UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2001
Commission file number: 1-9344
AIRGAS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-0732648
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
259 North Radnor-Chester Road, Suite 100
Radnor, PA 19087-5283
---------------------------------------- --------------
(Address of principal executive offices) (ZIP code)
(610) 687-5253
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Common Stock outstanding at August 10, 2001: 68,787,088 shares
1
AIRGAS, INC.
FORM 10-Q
June 30, 2001
INDEX
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Consolidated Statements of Earnings
for the Three Months Ended June 30, 2001 and 2000 (Unaudited)....... 3
Consolidated Balance Sheets
as of June 30, 2001 (Unaudited) and March 31, 2001.................. 4
Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 2001 and 2000 (Unaudited)....... 5
Notes to Consolidated Financial Statements (Unaudited).............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 26
Item 2. Changes in Securities and Use of Proceeds....................... 26
Item 6. Exhibits and Reports on Form 8-K................................ 26
SIGNATURES............................................................... 27
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
------------------ ------------------
Net sales
Distribution $ 378,314 $ 374,739
Gas Operations 37,361 34,259
--------- ---------
Total net sales 415,675 408,998
--------- ---------
Costs and expenses
Cost of products sold (excluding
depreciation and amortization)
Distribution 198,903 202,749
Gas Operations 13,320 12,447
Selling, distribution and
administrative expenses 152,719 140,015
Depreciation 15,672 16,325
Amortization 2,277 6,419
--------- ---------
Total costs and expenses 382,891 377,955
--------- ---------
Operating income
Distribution 26,571 26,125
Gas Operations 6,213 4,918
--------- ---------
Total operating income 32,784 31,043
Interest expense, net (10,913) (15,765)
Discount on securitization of trade
receivables (1,492) --
Other income (expense), net (193) 52
Equity in earnings of unconsolidated affiliates 913 1,364
--------- ---------
Earnings before income taxes 21,099 16,694
Income taxes 7,648 6,878
--------- ---------
Net earnings $ 13,451 $ 9,816
========= =========
Basic earnings per share $ .20 $ .15
========= =========
Diluted earnings per share $ .20 $ .15
========= =========
Weighted average shares outstanding:
Basic 67,400 65,100
========= =========
Diluted 68,400 67,300
========= =========
Comprehensive income $ 9,732 $ 9,672
========= =========
Pro forma amounts assuming the application
of the change in accounting principle applied
retroactively (Notes 2 and 8):
Net earnings $ 13,451 $ 13,371
========= =========
Basic earnings per share $ .20 $ .20
========= =========
Diluted earnings per share $ .20 $ .20
========= =========
See accompanying notes to consolidated financial statements.
3
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
June 30, March 31,
2001 2001
----------- ---------
ASSETS
Current Assets
Trade receivables, less allowances for doubtful
accounts of $8,253 at June 30, 2001 and $7,402
at March 31, 2001 $ 81,437 $ 143,129
Inventories, net 157,970 155,024
Deferred income tax asset, net 10,394 10,143
Prepaid expenses and other current assets 18,874 25,549
---------- ----------
Total current assets 268,675 333,845
---------- ----------
Plant and equipment, at cost 1,086,611 1,073,252
Less accumulated depreciation (383,056) (368,606)
---------- ----------
Plant and equipment, net 703,555 704,646
Goodwill, net 440,486 440,057
Other intangible assets, net 27,580 29,668
Investments in unconsolidated affiliates 63,449 63,262
Other non-current assets 19,529 9,812
---------- ----------
Total assets $1,523,274 $1,581,290
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 77,569 $ 76,337
Accrued expenses and other current liabilities 125,029 130,873
Current portion of long-term debt 18,628 72,945
---------- ----------
Total current liabilities 221,226 280,155
---------- ----------
Long-term debt 599,572 620,664
Deferred income taxes, net 162,457 161,176
Other non-current liabilities 29,995 22,446
Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, no par value, 20,000 shares
authorized, no shares issued or outstanding at
June 30, 2001 and March 31, 2001 -- --
Common stock, par value $.01 per share, 200,000
shares authorized, 74,650 and 74,361 shares issued
at June 30, 2001 and March 31, 2001, respectively 747 744
Capital in excess of par value 189,991 188,629
Retained earnings 369,047 355,596
Accumulated other comprehensive loss (4,872) (1,153)
Treasury stock, 547 and 516 common shares at cost
at June 30, 2001 and March 31, 2001, respectively (4,289) (3,982)
Employee benefits trust, 5,385 and 5,701 common
shares at cost at June 30, 2001 and
March 31, 2001, respectively (40,600) (42,985)
---------- ----------
Total stockholders' equity 510,024 496,849
---------- ----------
Total liabilities and stockholders' equity $1,523,274 $1,581,290
========== ==========
See accompanying notes to consolidated financial statements.
4
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 13,451 $ 9,816
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 17,949 22,744
Deferred income taxes 2,700 3,450
Equity in earnings of unconsolidated affiliates (913) (1,364)
Gains (losses) on sales of plant and equipment 89 (47)
Stock issued for employee stock purchase plan 1,562 1,442
Other non-cash charges 517 --
Changes in assets and liabilities, excluding
effects of business acquisitions and divestitures:
Securitization of trade receivables 64,100 --
Trade receivables, net (2,408) (5,206)
Inventories, net (2,946) (8,153)
Prepaid expenses and other current assets 6,186 (572)
Accounts payable, trade 1,232 (5,482)
Accrued expenses and other current liabilities 1,069 (2,451)
Other assets and liabilities, net (3,499) (1,971)
---------- ----------
Net cash provided by operating activities 99,089 12,206
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (16,991) (15,006)
Proceeds from sales of plant and equipment 309 520
Proceeds from divestitures -- 577
Business acquisitions, net of cash acquired -- (1,034)
Dividends and fees from unconsolidated affiliates 784 800
Other, net 2,328 1,548
---------- ----------
Net cash used in investing activities (13,570) (12,595)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 57,371 58,000
Repayment of debt (137,856) (49,487)
Purchase of treasury stock -- (11,214)
Proceeds from exercise of stock options 826 532
Cash overdraft (5,860) 2,558
---------- ----------
Net cash provided by (used in) financing activities (85,519) 389
---------- ----------
Change in Cash $ -- $ --
Cash - beginning of period -- --
---------- ----------
Cash - end of period $ -- $ --
========== ==========
Cash paid during the period for:
Interest $ 9,567 $ 13,462
Income taxes, net of refunds $ 9,020 $ 680
See accompanying notes to consolidated financial statements.
5
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. Prior to the adoption of SFAS 142 (see Note 2) in fiscal
2002, the excess of the cost of these affiliates over the Company's
share of their net assets at the acquisition date was being amortized
over 40 years. Intercompany accounts and transactions are eliminated
in consolidation.
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America. These statements do not include all
disclosures required for annual financial statements. These financial
statements should be read in conjunction with the more complete
disclosures contained in the Company's audited consolidated financial
statements for the fiscal year ended March 31, 2001.
The consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to present fairly the Company's
financial position, results of operations and cash flows for the
periods presented. Such adjustments are of a normal, recurring nature
except for the accounting changes, which are discussed in the notes to
the accompanying financial statements. The interim operating results
are not necessarily indicative of the results to be expected for an
entire year.
Certain reclassifications have been made to previously issued
financial statements to conform to the current presentation.
(2) ACCOUNTING CHANGES
------------------
SFAS 142
- --------
In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets. As allowed under the Standard,
the Company has adopted SFAS 142 retroactively to April 1, 2001. SFAS
142 requires goodwill and intangible assets with indefinite useful
lives to no longer be amortized, but instead be tested for impairment
at least annually.
With the adoption of SFAS 142, the Company reassessed the useful
lives and residual values of all acquired intangible assets to make any
necessary amortization period adjustments. Based on that assessment,
only goodwill was determined to have an indefinite useful life and no
adjustments were made to the amortization period or residual values of
other intangible assets. Additionally, certain reclassifications were
made to previously issued financial statements to conform to the
presentation required by SFAS 142.
SFAS 142 provides a six-month transitional period from the
effective date of adoption for the Company to perform an assessment of
whether there is an indication that goodwill is impaired. To the
extent that an indication of impairment exists, the Company must
perform a second test to measure the amount of the impairment. The
second test must be performed as soon as possible, but no later than
the end of the fiscal year. Any impairment measured as of the date of
adoption will be recognized as the cumulative effect of a change in
accounting principle. Because of the extensive effort needed to
complete this assessment, the Company has not determined whether there
is any indication that goodwill is impaired or estimated the amount of
any potential impairment.
6
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At June 30, 2001, the Company had goodwill (net of accumulated
amortization of $85 million) of $440 million, which is being assessed
for impairment. The Company anticipates completing its initial
assessment of impairment by September 30, 2001. Should an indication
of impairment exist, the Company will perform the second test under
SFAS 142 to measure and record the amount of impairment, if any.
SFAS 133
- --------
On April 1, 2001, the Company adopted FASB Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Certain Hedging Activities, as amended by SFAS No. 137
and 138. SFAS 133 requires all derivatives to be recorded on the
balance sheet at fair value. In accordance with the transition
provisions of SFAS 133, on April 1, 2001, the Company recorded the
cumulative effect of this accounting change as a liability and a
deferred loss of $6.7 million in the accumulated other comprehensive
income (loss) component of stockholder's equity to recognize, at fair
value, interest rate swap agreements that are designated as cash-flow
hedging instruments. Additionally, the Company recorded an asset and
adjusted the carrying value of the hedged portion of its fixed rate
debt by $6 million to recognize, at fair value, interest rate swap
agreements that are designated as fair value hedging instruments.
SFAS 141
- --------
Effective July 1, 2001, the Company will adopt FASB Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations.
SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. The Company
has evaluated the impact of SFAS 141 and believes that it will not have
a material impact on the results of operations, financial position and
liquidity of the Company.
(3) EARNINGS PER SHARE
------------------
Basic earnings per share is calculated by dividing net earnings by the
weighted average number of shares of the Company's common stock
outstanding during the period. Outstanding shares consist of issued
shares less treasury stock and common stock held by the Employee
Benefits Trust. Diluted earnings per share is calculated by dividing
net earnings by the weighted average common shares outstanding adjusted
for the dilutive effect of common stock equivalents related to stock
options and contingently issuable shares.
The table below reconciles basic weighted average common shares
outstanding to diluted weighted average common shares outstanding for
the three months ended June 30, 2001 and 2000:
Three Months Ended
June 30,
------------------
(In thousands) 2001 2000
---- ----
Weighted average common shares outstanding:
Basic 67,400 65,100
Stock options 1,000 400
Contingently issuable shares -- 1,800
------ ------
Diluted 68,400 67,300
====== ======
Contingently issuable shares represent the required issuance of
Company common stock in connection with a prior year acquisition.
7
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) 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. In April 2001, the Company completed the
second and final tranche of the $150 million trade receivables
securitization program and received net proceeds from the second
tranche of $64.1 million. During the quarter ended June 30, 2001, the
Company sold, net of its retained interest, $479.7 million of trade
receivables and remitted to the bank conduits, pursuant to a servicing
agreement, $342.4 million in collections on those receivables. From
inception of the securitization program through June 30, 2001, the
Company received $137.3 million of net cash proceeds, which were used
to reduce borrowings under the Company's then existing 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 securitization 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 $46 million and $26
million are included in "Trade receivables" in the accompanying
Consolidated Balance Sheets at June 30, 2001 and March 31, 2001,
respectively. 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.
(5) INVENTORIES
-----------
Inventories consist of:
(Unaudited)
June 30, March 31,
(In thousands) 2001 2001
----------- ---------
Finished goods $157,325 $154,385
Raw materials 645 639
-------- --------
$157,970 $155,024
======== ========
Net inventories determined by the LIFO inventory method totaled
$19.5 million and $19.1 million at June 30, 2001 and March 31, 2001,
respectively. If the FIFO inventory method had been used for these
inventories, they would have been $1.6 million and $1.5 million higher
at June 30, 2001 and March 31, 2001, respectively.
8
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
----------------------------------------------
Accrued expenses and other current liabilities include:
(Unaudited)
June 30, March 31,
(In thousands) 2001 2001
----------- ---------
Cash overdraft $ 18,585 $ 24,445
Accrued payroll and employee benefits 21,775 24,989
Insurance reserves 17,265 15,596
Restructuring reserves 4,460 5,157
Other accrued expenses and current liabilities 62,944 60,686
-------- --------
$125,029 $130,873
======== ========
The cash overdraft is attributable to the float of the Company's
outstanding checks. The restructuring reserves were established in
conjunction with the cost reduction plan initiated in the fourth
quarter of fiscal 2001. The decrease in the restructuring reserves was
driven by cash payments related to severance paid to employees and the
exiting of facilities.
(7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
---------------------------------------------
The Company's involvement with derivative instruments is limited
to highly effective fixed and floating interest rate swap agreements
used to manage well-defined interest rate risk exposures. Interest
rate swap agreements are not entered into for trading purposes.
At June 30, 2001, the Company had a notional amount of $243
million in fixed interest rate swap agreements that effectively convert
a corresponding amount of variable interest rate borrowings under the
revolving credit facilities to fixed interest rate debt. The scheduled
maturities of these cash flow hedging instruments are fiscal 2002, $75
million; fiscal 2003, $128 million; and fiscal 2005, $40 million.
During the quarter ended June 30, 2001, the Company recorded the change
in fair value of the fixed interest rate swap agreements to accumulated
other comprehensive income (loss). The net additional interest
payments made under these swap agreements during the quarter were
recognized in interest expense. Over the next 12 months, the Company
expects to reclassify approximately $4.9 million of the deferred loss
from accumulated other comprehensive income (loss) to interest expense
as payments under the swap agreements come due.
At June 30, 2001, the Company also had a notional amount of $130
million in variable interest rate swap agreements that effectively
converts a corresponding amount of fixed rate Medium Term Notes to
variable rate debt. The fair value of these variable interest rate
swap agreements and the adjusted carrying value of the hedged portion
of the Medium Term Notes at June 30, 2001 was $5.1 million. There is
no ineffectiveness associated with the Company's variable interest rate
swap agreements, and therefore, changes in the fair value of the swap
agreements are completely offset by changes in the fair value of the
hedged portion of the Medium Term Notes.
9
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) GOODWILL AND OTHER INTANGIBLE ASSETS
------------------------------------
As described in Note 2, the Company adopted SFAS 142 on April 1,
2001. The following table reconciles the prior year's reported
operating income, equity in earnings of unconsolidated affiliates and
net income to their respective pro forma balances adjusted to exclude
goodwill amortization expense which is no longer recorded under the
provisions of SFAS 142. Current period net income and earnings per
share are presented for comparative purposes.
Three Months Ended
June 30,
------------------
(In thousands, except per share amounts) 2001 2000
---- ----
OPERATING INCOME:
Distribution segment $26,571 $26,125
Gas Operations segment 6,213 4,918
------- -------
Total reported operating income 32,784 31,043
------- -------
Add back: Distribution goodwill amortization -- 3,084
Add back: Gas Operations goodwill amortization -- 533
------- -------
Add back: Total goodwill amortization -- 3,617
------- -------
Adjusted Distribution operating income 26,571 29,209
Adjusted Gas Operations operating income 6,213 5,451
------- -------
Adjusted total operating income $32,784 $34,660
======= =======
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES:
Reported equity in earnings of unconsolidated
affiliates $ 913 $ 1,364
Add back: equity method goodwill amortization -- 425
------- -------
Adjusted equity in earnings of unconsolidated
affiliates $ 913 $ 1,789
======= =======
NET INCOME:
Reported net income $13,451 $ 9,816
Add back: goodwill amortization after-tax -- 3,555
------- -------
Adjusted net income $13,451 $13,371
======= =======
BASIC EARNINGS PER SHARE:
Reported net income $.20 $.15
Goodwill amortization after-tax -- .05
------- -------
Adjusted net income $.20 $.20
======= =======
DILUTED EARNINGS PER SHARE:
Reported net income $.20 $.15
Goodwill amortization after-tax -- .05
------- -------
Adjusted net income $.20 $.20
======= =======
10
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) GOODWILL AND OTHER INTANGIBLE ASSETS - (Continued)
------------------------------------
Changes in the net carrying amount of goodwill for the three
months ended June 30, 2001, were as follows:
Distribution Gas Operations
(In thousands) Segment Segment Total
------------ -------------- --------
Balance at March 31, 2001 $364,943 $75,114 $440,057
Foreign currency
translation and other
adjustments 396 33 429
-------- ------- --------
Balance at June 30, 2001 $365,339 $75,147 $440,486
-------- ------- --------
Other intangible assets amounted to $27.6 million (net of accumulated
amortization of $75.4 million) and $29.7 million (net of accumulated
amortization of $73.1 million) at June 30, 2001 and March 31, 2001,
respectively. These intangible assets primarily consist of non-compete
agreements entered into in connection with business combinations and are
amortized over the term of the agreements, principally five years. There
are no expected residual values related to these intangible assets.
Estimated fiscal year amortization expense in millions is as follows:
2002 - $8.8; 2003 - $5.6; 2004 - $4.8; 2005 - $3.3; and 2006 - $2.2.
(9) 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-March 31, 2001 74,361 516 5,701
Common stock issuance (a) 289 -- --
Purchase of treasury stock -- 31 --
Reissuance of stock from Trust (c) -- -- (316)
------ ---- -----
Balance-June 30, 2001 74,650 547 5,385
====== ==== =====
11
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) STOCKHOLDERS' EQUITY - (Continued)
--------------------
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-March 31, 2001 $744 $188,629 $355,596 $(1,153) $(3,982) $(42,985) $ --
Net earnings -- -- 13,451 -- -- -- 13,451
Common stock issuance (a) 3 823 -- -- -- -- --
Foreign currency
translation adjustments -- -- -- 297 -- -- 297
Purchase of treasury stock -- -- -- -- (307) -- --
Cumulative effect of a
change in accounting
principle (b) -- -- -- (6,664) -- -- (6,664)
Net change in fair value
of interest rate swap
agreements -- -- -- 534 -- -- 534
Reissuance of common stock
from Trust (c) -- (823) -- -- -- 2,385 --
Issuance of warrants (d) -- 517 -- -- -- -- --
Net tax benefit of
comprehensive income items -- -- -- 2,114 -- -- 2,114
Tax benefit from stock
option exercises -- 845 -- -- -- -- --
---- -------- -------- ------- ------- -------- -------
Balance-June 30, 2001 $747 $189,991 $369,047 $(4,872) $(4,289) $(40,600) $ 9,732
==== ======== ======== ======= ======= ======== =======
(a) Issuance of common stock for stock option exercises.
(b) Recognition of the cumulative effect of a change in accounting principle
related to the adoption of SFAS 133 in the quarter (see Notes 2 and 7).
(c) Reissuance of common stock from the Employee Benefits Trust for employee benefit programs.
(d) The Company granted warrants to purchase 150,000 shares of the Company's common stock to
an outside consulting firm for services rendered during the quarter. The warrants have a
term of three years from the date of grant and have exercise prices in excess of market
value on the date of grant ranging from $11.98 to $14.38 per share. The aggregate value
of the warrants on the dates of grant, as determined by the Black-Scholes pricing model,
was $517 thousand, which the Company expensed in the quarter.
12
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) COMMITMENTS AND CONTINGENCIES
-----------------------------
Litigation
- ----------
In July 1996, Praxair, Inc. ("Praxair") filed suit against the
Company in the Circuit Court of Mobile County, Alabama. The complaint
alleged tortious interference with business or contractual relations
with respect to Praxair's Right of First Refusal contract with the
majority shareholders of National Welders Supply Company, Inc.
("National Welders") in connection with the Company's formation of a
joint venture with National Welders. In June 1998, Praxair filed a
motion to dismiss its own action in Alabama and commenced another
action in the Superior Court of Mecklenburg County, North Carolina,
alleging substantially the same tortious interference by the Company.
The North Carolina action also alleges breach of contract against
National Welders and certain shareholders of National Welders and
unfair trade practices and conspiracy against all the defendants. In
the North Carolina action, Praxair seeks compensatory damages in excess
of $10 thousand, punitive damages and other unspecified relief. The
Company 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.
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.
(11) SUMMARY BY BUSINESS SEGMENT
---------------------------
Information related to the Company's operations by business segment
for the three months ended June 30, 2001 and 2000 is as follows:
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
------------------ ------------------
Gas Gas
(In thousands) Distribution Operations Combined Distribution Operations Combined
------------ ---------- -------- ------------ ---------- --------
Gas and rent $ 173,475 $ 36,806 $ 210,281 $ 158,597 $ 33,494 $ 192,091
Hardgoods 204,839 555 205,394 216,142 765 216,907
---------- ---------- ---------- ---------- ---------- ----------
Total net sales 378,314 37,361 415,675 374,739 34,259 408,998
Intersegment sales -- 8,867 8,867 -- 8,369 8,369
Gross profit, excluding
depreciation and
amortization expense 179,411 24,041 203,452 171,990 21,812 193,802
Gross profit margin 47.4% 64.3% 48.9% 45.9% 63.7% 47.4%
Operating income (a) 26,571 6,213 32,784 26,125 4,918 31,043
Earnings before
income taxes (a) 17,643 3,456 21,099 14,357 2,337 16,694
Assets 1,346,942 176,332 1,523,274 1,515,438 228,778 1,744,216
(a) Financial results for the June 30, 2001 quarter do not include any
goodwill amortization expense as a result of adopting SFAS 142 (see
Note 2). See Note 8 for a reconciliation of prior period financial
results as reported to financial results adjusted to exclude goodwill
amortization expense.
13
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(12) SUBSEQUENT EVENTS
-----------------
Debt Refinancing and Note Issuance
- ----------------------------------
On July 30, 2001, the Company refinanced its existing revolving
credit facilities due December 5, 2002 with new bank credit facilities
(the "new credit facilities") under a credit agreement with a syndicate
of lenders. The new credit facilities consist of revolving credit
facilities totaling $367.5 million and $50 million Canadian (US $32.5
million), including letters of credit. The new credit facilities will
mature on July 30, 2006. On July 30, 2001, the Company had initial
borrowings under the new credit facilities of approximately $105
million and $41 million Canadian (US $27 million). The Company also
had commitments under letters of credit supported by the new credit
facilities of approximately $46 million. Based on restrictions related
to certain leverage ratios, the Company had additional borrowing
capacity under the new credit facilities of approximately $100 million
at July 30, 2001. The variable interest rates of the U.S. and
Canadian revolving credit facilities are based on LIBOR and Canadian
Bankers' acceptance rates, respectively. At July 30, 2001, the
effective interest rates on borrowings under the new credit facilities
were 5.55% on U.S. borrowings and 5.80% on Canadian borrowings.
Borrowings under the new credit facilities are guaranteed by certain of
the Company's domestic subsidiaries and Canadian borrowings are also
guaranteed by certain foreign subsidiaries. If the Company's long-term
senior unsecured debt ratings are reduced by one level, the Company
will be required to pledge 100% of the stock of the domestic guarantors
and 65% of the stock of the Canadian guarantors for the benefit of the
syndicate of lenders. If the Company's long-term senior unsecured debt
ratings are reduced by two or more levels, the Company will be required
to grant a security interest in substantially all of the tangible and
intangible assets of the Company for the benefit of the syndicate of
lenders. The new credit facilities also contain covenants, which
include the maintenance of certain leverage ratios, a fixed charge
ratio, and restrictions on certain additional borrowings, the payment
of dividends and the repurchase of common stock.
On July 30, 2001, concurrent with the refinancing of its revolving
credit facilities, the Company issued $225 million of senior
subordinated notes (the "Notes") with a maturity date of October 1,
2011. The Notes bear interest at a fixed annual rate of 9.125%,
payable semi-annually on April 1 and October 1 of each year. The Notes
were sold in accordance with the provisions of Rule 144A of the
Securities Exchange Act of 1933 (the "Securities Act"). The Company has
agreed to exchange the Notes for substantially similar notes that are
registered with the Securities and Exchange Commission in accordance
with the Securities Act. The Notes contain covenants that restrict the
payment of dividends, the issuance of preferred stock, and the
incurrence of additional indebtedness and liens. The Notes are
guaranteed on a subordinated basis by each of the domestic guarantors
under the new credit facilities.
2001 Employee Stock Purchase Plan
- ---------------------------------
On August 2, 2001, the Company's stockholders approved the 2001
Employee Stock Purchase Plan (the "2001 Plan"). The 2001 Plan is
authorized to issue up to 1.5 million shares of Company common stock
and contains essentially the same terms and conditions as the Company's
previous 1998 Employee Stock Purchase Plan.
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 JUNE 30, 2001 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2000
INCOME STATEMENT COMMENTARY
Net Sales
- ---------
Net sales increased 1.6% in the quarter ended June 30, 2001
("current quarter") compared to the quarter ended June 30, 2000 ("prior
year quarter"). Total same-store sales increased 1.8% in the current
quarter versus the prior year quarter. The Company estimates same-
store sales based on a comparison of current period sales to prior
period sales, adjusted for acquisitions and divestitures.
Three Months Ended
(In thousands) June 30,
------------------
Net Sales 2001 2000 Increase
- --------- ---- ---- --------------
Distribution $378,314 $374,739 $3,575 1.0%
Gas Operations 37,361 34,259 3,102 9.1%
-------- -------- ------
$415,675 $408,998 $6,677 1.6%
======== ======== ======
The Distribution segment's principal products and services include
industrial, medical and specialty gases; equipment rental; and
hardgoods. 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 $3.6 million primarily as a
result of same-store sales growth. The increase in Distribution
same-store sales of $3.3 million (0.9%) was the result of gas and rent
sales growth of $14.8 million (9.3%), offset by a decline in hardgoods
sales of $11.5 million (-5.3%). Price increases implemented during the
current quarter as well as during fiscal 2001 were the primary drivers
of gas and rent same-store sales growth. The Company intends to
continue raising prices as contract terms and market conditions permit
to maintain acceptable margins and help offset rising costs. Continued
success in sales initiatives such as strategic accounts and strategic
product sales also contributed to same-store sales growth. Strategic
account sales (sales to large customers with multiple locations)
increased to $40 million in the current quarter, or an increase of 20%
compared to the prior year quarter. Growth in strategic products sales
was driven by higher volumes of medical, bulk and specialty gases and
welder equipment rentals. The decline in hardgoods same-store sales
was driven by lower volumes of tools and welding products reflecting
the continued weak industrial environment. Paritally offsetting the
decline in tools and welding hardgoods, safety product sales grew 7% to
approximately $66 million reflecting continued success of cross-selling
initiatives through the Company's distribution network.
Gas Operations' sales primarily include dry ice and carbon
dioxide that are used for cooling, the production of food and
beverages, and chemical products. In addition, the segment includes
businesses that produce and distribute specialty gases and nitrous
oxide. Sales increased $3.1 million compared to the prior year quarter
as a result of same-store sales growth, partially offset by a
divestiture. Gas Operations' same-store sales increased $4.2 million
(12.6%) primarily from price increases and higher volumes of dry ice
and liquid carbon dioxide. The divestiture of the Jackson Dome carbon
dioxide reserves and associated pipeline (the "Jackson Dome pipeline")
in the fourth quarter of fiscal 2001 reduced sales by $1.1 million.
15
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross Profits
- -------------
Gross profits, excluding depreciation and amortization expense,
increased 5.0% and the gross profit margin increased 150 basis points
to 48.9% during the current quarter compared to the prior year quarter.
Three Months Ended
(In thousands) June 30,
------------------
Gross Profits 2001 2000 Increase
- ------------- ---- ---- --------------
Distribution $179,411 $171,990 $7,421 4.3%
Gas Operations 24,041 21,812 2,229 10.2%
-------- -------- ------
$203,452 $193,802 $9,650 5.0%
======== ======== ======
The increase in Distribution gross profits of $7.4 million
primarily resulted from same-store gross profit growth of gas and rent
of $10.2 million (8.8%), partially offset by a decline in hardgoods
gross profits of $2.9 million (-4.6%). The Distribution segment's
gross profit margin of 47.4% in the current quarter increased
150 basis points from 45.9% in the prior year quarter primarily as a
result of a shift in sales mix towards higher-margin gas and rent
sales.
The increase in Gas Operations' gross profits of $2.2 million
resulted from same-store gross profit growth, partially offset by a
reduction in gross profits associated with a divestiture. Same-store
gross profit growth of $3.4 million (16.8%) was primarily due to
improved gross margins from price increases implemented during the
current quarter and during the latter half of fiscal 2001 and higher
volumes of dry ice and liquid carbon dioxide. Gross profit growth was
reduced by approximately $1 million as a result of the divestiture of
the Jackson Dome pipeline. Gas Operations' gross profit margin of 64.3%
increased 60 basis points from 63.7% in the prior year quarter.
Operating Expenses
- ------------------
Selling, distribution and administrative expenses ("operating
expenses") consist of personnel and related costs, distribution and
warehouse costs, occupancy expenses and other selling, general and
administrative expenses. Operating expenses increased $12.7 million
(9.1%) compared to the prior year quarter primarily from higher costs
associated with the Company's "Project One" initiative, personnel, and
health and workers' compensation insurance. The Company's "Project
One" initiative is focused on improving certain operational and
administrative processes, and added incremental costs of approximately
$4 million during the current quarter. The project was initiated
during the second half of fiscal 2001 and is expected to continue
through fiscal 2003. As a percentage of net sales, operating expenses
increased 250 basis points to 36.7% compared to 34.2% in the prior year
quarter. Project One costs contributed 95 basis points to the rise in
operating expenses as a percentage of net sales.
Amortization expense was $2.3 million in the current quarter
compared to $6.4 million in the prior year quarter. On April 1, 2001,
the Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill
and Other Intangible Assets. The decrease in amortization expense was
due to the adoption of SFAS 142, which resulted in the Company no
longer amortizing goodwill. SFAS 142 requires goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead
be tested for impairment at least annually. The Company anticipates
completing its initial assessment of impairment by September 30, 2001.
Because of the extensive effort needed to complete the initial goodwill
assessment, the Company has not determined whether there is any indication
that goodwill is impaired or estimated the amount of any potential
impairment.
16
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Income
- ----------------
Operating income decreased 5.4% during the current quarter
compared to the prior year quarter, adjusted to exclude the
amortization of goodwill.
Three Months Ended
(In thousands) June 30,
-------------------
Adjusted As reported
Operating Income 2001 2000 (a) Increase(Decrease) 2000
- ---------------- ---- ---------- ---------------------- -----------
Distribution $26,571 $29,209 $(2,638) (9.0%) $26,125
Gas Operations 6,213 5,451 762 14.0% 4,918
------- ------- ------- -------
$32,784 $34,660 $(1,876) (5.4%) $31,043
======= ======= ======= =======
(a) Operating income for the quarter ended June 30, 2000 has been adjusted
for comparative purposes to exclude the amortization of goodwill
(see Note 8 to the Financial Statements).
The Distribution segment's operating income margin decreased 80
basis points to 7.0% in the current quarter compared to 7.8% in the
prior year quarter, as adjusted. This decrease in the Distribution
segment's operating income margin was primarily attributable to Project
One costs. Increases in other operating expenses were largely offset
by increases in gross profits as discussed above.
Gas Operations' operating income margin increased 70 basis points to
16.6% in the current quarter compared to 15.9% in the prior year
quarter, as adjusted, primarily from higher gross profits from price
and volume increases related to dry ice and liquid carbon dioxide.
Interest Expense and Discount on Securitization of Trade Receivables
- --------------------------------------------------------------------
Interest expense, net, totaled $10.9 million representing a
decrease of $4.9 million (30.8%) compared to the prior year quarter.
The decrease in interest expense resulted from lower average debt
levels and lower weighted-average interest rates. The decrease in
average debt levels was attributable to cash flow provided from
operations, the securitization of trade receivables, as discussed
below, and proceeds from the divestiture of the Jackson Dome pipeline
in the fourth quarter of fiscal 2001. Lower weighted-average interest
rates resulted from lower prevailing market rates related to the
Company's variable rate debt.
In December 2000, the Company entered into a trade receivables
securitization agreement with two commercial banks. Net proceeds
received by the Company through June 30, 2001 were $137.3 million and
were used to reduce borrowings under the Company's revolving credit
facilities. The discount on the securitization of trade receivables of
$1.5 million for the current quarter 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.
As discussed in "Liquidity and Capital Resources" and in Note 12
to the Financial Statements, on July 30, 2001, the Company refinanced
its variable rate revolving credit facilities and concurrently issued
fixed rate senior subordinated notes. The Company's refinancing
strategy also included the securitization of trade receivables, which
helped diversify its funding sources. The Company refinanced its debt
facilities prior to their maturity in December 2002 to take advantage
of current favorable market conditions. Subsequent to completion of
the refinancing and note issuance on July 30, 2001, the Company's all-
in cost of borrowing (interest expense and discount on securitization
of trade receivables) increased by approximately 150 basis points
compared to rates as of June 30, 2001. The Company expects the higher
all-in cost of borrowing to contribute to higher interest expense in
fiscal 2002 compared to fiscal 2001.
17
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Equity in Earnings of Unconsolidated Affiliates
- -----------------------------------------------
Equity in earnings of unconsolidated affiliates of $913 thousand
decreased approximately $500 thousand compared to $1.4 million in the
prior year quarter primarily due to lower joint venture earnings
related to National Welders Supply ("National Welders") and the
Company's liquid carbon dioxide joint venture. Adjusting for the
impact of SFAS 142, equity earnings in the prior year quarter were $1.8
million. National Welders' earnings were negatively impacted in the
quarter by lower sales of hardgoods and lower spot sales of bulk gases.
Income Tax Expense
- ------------------
The effective income tax rate was 36.2% of pre-tax earnings in the
current quarter compared to 41.2% in the prior year quarter. The
decrease in the effective income tax rate was primarily due to the
adoption of SFAS 142 and the elimination of non-deductible goodwill
amortization expense in the current year quarter. Adjusting the prior
year for the pro forma impact of SFAS 142, the effective income tax
rate was 35.5%.
Net Earnings
- ------------
Net earnings for the quarter ended June 30, 2001 were $13.5
million, or $.20 per diluted share, compared to $9.8 million, or $.15
per diluted share, in the prior year quarter. Adjusting for the pro
forma impact of SFAS 142, net earnings were $.20 per diluted share in
the prior year quarter.
18
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
- ----------
Net cash provided by operating activities totaled $99.1 million
for the three months ended June 30, 2001 compared to $12.2 million in
the prior year quarter. The primary components of cash provided by
operating activities were the sale of trade receivables, net earnings
and working capital. The sale of trade receivables under the second
tranche of the trade receivables securitization program, described
below, provided cash of $64.1 million. Net earnings, adjusted for non-
cash items, were $35.4 million compared to $36.0 million in the prior
year quarter. Working capital components provided cash of $3.1 million
compared to a use of cash of $21.9 million in the prior year quarter.
Effective working capital management and the reduction of working
capital requirements are goals associated with the Company's "Project
One" initiative focused on improving operational and administrative
processes. 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 $13.6 million during the
current quarter and primarily consisted of capital expenditures.
Financing activities used cash of $85.5 million primarily for the net
repayment of debt of $80.5 million. The reduction in debt was
principally the result of the sale of receivables under the Company's
securitization program.
Cash on hand at the end of each period presented was 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 by cash flow from operations,
revolving credit facilities and other financing alternatives. 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
- ---------------------
At June 30, 2001, the Company had unsecured revolving credit
facilities totaling $600 million and $61 million Canadian (US $40
million) under a credit agreement with a final maturity date of
December 5, 2002. The credit agreement contained covenants that
included the maintenance of certain financial ratios, restrictions on
additional borrowings and limitations on dividends. At June 30, 2001,
the Company had borrowings under the credit agreement of approximately
$312 million and $41 million Canadian (US $27 million). The Company
also had commitments under letters of credit supported by the credit
agreement of approximately $51 million. Based on restrictions related
to cash flow to funded debt coverage, the Company had additional
borrowing capacity under the credit facilities of approximately $244
million at June 30, 2001. At June 30, 2001, the effective interest
rates on borrowings under the credit facilities were 4.43% on U.S.
borrowings and 4.59% on Canadian borrowings. Effective July 30, 2001,
the Company refinanced its revolving credit facilities as described
further below.
19
At June 30, 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 June 30, 2001, long-term debt of the Company included
acquisition notes and other long-term debt instruments of approximately
$49 million with interest rates ranging from 7% to 9%. 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 manages its exposure to changes in market interest
rates. At June 30, 2001, the Company was party to 15 interest rate
swap agreements. The swap agreements are with major financial
institutions and aggregate $373 million in notional principal amount at
June 30, 2001. Eleven swap agreements with approximately $243 million
in notional principal amount require fixed interest payments based on
an average effective rate of 6.67% 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 June 30, 2001. 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 48% to 52%, respectively.
Debt Refinancing and Senior Subordinated Note Issuance
- ------------------------------------------------------
On July 30, 2001, the Company refinanced its existing revolving
credit facilities due December 5, 2002 with new bank credit facilities
(the "new credit facilities") under a credit agreement with a syndicate
of lenders. The new credit facilities consist of revolving credit
facilities totaling $367.5 million and $50 million Canadian (US $32.5
million), including letters of credit. The new credit facilities will
mature on July 30, 2006. On July 30, 2001, the Company had initial
borrowings under the new credit facilities of approximately $105
million and $41 million Canadian (US $27 million). The Company also
had commitments under letters of credit supported by the new credit
facilities of approximately $46 million. Based on restrictions related
to certain leverage ratios, the Company had additional borrowing
capacity under the new credit facilities of approximately $100 million
at July 30, 2001. The variable interest rates of the U.S. and
Canadian revolving credit facilities are based on LIBOR and Canadian
Bankers' acceptance rates, respectively. At July 30, 2001, the
effective interest rates on borrowings under the new credit facilities
were 5.55% on U.S. borrowings and 5.80% on Canadian borrowings.
Borrowings under the new credit facilities are guaranteed by certain of
the Company's domestic subsidiaries and Canadian borrowings are also
guaranteed by certain foreign subsidiaries. If the Company's long-term
senior unsecured debt ratings are reduced by one level, the Company
will be required to pledge 100% of the stock of the domestic guarantors
and 65% of the stock of the Canadian guarantors for the benefit of the
syndicate of lenders. If the Company's long-term senior unsecured debt
ratings are reduced by two or more levels, the Company will be required
to grant a security interest in substantially all of the tangible and
intangible assets of the Company for the benefit of the syndicate of
lenders. The new credit facilities also contain covenants, which
include the maintenance of certain leverage ratios, a fixed charge
ratio, and restrictions on certain additional borrowings, the payment
of dividends and the repurchase of common stock.
On July 30, 2001, concurrent with the refinancing of its revolving
credit facilities, the Company issued $225 million of senior
subordinated notes (the "Notes") with a maturity date of October 1,
2011. The Notes bear interest at a fixed annual rate of 9.125%,
payable semi-annually on April 1 and October 1 of each year. The Notes
were sold in accordance with the provisions of Rule 144A of the
Securities Exchange Act of 1933 (the "Securities Act"). The Company has
agreed to exchange the Notes for substantially similar notes that are
registered with the Securities and Exchange Commission in accordance
with the Securities Act. The Notes contain covenants that restrict the
payment of dividends, the issuance of preferred stock, and the
incurrence of additional indebtedness and liens. The Notes are
guaranteed on a subordinated basis by each of the domestic guarantors
under the new credit facilities.
20
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Trade Receivables Securitization
- --------------------------------
In December 2000, the Company entered into a $150 million three-
year trade receivables securitization agreement with two commercial
banks. In April 2001, the Company completed the second and final
tranche of the $150 million trade receivables securitization program
and received net proceeds from the second tranche of $64.1 million.
During the quarter ended June 30, 2001, the Company sold, net of its
retained interest, $479.7 million of trade receivables and remitted to
the bank conduits, pursuant to a servicing agreement, $342.4 million in
collections on those receivables. From inception of the securitization
program through June 30, 2001, the Company received $137.3 million of
net cash proceeds, which were used to reduce borrowings under the
Company's then existing revolving credit facilities. See Note 4 to the
Financial Statements for additional disclosures.
OTHER
New Accounting Pronouncements
- -----------------------------
Effective July 1, 2001, the Company will adopt FASB Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations.
SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. The Company
has evaluated the impact of SFAS 141 and believes that it will not have
a material impact on the results of operations, financial position and
liquidity of the Company.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. Statement 143 requires the recognition of a
liability for an asset retirement obligation in the period in which it
is incurred. A retirement obligation is defined as one in which a
legal obligation exists in the future resulting from existing laws,
statutes or contracts. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company is evaluating the impact of
SFAS 143 on its results of operations, financial position and
liquidity.
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
success of the Company's 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
Company to continue raising prices to maintain acceptable margins and
offset rising costs; the estimate of future legal expenses related to
the Praxair, Inc. lawsuit; the ultimate outcome of the Praxair, Inc.
lawsuit; the timing, scope and success of the Company's "Project One"
initiative 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, and other financing alternatives; the
identification of acquisition candidates; future sources of financing
for unanticipated requirements; the Company's expectation of higher
quarterly interest expense in future periods; the effect on the Company
of higher interest rates and/or changes in the Company's credit rating;
the effective management of working capital and the reduction in
working capital requirements; 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 inability of the Company's "Project One" initiative
to improve operational and administrative processes; higher than
estimated expenses related to Project One; 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
21
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
future results; an economic downturn (including adverse changes in the
specific markets for the Company's products); the inability to generate
sufficient cash flow from operations or other sources to fund future
acquisitions, capital expenditures, and current debt maturities; higher
interest rates in future periods or downgrades of the Company's credit
rating; the inability to identify acquisition candidates; the inability
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.
22
Item 3. 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 rate 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 48% to 52% at June 30, 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 June 30, 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.
Fiscal Year of Maturity
________________________________________________________________________
(In millions) Fair
2002 (a) 2003 2004 2005 2006 2007 Thereafter Total Value
________________________________________________________________________
Fixed Rate Debt:
- ----------------
Medium-term notes $ 50 $ -- $ 75 $ -- $ -- $100 $ -- $225 $218
Interest expense $ 11 $ 13 $ 13 $ 8 $ 8 $ 4 $ -- $ 57
Average interest rate 7.42% 7.49% 7.49% 7.75% 7.75% 7.75%
Acquisition and
other notes $ 11 $ 2 $ 22 $ -- $ 5 $ -- $ 1 $ 41 $ 39
Interest expense $ 2 $ 2 $ 2 $ -- $ -- $ -- $ -- $ 6
Average interest rate 7.41% 7.44% 7.66% 8.08% 8.50%
Variable Rate Debt:
- -------------------
Revolving credit facilities $339 $ -- $ -- $ -- $ -- $ -- $ -- $339 $339
Interest expense $ 1 $ -- $ -- $ -- $ -- $ -- $ -- $ 1
Interest rate (b) (c) 4.45%
Other notes $ 7 $ -- $ -- $ 1 $ -- $ -- $ -- $ 8 $ 8
Average interest rate 7.75% 7.27%
23
Fiscal Year of Maturity
________________________________________________________________________
(In millions) Fair
2002 (a) 2003 2004 2005 2006 2007 Thereafter Total Value
________________________________________________________________________
Interest Rate Swaps:
- --------------------
US $ denominated Swaps:
10 Swaps Receive Variable/Pay Fixed
Notional amounts $ 73 $128 $ -- $ 40 $ -- $ -- $ -- $241 $ 7
Swap payments/(receipts) $ 4 $ 4 $ 1 $ 1 $ -- $ -- $ -- $ 10
Variable receive rate = 4.23%
(3 month LIBOR)
Weighted average pay rate = 6.67%
4 Swaps Receive Fixed/Pay Variable
Notional amounts $ 50 $ -- $ 30 $ -- $ -- $ 50 $ -- $130 $ (5)
Swap payments/(receipts) $ (1) $ (1) $ (1) $ (1) $ (1) $ -- $ -- $ (5)
Weighted average receive
rate = 6.99%
Variable pay rate = 5.51%
(6 month LIBOR)
Canadian $ denominated Swaps:
1 Swap Receive Variable/Pay Fixed
Notional amounts $ 2 $ -- $ -- $ -- $ -- $ -- $ -- $ 2 $ --
Variable receive rate = 4.39%
(3 month CAD BA (d))
Weighted average pay rate = 5.98%
Other Off-Balance Sheet
LIBOR-based agreements:
- ------------------------
Operating leases with trust (e) $ 1 $ 1 $ 1 $ 41 $ -- $ -- $ -- $ 44 $ 44
Lease expense $ 2 $ 2 $ 2 $ 2 $ -- $ -- $ -- $ 8
Trade receivables securitization (f)$ -- $ -- $137 $ -- $ -- $ -- $ -- $137 $137
Discount on securitization $ 5 $ 6 $ 5 $ -- $ -- $ -- $ -- $ 16
(a) Fiscal 2002 financial instrument maturities and interest expense
relate to the period July 1, 2001 through March 31, 2002.
(b) The variable rate of U.S. revolving credit facilities is based on the
London Interbank Offered Rate ("LIBOR") as of June 30, 2001. The variable
rate of the Canadian dollar portion of the revolving credit facilities is
the rate on Canadian Bankers' acceptances as of June 30, 2001.
(c) On July 30, 2001, the Company refinanced its revolving credit
facilities and concurrently issued $225 million of senior subordinated
notes as described in "Liquidity and Capital Resources." As a result of
the July 2001 refinancing, the revolving credit facilities existing at
June 30, 2001 are presented in the table as maturing in fiscal 2002.
(d) The variable receive rate for Canadian dollar denominated interest
rate swaps is the rate on Canadian Bankers' acceptances ("CAD BA").
(e) The operating lease terminates October 8, 2004, but may be renewed
subject to provisions of the lease agreement.
(f) The three-year agreement expires on December 19, 2003, but the
initial term is subject to renewal provisions of the trade receivables
securitization agreement.
24
Limitations of the tabular presentation
- ---------------------------------------
As the table incorporates only those interest rate risk exposures
that exist as of June 30, 2001, it does not consider those exposures or
positions that could arise after that date, including the July 2001 debt
refinancing and note issuance which are described in "Liquidity and
Capital Resources." 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, debt levels and the Company's credit rating.
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.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 1996, Praxair, Inc. ("Praxair") filed suit against the
Company in the Circuit Court of Mobile County, Alabama. The complaint
alleged tortious interference with business or contractual relations
with respect to Praxair's Right of First Refusal contract with the
majority shareholders of National Welders Supply Company, Inc.
("National Welders") in connection with the Company's formation of a
joint venture with National Welders. In June 1998, Praxair filed a
motion to dismiss its own action in Alabama and commenced another
action in the Superior Court of Mecklenburg County, North Carolina,
alleging substantially the same tortious interference by the Company.
The North Carolina action also alleges breach of contract against
National Welders and certain shareholders of National Welders and
unfair trade practices and conspiracy against all the defendants. In
the North Carolina action, Praxair seeks compensatory damages in excess
of $10 thousand, punitive damages and other unspecified relief. The
Company 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.
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 2. Changes in Securities and Use of Proceeds
During the quarter ended June 30, 2001, in connection with
services rendered by an outside consulting firm, the Company granted
warrants to the consulting firm to purchase 150,000 shares of the
Company's common stock at exercise prices ranging from $11.98 to $14.38
per share. The warrants have a term of three years from the date of
grant. No underwriter was involved in the foregoing grant of warrants.
The grants were made by the Company in reliance upon an exemption from
the registration provisions of the Securities Act of 1933 set forth in
Section 4 (2) thereof as a transaction by an issuer not involving a
public offering. The warrants were acquired for investment and not for
distribution by an accredited investor which had access to information
respecting the Company and its business.
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
----------- -----------
4.1 Tenth Amended and Restated Credit Agreement dated as
of July 30, 2001 among Airgas, Inc., Airgas Canada, Inc.,
Red-D-Arc Limited, Bank of America as U.S. Agent and
Canadian Imperial Bank of Commerce as Canadian Agent.
11 Calculation of earnings per share
b. Reports on Form 8-K
-------------------
On May 11, 2001, the Company filed a Form 8-K pursuant to Item 5,
reporting its earnings for its fourth quarter and fiscal year ended
March 31, 2001.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Airgas, Inc.
------------
(Registrant)
Date: August 14, 2001 /s/ Robert M. McLaughlin
Robert M. McLaughlin
Vice President and Controller
(Principal Accounting Officer)
27