1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ Form 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1995 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File No. 1-9344 AIRGAS, INC. (Exact name of registrant as specified in its charter) Delaware 56-0732648 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 Radnor Corporate Center, Suite 550 100 Matsonford Road, Radnor, Pennsylvania 19087-4579 (Address of principal executive offices) (Zip Code) (610) 687-5253 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12 (b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ______________________________________ _____________________ Common Stock, par value $.01 per share New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _________ ________ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the 26,086,772 shares of voting stock held by non-affiliates of the registrant on May 22, 1995 was $694.6 million. For purposes of this calculation, only executive officers and directors were deemed to be affiliates. The number of shares of Common Stock outstanding as of May 22, 1995 was 30,784,645. DOCUMENTS INCORPORATED BY REFERENCE The Company's Proxy Statement for the Annual Meeting of Stockholders to be held August 7, 1995 is partially incorporated by reference into Part III. Those portions of the Proxy Statement included in response to Item 402(k) and Item 402(l) of Regulation S-K are not incorporated by reference into Part III. 2 AIRGAS, INC. TABLE OF CONTENTS PART I ITEM PAGE NO. _____ ________ 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . .10 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . .10 PART II 5. Market for the Company's Common Stock and Related Stockholder Matters . 11 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . 19 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . 19 PART III 10. Directors and Executive Officers of the Company . . . . . . . . . . . . 20 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 20 12. Security Ownership of Certain Beneficial Owners and Management. . . . . 20 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . 20 PART IV 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K . . . . 21 3 PART I ITEM 1. BUSINESS. General Airgas, Inc. ("Airgas" or the "Company") classifies its operations in two business segments: distribution and manufacturing. Distribution revenues currently represent 95% of total revenues and 92% of the Company's operating income. Financial information by business segment can be found in note 20 to the Company's consolidated financial statements. The distribution business is conducted through approximately 400 locations in 37 states and Canada. Principal products distributed include: industrial, medical and specialty gases and a wide selection of name-brand welding equipment, accessories and industrial protective equipment ("hardgoods"), including electrode holders, welding wire, cable lugs and connectors, hard hats, welding helmets, hearing protectors, goggles, face shields, safety glasses, welding machines and electrodes. In connection with the distribution of gases, the Company rents industrial gas cylinders and bulk storage tanks to its customers. Additionally, acetylene gas is manufactured and sold as part of the Company's distribution business. Since its formation, the Company's strategy has been to expand through a program of acquiring independent distributors. The Company believes that its industrial gas distribution network is the largest and fastest growing industrial gas distribution system in the United States. Manufacturing operations include the production of carbon products, calcium carbide and nitrous oxide. THE DISTRIBUTION BUSINESS Industry Background and Company Strategy The industrial gas distribution market is broad and includes most major industries. The Company sells nitrogen, oxygen, argon, helium, acetylene, carbon dioxide, nitrous oxide, hydrogen and welding gases plus a variety of medical and specialty gases to a diverse customer base. Gases are distributed and stored in industrial gas cylinders and bulk storage tanks. Hardgoods sold through its distribution network include: protective equipment such as hard hats, welding helmets, goggles, face shields and protective glasses, welding machines and welding consumables and accessories, such as electrodes, electrode holders and cable connectors. The United States market for industrial gases is approximately $6 billion. Sales to major users of industrial gases that have the capacity to accept large bulk shipments or pipeline deliveries are generally serviced directly by industrial gas producers and account for approximately $3 billion of sales. Historically, industrial gas producers have focused on this segment of the market which is very capital intensive. The remaining $3 billion of industrial gas sales are made to small bulk users and cylinder gas customers. These small bulk users and cylinder gas customers are also believed to purchase $3 billion annually of hardgoods. Small bulk users and cylinder gas customers are served by a fragmented distribution system of approximately 1,000 distributors, the majority of which are independently owned. The Company concentrates on the small bulk, cylinder gas, welding and protective equipment segment of the market. This segment is less capital intensive because of the long useful lives of the fixed assets acquired, principally cylinders. 4 Acquisition Program Since May 1986, the Company has acquired over 165 industrial gas distributors. These distributors are organized into four operating divisions with approximately 400 locations in 37 states and Canada. The four operating divisions provide the Company with a national industrial gas distribution network that is unique to the industry. The Company's principal business strategy is to continue to expand its distribution network through a program of acquiring independent distributors. The industrial gas distribution industry continues to undergo a consolidation process which the Company believes will continue to present it with opportunities to acquire industrial gas distributors. The Company believes that its principal competitive advantages in acquiring distributors are its operating expense discipline, its well-organized acquisition program, flexibility in structuring acquisitions to meet sellers' needs and ability to offer sellers a continuing role in management. In seeking to acquire distributors, the Company competes with industrial gas producers and other large independent distributors. Management identifies acquisition candidates with the assistance of the Company's Advisory Board which consists of individuals with extensive experience in the industrial gas industry and through contacts made by the Company's nationwide network of subsidiary managers. Management believes the Company's return on capital can be maximized by financing distributor acquisitions primarily with internally generated funds and debt. The Company has been able to obtain debt financing due, in part, to its ability to generate cash flow from operating activities and the long useful lives and relatively stable market values of the acquired assets, principally cylinders. Foreign Investments During fiscal 1995, the Company entered into agreements to acquire interests in certain foreign distribution operations in Poland, India and Indonesia. At March 31, 1995, the total investment in foreign operations was less than 1% of total assets. The Company will continue to evaluate foreign distribution opportunities, however, its principal focus remains on North American expansion. Operating Policies The Company believes that industrial gas distributors are best managed at the local level by entrepreneurial, incentive-driven executives with backgrounds in the industrial gas industry. The president of each distribution subsidiary is typically a former owner or key employee of the acquired business or an experienced industrial gas executive recruited by management. The continuity afforded by retaining the key employees of an acquired business combined with local management is essential because the industrial gas distribution business is local in nature and is dependent upon satisfied repeat customers. 5 While managers are given a high degree of autonomy and operating control, the Company has developed standardized management reporting and operations review systems to monitor profitability and internal growth. Operations personnel and the Company's internal audit department perform in-depth reviews of subsidiary operations and prepare reports containing, among other things, recommendations regarding operating efficiencies, financial controls, personnel and safety. These personnel monitor the implementation of their recommendations through follow-up systems and visits. Customer Base The majority of the Company's gases are stored in bulk tanks at the Company's "cylinder fill" facilities and are compressed into cylinders for distribution to customers or, in the case of bulk customers, in tank trucks for storage in bulk tanks at the customer's business location. The Company emphasizes sales to cylinder and small bulk gas customers. The distribution of industrial gases historically has been to customers engaged in the business of welding and metal fabrication. In order to better serve these customers, industrial gas distributors have traditionally sold hardgood items through their distribution branch locations. As certain sectors of the economy have grown, such as the electronics and chemicals industries, and as new applications for gases have developed, the customer base of the gas distribution business has broadened significantly to include businesses in almost every major industry, from medical and high technology to consumer and basic industries. For example, the food and beverage industry uses carbon dioxide and nitrogen; the electronics industry uses oxygen, nitrogen, argon and hydrogen; the healthcare industry uses oxygen, nitrogen and nitrous oxide; and the chemical and fiber industries use nitrogen. Specialty gases, including ultra high purity gases, are used in many industries. The Company currently operates 22 specialty gas mini-labs in 18 states, capable of filling high purity gases, blending multi-component gas mixtures and providing quality control services. The Company anticipates continuing growth in this product area. The principal drivers for market growth include: (1) environmental regulations, such as the Clean Air Act, water testing and pollution remediation and testing and monitoring (2) quality control services where in-line chromatography and spectrography are used to analyze samples and (3) growth of environmental, research and clinical laboratories. The Company also concentrates its efforts in the small bulk gas market. The primary gases that the Company sells in bulk are liquid oxygen, nitrogen, argon, carbon dioxide, and sales of hydrogen, helium and nitrogen in high- pressure tube trailers. The Company charges customers rent for the use of bulk tanks and tube trailers which are placed on the customer's property. As large industrial gas producers continue to shift their focus from small bulk customers to large bulk shipments, the Company believes there are growth opportunities in marketing to these small bulk customers, which it can serve more effectively than industrial gas producers. Management believes that the gas portion of the distribution business is partially resistant to downturns in the business cycle due to the following factors: 1) gases frequently represent a fixed cost of operations that do not necessarily decline with production levels; 2) gases are required for maintenance and renovation activities which tend to increase during an economic downturn; 3) industries less subject to the effects of an economic downturn are major purchasers of gases; and 4) gas purchases represent a small 6 portion of a typical user's overall cost of operation and, therefore, do not represent a large cost-cutting item. Management believes the Company's broad customer base and the geographic diversity of its gas distribution business also help to reduce the adverse effects of an economic downturn on the Company. Products Gases distributed by the Company include oxygen, nitrogen, hydrogen, argon, helium, acetylene, carbon dioxide, nitrous oxide and specialty gases. In addition to gases, the Company distributes a wide selection of name-brand hardgoods, including electrode holders, welding wire, cable lugs and connectors, hard hats, welding helmets, hearing protectors, goggles, face shields, safety glasses, welding machines and electrodes. Of the Company's fiscal 1995 sales from distribution, approximately 52 percent represent sales of gases and rentals of cylinders and bulk tanks, and 48 percent represent hardgood sales. Airgas has concentrated on growing its gas and cylinder rental revenues through the implementation of gas oriented marketing programs and by focusing on small bulk customers. Suppliers The Company purchases industrial, medical and specialty gases pursuant to requirements contracts from all four of the major producers of industrial gases in the United States and three regional producers. The Company believes that if a contractual arrangement with any supplier of gases were terminated, it would be able to locate alternative sources of supply without significant cost increases and with no disruption of service. The Company purchases hardgoods from name-brand manufacturers and suppliers. For certain products, the Company has negotiated favorable pricing based on national purchasing arrangements and is reducing its investment in hardgood inventories by consolidating vendors. MANUFACTURING AND RELATED BUSINESSES Nitrous Oxide The Company's subsidiary, Nitrous Oxide Corp. ("Nitrous Oxide"), produces nitrous oxide which is used in various medical and commercial applications. Nitrous oxide is used as an anesthetic in the medical and dental fields, as a propellant in the packaged food business and is utilized in the manufacturing process of certain high technology electronic industries. Nitrous Oxide operates manufacturing facilities located in Yazoo City, Mississippi and Donora, Pennsylvania. Carbon Products Through its Midwest Carbide subsidiary located in Keokuk, Iowa, the Company manufacturers carbon electrode paste, carbon ramming mix ("Ramblox") and electrically calcined anthracite ("ECA"). Midwest Carbide is the nation's primary manufacturer of carbon electrode paste which is used as a consumable electrode in the production of special alloy steel, nickel and other metals. Ramblox is a carbon mixture used in the lining of non-ferrous metals furnaces. ECA is used as an ingredient in carbon mixes used in the aluminum industry as an additive in the production of certain metals. Sales of electrode paste, Ramblox and ECA are conducted through a marketing organization which owns more 7 than five percent of the Company's outstanding common stock (see Item 13. Certain Relationships and Related Transactions). Calcium Carbide The Company is a partner with Elkem Metals Company ("Elkem") in a joint venture (Elkem-American Carbide Company) which primarily sells calcium carbide which is used in the production of acetylene gas. The Company and Elkem have equal control over activities of the joint venture. The Company accounts for its investment in the joint venture using the equity method of accounting. Earnings and losses are allocated 55% to the Company and 45% to Elkem. The Company and Elkem receive certain fees, based on net sales, for acting as agents for the joint venture. Additionally, as general manager of the joint venture, Elkem receives a management fee based on net sales. The Company also operates a manufacturing facility in Pryor, Oklahoma. COMPETITION Each of the major business areas in which the Company participates is highly competitive. Some competitors are larger than the Company and have greater resources. The Company's industrial gas distribution operations compete with independent distributors and vertically integrated gas producers such as Air Products and Chemicals, Praxair, Liquid Air Corporation of America, BOC Gases Group and others; all of which have distribution operations. Competition in the industrial gas distribution market is based primarily on customer service and price. The Company also purchases industrial gases pursuant to requirement contracts from all four of the above major producers of industrial gases. Management believes that competition for the Company's manufactured products is based primarily on product quality, price and quality of customer service. REGULATORY AND ENVIRONMENTAL MATTERS The businesses of the Company's subsidiaries are subject to federal and state laws and regulations adopted for the protection of the environment and the health and safety of employees and users of the Company's products. The Company has programs for the operation and design of its facilities which meet or exceed applicable environmental rules and regulations. The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations. The Company is in varying stages of investigation or remediation of potential, alleged or acknowledged contamination of current or former facilities. Expenditures for environmental purposes during 1995 were not material. 8 INSURANCE The Company maintains liability and property insurance which is usual and customary for companies operating in its business segments. As of March 31, 1995, the Company had a liability insurance limit of $51 million. The liability insurance is subject to per occurrence deductible amounts of $1 million for product liability, general liability and workers' compensation claims, and $500 thousand for motor vehicle liability. The nature of the Company's business may subject it to product and general liability lawsuits. To the extent that the Company is subject to claims which exceed its liability insurance coverages, such suits could have a material adverse effect on the Company's financial position, results of operations or liquidity. No such material lawsuits are pending against the Company or any of its subsidiaries (see Item 3. Legal Proceedings). EMPLOYEES On March 31, 1995, the Company employed approximately 4,100 persons of whom approximately 5% were covered by collective bargaining agreements. The Company believes it has good relations with its employees and has not experienced a strike or work stoppage in the past eight years. PATENTS, TRADEMARKS AND LICENSES The Company holds trademark registrations for "Airgas," "ECA", "Ramblox", "Dyna-Switch", "Va-Weld", and a method for purification of acetonitrile. The Company believes that its businesses as a whole are not materially dependent upon any single patent, trademark or license. EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES OF THE COMPANY The executive officers of the Company are listed below: Name Age Position ____ ___ ________ Peter McCausland (1)(2) 45 Chairman of the Board, President and Chief Executive Officer E. Pat Baker (2) 55 Division President - Eastern Division Alfred B. Crichton (2) 47 Division President - Western Division Kenneth A. Keeley (2) 54 Division President - Central Division Hermann Knieling (2) 57 Division President - Southern Division William A. Rice, Jr. (2) 48 Division President -Industrial Distribution and Purchasing Britton H. Murdoch (2) 37 Vice President - Finance and Chief Financial Officer Gordon L. Keen, Jr. (2) 50 Vice President - Corporate Development William E. Sanford (2) 35 Vice President - Sales and Marketing Scott M. Melman (2) 38 Vice President - Chief Administrative Officer Ronald W. Beebe (2) 46 Vice President - Chief Information Officer Rudi G. Endres (2) 51 Vice President - International _____________ (1) Member of the Board of Directors (2) Executive Officer 9 Mr. McCausland has been a Director of the Company since June 1986, the Chairman of the Board and Chief Executive Officer of the Company since May 1987, President since April 1, 1993 and from June 1986 to August 1988 and Chairman and Chief Executive Officer of US Airgas since its organization in February 1982. From January 1982 until June 1990, Mr. McCausland was a partner in the law firm of McCausland, Keen & Buckman, Radnor, Pennsylvania, which provides legal services to the Company. Mr. Baker has been the Company's Division President - Eastern Division since April 1, 1995. Mr. Baker served as a Regional Vice President from May 1991 to February 1993 and President of Lone Star Airgas since the acquisition of Lone Star Airgas (formerly West Texas Welders Supply) in October 1988 to March 1995. Prior to joining Airgas, Mr. Baker was President and owner of West Texas Welders Supply from August 1981 to October 1988. Mr. Crichton has been the Company's Division President - Western Division since February 3, 1993. Mr. Crichton served as a Regional Vice President from May 1991 to February 1993 and as President of Sierra Airgas since the acquisition of Sierra Airgas (formerly Moore Bros.) in January 1987. Mr. Crichton was employed by Union Carbide Industrial Gases (UCIG) from 1969 through 1986, and prior to joining Moore Bros., was President of a subsidiary of UCIG. Mr. Keeley has been the Company's Division President - Central Division since February 3, 1993. Mr. Keeley served as a Regional Vice President from April 1989 to February 1993 and as President of Michigan Airgas from March 1984 to March 1989. Prior to 1984, Mr. Keeley owned and operated an industrial gas distributor which was sold to the Company. Mr. Knieling has been the Company's Division President - Southern Division since April 1, 1995. Mr. Knieling served as Division President - Eastern Division from February 3, 1993 to March 1995. Mr. Knieling served as a Regional Vice President from June 1990 to February 1993 and as President of Gulf States Airgas from June 1989 to February 1993. Mr. Knieling owned and operated an industrial gas distributor which was sold to the Company in 1989. Also, Mr. Knieling served in various capacities for Hoechst AG during a period of 18 years, and, prior to his leaving Hoechst in 1982 was President and Chief Executive Officer of its subsidiary, MG Burdett Gas Products Company. Mr. Rice has been the Company's Division President - Industrial Distribution and Purchasing since April 1, 1995 and served as Vice President - Purchasing from August 1, 1993 to March 1995. Until August 1993, he was President of Virginia Welding Supply, an industrial gas distributor which was acquired by the Company in July 1992. Prior to joining Airgas, Mr. Rice was President and a majority owner of Virginia Welding Supply. Mr. Rice has over 20 years of industry experience and serves on the boards of various companies. Mr. Murdoch has been the Vice President - Finance and Chief Financial Officer of the Company since June 1, 1990 and served as Vice President - Corporate Development from September 1987 until May 1990. Mr. Murdoch served as a Vice President of Philadelphia National Bank from 1983 to September 1987. Mr. Keen has been the Vice President - Corporate Development since January 1, 1992. From January 1982 until December 1991, Mr. Keen was a partner in the law firm of McCausland, Keen & Buckman, Radnor, Pennsylvania, which provides legal services to the Company. 10 Mr. Sanford has been Vice President - Sales and Marketing since February 3, 1993 and served as President of Cascade Airgas from March 1989 to February 1993. From May 1984 to February 1989 Mr. Sanford served as Vice President -- Sales and Marketing for American Carbide and Carbon Corp., another subsidiary of the Company. Mr. Melman has been Vice President - Chief Administrative Officer since April 1, 1995. Mr. Melman served as Vice President - Corporate Controller from August 1994 to March 1995 and Corporate Controller from August 1986 to July 1994. Prior to joining Airgas, Mr. Melman was the Controller for Integrated Circuit Systems, Inc. from November 1983 to July 1986, and prior to joining Integrated Circuit Systems, Inc., was a Tax Manager for KPMG Peat Marwick LLP. Mr. Beebe has been Vice President - Chief Information Officer since April 1, 1995 and Vice President - Administration from May 1991 to March 1995 and served as Group Controller from August 1988 to April 1991. Mr. Beebe was controller of Michigan Airgas from April 1985 to July 1988. Prior to that, Mr. Beebe served in key management positions for several emerging businesses. Mr. Endres has been the Vice President - International since January 1993. Mr. Endres served as Vice President - Marketing from July 1991 until December 1992. From February 1987, Mr. Endres served as General Manager and Vice President for the western region of Airgas. Prior to joining Airgas, Mr. Endres served for 18 years in various positions nationally and internationally for Messer Griesheim, a major producer of industrial gases headquartered in Germany. His last position was Vice President for Specialty Gases and Chemicals at MG Industries in Valley Forge, PA. ITEM 2. PROPERTIES. The Company has offices, manufacturing and distribution facilities in 37 states and Canada. The principal executive offices of Airgas are located in leased space in Radnor, Pennsylvania. The Company's manufacturing segment produces carbon products at its Keokuk, Iowa, facility; calcium carbide at its Pryor, Oklahoma, facility; and nitrous oxide at its Donora, Pennsylvania and Yazoo City, Mississippi facilities. Manufacturing facility utilization during 1995, based on market demand, has ranged from 65 to 100 percent. The Keokuk and Pryor facilities are owned by the Company. The Donora plant is located on property leased through the year 1996. The Yazoo City property is owned by the Company, however, it will revert to the local municipality if the plant terminates operations. The Keokuk, Pryor and Donora facilities are pledged as collateral under Industrial Development Board revenue bonds (see note 8 to the Company's consolidated financial statements). The Company's distribution segment conducts business from its 400 industrial gas and welding supply locations in 37 states and Canada. These locations are either owned or are leased from third parties or from employees of the Company who were previous owners of businesses acquired on terms consistent with commercial rental rates prevailing in the surrounding rental market. Nineteen distribution locations in 12 states include acetylene manufacturing plants. The Company's acetylene plants operated at approximately 60 percent of capacity during 1995. 11 The Company believes that its facilities are adequate for its present needs and that its properties are generally in good condition, well maintained and suitable for their intended use. ITEM 3. LEGAL PROCEEDINGS. The Company and its subsidiaries are parties to pending legal proceedings arising out of their business operations. The proceedings involve claims for personal injuries, breach of contract, product warranty and product design, and claims involving employee relations and certain administrative proceedings. Management does not believe that the eventual outcome of any litigation to which the Company or its subsidiaries are parties would have a material adverse effect on the consolidated financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 12 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is listed on the New York Stock Exchange (ticker symbol: ARG). The following table sets forth, for each quarter during the last two fiscal years, the high and low sales prices as reported by the New York Stock Exchange. High Low ---- --- 1995 Fiscal First Quarter $27.63 $20.63 Second Quarter 28.50 23.50 Third Quarter 29.88 20.50 Fourth Quarter 26.50 19.63 1994 Fiscal First Quarter (1) $16.31 $11.19 Second Quarter (1) 19.75 15.63 Third Quarter (1) 23.00 17.75 Fourth Quarter 26.00 19.75 ________________ (1) Adjusted to reflect a two-for-one stock split effective on November 9, 1993 (See note 9 to the Company's consolidated financial statements). On April 30, 1995, there were approximately 11,000 holders of record of the Company's Common Stock. The present policy of the Company is to retain earnings to provide funds for the operation and expansion of its business. Accordingly, the Company has not paid cash dividends on its Common Stock. Any payment of future dividends and the amounts thereof will depend upon the Company's earnings, financial condition, loan covenants, capital requirements and other factors deemed relevant by the Board of Directors (see note 8 to the Company's consolidated financial statements). ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the Company is presented in the table below and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 and the Company's consolidated financial statements included in Item 8 herein. 13 (amounts in thousands except per share data): Years Ended March 31, (6) ___________________________________________ (3) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Operating Results: Net sales $687,983 $519,349 $410,771 $351,491 $322,478 Depreciation & amortization(2) 36,868 30,571 28,045 23,670 21,410 Operating income 72,600 48,667 34,367 26,316 17,286 Interest expense, net 17,625 12,486 11,403 12,838 15,179 Income taxes(1) 23,894 16,027 10,811 7,718 3,400 Net earnings 31,479 20,290 12,469 7,292 1,166 Earnings Per Share(4): Primary: Net earnings $ .96 $ .63 $ .40 $ .27 $ .05 Fully Diluted: Net earnings $ .96 $ .63 $ .39 $ .26 $ .05 Balance Sheet Data: Working capital $ 54,084 $ 47,071 $ 40,253 $ 39,425 $ 48,774 Total assets 645,637 514,897 399,477 338,218 307,576 Current portion of long-term debt 11,780 10,304 9,923 10,026 7,383 Long-term debt 259,970 205,311 158,629 151,098 149,826 Stockholders' equity(5) 189,652 156,867 127,571 104,931 91,779 _______________ (1) The Company has retroactively adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" as of April 1, 1992. See additional information in note 13 to the consolidated financial statements. (2) Effective April 1, 1993, the Company changed its estimate of the useful lives of its acetylene and high pressure cylinders from 20 to 30 years. This change was made to better reflect the estimated periods during which these assets will remain in service. The change had the effect of reducing depreciation expense in 1994 by approximately $3.1 million and increasing net earnings by $1.9 million or $.06 per share. (3) During 1991, the Company recorded a $4.2 million pre-tax restructuring charge related to the disposal of certain businesses and severance costs associated with downsizing of the Company. Including the restructuring charge, operating losses of these businesses totalled $5.3 million during 1991. During 1992 and 1993, the restructured businesses were sold. (4) See notes 3 and 9 to the Company's consolidated financial statements for information regarding earnings per share calculations and stock split information. (5) The Company has not paid any dividends. (6) During the fiscal years 1991 through 1995, the Company acquired 99 industrial gas distributors. 14 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Item 7. FINANCIAL REVIEW OVERVIEW The Company's financial results for the year ended March 31, 1995 reflect substantial growth compared with 1994. Net sales of $688 million, net earnings of $31.5 million and earnings per share of $.96 represent increases over 1994 of 32%, 55% and 52%, respectively. During 1995, the Company benefited from an improved economy, the acquisition and consolidation of industrial gas distributors and from continuing improvement efforts. Same-store sales, a comparison of current period sales to the prior period's sales, adjusted for acquisitions, increased 5% over 1994. The Company's industrial gas distribution acquisition program continued during 1995 with the acquisition of 25 distributors with annual sales of approximately $108 million. This follows 18 acquisitions in 1994 with annual sales of approximately $137 million. Consolidation of acquisitions is enabling economies of scale both nationally and at the local level, which is resulting in better purchasing power and more cost effective programs for safety, compliance, training and quality. The Company expects to achieve improvements in operating results through the future acquisition of industrial gas distributors, improvement in operating margins by operating more efficiently and from expanding markets for its existing products. The industrial gas distribution industry continues to undergo a consolidation process which the Company believes will present it with opportunities to acquire distributors. In seeking to acquire distributors, the Company anticipates increased competition with industrial gas producers and with certain other large independent distributors. The Company believes it will continue to be successful in acquiring distributors since it is the largest distributor and has the greatest geographic scope combined with the ability to offer sellers and their employees a continuing management role in a decentralized entrepreneurial environment. The Company continues to concentrate on growing its gas and cylinder rental revenues through the implementation of gas oriented marketing programs, such as specialty gases, and by focusing on the small bulk business. Sales related to gas and rent represent 52% or $340.3 million of total distribution net sales in 1995. The Company has established 22 specialty gas mini-labs which benefit customers by providing them with approximately 80% of specialty gas products in their local market. In connection with hardgoods, the Company is focused on strategically reducing its investment in inventories by consolidating vendors and negotiating favorable pricing based on national purchasing arrangements. Hardgoods sales in 1995 account for 48% or $314.1 million of total distribution net sales. Airgas remains focused on cash flow growth. Historically, operations have generated sufficient cash flow to finance the Company's operating requirements while borrowings have been incurred largely to finance acquisitions. Over the past three years, cash flow from operations has totalled $201.3 15 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) million. This strong cash flow has substantially funded the Company's investment, excluding debt assumed, in acquisitions and capital expenditures which, for the past three years totalled $222.8 million and $72.7 million, respectively. At March 31, 1995, The Company had $148.0 million in unsecured lines of credit available at favorable rates. The Company's debt-to-equity ratio of 1.43 at March 31, 1995 was up slightly from the prior year of 1.37 primarily as a result of the repurchases of Company stock. RESULTS OF OPERATIONS: 1995 COMPARED TO 1994 Net sales increased 32% in 1995 compared to 1994: (in thousands) 1995 1994 Increase ____ ____ __________ Distribution $654,381 $486,836 $167,545 Manufacturing 33,602 32,513 1,089 _______ _______ _______ $687,983 $519,349 $168,634 ======= ======= ======= In 1995, distribution sales increased approximately $136 million resulting from the acquisition of 40 industrial gas distributors since April 1, 1993 and approximately $32 million from same-store sales. Based on unaudited historical pro forma data, the Company estimates that had all 1995 acquisitions been consummated on April 1, 1994, distribution sales for 1995 would have been approximately $49 million higher. The increase in same-store sales of approximately 5% is primarily the result of increased volume of hardgoods sales and increases in gas and rental businesses. The Company estimates same-store sales based on a comparison of current period sales to the prior period's sales, adjusted for acquisitions. Hardgoods and gas volumes have primarily increased as a result of the general improvement in the economy and certain gas marketing programs. Same-store sales have also increased slightly as a result of price increases initiated during the current and prior year. Future same-store sales growth is dependent on continued growth in the economy and the Company's ability to expand markets for existing products and to increase prices. The Company believes that sales of hardgoods are adversely impacted during a recession, and conversely, are typically the fastest to rebound during an economic recovery. Sales for the Company's manufacturing operations increased slightly compared to 1994 primarily as a result of an increase in the volume of lower margin products. Compared to 1994, distribution gross profit increases associated with acquisitions totalled an estimated $69 million. Gross profits associated with distribution same-store sales growth are estimated to total $16 million. The same-store gross profit growth is attributable to increased hardgoods volumes combined with improved gross margins resulting from the Company's national 16 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) purchasing arrangements, success of gas marketing programs and improved gas and rental gross margins due to price increases to customers. On a same-store basis, considering the impact of the change in the Company's sales mix slightly towards lower margin hardgoods sales, distribution gross margins increased an estimated .6% compared to 1994. Selling, distribution and administrative expenses as a percentage of sales decreased to 34.3% compared to 34.8% in 1994. The decrease is a result of acquisition consolidation efforts during the past year and from controlling certain operating costs, such as business insurance through improved claims management and reduced incident rates. Through improved billing and collection efforts, the Company has also reduced its bad debt expense and lowered its accounts receivable days sales outstanding to 44 days compared to 49 days at March 31, 1994. Also, certain operating costs, such as occupancy costs, are relatively fixed even though the Company's same-store sales have increased over 1994. Partially offsetting these improvements were normal salary increases. Operating income increased 49% in 1995 compared to 1994: (in thousands) 1995 1994 Increase (Decrease) ____ ____ __________ Distribution $66,521 $42,399 $24,122 Manufacturing 6,079 6,268 (189) ______ ______ ______ $72,600 $48,667 $23,933 ====== ====== ====== Distribution operating income as a percentage of net distribution sales increased to 10.2% compared to 8.7% in 1994. The improvement in distribution operating income in 1995 was a result of the increase in gross profits from higher same-store sales, operating income provided by acquisitions and improved gross profit margins. Manufacturing operating income decreased $189,000 compared to the prior year due to a product shift towards lower margin export sales of carbon products, slightly lower profits from the sale of calcium carbide combined with higher raw material costs, principally ammonium nitrate, for the Company's nitrous oxide plants. Interest expense, net, increased $5.1 million compared to 1994 primarily as a result of the increase in average outstanding debt associated with the acquisition of industrial gas distributors since April 1, 1993 combined with slightly higher interest rates. As discussed in "Liquidity and Capital Resources" below, the Company has hedged floating interest rates under certain borrowings with interest rate swap agreements. 17 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Income tax expense represented 43.2% of pre-tax earnings in 1995 compared to 44.1% in 1994. The decrease in the effective income tax rate is primarily due to an increase in pre-tax earnings relative to permanent differences. Net earnings increased 55% to $31.5 million or $.96 per share in 1995 from $20.3 million or $.63 per share in 1994. After tax cash flow (net earnings plus depreciation, amortization and deferred income taxes) increased 35% to $79.9 million from $59.1 million in 1994. After tax cash flow is an important measurement of the Company's ability to repay debt through operations and provides the Company with the ability to pursue investment alternatives such as acquisitions and the repurchase of Company stock. RESULTS OF OPERATIONS: 1994 COMPARED WITH 1993 Net Sales increased 26% in 1994 compared to 1993: (in thousands) 1994 1993 Increase ____ ____ ________ Distribution $486,836 $379,899 $106,937 Manufacturing 32,513 30,872 1,641 _______ _______ ______ $519,349 $410,771 $108,578 ======= ======= ======= In 1994, distribution sales increased approximately $93 million resulting from the acquisition of 35 industrial gas distributors since April 1, 1992 and approximately $14 million from same-store sales. Based on unaudited historical pro forma data, the Company estimates that had all 1994 acquisitions been consummated on April 1, 1993, distribution sales for 1994 would have been approximately $75 million higher. The increase in same-store sales of approximately 3% is primarily a result of increased volume in hardgoods sales combined with a slight increase in gas sales. The Company estimates same-store sales based on a comparison of current period sales to the prior period's sales, adjusted for acquisitions. Hardgoods and gas volumes have primarily increased as a result of the general improvement in the economy. The growth in 1994 reverses the negative same-store sales trend exhibited during the previous three years. Compared to 1993, distribution gross profit increases associated with acquisitions total an estimated $49 million. Gross profits associated with distribution same-store sales growth are estimated to total $8 million. The same-store gross profit growth is attributable to increased hardgoods volumes, the success in gas marketing programs and improved gas and rental gross margins due to price increases to customers. 18 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Sales for the Company's manufacturing operations increased approximately 5% as a result of an increase in the volume of nitrous oxide gases and export sales of carbide and carbon products. Operating income increased 42% in 1994 compared to 1993: (in thousands) 1994 1993 Increase ____ ____ ________ Distribution $42,399 $28,443 $13,956 Manufacturing 6,268 5,924 344 ______ ______ _____ $48,667 $34,367 $14,300 ====== ====== ====== Distribution operating income as a percentage of net distribution sales increased to 8.7% compared to 7.5% in 1993 as a result of the increase in gross profits from higher same-store sales, a decrease in depreciation expense related to a change in the depreciable life of cylinders and operating income provided by acquisitions. Distribution operating income increased as a result of the operating income from business acquisitions, an increase in same-store sales, increased gross profit margins, a decrease in depreciation expense and cost containment efforts with respect to operating costs. Depreciation expense decreased as a result of a lengthening of the estimated service lives of industrial gas cylinders from 20 to 30 years. The effect of the change in cylinder lives was to decrease depreciation expense in 1994 by approximately $3.1 million. The Company changed the estimated useful life of cylinders as a result of thorough studies and analyses. The studies considered technological advances in cylinders, empirical data obtained from cylinder manufactures and other industry experts and experience gained from the Company's maintenance of a cylinder population of approximately two million cylinders. Interest expense, net, increased $1.1 million compared to 1993 primarily as a result of the increase in average outstanding debt associated with the acquisition of industrial gas distributors since April 1, 1992. Income tax expense represented 44.1% of pre-tax earnings in 1994 compared to 46.4% in 1993. The decrease in the effective income tax rate is primarily due to an increase in pre-tax earnings relative to permanent differences partially offset by the enactment of higher federal corporate income tax rates. Net earnings increased 63% to $20.3 million or $.63 per share in 1994 from $12.5 million or $.39 per share in 1993. As discussed above, the change in the estimated service lives of industrial gas cylinders increased 1994 earnings by $1.9 million or $.06 per share. After tax cash flow (earnings from continuing operations plus depreciation, amortization and deferred income taxes) increased 29% to $59.1 million from $45.7 million in 1993. After-tax cash flow, is an important measurement of the Company's ability to repay debt through operations and provides the Company with the ability to pursue investing alternatives such as acquisitions and the repurchase of Company stock. 19 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES _______________________________ The Company has financed its operations, capital expenditures and acquisitions with borrowings, funds provided by operating activities and through the issuance of common stock. Cash flows from operating activities totaled $84.7 million in 1995. Depreciation and amortization represent $36.9 million of cash flow from operating activities. Deferred income taxes of $11.5 million principally resulted from temporary differences and utilization of alternative minimum tax credit carryforwards. Working capital components of cash flow decreased $2.4 million as a result of an increase in accounts receivable based on higher sales, building inventory levels to meet increased hardgoods sales volumes offset by an increase in trade accounts payable and accrued expenses and other liabilities. Although accounts receivable and inventory levels have increased, days-sales outstanding and days-supply of inventory levels have improved since March 31, 1994. Cash used by investing activities totaled $119.5 million in 1995 which was primarily comprised of $36.7 million for capital expenditures and $86.3 million related to acquisitions. The Company's use of cash for capital expenditures was partially attributable to the continued assimilation of certain 1995 and 1994 acquisitions which required the Company to make capital expenditures in areas such as combining cylinder fill plants, improving truck fleets, purchasing cylinders in order to return cylinders rented from third parties and completing computer conversions. Additionally, capital expenditure costs have increased during 1995 as a result of the purchase of cylinders and bulk tanks, necessary to facilitate gas sales growth. The Company estimates that its maintenance capital expenditures are approximately 2% of net sales. The Company considers the replacement of existing capital assets to be maintenance capital expenditures. In 1996, subject to the effects of future acquisitions, the Company expects the level of capital expenditures to approximate 1995 amounts. During the third quarter of fiscal 1995, in contemplation of a transaction with CBI Industries, Inc. ("CBI") the Company purchased 740,000 shares of CBI common stock. During the fourth quarter, the Company sold its shares of CBI common stock for a gain of $560,000. Financing activities provided cash of $34.8 million in 1995 with total debt outstanding increasing by $56.1 million from March 31, 1994. Debt incurred in connection with the acquisition of industrial gas distribution businesses, including seller notes and assumed notes, totalled $107.5 million. In January 1995, the Company's Board of Directors approved the repurchase of up to one million shares of Airgas Common stock. Through May 22, 1995, the Company has purchased 749,000 shares at an aggregate cost of $18.1 million. The purchase of additional shares is dependent on prevailing market conditions. 20 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) One of the Company's primary sources of borrowings is an unsecured revolving credit facility with various commercial banks. At March 31, 1995, the facility provided for borrowings up to $250 million, with sub-limits for money market loans, bankers acceptances and the issuance of letters of credit. On March 31, 1995, the Company had approximately $105 million in borrowings under the facility and approximately $32 million committed under letters of credit, resulting in availability under the facility of approximately $113 million. The facility provides for quarterly interest payments payable currently with equal quarterly principal payments beginning in September 1996 and continuing through June 2001. In November 1994, the Company entered into a new $100 million unsecured revolving credit facility with various commercial banks to provide additional availability for the Company's ongoing acquisition and investment programs. The facility currently bears interest at the Libor rate plus an applicable margin and matures on July 1, 1996. On March 31, 1995, the Company had approximately $75 million in borrowings under the facility resulting in availability under the facility of approximately $25 million. The Company intends to terminate its $100 million facility in conjunction with an anticipated increase in the Company's $250 million revolving credit facility in August 1995, which will have terms and conditions similar to its existing $250 million facility. The Company also has unsecured line of credit agreements which provide for borrowings aggregating $25 million. At March 31, 1995, $15 million was outstanding under these agreements. At March 31, 1995, the effective interest rate related to the $195 million of outstanding borrowings under the above credit lines was approximately 6.6%. The Company had $27.9 million outstanding at March 31, 1995 related to senior subordinated notes which bear interest at a fixed rate of 11.375% and require principal payments through August 1998. The Company's loan agreements contain restrictive covenants which include the maintenance of a minimum equity level, maintenance of certain financial ratios and restrictions on additional borrowings and the level of dividend payments. In managing interest rate exposure, principally under the Company's floating rate revolving credit facilities, the Company has entered into thirteen interest rate swap agreements during the period from June 1992 through March 31, 1995. The swap agreements are with major financial institutions and have a total notional principal amount of $138 million at March 31, 1995. Approximately $119 million of the notional principal amount of the swap agreements require fixed interest payments based on an average effective rate of 7.3% for remaining periods ranging between 3 and 8 years. Two swap agreements require floating rates ($19.5 million notional amount at 6.5% at March 31, 1995). The Company continually monitors its positions and the credit ratings of its counterparties, and does not anticipate nonperformance by the counterparties. 21 AIRGAS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company will continue to look for appropriate acquisitions and expects to fund such acquisitions, future capital expenditure requirements and commitments related to foreign investments through cash flow from operations and with debt and other available sources. Subsequent to March 31, 1995, the Company has acquired, entered into agreements, or signed letters of intent to acquire industrial gas distribution businesses with an aggregate purchase price of approximately $42 million. The Company does not currently pay dividends. OTHER Environmental The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations. The Company is in varying stages of investigation or remediation of potential, alleged or acknowledged contamination of current or former facilities. In conducting due diligence for prospective acquisitions, the Company completes Phase I environmental studies. Expenditures for environmental purposes during 1995 were not material. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk are limited due to the Company's large number of customers and their dispersion across many industries. Credit terms granted to customers are generally net 30 days. Effects of Inflation In the past, the Company has been able to adjust its sales price of products in response to market demand, cost of products, competitive factors and other industry trends. Consequently, the impacts of inflation have not had a materially adverse impact on the Company's financial position, results of operations, or liquidity. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and financial statement schedule of the Company are set forth at pages F-1 to F-31 of the report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. The biographical information relating to the Company's directors appearing in the Proxy Statement relating to the Company's 1995 Annual Meeting of Stockholders is incorporated herein by reference. Biographical information relating to the Company's executive officers is set forth in Item 1 of Part I of this Report. 22 ITEM 11. EXECUTIVE COMPENSATION. The information under "Board of Directors and Committees" and "Certain Transactions" appearing in the Proxy Statement relating to the Company's 1995 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is set forth in the section headed "Security Ownership" appearing in the Company's Proxy Statement relating to the Company's 1995 Annual Meeting of Stockholders and such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under "Certain Transactions" appearing in the Proxy Statement relating to the Company's 1995 Annual Meeting of Stockholders is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) and (2): The response to this portion of Item 14 is submitted as a separate section of this report beginning on page F-1. All other schedules have been omitted as inapplicable, or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)(3) Exhibits. The exhibits required to be filed as part of this annual report on Form 10-K are listed in the attached Index to Exhibits. (b) Reports on Form 8-K. None. (c) Index to Exhibits and Exhibits filed as a part of this report. 2.1 Acquisition of certain operations of The BOC Group, Inc. on February 8, 1994. (Incorporated by reference to the Company's Current Report, dated February 17, 1994, filed on Form 8-K). 3.1 Certificate of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's June 30, 1987 Quarterly Report on Form 10-Q). 3.2 By-Laws of the Company, as amended. (Incorporated by reference to Exhibit 3.2 to the Company's June 30, 1987 Quarterly Report on Form 10-Q). 3.3 Amendments to the Certificate of Incorporation of the Company dated August 13, 1987, November 20, 1989 and August 3, 1994. 4.1 Sixth Amended and Restated Loan Agreement dated August 30, 1994 between Airgas, Inc. and certain banks and NationsBank of North Carolina, N.A. ($250,000,000 credit facility). 23 4.2 Amendment No. 1 to the Sixth Amended and Restated Loan Agreement dated as of November 8, 1994 between Airgas, Inc. and certain banks and NationsBank of North Carolina, N.A. 4.3 Loan Agreement dated November 8, 1994 between Airgas, Inc. and certain banks and Nationsbank of North Carolina, N.A. ($100,000,000 credit facility). There are no other instruments with respect to long-term debt of the Company that involve indebtedness or securities authorized thereunder exceeding 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to file a copy of any instrument or agreement defining the rights of holders of long- term debt of the Company upon request of the Securities and Exchange Commission. * 10.1 Agreement between the Company and Peter McCausland, dated January 8, 1991, and form of Common Stock Purchase Warrant. (Incorporated by reference to Exhibit 10.16 to the Company's March 31, 1992 report on Form 10-K). * 10.2 Common Stock Purchase Warrant held by Britton H. Murdoch and certain other employees and other persons (Pursuant to Instruction 2 to Item 601 of Regulation S-K, the Common Stock Purchase Warrants, which are substantially identical in all material respects except as to the parties thereto, held by certain employees, including the following Executive Officers and a Director, and other persons are not being filed: Hermann Knieling, Kenneth A. Keeley, Alfred B. Crichton, Gordon L. Keen, Jr., William Sanford, Scott Melman and Ronald Beebe and a Director, Merril Stott). (Incorporated by reference to Exhibit 10.17 to the Company's March 31, 1993 report on Form 10-K). * 10.3 Amended and Restated 1984 Stock Option Plan. (Incorporated by reference to Exhibit "A" to Exhibit 10.6 to the Company's March 31, 1992 report on Form 10-K). * 10.4 Amendment to the Amended and Restated 1984 Stock Option Plan. (Incorporated by reference to exhibit 10.18 to the Company's March 31, 1993 report on Form 10-K). * 10.5 1989 Non-Qualified Stock Option Plan for Directors (Non-Employees), as amended. (Incorporated by reference to Exhibit 10.7 to the Company's March 31, 1992 report on Form 10-K). * 10.6 1994 Employee Stock Purchase Plan. (Incorporated by reference to exhibit 10.19 to the Company's March 31, 1993 report on Form 10-K). 10.7 Amended and Restated Joint Venture Agreement dated March 31, 1992 between American Carbide and Carbon Corporation and Elkem Metals Company. (Incorporated by reference to Exhibit 10.5 to the Company's March 31, 1992 report on Form 10-K). * 10.8 Exchange Rights Agreement dated October 1, 1989 between the Company and John Smith (Pursuant to Instruction 2 to Item 601 of Regulation S-K, the Exchange Rights Agreements, which are substantially identical in all material respects except as to the parties thereto, between the Company and the following individuals are not being filed: Alfred B. Crichton, Rudi Endres, Ronald W. Savage, Mark A. Straka, William E. 24 Sanford, E. Pat Baker, Kenneth A. Keeley, Kenneth D. Morrison, Richard W. Johnson, Thomas J. Bennett, Hermann Knieling and John Musselman). (Incorporated by reference to Exhibit 10.13 to the Company's March 31, 1992 report on Form 10-K). * 10.9 First Amendment to Exchange Rights Agreement dated April 30, 1992 between the Company and John Smith (Pursuant to Instruction 2 to Item 601 of Regulation S-K, the First Amendments, which are substantially identical in all material respects except as to the parties thereto, between the Company and the following individuals are not being filed: Alfred B. Crichton, Rudi Endres, Ronald W. Savage, Mark A. Straka, William E. Sanford, E. Pat Baker, Kenneth A. Keeley, Kenneth D. Morrison, Richard W. Johnson, Thomas J. Bennett, Hermann Knieling and John Musselman). (Incorporated by reference to Exhibit 10.14 to the Company's March 31, 1992 report on Form 10-K). * 10.10 Amended and Restated Exchange Rights Agreement between the Company and Ronald E. Arnold (Pursuant to Instruction 2 to Item 601 of Regulation S-K, the Amended and Restated Exchange Rights Agreements, which are substantially identical in all material respects except as to the parties thereto, between the Company and the following individuals are not being filed: John T. Winn, Dennis B. Lee, Howard E. Wolfe, Charles Graves, I.C. Fortenberry, Henry B. Coker, Ronald B. Rush, William V. Accuosti, Dan L. Tatro, Theodore D. Erkenbrack, Geoffrey C. Pulford, Dale E. Hess, Jeff Allen and Barry W. Himes). (Incorporated by reference to Exhibit 10.15 to the Company's March 31, 1993 report on Form 10-K). * 10.11 First Amendment to Amended and Restated Exchange Rights Agreement between the Company and John T. Winn (Pursuant to Instruction 2 to Item 601 of Regulation S-K, the First Amendment to the Amended and Restated Exchange Rights Agreements, which are substantially identical in all material respects except as to the parties thereto, between the Company and the following individuals are not being filed: I.C. Fortenberry, Hermann Knieling, William E. Sanford, Rudi Endres and Kenneth D. Morrison). (Incorporated by reference to Exhibit 10.11 to the Company's March 31, 1994 report on Form 10-K). * 10.12 Second Amendment to Amended and Restated Exchange Rights Agreement between the Company and Mark Straka (Pursuant to Instruction 2 to Item 601 of Regulation S-K, the Second Amendment to the Amended and Restated Exchange Rights Agreement, which are substantially identical in all material respects except as to the parties thereto, between the Company and the following individuals are not being filed: Rudi Endres, Alfred B. Crichton and E. Pat Baker). (Incorporated by reference to Exhibit 10.12 to the Company's March 31, 1994 report on Form 10-K). * 10.13 Amendment dated as of April 13, 1994 to the Amended and Restated 1984 Stock Option Plan. (Incorporated by reference to Exhibit 10.13 to the Company's March 31, 1994 report on Form 10-K). 25 (11) Statement re: computation of earnings per share. (21) Subsidiaries of the Company. (23.1) Consent of KPMG Peat Marwick LLP. (23.2) Consent of KPMG Peat Marwick LLP (to be filed by amendment) (23.3) Consent of KPMG Peat Marwick LLP (to be filed by amendment) (99.1) Form 11-K for the Registrant's 401(K) Plan (to be filed by amendment) (99.2) Form 11-K for the Registrant's Employee Stock Purchase Plan (to be filed by amendment) _____________ * A management contract or compensatory plan required to be filed by Item 14(c) of this Report. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: June 9, 1995 Airgas, Inc. By: /s/ Peter McCausland _________________________ Peter McCausland Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date _________ _____ ____ /s/ Peter McCausland Director, Chairman of the June 9, 1995 ____________________________ Board, President and (Peter McCausland) Chief Executive Officer /s/ Britton H. Murdoch Vice President/Finance and June 9, 1995 ____________________________ Chief Financial Officer (Britton H. Murdoch) /s/ Jeffrey P. Cornwell Corporate Controller ____________________________ June 9, 1995 (Jeffrey P. Cornwell) /s/ W. Thacher Brown Director June 9, 1995 ____________________________ (W. Thacher Brown) Director ____________________________ (Frank B. Foster, III) Director ____________________________ (Dr. Robert E. Naylor) Director ____________________________ (James M. Hoak, Jr.) 27 /s/ Robert L. Yohe Director June 9, 1995 ____________________________ (Robert L. Yohe) /s/ John A.H. Shober Director June 9, 1995 ____________________________ (John A.H. Shober) /s/ Merril L. Stott Director June 9, 1995 ____________________________ (Merril L. Stott) /s/ Erroll C. Sult Director June 9, 1995 ____________________________ (Erroll Sult) 28 AIRGAS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page Reference In Report on Form 10-K _________ Independent Auditors' Report . . . . . . . . . . . . . . . . . . F-2 Statement of Management's Financial Responsibility . . . . . . . F-3 Consolidated Balance Sheets at March 31, 1995 and 1994 . . . . . F-4 Consolidated Statements of Earnings for the Years Ended March 31, 1995, 1994 and 1993. . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1995, 1994 and 1993. . . . . . . . . . . F-6 Consolidated Statements of Cash Flows for the Years Ended March 31, 1995, 1994 and 1993. . . . . . . . . .. . . . . . . . F-7 Notes to Consolidated Financial Statements. . . . . . . . . . . . F-8 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts . . . . . . F-31 All other schedules for which provision is made in the applicable accounting regulations promulgated by the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. F-1 29 INDEPENDENT AUDITORS' REPORT The Board of Directors Airgas, Inc.: We have audited the consolidated financial statements of Airgas, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Airgas, Inc. and subsidiaries as of March 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth thereon. As discussed in notes 1 and 13 to the consolidated financial statements, the Company retroactively adopted in 1994 the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes." Philadelphia, Pennsylvania KPMG PEAT MARWICK LLP May 10, 1995 F-2 30 STATEMENT OF MANAGEMENT'S FINANCIAL RESPONSIBILITY Management has prepared and is responsible for the integrity and objectivity of the consolidated financial statements and related financial information in this Annual Report. The statements are prepared in conformity with generally accepted accounting principles. The financial statements reflect management's informed judgment and estimation as to the effect of events and transactions that are accounted for or disclosed. Management maintains a system of internal control at each business unit. This system, which undergoes periodic evaluation, is designed to provide reasonable assurance that assets are safeguarded and records are adequate for the preparation of reliable financial data. In determining the extent of the system of internal control, management recognizes that the cost should not exceed the benefits derived. The evaluation of these factors requires estimates and judgment by management. The Company's financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. Their Independent Auditors' Report, which is based on an audit made in accordance with generally accepted auditing standards is presented on the previous page. In performing their audit, KPMG Peat Marwick LLP considers the Company's internal control structure to the extent they deem necessary in order to plan their audit, determine the nature, timing and extent of tests to be performed and issue their report on the consolidated financial statements. The Audit Committee of the Board of Directors meets with the independent auditors and management to satisfy itself that they are properly discharging their responsibilities. The auditors have direct access to the Audit Committee. Airgas, Inc. /s/ Britton H. Murdoch /s/ Peter McCausland ________________________ _______________________ Britton H. Murdoch Peter McCausland Vice President and Chairman, President and Chief Financial Officer Chief Executive Officer F-3 31 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, ________________ (In thousands, except per share amounts) 1995 1994 ________________________________________ ____ ____ ASSETS (NOTE 8) Current Assets Trade receivables, less allowances for doubtful accounts of $4,161 in 1995 and $4,207 in 1994 . . . . . .$ 93,423 $ 79,034 Inventories (Note 4) . . . . . . . . . . . . . . . . . . . 65,947 51,721 Prepaid expenses and other current assets. . . . . . . . . 10,467 8,367 _______ _______ Total current assets. . . . . . . . . . . . . . . . . 169,837 139,122 _______ _______ Plant and Equipment, at cost (Note 5). . . . . . . . . . . 464,983 390,832 Less accumulated depreciation. . . . . . . . . . . . . . (118,715) (96,201) _______ _______ Plant and equipment, net . . . . . . . . . . . . . . . . 346,268 294,631 _______ _______ Other Non-current Assets (Note 6) . . . . . . . . . . . . . 41,388 30,421 Goodwill, net of accumulated amortization of $15,094 in 1995 and $11,875 in 1994. . . . . . . . . . 88,144 50,723 _______ _______ $645,637 $514,897 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt (Note 8) . . . . . . . .$ 11,780 $ 10,304 Accounts payable, trade. . . . . . . . . . . . . . . . . . 43,782 34,644 Accrued expenses and other current liabilities (Note 7). . 60,191 47,103 _______ ______ Total current liabilities . . . . . . . . . . . . . . 115,753 92,051 _______ _______ Long-Term Debt (Note 8). . . . . . . . . . . . . . . . . . 259,970 205,311 Deferred Income Taxes (Note 13). . . . . . . . . . . . . . 67,540 53,096 Other Non-current Liabilities. . . . . . . . . . . . . . . 11,116 6,635 Minority Interest in Subsidiaries (Note 19). . . . . . . . 1,606 937 Commitments and Contingencies (Note 17) Stockholders' Equity (Note 9) Common Stock, par value $.01 per share, 200,000 shares authorized, 31,501 and 32,897 shares issued in 1995 and 1994, respectively . . . . . . . . . . . . . . . 315 329 Capital in Excess of Par Value . . . . . . . . . . . . . . 62,135 56,330 Retained Earnings. . . . . . . . . . . . . . . . . . . . . 133,640 102,161 Cumulative Translation Adjustments . . . . . . . . . . . . (469) (471) Treasury Stock, 236 and 1,877 common shares at cost in 1995 and 1994, respectively. . . . . . . . . . . . . . (5,969) (1,482) _______ _______ Total stockholders' equity. . . . . . . . . . . . . . 189,652 156,867 _______ _______ $645,637 $514,897 ======= ======= See accompanying notes to consolidated financial statements. F-4 32 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Years Ended March 31, (In thousands, except per share amounts) ______________________________ _______________________________________ 1995 1994 1993 ____ ____ ____ Net Sales Distribution . . . . . . . . . . . . . . . . $654,381 $486,836 $379,899 Manufacturing . . . . . . . . . . . . . . . 33,602 32,513 30,872 _______ _______ _______ Total net sales . . . . . . . . . . . . 687,983 519,349 410,771 Costs and Expenses Cost of products sold (excluding depreciation and amortization) Distribution . . . . . . . . . . . . . . . 320,800 238,429 188,717 Manufacturing. . . . . . . . . . . . . . . 22,076 20,741 19,396 Selling, distribution and administrative expenses . . . . . . . . . . . . . . . . . 235,639 180,941 140,246 Depreciation and amortization. . . . . . . . 36,868 30,571 28,045 _______ _______ _______ Total costs and expenses. . . . . . . . 615,383 470,682 376,404 _______ _______ _______ Operating Income Distribution . . . . . . . . . . . . . . . . 66,521 42,399 28,443 Manufacturing. . . . . . . . . . . . . . . . 6,079 6,268 5,924 _______ _______ _______ Total operating income . . . . . . . . . 72,600 48,667 34,367 Interest expense, net (Note 11). . . . . . . (17,625) (12,486) (11,403) Other income, net (Note 12). . . . . . . . . 1,067 453 546 Minority interest (Note 19). . . . . . . . . (669) (317) (230) _______ _______ _______ Earnings before income taxes. . . . . . 55,373 36,317 23,280 Income taxes (Note 13) . . . . . . . . . . . . 23,894 16,027 10,811 _______ _______ _______ Net earnings. . . . . . . . . . . . . $ 31,479 $ 20,290 $ 12,469 ======= ======= ======= Earnings Per Share (Notes 3 and 9) Primary. . . . . . . . . . . . . . . . . . $ .96 $ .63 $ .40 _______ _______ _______ Fully diluted. . . . . . . . . . . . . . . $ .96 $ .63 $ .39 _______ _______ _______ Weighted average shares Primary. . . . . . . . . . . . . . . . . . 32,762 32,390 30,886 Fully diluted. . . . . . . . . . . . . . . 32,762 32,390 32,016 See accompanying notes to consolidated financial statements. F-5 33 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended March 31, 1995, 1994 and 1993 _________________________________________ Shares of Capital in Common Stock Common Excess of (In thousands) $.01 Par Value Stock Par Value ______________ ______________ _____ __________ Balance--April 1, 1992. . . . . . . . . 26,811.6 $268 $36,798 Net earnings . . . . . . . . . . . . . . Foreign currency translation adjustment. . . . . . . . . . . . . . . Stock warrants and options exercised . . 836.6 8 3,403 Tax benefit associated with exercise of stock options and warrants . . . . . 1,587 Shares issued upon acquisition of minority interests (Note 19). . . . . . 702.0 8 5,214 Shares issued in connection with Chairman's exercise of warrants (Note 9). . . . . . . . . . . . . . . . 3,649.4 36 (36) ________ ___ ______ Balance--March 31, 1993. . . . . . . . . 31,999.6 320 46,966 Net earnings . . . . . . . . . . . . . . Foreign currency translation adjustment. . . . . . . . . . . . . . . Stock warrants and options exercised . . 784.4 8 3,485 Tax benefit associated with exercise of stock options and warrants . . . . . 3,590 Shares issued upon acquisition of minority interests (Note 19). . . . . . 83.4 1 1,739 Shares issued in connection with Employee Stock Purchase Plan (Note 14). 29.7 550 ________ ___ ______ Balance--March 31, 1994. . . . . . . . . 32,897.1 329 56,330 Net earnings . . . . . . . . . . . . . . Foreign currency translation adjustment. . . . . . . . . . . . . . . Retirement of treasury stock . . . . . . (1,877.2) (19) (1,463) Purchase of treasury stock (Note 9). . . Issuance of stock in connection with acquisitions . . . . . . . . . . . 61.6 1 1,437 Stock warrants and options exercised . . 269.4 3 1,267 Tax benefit associated with exercise of stock options and warrants . . . . . 1,858 Shares issued in connection with Employee Stock Purchase Plan (Note 14). 150.1 1 2,706 ________ ___ ______ Balance--March 31, 1995. . . . . . . . . 31,501.0 $315 $62,135 ======== === ====== COLUMNS CONTINUED ON NEXT PAGE F-6 34 AIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Continued) Years Ended March 31, 1995, 1994 and 1993 _________________________________________ Cumulative Retained Translation Treasury (In thousands) Earnings Adjustments Stock ______________ _________ ___________ ________ Balance--April 1, 1992 . . . . . . . . . $69,402 $(55) $(1,482) Net earnings. . . . . . . . . . . . . . . 12,469 Foreign currency translation adjustment . . . . . . . . . . . . . . . (49) Stock warrants and options exercised. . . Tax benefit associated with exercise of stock options and warrants. . . . . . Shares issued upon acquisition of minority interests (Note 19) . . . . . . Shares issued in connection with Chairman's exercise of warrants (Note 9) . . . . . . . . . . . . . . . . ______ ___ _____ Balance--March 31, 1993 . . . . . . . . . 81,871 (104) (1,482) Net earnings. . . . . . . . . . . . . . . 20,290 Foreign currency translation adjustment . . . . . . . . . . . . . . . (367) Stock warrants and options exercised. . . Tax benefit associated with exercise of stock options and warrants. . . . . . Shares issued upon acquisition of minority interests (Note 19) . . . . . . Shares issued in connection with Employee Stock Purchase Plan (Note 14) . _______ ____ _____ Balance--March 31, 1994 . . . . . . . . . 102,161 (471) (1,482) Net earnings. . . . . . . . . . . . . . . 31,479 Foreign currency translation adjustment . . . . . . . . . . . . . . . 2 Retirement of treasury stock. . . . . . . 1,482 Purchase of treasury stock (Note 9) . . . (5,969) Issuance of stock in connection with acquisitions. . . . . . . . . . . . Stock warrants and options exercised. . . Tax benefit associated with exercise of stock options and warrants. . . . . . Shares issued in connection with Employee Stock Purchase Plan (Note 14) . _______ ____ ______ Balance--March 31, 1995 . . . . . . . . .$133,640 $(469) $(5,969) ======= ===== ======= See accompanying notes to consolidated financial statements. F-6, Continued 35 AIRGAS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended March 31, 1995 1994 1993 ____ ____ ____ Cash Flows From Operating Activities Net earnings . . . . . . . . . . . . . . . . . . $31,479 $20,290 $12,469 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization . . . . . . . . 36,868 30,571 28,045 Deferred income taxes . . . . . . . . . . . . 11,548 8,189 5,158 Equity in earnings of joint venture . . . . . (840) (1,258) (897) Gain on sale of investment. . . . . . . . . . (560) -- -- (Gain)/Loss on sale of plant and equipment. . 110 (63) (292) Minority interest in earnings . . . . . . . . 669 317 230 Stock issued for employee benefit plan expense 2,707 550 -- Changes in assets and liabilities, excluding effects of business acquisitions: Trade receivables, net. . . . . . . . . . . (1,179) (5,444) 1,552 Inventories . . . . . . . . . . . . . . . . (1,874) 1,626 3,909 Prepaid expenses and other current assets . 198 (546) 969 Accounts payable, trade. . . . . . . . . . 2,934 3,799 (845) Accrued expenses and other current liabilities. . . . . . . . . . . . . . . . 2,324 5,572 1,507 Other assets and liabilities, net . . . . . 298 (714) 1,928 _______ ______ ______ Net cash provided by operating activities. 84,682 62,889 53,733 _______ ______ ______ Cash Flows From Investing Activities Capital expenditures . . . . . . . . . . . . . . (36,712) (21,318) (14,702) Proceeds from sale of plant and equipment. . . . 2,563 1,914 2,259 Business acquisitions, net of cash acquired. . . (86,342) (93,375) (43,072) Purchase of investment . . . . . . . . . . . . . (17,026) -- -- Proceeds from sale of investment . . . . . . . . 17,892 -- -- Other, net . . . . . . . . . . . . . . . . . . . 116 (287) (502) _______ ______ ______ Net cash used by investing activities. . . .(119,509) (113,066) (56,017) _______ _______ ______ Cash Flows From Financing Activities Proceeds from borrowings . . . . . . . . . . . . 394,193 195,292 90,939 Repayment of debt. . . . . . . . . . . . . . . .(359,253) (150,844) (95,207) Repurchase of treasury stock . . . . . . . . . . (5,969) -- -- Exercise of options and warrants . . . . . . . . 1,270 3,493 3,411 Net overdraft. . . . . . . . . . . . . . . . . . 4,591 2,459 3,944 _______ ______ ______ Net cash provided by financing activities. . 34,832 50,400 3,087 _______ ______ ______ Effects of discontinued activities, net. . . . . (5) (223) (803) _______ ______ ______ Cash Increase (Decrease) . . . . . . . . . . . . -- -- -- Cash--beginning of year. . . . . . . . . . . . . -- -- -- ______ ______ ______ Cash--End of Year. . . . . . . . . . . . . . . . $ -- $ -- $ -- ====== ====== ====== For supplemental cash flow disclosures see Note 18. See accompanying notes to consolidated financial statements. F-7 36 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The consolidated financial statements include the accounts of Airgas, Inc. and its subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. (b) Inventories Inventories are stated at the lower of cost or market with cost for approximately 77% and 79% percent of the inventories at March 31, 1995 and 1994, respectively, determined by the first-in, first-out (FIFO) method. Cost for the remainder of inventories was determined using the last-in, first-out (LIFO) method. (c) Plant and Equipment Plant and equipment are stated at cost. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets. Effective April 1, 1993, the Company changed its estimate of the useful lives of its acetylene and high pressure cylinders from 20 to 30 years. This change was made to better reflect the estimated periods during which these assets will remain in service. The change had the effect of reducing depreciation expense in 1994 by approximately $3.1 million and increasing net earnings by $1.9 million or $.06 per share. The Company changed the estimated useful life of cylinders as a result of thorough studies and analyses. The studies considered technological advances in cylinders, empirical data obtained from cylinder manufacturers and other industry experts and experience gained from the Company's maintenance of a cylinder population of approximately two million cylinders. (d) Other Assets Costs related to the acquisition of long-term debt are deferred and amortized over the term of the related debt. Costs and payments pursuant to noncompetition arrangements entered into in connection with business acquisitions are amortized over the terms of the arrangements which are principally over 5 years. On an ongoing basis, management reviews the valuation and amortization of intangible assets. (e) Goodwill Goodwill represents costs in excess of net assets of businesses acquired and is amortized on a straight-line basis over the expected periods to be benefited, which currently ranges from 20 to 40 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows. F-8 37 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) (f) Joint Venture The Company is a partner in a joint venture which is accounted for using the equity method. (g) Income Taxes In fiscal 1994, the Company retroactively adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," (Statement No. 109), as of April 1, 1992. Statement No. 109 requires the use of the liability method of accounting for deferred income taxes. The adoption of Statement No. 109 had no material impact on the Company's results of operations or retained earnings. The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. (h) Foreign Currency Translation The functional currency of the Company's foreign operations is the applicable local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using average exchange rates during each reporting period. The gains or losses, net of applicable deferred income taxes, resulting from such translations are included in stockholders' equity. Gains and losses arising from foreign currency transactions are reflected in the consolidated statements of earnings as incurred. (i) Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk are limited due to the Company's large number of customers and their dispersion across many industries. Credit terms granted to customers are generally net 30 days. (j) Revenue Recognition Sales are recorded upon shipment to the customer. F-9 38 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (k) Financial Instruments In hedging interest rate exposure, the Company enters into interest rate swap agreements. These instruments are not entered into for trading purposes and the Company has the ability and intent to hold these instruments to maturity. The Company only uses non-leveraged instruments. When interest rates change, the difference to be paid or received is accrued and recognized as interest expense over the life of the agreement. The fair values of the Company's financial instruments are estimated based on quoted market prices for the same or similar issues. The carrying amounts for accounts receivable, accounts payable and current portion of long-term debt approximate fair value because of the short-term maturity of these financial instruments. (l) Reclassification Certain reclassifications have been made in previously issued financial statements to conform to the current presentation. (2) ACQUISITIONS The Company acquires businesses primarily engaged in the distribution of industrial, medical and specialty gases and related welding supplies and accessories. Acquisitions have been recorded using the purchase method of accounting, and, accordingly, results of their operations have been included in the Company's consolidated financial statements since the effective dates of the respective acquisitions. 1995--During 1995, the Company purchased twenty-five businesses. The largest of these acquisitions and their effective dates included The Jimmie Jones Company (August 1, 1994) and Post Welding Supply (November 1, 1994). The aggregate purchase price for these acquisitions amounted to approximately $83 million. The purchase price for the remaining twenty-three businesses amounted to approximately $41 million. On November 1, 1994, the Company entered into an agreement with Poligaz, S.A., (Poligaz), for the purchase of an interest in Poligaz for approximately $3.3 million. The Company's investment in Poligaz is accounted for at cost, and is included as other non-current assets. 1994--During 1994, the Company purchased eighteen businesses. The largest of these acquisitions and their effective dates included General Welding Supply Co. (July 1, 1993), PDI Western Distributing Group, Inc. (July 1, 1993), Phoenix Northeast Distributors Group, Inc. (September 1, 1993) and certain operations of The BOC Group, Inc. (February 1, 1994). The aggregate purchase price for these acquisitions amounted to approximately $90 million. The purchase price for the remaining fourteen businesses amounted to approximately $31 million. 1993--During 1993, the Company purchased seventeen businesses. The largest of these acquisitions and their effective dates included Virginia Welding Supply, Inc. (July 27, 1992), Cryodyne Corp. (January 1, 1993) and Presto Technologies, Inc. (January 29, 1993). The aggregate purchase price for these acquisitions amounted to approximately $45 million. The purchase price for the remaining fourteen businesses amounted to approximately $16 million. F-10 39 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (2) ACQUISITIONS - (Continued) In connection with the above business acquisitions, the total purchase price, fair value of assets acquired, cash paid and liabilities assumed were as follows: Years Ended March 31, ___________________________ (In thousands) 1995 1994 1993 ______________ ____ ____ ____ Cash paid . . . . . . . . . . . . . . . . . . $ 83,033 $ 89,782 $ 42,228 Notes issued to sellers . . . . . . . . . . . 14,518 6,208 6,381 Notes payable assumed and capital leases. . . 9,067 4,196 5,884 Other liabilities assumed and accrued acquisition costs. . . . . . . . . . . . . . 20,198 20,486 6,407 _______ _______ ______ Total purchase price allocated to assets acquired. . . . . . . . . . . . . . . . . . $126,816 $120,672 $ 60,900 ======= ======= ====== Also, as discussed in note 19, the Company has accounted for the acquisition of certain subsidiary minority interests in 1994 and 1993 using the purchase method of accounting. In connection with certain acquisitions, the Company is required to make future payments to sellers based on future earnings of the acquired business in excess of predetermined amounts. Such payments, if any, are capitalized as an additional cost of the acquisition. Amounts payable under contingent payment terms continue through 1997 and are limited to $3.4 million. To-date, the Company has made aggregate payments of $660 thousand under these contingent terms. The purchase price for business acquisitions and minority interests were allocated to the assets acquired and liabilities assumed based on their estimated fair values. Costs in excess of net assets acquired (goodwill) for 1995, 1994 and 1993 amounted to $40.8 million, $9.9 million and $7.7 million, respectively. The following presents unaudited estimated pro forma operating results as if the 1995 and 1994 acquisitions had been consummated on April 1, 1993. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of April 1, 1993 or of results which may occur in the future. Years Ended March 31, _____________________ (In thousands except per share amounts) 1995 1994 _______________________________________ ____ ____ Net sales . . . . . . . . . . . . . . . . . . . $737,104 $697,507 Net earnings. . . . . . . . . . . . . . . . . . 31,786 22,212 Earnings per share: Primary. . . . . . . . . . . . . . . . . . . . .97 .69 Fully diluted. . . . . . . . . . . . . . . . . .97 .69 F-11 40 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (2) ACQUISITIONS - (Continued) Subsequent to March 31, 1995, the Company has acquired, entered into agreements, or signed letters of intent to acquire industrial gas distribution businesses with an aggregate purchase price of approximately $42 million. (3) EARNINGS PER SHARE Primary and fully diluted earnings per share amounts were determined using the Treasury Stock method. (4) INVENTORIES Inventories consist of: March 31, _______________________ (In thousands) 1995 1994 ______________ ____ ____ Finished goods. . . . . . . . . . . . . . . . . . . $65,693 $51,263 Raw materials . . . . . . . . . . . . . . . . . . . 1,315 1,117 ______ ______ 67,008 52,380 Less reduction to LIFO cost . . . . . . . . . . . . (1,061) (659) ______ ______ $65,947 $51,721 ====== ====== (5) PLANT AND EQUIPMENT The major classes of plant and equipment, at cost, are as follows: March 31, _______________________ (In thousands) 1995 1994 ______________ ____ ____ Land and land improvements . . . . . . . . . . . . $ 17,571 $ 15,879 Buildings and leasehold improvements . . . . . . . 43,714 30,494 Machinery and equipment, including cylinders . . . 376,284 322,336 Transportation equipment . . . . . . . . . . . . . 25,944 20,830 Construction in progress . . . . . . . . . . . . . 1,470 1,293 _______ _______ $464,983 $390,832 ======= ======= Depreciation and amortization of plant and equipment charged to operations amounted to $26.3 million, $21.1 million and $19.7 million in 1995, 1994 and 1993, respectively. F-12 41 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (6) OTHER NONCURRENT ASSETS Other noncurrent assets include: March 31, _______________________ (In thousands) 1995 1994 ______________ ____ ____ Investment in a joint venture (Note 10). . . . . . $ 1,597 $ 1,308 Noncompete agreements and other intangible assets, at cost, net of accumulated amortization of $37.4 million in 1995 and $30.0 million in 1994 . . . . . . . . . . . . 31,955 26,673 Other assets. . . . . . . . . . . . . . . . . . . . 7,836 2,440 ______ ______ $41,388 $30,421 ====== ====== (7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities include: March 31, _______________________ (In thousands) 1995 1994 ______________ ____ ____ Cash overdraft. . . . . . . . . . . . . . . . . . . $11,638 $ 7,047 Insurance payable and related reserves. . . . . . . 6,304 5,341 Customer cylinder deposits. . . . . . . . . . . . . 6,242 3,325 Other accrued expenses and current liabilities. . . 36,007 31,390 ______ ______ $60,191 $47,103 ====== ====== The cash overdraft is attributable to the float of the Company's outstanding checks. (8) INDEBTEDNESS (a) Long-term debt consists of the following: March 31, _______________________ (In thousands) 1995 1994 ______________ ____ ____ Revolving credit borrowings . . . . . . . . . . . . $195,000 $151,235 Senior subordinated notes . . . . . . . . . . . . . 27,857 35,714 Acquisition notes . . . . . . . . . . . . . . . . . 26,532 16,014 Industrial Development Board revenue bonds. . . . . 3,450 4,645 All other notes, at various rates and maturities. . 18,911 8,007 _______ _______ Total long-term debt. . . . . . . . . . . . . . . . 271,750 215,615 Less current installments . . . . . . . . . . . . . (11,780) (10,304) _______ _______ Long-term debt, excluding current installments. . . $259,970 $205,311 ======= ======= F-13 42 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (8) INDEBTEDNESS - (Continued) During 1995, the Company increased its unsecured revolving credit facility with various commercial banks from $200 million to $250 million and extended the maturity of the facility to August 2001. The revolving credit facility provides for the issuance of letters of credit up to $50 million. Under the terms of the revolving credit facility, interest is payable quarterly with equal quarterly principal payments beginning in September 1996 and continuing through June 2001. At March 31, 1995, $105 million of borrowings were outstanding under the revolving credit facility at money market rates of 6.5%. At the Company's option, borrowings under the revolving credit facility may bear interest at a rate per year equal to prime, the Libor rate, the Certificate of Deposit rate, or the Banker's Acceptance rate, in each case plus an applicable margin (for which no borrowings were outstanding at March 31, 1995). Also, during 1995, the Company entered into an additional $100 million unsecured line of credit with two commercial banks which matures in July 1996 and provides for borrowings at the Libor rate plus an applicable margin ($75 million outstanding at 6.7% as of March 31, 1995). The Company intends to terminate its $100 million facility in conjunction with an anticipated increase in the Company's $250 million revolving credit facility in August 1995, which will have terms and conditions similar to its existing $250 million facility. The Company also had a $25 million line of credit agreement with a commercial bank that provides for unsecured money market rate borrowings with no fixed date of maturity ($15 million outstanding at 6.36% as of March 31, 1995). Senior subordinated notes with an original face value aggregating $55 million require semi-annual interest payments at 11.375%. Equal annual principal payments of $4.3 million for $17.1 million of the senior subordinated notes continue through August 1998 and equal annual principal payments of $3.6 million for $10.7 million of the senior subordinated notes continue through July 1997. Acquisition notes represent notes issued to sellers of businesses acquired and are repayable in periodic installments including interest at an average rate of 7.4%. Some acquisition notes require balloon payments which are included in the aggregate maturity schedule. Industrial Development revenue bonds have variable interest rates ranging from 60% to 75% of the prime rate. The bonds mature at various dates between 1996 and 2006. Certain bonds are redeemable at the option of the issuer. The bonds are secured by mortgages on certain plant and equipment. Certain of the Company's credit facility agreements contain restrictive covenants which include the maintenance of a minimum equity level, maintenance of certain financial ratios and restrictions on additional borrowings and dividend payments. F-14 43 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (8) INDEBTEDNESS - (Continued) The aggregate maturities of long-term debt for the five years ending March 31, 2000 and thereafter are as follows (in thousands): Years Ending March 31, Aggregate Maturity ______________________ __________________ 1996 . . . . . . . . . . . . . . . . . . . $ 11,780 1997 . . . . . . . . . . . . . . . . . . . 104,332 1998 . . . . . . . . . . . . . . . . . . . 48,326 1999 . . . . . . . . . . . . . . . . . . . 31,292 2000 . . . . . . . . . . . . . . . . . . . 36,217 2001 and thereafter. . . . . . . . . . . . 39,803 _______ $271,750 ======= The fair value of long term debt as of March 31, 1995 was approximately $274 million. (b) Swap Agreements In managing interest rate exposure, principally under the Company's floating rate revolving credit facilities, the Company has entered into thirteen interest rate swap agreements during the period from June 1992 through March 31, 1995. The interest rate swap agreements are with major financial institutions having a total notional principal amount of $138 million at March 31, 1995. Approximately $119 million of the swap agreements require fixed interest payments based on an average effective rate of 7.3% for remaining periods ranging between 3 and 8 years. The remaining $19 million of swap agreements require floating rates (6.5% at March 31, 1995). The effect of the swap agreements were to increase interest expense $1.2 million and $1.4 million in 1995 and 1994, respectively. Under the terms of four of the swap agreements, the Company has elected to receive the discounted value of the counterparty's interest payments upfront. At March 31, 1995, approximately $2.0 million and $7.0 million of such payments were included in accrued expenses and other non-current liabilities, respectively. The Company continually monitors its positions and the credit ratings of its counterparties, and does not anticipate nonperformance by the counterparties. The net gain to settle all interest rate swap agreements at March 31, 1995 was approximately $900 thousand. The aggregate maturities of the Company's interest rate swaps by type of swap for the five years ending March 31, 2000 and thereafter are as follows (in thousands): Notional Principal Amounts __________________________ Years Ending March 31, Pay-Fixed Receive-Fixed ______________________ _________ _____________ 1998 . . . . . . . . . . . . . 30,000 0 1999 . . . . . . . . . . . . . 12,500 7,500 2000 and thereafter. . . . . . 76,074 12,000 _______ ______ $118,574 $19,500 ======= ====== F-15 44 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (9) STOCKHOLDERS' EQUITY (a) Common Stock In August 1994, the Company increased the number of authorized shares of common stock from 55 million to 200 million shares. On October 28, 1993, the Company's Board of Directors declared a two-for-one stock split to stockholders of record on November 9, 1993, payable on November 24, 1993. Stock options and other rights to acquire the Company's common stock reflect the split. All references to the number of shares, except shares authorized, reflect the stock split. (b) Preferred Stock and Redeemable Preferred Stock The Company is authorized to issue 20 million shares of preferred stock. At March 31, 1995 and 1994, no shares were outstanding. The preferred stock may be issued from time to time by the Board of Directors in one or more series, and the Board of Directors is authorized to fix the dividend rights and terms, conversion rights, voting rights, rights and terms of redemption, liquidation preferences, and any other rights, preferences, privileges and restrictions of any series of Preferred Stock, and the number of shares constituting each such series and designation thereof. Additionally, the Company is authorized to issue 30,000 shares of redeemable preferred stock. At March 31, 1995 and 1994, no shares were outstanding. (c) Treasury Stock In January 1995, the Company's Board of Directors approved the repurchase of up to one million shares of Airgas common stock. At March 31, 1995, the Company had purchased 235,900 shares of common stock. Through May 10, 1995, the Company has purchased an additional 420,200 shares. (d) Stock Options The Company has a stock option plan for officers and key employees and has reserved 7,040,000 shares under this plan. Options are granted on terms and conditions determined by a committee of the Board of Directors. At March 31, 1995, 2,367,038 options were available for issuance. F-16 45 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (9) STOCKHOLDERS' EQUITY - (Continued) The following table summarizes the activity of the plan during the three years ended March 31, 1995: Number Price Per of Shares Share __________ _________ March 31, 1993 Outstanding, beginning of year . . . . . . . . 2,274,408 $2.88 - $6.00 Granted. . . . . . . . . . . . . . . . . . . . 769,000 6.60 - 6.97 Exercised. . . . . . . . . . . . . . . . . . . (382,650) 2.88 - 5.79 Expired. . . . . . . . . . . . . . . . . . . . (144,112) 2.88 - 6.60 March 31, 1994 Outstanding, beginning of year . . . . . . . . 2,516,646 2.91 - 6.97 Granted. . . . . . . . . . . . . . . . . . . . 669,660 12.63 - 17.13 Exercised. . . . . . . . . . . . . . . . . . . (527,704) 2.91 - 6.97 Expired. . . . . . . . . . . . . . . . . . . . (33,152) 3.66 - 12.63 March 31, 1995 Outstanding, beginning of year . . . . . . . . 2,625,450 $ 2.91 -$17.13 Granted. . . . . . . . . . . . . . . . . . . . 502,300 22.63 - 29.41 Exercised. . . . . . . . . . . . . . . . . . . (212,030) 2.91 - 15.78 Expired. . . . . . . . . . . . . . . . . . . . (1,250) 6.60 - 12.63 Outstanding, end of year . . . . . . . . . . . 2,914,470 $ 3.66 -$29.41 The Company maintains a stock option plan covering Directors who are not employees which has 400,000 shares reserved. At March 31, 1995, 220,000 options were available for issuance. The following table summarizes the activity of the plan during the three years ended March 31, 1995: Number Price Per of Shares Share __________ _________ March 31, 1993 Outstanding, beginning of year . . . . . . . . 92,000 $4.19 - $4.41 Granted. . . . . . . . . . . . . . . . . . . . 32,000 4.19 - 8.31 March 31, 1994 Outstanding, beginning of year . . . . . . . . 124,000 4.19 - 8.31 Granted. . . . . . . . . . . . . . . . . . . . 28,000 17.13 Exercised. . . . . . . . . . . . . . . . . . . (16,000) 4.19 - 4.41 March 31, 1995 Outstanding, beginning of year . . . . . . . . 136,000 4.19 - 17.13 Granted. . . . . . . . . . . . . . . . . . . . 20,000 27.63 Outstanding, end of year . . . . . . . . . . . 156,000 4.19 - 27.63 (e) Stock Purchase Warrants The Company and the Chairman of the Company were parties to a Stock and Warrant Issuance Agreement, as amended (the "Warrant Agreement"), which was entered into in connection with the Company's acquisition of US Airgas, Inc., of which the Chairman was the majority shareholder, in May 1986. Pursuant to the Warrant Agreement, the Chairman received warrants to purchase a total of 7,063,716 shares of the Company's common stock. Subsequent to the grant dates, the Chairman transferred warrants to purchase 1,488,400 shares of common stock to employees of the Company and to certain other individuals. The expiration date of the warrants held by these individuals is May 1, 1996. F-17 46 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (9) STOCKHOLDERS' EQUITY - (Continued) During 1991, in connection with an amendment to the Warrant Agreement which extended the original expiration date and increased the exercise price of the warrants, the Chairman exercised warrants to purchase 605,864 shares of common stock for approximately $1.1 million. On February 17, 1993, the Chairman exchanged warrants to purchase 4,962,612 shares of common stock for a net issuance, as provided for under the Warrant Agreement, of 3,649,464 shares of common stock. The following table summarizes the activity of the stock purchase warrants during the three years ended March 31, 1995. Number Price Per of Shares Share __________ _________ March 31, 1993 Outstanding, beginning of year . . . . . . . . 6,461,452 2.52 - 6.00 Exercised. . . . . . . . . . . . . . . . . . . (446,000) 2.52 - 4.38 Chairman's net issuance exercise . . . . . . . (4,962,612) -- March 31, 1994 Outstanding, beginning of year . . . . . . . . 1,052,840 3.36 - 4.38 Exercised. . . . . . . . . . . . . . . . . . . (240,700) 3.52 - 4.38 March 31, 1995 Outstanding, beginning of year . . . . . . . . 812,140 $3.36 - $4.38 Exercised. . . . . . . . . . . . . . . . . . . 57,400 3.52 - 4.38 Outstanding, end of year . . . . . . . . . . . 754,740 $3.36 - $4.38 (f) Shareholder Rights Plan Under the terms of a Shareholder Rights Plan, preferred share purchase rights were distributed during 1988 as a dividend at the rate of one right for each common share. The number of rights outstanding is subject to adjustment under certain circumstances and all rights expire on August 1, 1998. The rights are not exercisable until a person or entity acquires twenty percent of the Company's common stock. Each right will entitle the holder to buy $32.50 worth of the Company's common stock at an exercise price of $16.25. (10) JOINT VENTURE The Company is a partner in a joint venture which primarily sells calcium carbide. The Company and its joint venture partner, Elkem Metals Company ("Elkem"), have equal control over activities of the joint venture. Based on a product sourcing arrangement, the joint venture purchases all of its calcium carbide needs from the venturers. Also, earnings and losses generated by the joint venture, are allocated 55 percent to the Company and 45 percent to Elkem. The Company's calcium carbide operations and equity in the earnings related to the joint venture are reported as components of manufacturing net sales and operating expenses. The Company and Elkem receive marketing fees, based on net sales, for acting as exclusive sales and marketing agents for the joint venture. Additionally, as general manager of the joint venture, Elkem receives a management fee based on net sales. F-18 47 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (10) JOINT VENTURE - (Continued) Condensed balance sheet information as of March 31, 1995 and statement of operations for the joint venture for the year ended March 31, 1995 are as follows: (In thousands) _____________ Balance Sheet Current assets . . . . . . . . . . . . . . . . . . . . . . $ 6,680 Property, plant and equipment, net . . . . . . . . . . . . 348 ______ $ 7,028 ===== Current liabilities. . . . . . . . . . . . . . . . . . . . $ 4,274 Partners' capital. . . . . . . . . . . . . . . . . . . . . 2,754 ______ Total liabilities and partners' capital. . . . . . . . . $ 7,028 ====== Statement of Operations Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $40,239 Costs and expenses . . . . . . . . . . . . . . . . . . . . (38,836) Other income, net. . . . . . . . . . . . . . . . . . . . . 89 ______ Net earnings. . . . . . . . . . . . . . . . . . . . . $ 1,492 ====== (11) INTEREST EXPENSE, NET Interest expense, net, consists of: March 31, ___________________________ (In thousands) 1995 1994 1993 ______________ ____ ____ ____ Interest expense. . . . . . . . . . . . . . . $18,476 $13,189 $12,157 Interest and finance charge income. . . . . . (851) (703) (754) ______ ______ ______ $17,625 $12,486 $11,403 ====== ====== ====== (12) OTHER INCOME, NET Other income, net, consists of: March 31, ___________________________ (In thousands) 1995 1994 1993 ______________ ____ ____ ____ Net gain (loss) from plant and equipment sales. . . . . . . . . . . . . . . . . . . . $ (110) $ 63 $292 Gain on sale of investment. . . . . . . . . . 560 -- -- Other income,net . . . . . . . . . . . . . . 617 390 254 _____ ___ ___ $1,067 $453 $546 ===== === === F-19 48 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (13) INCOME TAXES Pre-tax earnings were derived from the following sources: Years Ended March 31, ___________________________ (In thousands) 1995 1994 1993 ______________ ____ ____ ____ United States . . . . . . . . . . . . . . . . $54,239 $35,621 $22,917 Foreign . . . . . . . . . . . . . . . . . . . 1,134 696 363 ______ ______ ______ $55,373 $36,317 $23,280 ====== ====== ====== Income tax expense consisted of: Years Ended March 31, ___________________________ (In thousands) 1995 1994 1993 ______________ ____ ____ ____ Current: Federal . . . . . . . . . . . . . . . . . $ 9,997 $ 6,515 $ 4,762 Foreign . . . . . . . . . . . . . . . . . 573 326 111 State . . . . . . . . . . . . . . . . . . 1,775 997 780 ______ ______ ______ 12,345 7,838 5,653 ______ ______ ______ Deferred: Federal . . . . . . . . . . . . . . . . . . 9,829 6,827 4,348 Foreign . . . . . . . . . . . . . . . . . . 47 61 96 State . . . . . . . . . . . . . . . . . . . 1,673 1,301 714 ______ ______ ______ 11,549 8,189 5,158 ______ ______ ______ $23,894 $16,027 $10,811 ====== ====== ====== F-20 49 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (13) INCOME TAXES - (Continued) Significant differences between taxes computed at the federal statutory rate and the provision for income taxes were: Years Ended March 31, ___________________________ 1995 1994 1993 ____ ____ ____ Taxes at U.S. federal statutory rate . . . . . . 35.0% 35.0% 34.0% Increase in income taxes resulting from: State income taxes, net of federal benefit . . . 4.0 4.1 4.2 Increase in statutory rate on deferred tax items -- 4.5 -- Amortization of non-deductible goodwill. . . . . 1.8 2.3 3.1 Adjustment of federal and state accruals . . . . -- (4.5) -- Other, net . . . . . . . . . . . . . . . . . . . 2.4 2.7 5.1 ____ ____ ____ 43.2% 44.1% 46.4% ==== ==== ==== The significant components of deferred income tax expense attributable to earnings for the years ended March 31, 1995 and 1994 are as follows: Years Ended March 31, ___________________________ (In thousands) 1995 1994 ______________ ____ ____ Deferred tax expense (exclusive of the effects of other components listed below). . . . $11,549 $ 8,189 Adjustments to deferred tax assets and liabilities for enacted changes in tax laws and rates. . . . . . . . . . . . . . . . . . . . -- 663 Adjustment of federal and state accruals. . . . . -- (663) ______ _____ $11,549 $ 8,189 ====== ===== F-21 50 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (13) INCOME TAXES - (Continued) The tax effects of cumulative temporary differences that gave rise to the significant portions of the deferred tax liability and deferred tax asset were as follows: Years Ended March 31, _______________________ (In thousands) 1995 1994 ______________ ____ ____ Deferred Tax Assets: ____________________ Inventories . . . . . . . . . . . . . . . . . . $ 1,368 $ 1,015 Accounts Receivable . . . . . . . . . . . . . . 885 997 Deferred Rental Income. . . . . . . . . . . . . 880 799 Insurance Reserves. . . . . . . . . . . . . . . 1,791 1,383 Other Reserves. . . . . . . . . . . . . . . . . 2,296 1,600 AMT Credit Carryforwards. . . . . . . . . . . . 3,079 5,656 Other . . . . . . . . . . . . . . . . . . . . . 1,185 835 ______ ______ 11,484 12,285 ______ ______ Deferred Tax Liabilities: _________________________ Property and equipment. . . . . . . . . . . . . (70,787) (57,975) Intangible Assets . . . . . . . . . . . . . . . (2,734) (3,258) Other . . . . . . . . . . . . . . . . . . . . . (286) (551) ______ ______ (73,807) (61,784) ______ ______ Net Deferred Tax Liability . . . . . . . . . . . $(62,323) $(49,499) ====== ====== The Company has recorded tax benefits amounting to $1.9 million, $3.6 million and $1.6 million in 1995, 1994 and 1993, respectively, resulting from the exercise of stock options and warrants. This benefit has been recorded in capital in excess of par value. The Internal Revenue Service (the "IRS") has completed an examination of the Company's consolidated income tax returns for the years ended March 31, 1988 through 1991. The results of the completed examination did not have a material effect on the Company's financial position, results of operations or liquidity. The IRS has also notified the Company that an examination will be conducted for the year ended March 31, 1993. Management believes that the results of the pending examination will not have a material effect on the Company's financial position, results of operations or liquidity. F-22 51 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (13) INCOME TAXES - (Continued) In fiscal 1994, the Company retroactively adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," (Statement No. 109) as of April 1, 1992. The adoption of Statement No. 109 had no material impact on the Company's results of operations or retained earnings. The effect of adopting Statement No. 109 at April 1, 1992 was to establish a current deferred tax asset of $2.3 million, increase net property and equipment and goodwill by $9.0 million and $100 thousand, respectively, and to increase deferred tax liabilities by $11.4 million. The restatement at March 31, 1993 resulted in a current deferred tax asset of $2.2 million, an increase in net property and equipment and goodwill of $10.9 million and $3.0 million, respectively, and an increase in deferred tax liabilities of $16.1 million. (14) BENEFIT PLANS (a) Pension and Profit Sharing Plans The Company has a defined contribution 401(k) plan covering substantially all full-time employees. Under the terms of the plan, the Company makes matching contributions up to two percent of participants' wages plus additional discretionary profit sharing contributions based upon the profitability of the Company. Amounts expensed under the plan for 1995, 1994 and 1993 were $4.7 million, $3.3 million and $2.3 million, respectively. During 1993, the Company authorized termination of two defined benefit pension plans effective December 31, 1992. At December 31, 1994, the plans' projected benefit obligations approximate the plans' net assets available for benefits. The settlement of the vested benefit obligations by the purchase of nonparticipating annuity contracts or lump-sum payments for covered employees is expected to be completed during 1996 or 1997. No significant gain or loss is anticipated when the plans' benefit obligations are settled. Certain subsidiaries of the Company participate in multi-employer pension plans which provide defined benefits to union employees. Contributions are made to the plans in accordance with negotiated labor contracts. The Company has not taken any action to terminate or withdraw from these plans. Management believes that the Company's liability, if any, for multi-employer plan withdraw liability will not have a material effect on the Company's financial position, results of operations, or liquidity. Amounts expensed under these plans for 1995 and 1994 were $418 thousand and $227 thousand, respectively. (b) Employee Stock Purchase Plan During January 1994, the Company established an employee stock purchase plan (the "Plan") to encourage and assist employees to acquire an equity interest in the Company. The Plan is authorized to issue 1 million shares of common stock. Generally, employees may elect to have 1 to 15 percent of their gross pay withheld to buy Airgas, Inc. common stock at 85 to 95 percent of the market value depending upon base salary levels. Market value under the Plan is either the employees' enrollment date market value or the quarterly purchase date market value, whichever is lower. An employee may lock-in a purchase price for up to 27 months. The Plan is designed to comply with the requirements of section 423 of the Internal Revenue Code. F-23 52 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (14) BENEFIT PLANS - (Continued) Under the Plan, 150,102 and 29,735 shares were issued at an average purchase price of $18.03 and $17.99 per share during 1995 and 1994, respectively. (c) Other Employee Benefits The Company sponsors a multi-employer postretirement medical benefit plan for certain employees of one subsidiary under a collective bargaining agreement. In accordance with SFAS 106 "Employers Accounting for Postretirement Benefits Other Than Pensions" and APB Opinion No. 16 "Business Combinations", the postretirement benefit obligation was recorded at the acquisition date. The net postretirement benefit expense for the year ended March 31, 1995 was $88 thousand. The Company's funded postretirement benefit obligation was $837 thousand at March 31, 1995. In determining the APBO, the discount rate used to estimate the actuarial present value of other postretirement benefits was 8.25% at March 31, 1995. The assumed rate of increase in the health care cost trend rate for employees less than age 65 was 9.75% for March 31, 1995, declining gradually to 6.0% over the next four years. For employees 65 and older, the assumed rate of increase is 6.62% for March 31, 1995, declining gradually to 5.5% over the next four years. A 1% increase in the healthcare cost trend rate would have increased net postretirement benefit expense approximately $17 thousand and the APBO approximately $124 thousand at March 31, 1995. The Company does not have any significant benefit arrangements related to SFAS No. 112 "Employers' Accounting for Postemployment Benefits," and accordingly, the effects of adopting Statement No. 112 were immaterial. (15) RELATED PARTIES The Chairman and Vice President -- Corporate Development, were partners in the law firm which provides legal services to the Company. During the years ended March 31, 1995, 1994 and 1993, fees paid to the law firm totalled $525 thousand, $551 thousand, and $395 thousand, respectively. The Company is a party to a sales agency agreement for the sale of carbon products with a company which is a greater than five percent stockholder and a director of which is a former director of the Company. The sales agency agreement expires in October 2003. During the years ended March 31, 1995, 1994 and 1993, the Company paid approximately $543 thousand, $515 thousand and $495 thousand, respectively, under this agreement. A member of the Company's board of directors is the president of a national producer and distributor of industrial gases, welding supplies and related equipment in the Southeastern United States. During the years ended March 31, 1995 and 1994, this company paid $914 thousand and $1.1 million, respectively to a joint venture of the Company for the purchase of calcium carbide. F-24 53 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (16) LEASES The Company leases certain distribution facilities and equipment under long-term operating leases with varying terms. Most leases contain renewal options and in some instances, purchase options. Rentals under these long-term leases (exclusive of real estate taxes, insurance, and other expenses payable under the terms of the leases) for the years ended March 31, 1995, 1994 and 1993, amounted to $12.9 million, $9.7 million and $7.6 million, respectively. Additionally, the Company leases certain operating facilities from employees of the Company who were previous owners of businesses acquired. During 1995, the Company entered into certain operating leases with a trust established by a commercial bank. The trust is committed to purchase real estate properties up to an aggregate amount of $25 million. The trust holds title to the properties and leases the properties to the Company. The rental payments are based on LIBOR plus an applicable margin and the cost of the property acquired by the trust. The Company has entered into interest rate swap agreements in a notional principal amount of $10 million to hedge the effects of fluctuations in the LIBOR based rental rate. At the expiration of the leases with the trust in 1999, the Company has the option to purchase the real properties at amortized cost or assist in the sale of the properties to a third party. The Company has guaranteed a portion of the debt outstanding against these properties in the event the proceeds of a sale are not sufficient to cover the trust's investment in the properties. At March 31, 1995, the Company had a contingent guarantee of approximately $4.2 million related to this lease facility. At March 31, 1995, future minimum lease payments under noncancellable operating leases are as follows: (in thousands) ______________ 1996 . . . . . . . . . . . . . . . . . . $13,561 1997 . . . . . . . . . . . . . . . . . . 10,784 1998 . . . . . . . . . . . . . . . . . . 8,719 1999 . . . . . . . . . . . . . . . . . . 5,900 2000 . . . . . . . . . . . . . . . . . . 3,523 2001 and thereafter. . . . . . . . . . . 5,533 ______ $48,020 ====== F-25 54 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (17) COMMITMENTS AND CONTINGENCIES The Company is involved in various legal and regulatory proceedings which 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 position, results of operations or liquidity. (18) CASH FLOWS Cash paid for interest expense and income taxes was as follows: Years Ended March 31, ___________________________ (In thousands) 1995 1994 1993 ______________ ____ ____ ____ Interest . . . . . . . . . . . . . . . . . . . $19,011 $13,502 $12,457 Income taxes (net of refunds). . . . . . . . . 11,411 5,333 4,450 ====== ====== ====== The total purchase price, fair value of assets acquired, cash paid and liabilities assumed for business acquisitions is described in note 2. During 1995 and 1994, the Company entered into capital lease obligations for approximately $3.7 million and $700 thousand, respectively. During 1995, the Company retired 1.9 million shares of treasury stock. (19) MINORITY INTEREST IN SUBSIDIARIES Minority interests in subsidiaries represent the minority shareholders' proportionate share of the equity and the results of operations of certain subsidiaries. Under the terms of exchange rights agreements between the Company and minority shareholders, the Company, under certain circumstances, may require or permit exchange of the minority interests of a subsidiary for common stock of the Company. The agreements provide the minority shareholders with the right to exchange their subsidiary shares for common stock of the Company on August 31, 1995 or any other exchange date designated by the Board of Directors. Each exchange will be based on the fair value of the subsidiary's shares and the market price of the Company's common stock as of valuation dates designated by the Board of Directors. F-26 55 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) On February 28, 1994 and July 1, 1992, in connection with optional exchanges, certain minority shareholders elected to exchange their minority interests for an aggregate of 83,366 and 702,000 shares of common stock, respectively. The market price of the Company's common stock on February 28, 1994 and July 1, 1992 was $20.875 and $7.438 per share, respectively . The acquisition of the minority interests has been recorded using the purchase method of accounting. During 1995, 1994 and 1993, the Company sold minority interests in certain of its subsidiaries to employees based on the estimated fair market value of the subsidiary shares. These sales of subsidiary shares were accounted for as capital transactions and, therefore, no gain or loss was recorded. (20) SUMMARY BY BUSINESS SEGMENT The Company, through its subsidiaries, is principally engaged in two related businesses: 1) the distribution of industrial, medical and specialty gases, and the distribution of protective and welding equipment; and 2) the manufacture of products for the industrial gas industry. Industrial, medical and specialty gases are distributed through the Company's subsidiaries which operate in four divisions with locations in 37 states and Canada. The industrial gas distribution market is broad and includes most major industries. F-27 56 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Products manufactured by the Company include nitrous oxide, a gas with applications in the medical, food packaging and certain high technology electronic industries and calcium carbide and carbon products for the production of acetylene gas and for the non-ferrous metal industry. (In thousands) Distribution Manufacturing Total ______________ ____________ _____________ _____ 1995 Net sales. . . . . . . . . . . . . . . . $654,381 $ 33,602 $687,983 Operating income . . . . . . . . . . . . 66,521 6,079 72,600 Assets . . . . . . . . . . . . . . . . . 613,320 32,317 645,637 Depreciation and amortization. . . . . . 35,548 1,320 36,868 Additions to plant and equipment excluding business acquisitions. . . . . 35,961 751 36,712 1994 Net sales . . . . . . . . . . . . . . . 486,836 32,513 519,349 Operating income . . . . . . . . . . . . 42,399 6,268 48,667 Assets . . . . . . . . . . . . . . . . . 487,701 27,196 514,897 Depreciation and amortization. . . . . . 29,101 1,470 30,571 Additions to plant and equipment excluding business acquisitions. . . . . 20,515 803 21,318 1993 Net sales . . . . . . . . . . . . . . . 379,899 30,872 410,771 Operating income . . . . . . . . . . . . 28,443 5,924 34,367 Assets . . . . . . . . . . . . . . . . . 375,718 23,759 399,477 Depreciation and amortization. . . . . . 26,540 1,505 28,045 Additions to plant and equipment excluding business acquisitions. . . . . 13,792 910 14,702 Corporate operating expenses are allocated between the Company's distribution and manufacturing business segments based on relative sales dollars. F-28 57 AIRGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (21) SUPPLEMENTARY INFORMATION (UNAUDITED) Summary By Quarter This table summarizes the unaudited results of operations for each quarter of 1995 and 1994: (In thousands, except per share data) First Second Third Fourth _____________________________________ _____ ______ _____ ______ 1995 Net sales . . . . . . . . . . . . . . . $159,462 $164,986 $174,112 $189,423 Operating income. . . . . . . . . . . . 15,701 17,115 18,577 21,207 Net earnings. . . . . . . . . . . . . . 6,789 7,460 7,790 9,440 Net earnings per share (1): Primary . . . . . . . . . . . . . . . $ .21 $ .23 $ .24 $ .29 Fully diluted . . . . . . . . . . . . $ .21 $ .23 $ .24 $ .29 1994 (2) Net sales . . . . . . . . . . . . . . . $115,934 $126,763 $130,081 $146,571 Operating income. . . . . . . . . . . . 10,233 11,645 12,041 14,748 Net earnings. . . . . . . . . . . . . . 4,192 4,633 5,055 6,410 Net earnings per share (1): Primary . . . . . . . . . . . . . . . $ .13 $ .14 $ .16 $ .20 Fully diluted . . . . . . . . . . . . $ .13 $ .14 $ .16 $ .20 __________________ (1) Earnings per share calculations for each of the quarters are based on the weighted average number of shares outstanding in each period. Therefore, the sum of the quarters do not necessarily equal the full year earnings per share. (2) Effective April 1, 1993, the Company changed its estimate of the useful lives of its acetylene and high pressure cylinders from 20 to 30 years. This change was made to better reflect the estimated periods during which these assets will remain in service. The change had the effect of reducing depreciation expense in 1994 by approximately $3.1 million and increasing net earnings by $1.9 million or $.06 per share. F-29 58 (21) SUPPLEMENTARY INFORMATION (UNAUDITED) - (Continued) Financial Summary Years Ended March 31, (6) ________________________________ (In thousands, except per share 1995 1994 1993 1992 1991 amounts) (3) _______________________________ ____ ____ ____ ____ ____ Operating Results Net sales . . . . . . . . . . .$687,983 $519,349 $410,771 $351,491 $322,478 Depreciation and amortization(1) 36,868 30,571 28,045 23,670 21,410 Operating income. . . . . . . . 72,600 48,667 34,367 26,316 17,286 Interest expense, net . . . . . 17,625 12,486 11,403 12,838 15,179 Income taxes(2) . . . . . . . . 23,894 16,027 10,811 7,718 3,400 Net earnings. . . . . . . . . . 31,479 20,290 12,469 7,292 1,166 Earnings Per Share (4): Primary: Net earnings . . . . . . . . .$ .96 $ .63 $ .40 $ .27 $ .05 Fully diluted: Net earnings . . . . . . . . .$ .96 $ .63 $ .39 $ .26 $ .05 ______________________________________________________________________________ Balance Sheet Data Working capital . . . . . . . .$ 54,084 $ 47,071 $ 40,253 $ 39,425 $ 48,774 Total assets. . . . . . . . . . 645,637 514,897 399,477 338,218 307,576 Current portion of long-term debt. . . . . . . . . . . . . . 11,780 10,304 9,923 10,026 7,383 Long-term debt. . . . . . . . . 259,970 205,311 158,629 151,098 149,826 Stockholders' equity (5). . . . 189,652 156,867 127,571 104,931 91,779 __________________ (1) Effective April 1, 1993, the Company changed its estimate of the useful lives of its acetylene and high pressure cylinders from 20 to 30 years. This change was made to better reflect the estimated periods during which these assets will remain in service. The change had the effect of reducing depreciation expense in 1994 by approximately $3.1 million and increasing net earnings by $1.9 million or $.06 per share. (2) The Company has retroactively adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," (Statement No. 109) as of April 1, 1992. Statement No. 109 required the use of the liability method of accounting for deferred income taxes. The adoption of Statement No. 109 had no material impact on the Company's results of operations or retained earnings. (3) During 1991, the Company recorded a $4.2 million pre-tax restructuring charge related to the disposal of certain businesses and severance costs associated with downsizing of the Company. Including the restructuring charge, operating losses of these businesses totalled $5.3 million during 1991. During 1992 and 1993, the restructured businesses were sold. (4) See notes 3 and 9 to the Company's consolidated financial statements for information regarding earnings per share calculations and stock split information. (5) The Company has not paid any dividends. (6) During the fiscal years 1991 through 1995, the Company acquired 99 industrial gas distributors. F-30 59 SCHEDULE II CONSOLIDATED AIRGAS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS For the Years Ended March 31, 1995, 1994 and 1993 (In thousands of dollars) Column A Column B Column C ________ ________ ________ Additions _________ Charged Balance at Charged to (Credited) Beginning Cost and to Other Description of Period Expense Accounts ____________ _________ __________ ____________ 1995 Accounts Receivable -- Allowance for doubtful accounts . . $ 4,207 $ 3,102 $ 1,033 (1) LIFO cost reserve . . . . . . . . . 659 402 -- Insurance reserves. . . . . . . . . 5,341 17,038 132 1994 Accounts Receivable -- Allowance for doubtful accounts . . $ 3,392 $ 2,884 $ 1,155 (1) LIFO cost reserve . . . . . . . . . 465 194 -- Insurance reserves. . . . . . . . . 7,046 13,031 165 1993 Accounts Receivable -- Allowance for doubtful accounts . . $ 2,947 $ 2,185 $ 1,054 (1) LIFO cost reserve . . . . . . . . . 441 24 -- Insurance reserves. . . . . . . . . 5,087 10,998 106 (COLUMNS CONTINUED ON NEXT PAGE) F-31 60 SCHEDULE II CONSOLIDATED AIRGAS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS For the Years Ended March 31, 1995, 1994 and 1993 (In thousands of dollars) (Columns Continued) Column A Column D Column E ________ ________ ________ Balance at End of Description Deductions Period ____________ ______________ ________ 1995 Accounts Receivable -- Allowance for doubtful accounts . . . $ (4,181) (2) $ 4,161 LIFO cost reserve . . . . . . . . . . -- 1,061 Insurance reserves. . . . . . . . . . (16,207) 6,304 1994 Accounts Receivable -- Allowance for doubtful accounts . . . $ (3,224) (2) $ 4,207 LIFO cost reserve . . . . . . . . . . -- 659 Insurance reserves. . . . . . . . . . (14,901) 5,341 1993 Accounts Receivable -- Allowance for doubtful accounts . . . $ (2,794) (2) $ 3,392 LIFO cost reserve . . . . . . . . . . -- 465 Insurance reserves. . . . . . . . . . (9,145) 7,046 ________ (1) Includes collections on accounts previously written-off and allowances for doubtful accounts of businesses acquired less the allowance for doubtful accounts of businesses sold. (2) Write-off of uncollectible accounts. F-31, Continued