized, 73,084 and 72,024 shares issued at December 31, 1999 and March 31, 1999, respectively 731 720 Capital in excess of par value 196,563 190,175 Retained earnings 326,847 289,090 Accumulated other comprehensive loss (581) (910) Treasury stock, 1,118 and 130 common shares at cost at December 31, 1999 and March 31, 1999, respectively (10,525) (1,129) Employee benefits trust, 2,098 and 826 common shares at cost at December 31, 1999 and March 31, 1999, respectively (21,513) (7,001) Total stockholders' equity 491,522 470,945 Total liabilities and stockholders' equity $1,650,056 $1,698,472 See accompanying notes to consolidated financial statements. 5 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Nine Months Ended Nine Months Ended December 31,1999 December 31, 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 37,757 $ 43,843 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 67,105 65,849 Deferred income taxes 11,025 7,478 Equity in earnings of unconsolidated affiliates (2,388) (5,706) Gain on divestitures (14,850) (23,968) Gain on sales of plant and equipment (917) (397) Minority interest in earnings (51) 51 Stock issued for employee benefit plans 4,263 4,269 Other non-cash charges 458 (1,000) Changes in assets and liabilities, excluding effects of business acquisitions and divestitures: Trade receivables, net 4,921 (6,992) Inventories, net (1,107) (13,279) Prepaid expenses and other current assets (2,314) (502) Accounts payable, net (17,074) (9,854) Accrued expenses and other current liabilities 1,317 15,074 Other assets and liabilities, net (4,293) (12,742) Net cash provided by operating activities 83,852 62,124 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (47,609) (82,076) Proceeds from sale of plant and equipment 35,598 1,655 Proceeds from divestitures 46,596 48,816 Business acquisitions, net of cash acquired (24,218) (43,969) Business acquisitions, holdback settlements (1,862) (3,619) Investment in unconsolidated affiliates (30) (140) Dividends from unconsolidated affiliates 2,958 2,788 Other, net (289) 4,409 Net cash provided (used) by investing activities 11,144 (72,136) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 84,187 393,833 Repayment of debt (149,293) (360,789) Purchase of treasury stock (25,936) (13,982) Proceeds from exercise of stock options 1,431 1,325 Cash overdraft (5,385) (10,375) Net cash provided (used) by financing activities (94,996) 10,012 Cash Increase (Decrease) $ -- $ -- Cash - beginning of period -- -- Cash - end of period $ -- $ -- Cash paid during the period for: Interest $ 38,440 $ 42,704 Income taxes, net of refunds $ 8,089 $ 480 See accompanying notes to consolidated financial statements. 6 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The consolidated financial statements include the accounts of Airgas, Inc. and its subsidiaries (the "Company"). Unconsolidated affiliates are accounted for on the equity method and generally consist of 20 - 50% owned operations where control does not exist or is considered temporary. The excess of the cost of these affiliates over the Company's share of their net assets at the acquisition date is being amortized over 20 to 40 years. Intercompany accounts and transactions are eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles. These statements do not include all disclosures required for annual financial statements. These financial statements should be read in conjunction with the more complete disclosures contained in the Company's audited consolidated financial statements for the fiscal year ended March 31, 1999. The financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the Company's financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature except for the impact of acquisitions, divestitures, special charges and the accounting change which are discussed in the notes to the accompanying financial statements. The interim operating results are not necessarily indicative of the results to be expected for an entire year. Effective October 1, 1999, the Company changed its estimate of the useful life of its bulk gas storage tanks from 20 to 30 years. This change was made to better reflect the estimated periods during which these assets will remain in service. The impact of the change was not material. Certain reclassifications have been made to previously issued financial statements to conform to the current presentation. (2) ACCOUNTING CHANGE 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, or $.01 per diluted share. In accordance with SOP 98-5, the charge has been reflected on a separate line entitled "Cumulative effect of an accounting change, net of taxes", on the consolidated statement of earnings. The charge primarily resulted from the write-off of start-up costs capitalized in connection with the Company's two air separation units constructed during fiscal 1998 and 1999. (3) ACQUISITIONS AND DIVESTITURES During the nine months ended December 31, 1999, the Company acquired four distributors of industrial gas and related equipment with aggregate annual sales of approximately $27 million. On January 21, 2000, the Company acquired Mallinckrodt Inc.'s Puritan- Bennett medical gas business with annual sales of approximately $70 million. Puritan-Bennett distributes medical gases through a network of 36 locations and employs 390 employees in the United States and Canada. On August 4, 1999, the Company completed the divestiture of its operations in Poland and Thailand to Linde AG. The divestiture resulted in a gain of $14.9 million ($7.8 million after-tax, or $.11 per diluted share) which was recognized in "other income, net." Cash proceeds from the sale were $46.2 million ($38.4 million after taxes and closing costs). 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 of the divested companies were previously reported in the Gas Operations segment. 7 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On December 31, 1998, the Company completed the divestiture of its calcium carbide and carbon products operations to Elkem Metals Company L.P., a subsidiary of Elkem ASA. The divestiture resulted in a gain of approximately $24 million ($14.1 million after-tax, or $.20 per diluted share) which was recognized in "other income, net." The calcium carbide and carbon products operations had annual sales of approximately $30 million and were previously reported in the Gas Operations segment ($8.2 million and $23 million in sales and $1.6 million and $4 million in operating income for the three and nine months ended December 31, 1998, respectively). The Company divested two non-core businesses during the quarter ended June 30, 1998 and received consideration totaling approximately $10.5 million. The divested businesses had combined sales for the three months ended June 1998 of $4.6 million. (4) SPECIAL CHARGES AND RECOVERIES The Company recorded a $2.8 million ($1.7 million after-tax, or $.02 per diluted share) recovery during the quarter ended December 31, 1999 primarily consisting of an insurance settlement related to a fiscal 1997 loss. During the quarter ended June 30, 1998, the Company divested two non-core businesses and adjusted associated divestiture reserves by $1 million ($575 thousand after-tax, or $.01 per diluted share) to reflect differences between the original loss estimates and the actual losses on those businesses. (5) 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. Diluted earnings per share is calculated by dividing net earnings by the weighted average common shares outstanding adjusted for the dilutive effect of common stock equivalents related to stock options and contingently issuable shares. The table below reconciles basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three and nine months ended December 31, 1999 and 1998: Three Months Ended Nine Months Ended December 31, December 31, (In thousands) 1999 1998 1999 1998 Weighted average common shares outstanding: Basic 69,200 69,700 69,600 70,000 Stock options 1,000 1,300 1,100 1,500 Contingently issuable shares 600 600 300 200 Diluted 70,800 71,600 71,000 71,700 8 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (6) INVENTORIES Inventories consist of: (Unaudited) December 31, March 31, (In thousands) 1999 1999 Finished goods $157,299 $153,571 Raw materials 796 853 $158,095 $154,424 Inventories determined by the LIFO inventory method totaled $25.6 million and $25.7 million at December 31, 1999 and March 31, 1999, respectively. If the FIFO inventory method had been used for these inventories, they would have been $1.5 million higher at December 31, 1999 and $1.6 million higher at March 31, 1999. (7) OTHER NON-CURRENT ASSETS Other non-current assets include: (Unaudited) December 31, March 31, (In thousands) 1999 1999 Investments in unconsolidated affiliates $ 73,020 $100,834 Non-compete agreements and other intangible assets, at cost, net of accumulated amortization of $94.7 million at December 31, 1999 and $85.5 million at March 31, 1999 50,014 55,894 Other assets 10,166 16,694 $133,200 $173,422 The decrease in investments in unconsolidated affiliates is primarily due to the divestiture of operations in Poland and Thailand. 9 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities include: (Unaudited) December 31, March 31, (In thousands) 1999 1999 Cash overdraft $ 11,574 $ 16,959 Restructuring reserves 3,944 5,087 Insurance payable and related reserves 9,757 9,584 Customer cylinder deposits 8,100 8,233 Accrued interest 16,557 12,331 Other accrued expenses and current liabilities 51,560 56,101 $101,492 $108,295 Restructuring reserves primarily relate to pending divestitures. The cash overdraft is attributable to the float of the Company's outstanding checks. (9) LEASE TRANSACTION In October 1999, 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 appraised value of the real estate and equipment under the lease totaled approximately $46 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 $31 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. Cash proceeds received from the transaction were used to repay debt outstanding under the Company's revolving credit facility. 10 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (10) STOCKHOLDERS' EQUITY Changes in stockholders' equity were as follows: Employee Shares of Common Treasury Benefits (In thousands of shares) Stock $.01 Par Value Stock Trust Balance-April 1, 1999 72,024 130 826 Common Stock issuance (a) 1,060 -- -- Purchase of treasury stock -- 2,333 -- Reissuance of treasury stock (b) -- (48) -- Sale of treasury stock to Trust (c) -- (1,297) 1,297 Reissuance of stock held by Trust (d) -- -- (25) Balance-December 31, 1999 73,084 1,118 2,098 Accumulated Capital in Other Employee Compre- Common Excess of Retained Comprehensive Treasury Benefits hensive (In thousands of dollars) Stock Par Value Earnings Loss Stock Trust Income Balance-April 1, 1999 $720 $190,175 $289,090 $(910) $(1,129) $(7,001) $ -- Net earnings -- -- 37,757 -- -- -- 37,757 Common Stock issuance (a) 11 5,299 -- -- -- -- -- Foreign currency translation adjustments -- -- -- 329 -- -- 329 Purchase of treasury stock -- -- -- -- (24,842) -- -- Reissuance of treasury stock (b) -- (247) -- -- 424 -- -- Sale of treasury stock to Trust (c) -- (253) -- -- 15,022 (14,769) -- Reissuance of Common Stock from Trust (d) -- -- -- -- -- 257 -- Tax benefit from stock options exercises -- 1,589 -- -- -- -- -- Balance-December 31, 1999 $731 $196,563 $326,847 $(581) $(10,525) $(21,513) $38,086 (a) Issuance of Common Stock for stock option exercises and for the Company's Employee Stock Purchase Plan. (b) Reissuance of Common Stock in connection with stock option exercises. (c) Sale of Common Stock from treasury to the Employee Benefits Trust. (d) Reissuance of Common Stock from the Employee Benefits Trust for employee benefit programs. On February 11, 2000, the Employee Benefits Trust purchased approximately 1.4 million shares of Common Stock from the Company at fair market value. 11 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (11) COMMITMENTS AND CONTINGENCIES (a) Litigation In July 1996, Praxair, Inc. ("Praxair") filed suit against the Company in the Circuit Court of Mobile County, Alabama. The complaint alleged tortious interference with business or contractual relations with respect to Praxair's Right of First Refusal contract with the majority shareholders of National Welders Supply Company, Inc. ("National Welders") by the Company in connection with the Company's formation of a joint venture with National Welders. In June 1998, Praxair filed a motion to dismiss its own action in Alabama and commenced another action in the Superior Court of Mecklenburg County, North Carolina, alleging substantially the same tortious interference by the Company. The North Carolina action also alleges breach of contract against National Welders and certain shareholders of National Welders and unfair trade practices and conspiracy against all the defendants. In the North Carolina action Praxair seeks compensatory damages in excess of $10 thousand, punitive damages and other unspecified relief. The Company believes that Praxair's North Carolina claims are without merit and intends to defend vigorously against such claims. The Company is involved in various legal and regulatory proceedings that have arisen in the ordinary course of its business and have not been finally adjudicated. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse effect upon the Company's consolidated financial condition, results of operations or liquidity. (b) Insurance Coverage The Company maintains insurance programs with self-insured retentions of $500 thousand per occurrence to cover workers' compensation, business automobile, general and product liability. Losses are accrued based upon the Company's estimates, developed with third party insurance adjusters, of the aggregate liability for claims incurred, claims incurred but not reported and on Company historical experience. The nature of the Company's business may subject it to product and general liability claims. To the extent that the Company is subject to claims that exceed its liability insurance coverage of $100 million, such claims could have a material adverse effect on the Company's financial position, results of operations or liquidity. 12 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (12) SUMMARY BY BUSINESS SEGMENT Information related to the Company's operations by business segment for the three months ended December 31, 1999 and 1998 is as follows: Three Months Ended Three Months Ended December 31, 1999 December 31, 1998 (In thousands) Gas Gas Distribution Operations Combined Distribution Operations Combined Gas and rent $ 144,481 $ 28,845 $ 173,326 $ 140,879 $ 32,479 $ 173,358 Hardgoods 195,280 828 196,108 198,744 407 199,151 Other (1) -- -- -- -- 7,814 7,814 Total net sales 339,761 29,673 369,434 339,623 40,700 380,323 Intersegment sales -- 6,112 6,112 -- 6,325 6,325 Gross profit 159,635 14,202 173,837 155,701 22,908 178,609 Gross profit margin 47.0% 47.9% 47.1% 45.8% 56.3% 47.0% Operating income, excluding special charges 26,622 (447) 26,175 20,634 4,539 25,173 Earnings before income taxes, excluding special charges 16,316 (2,193) 14,123 9,909 26,783 36,692 EBITDA (2) 45,471 2,690 48,161 39,926 7,751 47,677 EBITDA margin 13.4% 9.1% 13.0% 11.8% 19.0% 12.5% Assets 1,433,703 216,353 1,650,056 1,452,915 257,957 1,710,872 13 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (12) SUMMARY BY BUSINESS SEGMENT - (Continued) Information related to the Company's operations by business segment for the nine months ended December 31, 1999 and 1998 is as follows: Nine Months Ended Nine Months Ended December 31, 1999 December 31, 1998 (In thousands) Gas Gas Distribution Operations Combined Distribution Operations Combined Gas and rent $ 432,575 $ 100,740 $ 533,315 $ 426,594 $ 100,040 $ 526,634 Hardgoods 600,126 2,775 602,901 627,790 1,197 628,987 Other (1) -- -- -- -- 22,067 22,067 Total net sales 1,032,701 103,515 1,136,216 1,054,384 123,304 1,177,688 Intersegment sales -- 22,497 22,497 -- 19,848 19,848 Gross profit 477,496 59,009 536,505 480,322 68,005 548,327 Gross profit margin 46.2% 57.0% 47.2% 45.6% 55.2% 46.6% Operating income, excluding special charges 79,290 8,288 87,578 75,246 14,147 89,393 Earnings before income taxes, excluding special charges and cumulative effect of an accounting change in 1999 44,371 20,067 64,438 40,511 32,682 73,193 EBITDA (2) 136,387 18,296 154,683 131,509 23,733 155,242 EBITDA margin 13.2% 17.7% 13.6% 12.5% 19.2% 13.2% Assets 1,433,703 216,353 1,650,056 1,452,915 257,957 1,710,872 Reconciliations of the combined operating segments to the applicable line items on the consolidated financial statements follow: Three Months Ended Nine Months Ended Nine Months Ended (In thousands) December 31, 1999 December 31, 1999 December 31, 1998 Segment operating income $ 26,175 $ 87,578 $ 89,393 Special charges 2,829 2,829 1,000 Operating income $ 29,004 $ 90,407 $ 90,393 Segment earnings before income taxes $ 14,123 $ 64,438 $ 73,193 Special charges 2,829 2,829 1,000 Earnings before income taxes $ 16,952 $ 67,267 $ 74,193 (1) Represents sales of calcium carbide and carbon products. (2) EBITDA - Operating income, excluding special charges, plus depreciation and amortization, is a measure of the Company's ability to generate cash flow and should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with generally accepted accounting principles. 14 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS: THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 1998 INCOME STATEMENT COMMENTARY Net Sales Net sales decreased 2.9% in the quarter ended December 31, 1999 ("current quarter") compared to the quarter ended December 31, 1998 ("prior year quarter"). Total same-store sales were flat in the current quarter versus the prior year quarter. Three Months Ended (In thousands) December 31, Net Sales 1999 1998 Increase(Decrease) Distribution $339,761 $339,623 $ 138 -- Gas Operations 29,673 40,700 (11,027) (27.1%) $369,434 $380,323 $(10,889) (2.9%) The Distribution segment's principal products and services include hardgoods; industrial, medical and specialty gases; and equipment rental. Hardgoods consist of welding supplies and equipment, safety products, and industrial tools and supplies. 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. Distribution sales increased $138 thousand primarily as a result of net acquisition and divestiture activity, offset by a decline in same-store hardgoods sales. Acquisition and divestiture activity accounted for a net increase in sales of $4.5 million as the acquisition of four distributors since October 1, 1998 were partially offset by a divestiture during fiscal 1999. Distribution same-store sales decreased $4.4 million (-1.3%) as a result of lower sales of hardgoods of $6.7 million (-3.3%), partially offset by gas and rent sales growth of $2.3 million (1.6%). Hardgoods sales were negatively impacted in the current quarter by the continued slowness in certain manufacturing and industrial markets including: metal fabrication, oil exploration, agriculture, mining and shipbuilding. Gas and rent same-store sales growth was attributable to the expansion of the rental welder fleet and certain gas products including bulk, refrigerant and medical gases. Gas Operations' sales primarily include dry ice and carbon dioxide that are used for cooling and beverage applications. In addition, the segment includes businesses that produce and distribute specialty gases and nitrous oxide. Sales decreased $11 million compared to the prior year quarter as a result of divestitures, partially offset by same-store sales growth. Sales decreased $15 million primarily due to the divestiture of the Company's calcium carbide and carbon operations in December 1998 and operations in Poland and Thailand in August 1999. Gas Operations' same- store sales increased $4 million (15%) resulting from higher liquid carbon dioxide, dry ice and nitrous oxide volumes. The Company estimates same-store sales based on a comparison of current period sales to the prior period sales, adjusted for acquisitions and divestitures. Future same-store sales growth is dependent on the economy, competition and the Company's ability to implement price increases and sell additional products and services to existing and new customers. 15 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Profits Gross profits decreased 2.7% during the current quarter compared to the prior year quarter. Three Months Ended (In thousands) December 31, Gross Profits 1999 1998 Increase(Decrease) Distribution $159,635 $155,701 $ 3,934 2.5% Gas Operations 14,202 22,908 (8,706) (38.0%) $173,837 $178,609 $ (4,772) (2.7%) The increase in Distribution gross profits of $3.9 million resulted from a same-store gross profits increase of $1.9 million (1.2%) and acquisitions contributing $3.2 million, partially offset by gross profits related to a divestiture of $1.2 million. Same-store gas and rent gross profits increased $2.3 million (2.2%), partially offset by a decrease in hardgoods gross profits of $400 thousand (-.8%). Distribution gross profit margin of 47% in the current quarter increased 120 basis points from 45.8% in the prior year quarter as a result of higher gas and hardgoods margins and a shift in sales mix more heavily weighted towards gas and rent. Gas and hardgoods margins were helped by lower costs resulting from centralized hardgoods purchasing initiatives, higher-margin private label hardgoods sales and lower gas costs from recently negotiated supply contracts. The decrease in Gas Operations' gross profits of $8.7 million resulted from divestitures in prior periods of $6.1 million, an inventory write-down of $3.8 million related to certain specialty gas inventories, partially offset by a same-store gross profit increase of $1.2 million. The inventory write-down related to certain specialty gases that were purchased in prior fiscal years and consisted of adjustments to reflect changes in market prices and book-to-physical inventory differences. The scope of the Company's operations related to such gases has been reduced and is now more focused on supplying specialty gases exclusively to the Distribution segment. Gas Operations' gross profit margin, excluding the divestitures, decreased from 63% in the prior year quarter to 48% in the current quarter primarily due to the inventory write-down and from increased sales volume of lower margin liquid carbon dioxide. 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 decreased $5.3 million (-4%) compared to the prior year quarter primarily as a result of cost reductions that were initiated during the third and fourth quarters of fiscal 1999, the net impact of acquisitions and divestitures and a decrease in repositioning-related expenses that were recognized in the prior year. The cost reductions have impacted many areas of the Company's expense structure, including headcount and administrative cost reductions from the consolidation of back office functions. As a percentage of net sales, operating expenses decreased 40 basis points to 34.0% compared to the prior year quarter. Depreciation and amortization totaled $22 million in the current quarter, a decrease of $500 thousand (2.3%) compared to the prior year quarter. The decrease is primarily due to divestitures, the sale of equipment included in a sale-leaseback transaction that was consummated in the current quarter, a change in depreciable lives of bulk gas storage tanks, partially offset by acquisitions and capital expenditures since October 1, 1998. 16 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Income Operating income, excluding special charges, increased 4% compared to the prior year quarter. Three Months Ended (In thousands) December 31, Operating Income (Loss) 1999 1998 Increase(Decrease) Distribution $26,622 $20,634 $ 5,988 29% Gas Operations (447) 4,539 (4,986) (110%) Special Charges 2,829 -- 2,829 -- $29,004 $25,173 $ 3,831 15% The Distribution segment's operating income margin increased 170 basis points to 7.8% in the current quarter compared to 6.1% in the prior year quarter primarily as a result of lower operating expenses and higher gross profits related to gases and hardgoods. The decrease in Gas Operations' operating profit of $5 million resulted primarily from divestitures and a decline in margins related to certain specialty gases as previously discussed under "Gross Profits". Gas Operations' operating income margin was -1.5% compared to 11.2% in the prior year quarter. The operating income margin decrease was mainly due to a decline in specialty gas gross margins and divestitures. Special charges of $2.8 million primarily consist of an insurance settlement related to a fiscal 1997 loss. Interest Expense Interest expense, net, totaled $13.9 million and represents a decrease of $1.8 million (11.2%) compared to the prior year quarter. The decrease in interest expense resulted from a reduction in debt. The decrease in debt is primarily due to the proceeds from divestitures and the sale- leaseback of certain equipment. As discussed in "Liquidity and Capital Resources" and in Item 3 "Quantitative and Qualitative Disclosures About Market Risk", the Company manages interest rate exposure of certain borrowing instruments through participation in interest rate swap agreements. Other Income, net Other income, net, totaled $1.2 million in the current quarter and $24.4 million in the prior year quarter. The prior year quarter includes a $24 million gain from the divestiture of the Company's calcium carbide and carbon operations. Equity in Earnings of Unconsolidated Affiliates Equity in earnings of unconsolidated affiliates of $663 thousand decreased $2.2 million compared to the prior year quarter primarily as a result of a $1.8 million gain from insurance proceeds received by an equity investee, National Welders Supply, in the prior year. 17 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Income Tax Expense Income tax expense represented 42.4% of pre-tax earnings in the current quarter compared to 39.8% in the prior year quarter. Excluding taxes on gains related to divestitures and special charges, income tax expense represented 41.3% of pre-tax earnings for the current quarter compared to 43.9% in the prior year quarter. Net Earnings Net earnings for the quarter ended December 31, 1999 were $9.8 million, or $.14 per diluted share, compared to $22.1 million, or $.31 per diluted share, in the prior year quarter. Excluding gains related to a divestiture and an insurance recovery by an equity affiliate, net earnings in the prior year quarter were $6.1 million, or $.09 per diluted share. EBITDA Operating income, excluding special charges, plus depreciation and amortization ("EBITDA"), was $48.2 million in the current quarter compared to $47.7 million in the prior year quarter. EBITDA as a percentage of sales increased to 13% in the current quarter from 12.5% in the prior year quarter primarily due to lower operating costs. 18 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 1998 INCOME STATEMENT COMMENTARY Net Sales Net sales decreased 3.5% for the nine months ended December 31, 1999 ("current period") compared to the nine months ended December 31, 1998 ("prior year period"). Total same-store sales declined 2.3% in the current period compared to the prior year period. Nine Months Ended (In thousands) December 31, Net Sales 1999 1998 Decrease Distribution $1,032,701 $1,054,384 $(21,683) (2.1%) Gas Operations 103,515 123,304 (19,789) (16.0%) $1,136,216 $1,177,688 $(41,472) (3.5%) Distribution sales decreased $21.7 million as a result of a same-store sales decline of $30 million (-2.8%), offset by acquisition and divestiture activity. The decrease in same-store sales resulted from a $35.1 million (- 5.5%) decline in hardgoods, partially offset by gas and rent same-store sales growth of $5.1 million (1.2%). The lower hardgoods sales resulted from the continued slowness in certain manufacturing and industrial markets including: metal fabrication, oil exploration, 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. Sales of $19 million from fifteen distributor acquisitions since April 1, 1998 were partially offset by the divestiture of three businesses during fiscal 1999 which had sales of $10.7 million in the prior year period. Gas Operations sales decreased $19.8 million in the current period as a result of divestitures which had sales of approximately $29 million in the prior year period, partially offset by sales of $6 million from four dry ice acquisitions completed since April 1, 1998 and same-store sales growth of $3.2 million (3.2%). The divestitures primarily consist of the Company's calcium carbide and carbon operations (December 1998) and the operations in Poland and Thailand (August 1999). Same-store sales growth resulted from higher sales volume of dry ice, liquid carbon dioxide and nitrous oxide. Gross Profits Gross profits decreased 2.2% in the current period compared to the prior year period. Nine Months Ended (In thousands) December 31, Gross Profits 1999 1998 Decrease Distribution $477,496 $480,322 $ (2,826) (0.6%) Gas Operations 59,009 68,005 (8,996) (13.2%) $536,505 $548,327 $(11,822) (2.2%) 19 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The decrease in Distribution gross profits of $2.8 million resulted from a same-store gross profit decline of $6.4 million (-1.3%), partially offset by acquisition and divestiture activity. The decline in same-store gross profits consisted of a decrease in hardgoods gross profits of $10.5 million (-6.1%), partially offset by gas and rent gross profit growth of $4.1 million (1.3%). The decrease in hardgoods same-store gross profits resulted primarily from lower sales volumes. Offsetting the same-store gross profit declines was a net gross profit increase of $3.6 million from fifteen distributor acquisitions since April 1, 1998 and three divestitures during fiscal 1999. The overall Distribution gross profit margin of 46.2% in the current period increased 60 basis points from 45.6% in the prior year period primarily as a result of a shift in sales mix more heavily weighted towards higher margin gas and rental revenues and lower costs resulting from centralized hardgoods purchasing initiatives. The decrease in Gas Operations gross profits of $9 million resulted from divestitures that had gross profits of $9.8 million in the prior year period and an inventory write-down of $3.8 million related to certain specialty gas inventories. The inventory write-down related to certain specialty gases that were purchased in prior fiscal years and consisted of adjustments to reflect changes in market prices and book-to-physical inventory differences. The scope of the Company's operations related to such gases has been reduced and is now more focused on supplying specialty gases exclusively to the Distribution segment. The gross profit decline was partially offset by gross profits of $3.7 million related to acquisitions and by same-store gross profit growth of approximately $900 thousand (1.5%). Excluding the impact of divestitures, the current period gross profit margin of 57% decreased from 61% in the prior year period primarily due to the inventory write-down. Operating Expenses Selling, distribution and administrative expenses ("operating expenses") decreased $11.3 million (-2.9%) compared to the prior year period primarily resulting from cost reductions that were initiated during the third and fourth quarters of fiscal 1999 and from the elimination of certain repositioning expenses that were recognized in the prior year. The Company estimates that cost reductions, including the elimination of certain repositioning expenses, are favorably impacting operating expenses by approximately $12 - $15 million during fiscal 2000. The cost reductions have impacted many areas of the Company's expense structure, including headcount reductions and administrative cost reductions from the consolidation of back office functions. As a percentage of net sales, operating expenses increased 20 basis points to 33.6% compared to the prior year period. The increase in the ratio of operating expenses relative to sales was due to the decrease in sales, which was larger than the Company's reduction of operating expenses. Depreciation and amortization totaled $67.1 million in the current period representing an increase of $1.3 million (1.9%) compared to the prior year period. Depreciation and amortization expense increased primarily as a result of net acquisition and divestiture activity and capital expenditures since April 1, 1998. Depreciation and amortization expense relative to sales was 5.9% for the current period compared to 5.6% in the prior year period. Operating Income Excluding special charges, operating income decreased 2% compared to the prior year period. The decrease in operating income was primarily due to lower gross profits from the decline in hardgoods sales, divestitures and a specialty gas inventory write-down in the Gas Operations segment, partially offset by a reduction in operating expenses. 20 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine Months Ended (In thousands) December 31, Operating Income 1999 1998 Increase(Decrease) Distribution $79,290 $75,246 $ 4,044 5.4% Gas Operations 8,288 14,147 (5,859) (41.4%) Special Charges 2,829 1,000 1,829 183% $90,407 $90,393 $ 14 -- The Distribution segment's operating income margin of 7.7% increased from 7.1% in the prior year period. Gas Operations' operating income margin of 8% decreased from 11.5% in the prior year period as a result of divestitures and lower gross margins in the current period. Special charges of $2.8 million for the nine months ended December 31, 1999 consist primarily of an insurance settlement related to a fiscal 1997 loss. Special charges of $1 million for the nine months ended December 31, 1998 represent adjustments to reflect differences between the original loss estimates and the actual losses related to the divestiture of two non-core businesses sold during the first quarter of fiscal 1999. Interest Expense Interest expense, net, totaled $42.2 million and represents a decrease of $4.1 million (-8.8%) compared to the prior year period. The decrease in interest expense was primarily attributable to a lower average debt balance and lower interest rates. As discussed in "Liquidity and Capital Resources" and in Item 3 "Quantitative and Qualitative Disclosures About Market Risk", the Company manages interest rate exposure of certain borrowing instruments through participation in interest rate swap agreements. Other Income, net Other income, net, totaled $16.6 million in the current period and $25.2 million in the prior year period. The current period includes a $14.9 million gain from the divestiture of operations in Poland and Thailand. Other income, net, in the prior year period includes a $24 million gain from the divestiture of the Company's calcium carbide and carbon operations. Equity in Earnings of Unconsolidated Affiliates Equity in earnings of unconsolidated affiliates of $2.4 million decreased from $4.8 million in the prior year primarily resulting from a $1.8 million gain from insurance proceeds received in the prior year period by an equity investee, National Welders Supply. Lower liquid carbon dioxide joint venture earnings in the current period also contributed to the decrease in equity earnings compared to the prior year period. Income Tax Expense Income tax expense represented 43% of pre-tax earnings in the current period and 40.9% in the prior year period. Income tax expense, excluding the taxes related to gains from divestitures and special charges in both periods, represented 41.5% of pre-tax earnings for the current period compared to 42.4% in the prior year period. 21 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Earnings Net earnings in the current period were $37.8 million, or $.53 per diluted share, compared to $43.8 million, or $.61 per diluted share, in the prior year period. Excluding special charges, gains related to divestitures, an insurance gain recorded by an equity affiliate and a charge from a change in accounting, net earnings in the current period were $29.1 million, or $.41 per diluted share, compared to $27.3 million, or $.38 per diluted share in the prior period. EBITDA Operating income, excluding special charges, plus depreciation and amortization ("EBITDA"), was $154.7 million in the current period compared to $155.2 million in the prior year period. EBITDA as a percentage of sales increased to 13.6% compared to 13.2% in the prior year period primarily due to cost reductions. 22 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Cash Flows Cash flows from operating activities totaled $83.9 million for the nine months ended December 31, 1999. Adjustments to reconcile net income to net cash provided by operating activities included depreciation and amortization of $67.1 million and deferred income taxes of $11 million from temporary differences, offset by a $14.9 million gain on the divestiture of operations in Poland and Thailand. Additionally, cash flows from working capital components decreased $14.3 million largely as a result of a decrease in accounts payable of $17.1 million related to the timing of payments to vendors. Accounts receivable provided cash of $4.9 million. Account receivables days' sales outstanding increased to 50 days from 47 days at March 31, 1999. Inventories used cash of $1.1 million with hardgoods days' supply of inventory increasing to 92 days from 77 days at March 31, 1999. The increase in hardgoods days' supply of inventory is primarily due to an increase in safety and welding product inventories in connection with centralized purchasing and distribution. After-tax cash flow (net earnings, excluding certain gains and charges, plus depreciation, amortization and deferred income taxes) increased 7% to $108.5 million compared to $101.6 million in the prior year period. Cash provided by investing activities totaled $11.1 million during the nine months ended December 31, 1999. Activities that used cash during the period primarily included capital expenditures of $47.6 million and four distributor acquisitions totaling $24.2 million. Fixed asset sales provided cash of $35.6 million and primarily included equipment sold in connection with a sale-leaseback transaction. The divestitures of certain foreign operations provided cash of $46.6 million. Capital expenditures during the current period totaled $47.6 million and were 42% lower compared to the prior year period. Capital expenditures associated with the purchase of cylinders, bulk tanks, rental welders and machinery and equipment totaled approximately $32 million or 67% of the total capital expenditures during the current period. Management continues to focus on improving asset utilization and believes that fiscal 2000 capital spending will total less than $70 million. Financing activities used cash of $95 million primarily for the repayment of debt and the repurchase of the Company's Common Stock. Additionally, the cash overdraft, the float of the Company's outstanding checks, decreased by $5.4 million since March 31, 1999. The Company will continue to look for appropriate acquisitions of distributors. Future acquisitions and capital expenditures are expected to be funded through cash flows from operations, debt, Common Stock for certain acquisitions, funds from the divestiture of certain businesses and other available sources. The Company believes that its sources of financing are adequate for its anticipated needs and that it could arrange additional sources of financing for unanticipated requirements. The cost and terms of any future financing arrangement will depend on the market conditions and the Company's financial position at that time. The Company does not currently pay dividends. 23 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Instruments The Company has unsecured revolving credit facilities totaling $725 million and $100 million Canadian (US$69 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 December 31, 1999, the Company had borrowings under the credit agreement of approximately $478 million and $45 million Canadian (US$31million). The Company also had commitments under letters of credit supported by the credit agreement of approximately $58 million. Availability under the credit facilities was approximately $228 million at December 31, 1999 (the availability was reduced by approximately $70 million in connection with the January 21, 2000 acquisition of Mallinckrodt Inc.'s Puritan-Bennett medical gas business). At December 31, 1999, the effective interest rate on borrowings under the credit facilities averaged 6.70% (6.79% on U.S. borrowings and 5.35% on Canadian borrowings). At December 31, 1999, the Company had the following long-term debt outstanding under medium-term notes: $50 million of unsecured notes due September 2001 bearing interest at a fixed rate of 7.15%; $75 million of unsecured notes due March 2004 bearing interest at a fixed rate of 7.14%; and $100 million of unsecured notes due September 2006 bearing interest at a fixed rate of 7.75%. Additionally, at December 31, 1999, long-term debt of the Company included acquisition notes and other long-term debt instruments of approximately $70 million with interest rates ranging from 6% to 9.5%. The Company also has a shelf registration statement which is currently effective under applicable federal securities laws and may be used to issue debt and other types of securities up to an aggregate of approximately $175 million. In managing interest rate exposure, principally under the Company's floating rate revolving credit facilities, the Company participates in 25 interest rate swap agreements. The swap agreements are with major financial institutions and aggregate $608 million in notional principal amount at December 31, 1999. Eighteen swap agreements with approximately $371 million in notional principal amount require fixed interest payments based on an average effective rate of 6.33% for remaining periods ranging between one and five years. Seven swap agreements with $237 million in notional principal amount require variable interest payments based on an average rate of 5.57% at December 31, 1999. Under the terms of five swap agreements, the Company has elected to receive the discounted value of the counterparties' interest payments up-front. At December 31, 1999, approximately $5.6 million 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. Share Repurchase Program In March 1999, the Company's Board of Directors authorized the repurchase of up to seven million shares of the Company's outstanding Common Stock. The shares may be repurchased in the open market or in privately negotiated transactions depending on market conditions and other factors. The Company has financed its repurchase programs with borrowings and funds provided by operating activities. During the nine months ended December 31, 1999, the Company repurchased 2.3 million shares at an average cost of $10.65 per share, including 175 thousand shares to complete a previous repurchase program. The effect of the share repurchases on earnings per share for the three and nine month periods ended December 31, 1999 was not material. From January 1, 2000 through February 4, 2000, the Company repurchased approximately 330 thousand shares at an average cost of $8.26 per share. As of February 4, 2000, the remaining shares authorized for repurchase under the repurchase program totaled approximately 4.5 million shares. Employee Benefits Trust On February 11, 2000, the Employee Benefits Trust purchased approximately 1.4 million shares of Common Stock from the Company at fair market value. 24 AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE YEAR 2000 MATTER The "Year 2000" matter related to whether computer hardware and software and equipment would properly recognize date sensitive information referring to the Year 2000. Prior to December 31, 1999, the Company undertook various remediation measures to address its state of readiness with regard to the Year 2000 issue. Such measures included evaluating and testing computer systems and equipment for Year 2000 compliance, contacting significant suppliers, customers and other critical business partners to assess their readiness plans, and developing contingency plans for key administrative and supply chain functions. To date during calendar year 2000, the Company has not experienced any significant Year 2000 problems with its information systems hardware, application software, equipment or operating systems. The Company also has not experienced any significant Year 2000 complications related to any of its key suppliers, customers or other business partners. Since latent Year 2000 related problems may arise in the future, the Company will continue to monitor the Year 2000 compliance of its operating systems and equipment. Accordingly, there can be no assurance that the Company and its suppliers, customers or business partners will not experience significant Year 2000 problems in the future. Forward-looking Statements This report contains statements that are forward-looking, as that term is defined by the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in rules, regulations and releases. The Company intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors, and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed therein will be achieved. Important factors that could cause actual results to differ materially from those contained in any forward-looking statement include, but are not limited to, underlying market conditions, growth in same-store sales, the Company's ability to reduce costs and capital spending, the Company's efforts to improve asset utilization, implementation and standardization of information systems projects, any potential problems relating to Year 2000 matters (including without limitation, those relating to latent Year 2000 problems that may affect the Company in the future, unanticipated remediation costs, and the adequate resolution of any Year 2000 problems experienced by significant vendors, suppliers, customers and other similar third parties), the success and timing of acquisitions and divestitures, the effects of competition from independent distributors and vertically integrated gas producers on products and pricing, growth and acceptance of new product lines through the Company's sales and marketing programs, changes in product prices from gas producers and name-brand manufacturers and suppliers of hardgoods, uncertainties regarding accidents or litigation which 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. 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk The Company's primary market risk exposure is from changes in interest rates. The Company's policy is to manage interest rate risk exposure through the use of a combination of fixed and floating rate debt and interest rate swap agreements. The Company maintains the ratio of fixed to variable rate debt within parameters established by management under policies approved by the Board of Directors. At December 31, 1999, the ratio of fixed versus floating debt was 50% -50%. In addition, the Company monitors its positions and the credit ratings of its counterparties, thereby minimizing the risk of non-performance by the counterparties. The Company does not enter into derivative financial instruments for trading purposes. The table below summarizes the Company's market risks associated with long-term debt obligations and interest rate swaps as of December 31, 1999. For long-term debt obligations, the table presents cash flows related to payments of principal and interest by expected fiscal year of maturity. For interest rate swaps, the table presents the notional amounts underlying the interest rate swaps by year of maturity. The notional amounts are used to calculate contractual payments to be exchanged and are not actually paid or received. Fair values were computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the period. [Continued on following page] 26 Expected Fiscal Year of Maturity __________________________________________________________________________________ (In millions) Fair Fixed Rate Debt: 2000 2001 2002 2003 2004 2005 Thereafter Total Value Medium-term notes $ -- $ -- $ 50 $ -- $ 75 $ -- $100 $225 $205 Interest expense $ 4 $ 17 $ 15 $ 13 $ 13 $ 8 $ 11 $ 81 Average interest rate 7.41% 7.41% 7.42% 7.49% 7.49% 7.75% 7.75% Acquisition notes $ 1 $ 13 $ 19 $ 2 $ 20 $ -- $ 3 $ 58 $ 55 Interest expense $ 1 $ 4 $ 3 $ 2 $ 2 $ -- $ -- $ 12 Average interest rate 7.45% 7.45% 7.45% 7.45% 7.45% 7.45% 7.45% Other notes $ -- $ 1 $ 1 $ 1 $ -- $ -- $ -- $ 3 $ 3 Average interest rate 7.55% 7.55% 7.55% 7.55% Variable Rate Debt: Revolving credit facilities $ -- $ -- $ -- $509 $ -- $ -- $ -- $509 $509 Interest expense $ 34 $ 34 $ 34 $ 34 $ -- $ -- $ -- $136 Interest rate (a) 6.70% 6.70% 6.70% 6.70% Other notes $ -- $ -- $ 7 $ -- $ -- $ 1 $ -- $ 8 $ 8 Average interest rate 9.22% 9.22% 9.00% 7.27% 7.27% 7.27% US denominated Swaps: 15 Swaps Receive Variable/Pay Fixed $ 5 $ 55 $170 $ 93 $ -- $ 40 $ -- $363 $ (5) Variable Receive rate (3 month LIBOR)= 6.12% Weighted average pay rate = 6.32% 7 Swaps Receive Fixed/Pay Variable $ 57 $ 50 $ 50 $ -- $ 30 $ -- $ 50 $237 $ -- Weighted average receive rate = 6.60% Variable pay rate (6 month LIBOR)=5.57% Canadian $ denominated Swaps: 3 Swaps Receive Variable/Pay Fixed $ 3 $ 3 $ 2 $ -- $ -- $ -- $ -- $ 8 $ -- Variable Receive rate (3 month CAD BA) = 4.91% (b) Weighted average pay rate = 6.66% Other LIBOR based agreements: Operating leases with trust $ -- $ 1 $ 1 $ 1 $ 44 $ -- $ -- $ 47 $ 47 Variable rate (3 month LIBOR plus 130 basis points = 7.42% 27 (a) The variable rate of long-term debt obligations is based on the London Interbank Offered Rate ("LIBOR") as of December 31, 1999. For future periods, the variable interest rate is assumed to remain at 6.70% with the principal balance of long-term debt obligations held constant at $509 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"). Limitations of the tabular presentation As the table incorporates only those interest rate risk exposures that exist as of December 31, 1999, 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 Certain subsidiaries of the Company are located in foreign countries. The Company does not hedge its exposure to translation gains and losses relating to foreign currency net asset exposures. The Company considers its exposure to foreign currency exchange fluctuations to be immaterial to its consolidated results of operations. 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings For information regarding certain litigation, reference is made to the Company's Form 10-Q for the quarter ended June 30, 1999, which is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K a. Exhibits The following exhibits are being filed as part of this Quarterly Report on Form 10-Q: Exhibit No. Description 11 Calculation of earnings per share 27 Financial Data Schedules as of December 31, 1999 and 1998 b. Reports on Form 8-K On November 1, 1999, the Company filed a Form 8-K pursuant to Item 5, reporting its earnings for the second quarter and six months ended September 30, 1999. 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Airgas, Inc. (Registrant) Date: February 11, 2000 /s/ Roger F. Millay Roger F. Millay Senior Vice President and Chief Financial Officer