1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: June 30, 1997
_____________________________
Commission file number: 1-9344
_____________________________
AIRGAS, INC.
______________________________________________________________________________
(Exact name of Registrant as specified in its charter)
Delaware 56-0732648
_______________________________ __________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
259 Radnor-Chester Road, Suite 100
Radnor, PA 19087-5240
_______________________________________ ________________
(Address of principal executive offices) (ZIP code)
(610) 687-5253
__________________________________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
______ ______
Common Stock outstanding at August 1, 1997: 69,413,994 shares
2
AIRGAS, INC.
FORM 10-Q
June 30, 1997
INDEX
PART I - FINANCIAL INFORMATION
______________________________
Consolidated Balance Sheets as of June 30, 1997
and March 31, 1997....................................................3
Consolidated Statements of Earnings
for the Three Months Ended June 30, 1997 and 1996.....................5
Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 1997 and 1996.....................6
Notes to Consolidated Financial Statements.................................7
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................11
PART II - OTHER INFORMATION
___________________________
Exhibits and Reports on Form 8-K..........................................17
Signatures................................................................18
3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
AIRGAS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, March 31,
1997 1997
(Unaudited)
_____________ ________
ASSETS
Current Assets
Trade receivables, less allowances for
doubtful accounts of $4,629 at June 30,
1997 and $4,443 at March 31, 1997 $ 164,452 $151,053
Inventories 135,802 129,372
Prepaid expenses and other current assets 30,097 31,574
_________ _________
Total current assets 330,351 311,999
_________ _________
Plant and Equipment, at cost 803,743 736,083
Less accumulated depreciation and amortization (195,191) (183,922)
_________ _________
Plant and equipment, net 608,552 552,161
Other Non-current Assets 148,466 132,257
Goodwill, net of accumulated amortization of
$31,881 at June 30, 1997 and $29,503
at March 31, 1997 326,587 294,614
_________ _________
Total assets $1,413,956 $1,291,031
========= =========
<FN>
See accompanying notes to consolidated financial statements.
4
AIRGAS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share amounts)
June 30, March 31,
1997 1997
(Unaudited)
___________ ________
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current Liabilities
Current portion of long-term debt $ 20,280 $ 25,158
Accounts payable, trade 65,754 74,329
Accrued expenses and other current liabilities 85,815 87,663
_________ _________
Total current liabilities 171,849 187,150
_________ _________
Long-Term Debt 722,164 629,931
Deferred Income Taxes 116,539 104,266
Other Non-current Liabilities 28,117 29,565
Minority Interest in Subsidiaries 3,770 3,462
Stockholders' Equity
Common stock $.01 par value, 200,000 shares
authorized, 69,438 and 68,762
shares issued at June 30, 1997 and
March 31, 1997, respectively 697 688
Capital in Excess of Par Value 164,108 155,543
Retained earnings 208,851 196,626
Cumulative Translation Adjustment (467) (468)
Treasury Stock, 100 and 800 common shares
at cost at June 30, 1997 and March 31, 1997,
respectively (1,672) (15,732)
_________ _________
Total stockholders' equity 371,517 336,657
_________ _________
Total liabilities and stockholders' equity $1,413,956 $1,291,031
========= =========
<FN>
See accompanying notes to consolidated financial statements.
5
AIRGAS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
__________________ __________________
Net sales:
Distribution $279,288 $248,129
Direct Industrial 36,845 16,452
Manufacturing 15,279 9,517
_______ _______
Total net sales 331,412 274,098
_______ _______
Costs and expenses:
Cost of products sold
(excluding depreciation,
depletion and amortization)
Distribution 140,020 126,590
Direct Industrial 26,005 13,432
Manufacturing 8,729 6,330
Selling, distribution and
administrative expenses 105,343 86,187
Depreciation and amortization 17,815 14,238
_______ _______
Total costs and expenses 297,912 246,777
_______ _______
Operating income:
Distribution 29,659 24,944
Direct Industrial 1,104 544
Manufacturing 2,737 1,833
_______ _______
33,500 27,321
Interest expense, net (12,108) (8,281)
Other income, net 473 281
Equity in loss of
unconsolidated affiliates (115) -
Minority interest (309) (229)
_______ _______
Earnings before income taxes 21,441 19,092
Income taxes 9,215 7,942
_______ _______
Net earnings $ 12,226 $ 11,150
======= =======
Earnings per share $ .18 $ .17
======= =======
Weighted average shares 69,420 67,095
======= =======
<FN>
See accompanying notes to consolidated financial statements.
6
AIRGAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
__________________ __________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 12,226 $ 11,150
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation, depletion and amortization 17,815 14,238
Deferred income taxes 2,304 2,382
Equity in earnings of unconsolidated
affiliates (251) (315)
(Gain) loss on sale of plant and equipment (137) 3
Minority interest in earnings 309 229
Stock issued for employee benefit plan expense 1,412 1,146
Changes in assets and liabilities,
excluding effects of business
acquisitions:
Trade receivables, net (5,287) (5,104)
Inventories (3,145) (10,494)
Prepaid expenses and other
current assets 2,736 (3,190)
Accounts payable, trade (12,001) 220
Accrued expenses and other current
liabilities 130 278
Other assets and liabilities, net (1,270) (5,513)
_______ _______
Net cash provided by operating activities 14,841 5,030
_______ _______
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (25,968) (14,814)
Proceeds from sale of plant and
equipment 497 947
Business acquisitions, net of cash acquired (38,229) (76,521)
Business acquisitions, holdback settlements (2,393) (2,356)
Investment in unconsolidated affiliates (7,395) (27,917)
Dividends from unconsolidated affiliates 661 413
Other, net (210) (10)
_______ _______
Net cash used by investing activities (73,037) (120,258)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 117,992 239,589
Repayment of debt (41,101) (123,832)
Repurchase of treasury stock, net (18,363) 0
Exercise of options and warrants 1,461 1,004
Net overdraft (1,793) (1,533)
_______ _______
Net cash provided by financing
activities 58,196 115,228
_______ _______
CHANGE IN CASH $ 0 $ 0
Cash - beginning of period 0 0
_______ _______
Cash - end of period $ 0 $ 0
======= =======
See accompanying notes to consolidated financial statements.
7
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
_____________________
The consolidated financial statements include the accounts of Airgas,
Inc. and its subsidiaries (the "Company"). Unconsolidated affiliates are
accounted for on the equity method and generally consist of 20 - 50% owned
operations where control does not exist or is considered temporary. The
excess of the cost of these affiliates is being amortized over 40 years.
Intercompany accounts and transactions are eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to interim
financial statements. These statements do not include all disclosures
required for annual financial statements. These financial statements should
be read in conjunction with the more complete disclosures contained in the
Company's audited consolidated financial statements for the year ended March
31, 1997.
The financial statements reflect, in the opinion of management, all
adjustments (normal recurring adjustments) necessary to present fairly the
Company's consolidated balance sheets at June 30, 1997 and March 31, 1997;
the consolidated statements of earnings for the three months ended June 30,
1997 and 1996; and the consolidated statements of cash flows for the three
months ended June 30, 1997 and 1996. The interim operating results are not
necessarily indicative of the results to be expected for an entire year.
Certain reclassifications have been made to previously issued financial
statements to conform to the current presentation.
(2) ACQUISITIONS
____________
From April 1, 1997 to June 30, 1997, the Company acquired eight
industrial gas distributors with aggregate annual sales of approximately $23
million, Carbonic Industries Corporation ("CIC") a C02 manufacturing concern
with annual sales in excess of $48 million, and Kendeco Industrial Supply, an
industrial products distributor with annual sales of approximately $15
million. The aggregate purchase price, including amounts related to
non-competition and confidentiality agreements, amounted to approximately $101
million and includes real estate acquired of approximately $6 million.
Included in the aggregate purchase price is the reissuance of approximately
1.8 million treasury shares which were reissued in connection with the
acquisition of CIC. 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.
Subsequent to June 30, 1997, the Company acquired Lyons Safety, Inc., an
industrial products distributor with annual sales of approximately $85
million.
8
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
(3) INVENTORIES
___________
Inventories consist of:
(In thousands)
June 30, March 31,
1997 1997
________ ________
Finished goods $133,975 $127,765
Raw materials 3,238 2,979
_______ _______
137,213 130,744
Less reduction to LIFO cost ( 1,411) (1,372)
_______ _______
$135,802 $129,372
======= =======
(4) PLANT AND EQUIPMENT
___________________
The major classes of plant and equipment are as follows:
(In thousands)
June 30, March 31,
1997 1997
_____________ _________
Land and land improvements $ 22,652 $ 21,676
Building and leasehold improvements 73,804 66,659
Cylinders 373,804 365,253
Machinery and equipment, including
bulk tanks 279,613 241,275
Transportation equipment 43,191 39,264
Construction in progress 10,679 1,956
_______ _______
$803,743 $736,083
======= =======
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AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
(5) OTHER NON-CURRENT ASSETS
_______________________
Other non-current assets include:
(In thousands)
June 30, March 31,
1997 1997
_____________ _________
Investment in unconsolidated
affiliates $ 81,185 $ 64,992
Noncompete agreements and other
intangible assets, at cost, net
of accumulated amortization of
$63.0 million at June 30, 1997
and $59.8 million at March 31, 1997 55,713 54,794
Other assets 11,568 12,471
_______ _______
$148,466 $132,257
======= =======
Investment in unconsolidated affiliates at June 30, 1997 includes the
Company's investment of approximately $47.6 million in cash and notes related
to the June 28, 1996 purchase of 47% of the voting capital stock of National
Welders Supply Company, Inc ("National Welders").
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
______________________________________________
Accrued expenses and other current liabilities include:
(In thousands)
June 30, March 31,
1997 1997
_____________ _________
Cash overdraft $ 12,953 $ 14,746
Accrued interest 10,861 5,425
Insurance payable and related
reserves 5,447 5,224
Customer cylinder deposits 8,469 8,185
Other accrued expenses and current
liabilities 48,085 54,083
_______ _______
$ 85,815 $ 87,663
======= =======
The cash overdraft is attributable to the float of the Company's outstanding
checks.
10
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
(7) EARNINGS PER SHARE
__________________
Earnings per share amounts were determined using the treasury
stock method.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 establishes new
standards for computing and presenting earnings per share, effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. All prior periods will be restated to reflect the
new Basic and Diluted earnings per share amounts. The Company's Basic
earnings per share is essentially net income divided by the weighted shares
outstanding, and the Diluted earnings per share is not expected to be
materially different than currently reported earnings per share amounts. The
Company will adopt SFAS No. 128 in the fourth quarter of fiscal 1998.
(8) COMMITMENTS AND CONTINGENCIES
_____________________________
On July 26, 1996, Praxair, Inc. ("Praxair") filed suit against the
Company in the Circuit Court of Mobile County, Alabama. The complaint alleges
tortious interference with business or contractual relations with respect to
Praxair's Right of First Refusal contract with the majority shareholders of
National Welders by the Company in connection with the Company's formation of
a joint venture with National Welders. Praxair is seeking compensatory
damages in excess of $100 million and punitive damages. On February 24, 1997,
the court entered an order denying the Company's motion to dismiss for forum
non conveniens. The Company believes that Praxair's claims are without merit
and intends to defend vigorously against such claims.
On September 9, 1996, the Company filed suit against Praxair in the Court
of Common Pleas of Philadelphia County, Pennsylvania. The complaint alleges
breach of contract, fraud, conversion and misappropriation of trade secrets
with respect to an agreement between Praxair and the Company, pursuant to
which Praxair induced the Company to provide Praxair valuable information and
conclusions developed by the Company concerning CBI Industries, Inc. ("CBI")
in exchange for Praxair's promise not to acquire CBI without the Company's
participation. The Company has alleged that it became entitled, pursuant to
such agreement, to acquire certain of CBI's assets having a value in excess of
$800 million. The Company is seeking compensatory and punitive damages. On
January 2, 1997, the court entered an order overruling Praxair's preliminary
objections to the Company's complaint and ordering Praxair to file an answer
to the complaint. Praxair has since filed an answer and asserted various
defenses.
11
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
On December 23, 1996, the Company reported that it had been a victim of a
fraudulent breach of contract by a supplier. On February 12, 1997, the
Company filed a lawsuit in the United States District Court for the Southern
District of Georgia under the Federal RICO and Georgia RICO statutes against
Discount Auto Parts, Inc. ("Discount"), an employee of Discount, and certain
other businesses and individual defendants, alleging that Discount and the
other defendants engaged in racketeering activity involving the fraudulent
sale of smuggled and counterfeit R-12 refrigerant gas. The Company's
complaint alleged that the racketeering activity of the defendants caused
damages to the Company in an amount not less than $20 million. On July 28,
1997 the Company reported that it had reached a comprehensive settlement with
all of the defendants in the litigation described above. Under the terms of
the settlement, the defendants have agreed to pay the Company approximately
$20 million to compensate it for most of the product losses and costs it
recognized with a pre-tax charge in the fourth quarter of its fiscal year
ended March 31, 1997. The settlement, which requires court approval in
bankruptcy proceedings for two of the defendants, resulted in a suspension of
the trial which was scheduled to begin on August 4, 1997. The Company will
reflect the settlement within its financial statements upon the conclusion of
the bankruptcy court approvals and when the receipt of payment from the
defendants is assured. The Company will continue to pursue insurance claims
for the balance of its product losses and related expenses.
The Company is involved in other various legal 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 financial condition, results of operations or liquidity.
12
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW
________________
OVERVIEW
________
The Company's financial results for the first quarter ended June 30,
1997 reflect substantial growth compared with the first quarter last year.
Net sales increased 21% to $331.4 million from $274.1 million in the first
quarter last year. Net earnings for the first quarter of fiscal 1998
increased by 10% to $12.2 million, or $.18 per share, compared to $11.2
million, or $.17 per share for the same quarter last year. After tax cash
flow (net earnings plus depreciation, depletion, amortization and deferred
taxes) increased by 16% to $32.3 million, or $.47 per share, compared to $27.8
million, or $.41 per share for the same quarter last year.
These increases were attributable to continued success of the Company's
acquisition growth strategies combined with internal sales growth and
continuous improvement in other areas, including higher hardgoods vendor
rebates and lower business insurance costs. Offsetting this solid growth were
costs associated with new branch start-ups in Eastern Canada, planned expenses
related to the expansion of Airgas Direct Industrial ("ADI"), interest costs
from debt incurred related to the refrigerant fraud, and interest costs and
equity loss associated with the Company's investment in National Welders
Supply ("National Welders"). Since April 1, 1997, the Company has completed
eleven acquisitions with aggregate annual sales of approximately $170 million.
Growth in the Company's industrial gas distribution business during the
first quarter of 1998 was helped by the acquisition of eight businesses with
aggregate annual sales of approximately $23 million. Internal growth and
expansion of existing product lines resulted in same-store sales growth of
3.5% and realized same-store gross profit growth of 5.4% compared to the first
quarter last year.
In fiscal 1997, the Company entered a new business segment and formed
its ADI Group with the acquisitions of IPCO Safety Products ("IPCO") and
Rutland Tool & Supply Co., Inc. ("Rutland"). ADI offers a multi-channel,
direct mail, national distribution infrastructure which broadens the line of
hardgoods and positions the Company for entry into the $55 billion safety and
metalworking industrial segment of the Maintenance, Repair and Operations
("MRO") market. Since April 1, 1997, ADI has acquired two key industrial
products distributors: (1) Kendeco Industrial Supply, an "engineered-systems
integrator" for the cutting tools and abrasives market with annual sales of
approximately $15 million, and (2) Lyons Safety, Inc., a national marketer of
safety and personal protection systems with annual sales of approximately $85
million. These two acquisitions strengthen ADI's position both through the
expansion of two key product lines (safety products and metalworking tools) in
the largest geographical market for industrial supplies, and through
additional marketing and service capabilities to large customers. In
addition, internal sales growth by ADI realized same-store sales growth of
approximately 12.5% compared to the first quarter last year.
During fiscal 1997, the Company also announced a strategy to expand its
distribution of carbon dioxide. In June 1997, the Company completed the
Carbonic Industries Corporation (CIC) acquisition, the fourth largest producer
of carbon dioxide in the United States with annual sales in excess of $48
million. Also during the first quarter of fiscal 1998, the Company acquired
American Dry Ice, an $11 million distributor of small bulk CO2, dry ice and
13
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
related products, and announced its intent to acquire Carbonic Reserves, a $14
million manufacturer and distributor of dry ice products. With these
acquisitions, the Company's combined annual sales of carbon dioxide and dry
ice products are expected to total in excess of $100 million. CIC, combined
with the acquisition of the Jackson Dome properties in fiscal 1997 and related
acquisitions of liquid carbon dioxide distributors and carbon dioxide beverage
companies, enhances the Company's ability to supply carbon dioxide and dry ice
products through its distribution network.
The fraudulent breach of contract by a third-party supplier of
refrigerant gas was reported by the Company on December 23, 1996. On February
12, 1997, the Company disclosed it had filed a lawsuit in the United Stated
District Court under the Federal RICO and Georgia RICO statutes against
Discount Auto Parts, Inc. ("Discount"), an employee of Discount, and certain
other businesses and individual defendants engaged in racketeering activity
involving the fraudulent sale of smuggled and counterfeit R-12 refrigerant
gas. The Company's complaint alleged that the racketeering activity of the
defendants caused damages to the Company in an amount not less than $20
million. On July 28, 1997 the Company reported that it had reached a
comprehensive settlement with all of the defendants in the litigation
described above. Under the terms of the settlement, the defendants have
agreed to pay the Company approximately $20 million to compensate it for most
of the product losses and costs it recognized with a pre-tax charge in the
fourth quarter of its fiscal year ended March 31, 1997. The settlement, which
requires court approval in bankruptcy proceedings for two of the defendants,
resulted in a suspension of the trial which was scheduled to begin on August
4, 1997. The Company will reflect the settlement within its financial
statements upon the conclusion of the bankruptcy court approvals and when the
receipt of payment from the defendants is assured. The Company will continue
to pursue insurance claims for the balance of its product losses and related
expenses.
14
RESULTS OF OPERATIONS: THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE
MONTHS ENDED JUNE 30, 1996
__________________________
Net sales increased 21% during the quarter ended June 30, 1997 compared
to the same quarter in the prior year:
(in thousands)
1996 1995 Increase
____ ____ __________
Distribution $279,288 $248,129 $ 31,159
Direct Industrial 36,845 16,452 20,393
Manufacturing 15,279 9,517 5,762
_______ _______ _______
$331,412 $274,098 $ 57,314
======= ======= =======
For the quarter ended June 30, 1997, Distribution sales increased
approximately $22 million resulting from the acquisition of 27 distributors
since April 1, 1996 and approximately $9 million from same-store sales.
The increase in same-store Distribution sales of 3.5% was a result of growth
in all three product groups: gases, hardgoods and rent. The internal growth
was attributable to higher sales volume and from improved pricing. The Company
continues to focus on internal sales growth through the development of new gas
products and product-line extensions, including specialty gases, small bulk
gases, carbon dioxide, replacement refrigerants in returnable containers,
expansion of rental welder fleets and increased hardgoods business through
ADI. The Company believes its same-store sales growth is slightly understated
since it does not reflect the Company's decision to cease unprofitable sales
to certain customers and other sales lost during acquisition consolidation and
integration activity. Airgas subsidiaries without significant acquisition
activity averaged approximately 5% same-store sales growth. The Company
estimates same-store sales based on a comparison of current period sales to
the prior period's sales, adjusted for acquisitions. Future same-store sales
growth is dependent on the economy and the Company's ability to expand markets
for new and existing products and to increase prices.
ADI's sales include welding, metalworking, safety and other MRO
hardgoods. The internal sales growth rate for ADI was approximately 12.5%
during the first quarter of 1998, with IPCO posting a growth rate of
approximately 15% and Rutland approximately 10%. Sales to the Distribution
segment totaled approximately $856 thousand.
The Manufacturing segment's sales increased 61% during the first quarter
of 1998 primarily as a result of the acquisition of CIC and the Jackson Dome
carbon dioxide businesses. Strong sales of calcium carbide were offset
slightly by lower demand for nitrous oxide and lower shipments of certain
carbon products to one customer. Excluding acquisitions, sales increased 1%
during the quarter. Sales to the Distribution segment totaled approximately
$385 thousand.
15
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The increase in Distribution gross profit of approximately $17.7 million
over the same quarter in the prior year resulted from acquisitions which
contributed approximately $10.6 million and from same-store gross profit
growth of 5.4% or approximately $7.1 million. Same-store gross profit growth
resulted from margin improvement of $2.7 million and sales volume growth of
$4.4 million. On a same-store basis, the Distribution gross margin was 49.9%
which represented an improvement of 90 basis points compared to the same
period in the prior year. Same-store gross margins improved as a result of a
shift in sales mix towards higher margin gases as a result of favorable gas
pricing and gas programs such as small bulk and specialty gases. In addition,
higher sales volumes and margins on hardgoods combined with higher hardgoods
rebates contributed to the favorable increase in gross profits. A sales
contest combined with lower margin refrigerant sales held margins down during
the prior period quarter. Finally, bulk tank rent related to small bulk
installations, and an increased base of rental welding equipment and the
return of third party rented cylinders also generated improvements in same-
store gross margins.
For the quarter, ADI's gross margin of 29.4% compared favorably to the
prior year since the prior year quarter did not reflect Rutland, which was
acquired September 1, 1996, and has a historical gross margin of approximately
40%. Favorable margins at IPCO were offset by Rutland which experienced a
shift in sales more towards lower margin machinery items and increased
wholesale business.
For the quarter, the Manufacturing gross margin of 42.9% compared
favorably to the same quarter last year, increasing approximately 9.4%. The
acquisitions of CIC and the Jackson Dome and the shift in the sales mix have
contributed to the favorable margin variance.
Selling, distribution, and administrative expenses ("SG&A") increased
$19.2 million compared to the same quarter last year primarily due to
acquisitions. SG&A expenses as a percentage of sales increased 40 basis
points to 31.8% compared to the same period in the prior quarter. The
increase in SG&A expenses relative to sales resulted from higher operating
costs associated with the start-up of new Distribution branches in Eastern
Canada, planned expenses related to the expansion of ADI, costs associated
with integration and consolidation of certain Distribution acquisitions, legal
expenses related to successfully defending a lawsuit and increases in
salaries, wages and benefits. As the Company continues to integrate such
acquisitions and complete such start-up and expansion activities, SG&A
expenses relative to net sales should improve, although such increased
activities could recur as a result of future acquisitions and expansion
activities.
Depreciation, depletion and amortization increased $3.6 million compared
to the same period in the prior quarter due to acquisitions and from increased
capital expenditures. Of the $11.2 million increase in capital expenditures,
$7.3 million of the increase related to expenditures for the consolidation of
two air separation plants. The balance of the increase primarily resulted
from purchases of cylinders, bulk tanks and machinery and equipment necessary
to facilitate gas sales growth and the integration of acquisitions.
16
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating income increased 23% in 1997 compared to 1996:
(in thousands)
1997 1996 Increase
____ ____ __________
Distribution $29,659 $24,944 $ 4,715
Direct Industrial 1,104 544 560
Manufacturing 2,737 1,833 904
______ ______ ______
$33,500 $27,321 $ 6,179
====== ====== ======
The Distribution segment's operating margin increased 50 basis points to
10.6% compared with the same quarter last year. The increase resulted
primarily from higher same-store gross profits. Operating margin expansion
was partially offset by acquisitions which have operating margins averaging
around 8% and from higher operating costs associated with the integration and
consolidation of acquisitions and new branch start-ups in Eastern Canada.
Subject to the effects of future acquisitions and the Company's ability to
increase sales and expand margins, the Company believes that its operating
margin performance will continue to improve as it implements selective price
increases, reduces costs by leveraging its national purchasing power and
continues to integrate acquisitions.
The operating income margin for ADI decreased 30 basis points to 3%
compared with the same quarter last year. The Company believes that ADI's
operating income margin will continue to be impacted by expansion costs
related to information systems, logistics and facility enhancements. ADI is
establishing a new distribution center in Southern California which will
consolidate four other ADI warehouses.
The Manufacturing segment's operating income increased $900 thousand
compared to the same quarter last year primarily as a result of the CIC and
Jackson Dome acquisitions.
17
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Interest expense, net, increased $3.8 million compared to the same
quarter last year primarily as a result of the increase in average outstanding
debt associated with the acquisition of businesses acquired since April 1,
1996, the joint venture investment in National Welders, interest costs on debt
associated with the refrigerant fraud, and the repurchase of the Company's
common stock. As discussed in "Liquidity and Capital Resources" below, the
Company has hedged floating interest rates under certain borrowings with
interest rate swap agreements.
Income tax expense represented 43.0% of pre-tax earnings in 1997 compared
to 41.6% in 1996. The increase in the effective income tax rate was primarily
a result of non-deductible goodwill from recent acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
The Company has primarily financed its operations, capital expenditures,
stock repurchases, and acquisitions with borrowings and funds provided by
operating activities.
Cash flows from operating activities totaled $14.8 million for the three
months ended June 30, 1997. Depreciation, depletion and amortization
represent $17.8 million of cash flow from operating activities. Cash flows
from working capital components decreased $17.6 million primarily as a result
of a decrease in accounts payable due to the timing of invoice payments and an
increase in accounts receivable associated with higher same store-sales and an
increase in inventory levels to meet increased sales volumes. Days' sales
outstanding and distribution hardgoods days' supply of inventory levels are
comparable to March 31, 1997 levels.
Cash used by investing activities totaled $73.0 million which was
primarily comprised of $26.0 million for capital expenditures and $38.2
million related to acquisitions.
The Company's use of cash for capital expenditures was attributable to
the consolidation of two air separation plants and the continued assimilation
of acquisitions which require expenditures for combining cylinder fill plants,
improving truck fleets and purchasing cylinders in order to return cylinders
rented from third parties. The Company has entered into long-term supply
contracts with two customers which require the construction of two air
separation plants which are scheduled to begin production late in calendar
1997. During the first quarter of fiscal 1998, the Company incurred capital
expenditures of approximately $7.3 million for air separation plant
construction. These two plants will also produce liquid oxygen and argon
which will be sold to the Company's Distribution customers. Additionally,
capital expenditures include the purchase of cylinders and bulk tanks
necessary to facilitate gas sales growth. Approximately 28% of first quarter
capital expenditures were for the purchase of cylinders, bulk tanks and
machinery and equipment and 65% were related to the consolidation of air
separation plants. 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.
18
Item 2. AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Financing activities provided cash of $58.2 million with total debt
outstanding increasing by $87.4 million from March 31, 1997. Funds from
financing activities were used primarily for the purchase of distributor
acquisitions, capital expenditures and the repurchase of Airgas common stock.
The Company's primary source of borrowing is a $500 million unsecured
revolving credit facility with various commercial banks which matures on
September 30, 2001. At June 30, 1997, the Company had approximately $366
million in borrowings under the facility and approximately $72 million
committed under letters of credit, resulting in unused availability under the
facility of approximately $62 million.
On June 30, 1997, the Company entered into an additional $125 million
unsecured revolving credit facility with a commercial bank which matures on
November 1, 1998. The terms and conditions of this facility are also similar
to the Company's existing $500 million facility. At June 30, 1997, the
Company had no borrowings outstanding under the facility. The Company intends
to terminate its $125 million facility in conjunction with an anticipated
increase in the Company's $500 million revolving credit facility in September
1997, which will have terms and conditions similar to its existing $500
million facility.
In fiscal 1997, the Company commenced a medium-term note program which
provides for the issuance of its securities with an aggregate public offering
price of up to $450 million. During fiscal 1997, the Company issued the
following long-term debt under the medium-term note program: $100 million of
unsecured notes due September 2006 bearing interest at a fixed rate of 7.75%;
$50 million of unsecured notes due September 2001 bearing interest at a fixed
rate of 7.15%; and $75 million of unsecured notes due March 2004 at a fixed
rate of 7.14%. The proceeds from the medium-term note issuances were used to
repay bank debt.
The Company has a Canadian credit facility totalling C$50 million (US$36
million) with various commercial banks which matures on November 14, 1998. At
June 30, 1997, the Company had approximately C$46 million (US$33 million) in
borrowings outstanding under the facility, resulting in unused availability
under the facility of approximately C$4 million (US$3 million). Subsequent to
June 30, 1997, the Company entered into an additional C$15 million (US$11
million) unsecured revolving credit facility with a commercial bank which
matures on January 8, 1999.
The Company also has unsecured line of credit agreements with various
commercial banks. At June 30, 1997, these agreements totaled $50 million,
under which the Company had no borrowings outstanding.
At June 30, 1997, the effective interest rate related to outstanding
borrowings under all credit lines was approximately 6.07%. The Company's loan
agreements contain covenants which include the maintenance of a minimum equity
level, maintenance of certain financial ratios, restrictions on additional
borrowings and limitations on dividends.
In managing interest rate exposure, principally under the Company's
floating rate revolving credit facilities, the Company has entered into
23 interest rate swap agreements during the period from June 1992
through June 30, 1997. The swap agreements are with major financial
institutions and aggregate $403 million in notional principal amount at
June 30, 1997. Approximately $253 million of the notional principal
amount of the swap agreements require fixed interest payments based on an
19
Item 2. AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
average effective rate of 6.64% for remaining periods ranging between 1 and 8
years. Five swap agreements require floating rates ($149.5 million notional
amount at 5.72% at June 30, 1997). Under the terms of seven of the swap
agreements, the Company has elected to receive the discounted value of the
counterparty's interest payments upfront. At June 30, 1997, approximately
$17.7 million of such payments were included in other liabilities. The
Company continually monitors its positions and the credit ratings of its
counterparties, and does not anticipate nonperformance by the counterparties.
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 primarily through the use of cash
flow from operations, debt, common stock for certain acquisition candidates
and other available sources. Subsequent to June 30, 1997, the Company
acquired Lyons Safety, Inc., an industrial safety products distributor with
annual sales of approximately $85 million.
In December 1996, the Board of Directors authorized the repurchase of up
to 1,600,000 shares of Airgas Common Stock, and on April 16, 1997, the Board
of Directors authorized the repurchase of up to 1,000,000 additional shares.
The Company purchased 800,000 shares of Airgas common stock during the year
ended March 31, 1997. During the first quarter ended June 30, 1997, the
Company repurchased 1,154,000 shares, leaving a total of 646,000 shares
available under the repurchase programs. Approximately 1.8 million shares
were issued in connection with the acquisition of CIC. The Company's treasury
shares will be used to fund acquisitions and employee benefit programs and
will be acquired in open-market transactions, from time-to-time, depending on
market conditions.
The Company does not currently pay dividends.
OTHER
_____
New Accounting Pronouncements
In the first quarter of fiscal 1998, the Company adopted SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Under the financial-components approach, after a transfer of financial assets,
an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with pledge of collateral.
This statement is effective for transfer and servicing of financial assets and
extinguishments of liabilities for fiscal years beginning after December 15,
1996 and is to be applied prospectively. The adoption of this statement did
not have a material impact on earnings, financial condition or liquidity of
the Company.
20
Item 2. AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In the first quarter of fiscal 1998, the Company adopted Statement of
Position 96-1 (SOP), which prescribes generally accepted accounting principles
for environmental remediation liabilities. This SOP more specifically
identifies future, long-term monitoring and administration expenditures as
remediation liabilities that need to be accrued on the balance sheet as an
existing obligation. This SOP is effective for fiscal years beginning after
December 15, 1996. The adoption of this statement did not have a material
impact on earnings, financial condition or liquidity of the Company.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128
establishes new standards for computing and presenting earnings per share,
effective for financial statements issued for periods ending after December
15, 1997, including interim periods. All prior periods will be restated to
reflect the new Basic and Diluted earnings per share amounts. The Company's
Basic earnings per share is essentially net income divided by the weighted
shares outstanding, and the Diluted earnings per share is not expected to be
materially different than currently reported earnings per share amounts. The
Company will adopt SFAS No. 128 in the fourth quarter of fiscal 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company plans to adopt this accounting
standard in the first quarter of fiscal 1999, as required. The adoption of
this standard will not impact earnings, financial condition, or liquidity, but
will require the Company to classify items of other comprehensive income in a
financial statement and display the accumulated balance of other comprehensive
income separately in the equity section of the balance sheet.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes
standards for reporting information about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company will adopt this accounting
standard in the first quarter of fiscal 1999, as required. The adoption of
this standard will not impact earnings, financial condition or liquidity of
the Company.
Forward-looking Statements
This report contains forward-looking statements. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, there are certain important factors that could cause the Company's
actual results to differ materially from those included in such forward-
looking statements. Some of the important factors which could cause actual
results to differ materially from those projected include, but are not limited
to: the Company's ability to continue to identify, complete and integrate
strategic acquisitions to enter new markets and expand existing business;
continued availability of financing to provide additional sources of funding
for future acquisitions; capital expenditure requirements and foreign
investments; the effects of competition from independent distributors and
vertically integrated gas producers on products and pricing, and growth and
acceptance of new product lines through the Company's sales and marketing
programs; changes in product prices from gas producers and name-brand
21
manufacturers and suppliers of hardgoods; uncertainties regarding accidents or
litigation which may arise in the ordinary course of business; the Company's
expectations regarding court approval in the bankruptcy proceedings for two of
the defendants in connection with the fraudulent breach of contract related to
refrigerant R-12 purchases; and the effects of, and changes in the economy,
monetary and fiscal policies, laws and regulations, inflation and monetary
fluctuations and fluctuations in interest rates, both on a national and
international basis.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 26, 1996, Praxair, Inc. ("Praxair") filed suit against the
Company in the Circuit Court of Mobile County, Alabama. The complaint alleges
tortious interference with business or contractual relations with respect to
Praxair's Right of First Refusal contract with the majority shareholders of
National Welders by the Company in connection with the Company's formation of
a joint venture with National Welders. Praxair is seeking compensatory
damages in excess of $100 million and punitive damages. On February 24, 1997,
the court entered an order denying the Company's motion to dismiss for forum
non conveniens. The Company believes that Praxair's claims are without merit
and intends to defend vigorously against such claims.
On September 9, 1996, the Company filed suit against Praxair in the Court
of Common Pleas of Philadelphia County, Pennsylvania. The complaint alleges
breach of contract, fraud, conversion and misappropriation of trade secrets
with respect to an agreement between Praxair and the Company, pursuant to
which Praxair induced the Company to provide Praxair valuable information and
conclusions developed by the Company concerning CBI Industries, Inc. ("CBI")
in exchange for Praxair's promise not to acquire CBI without the Company's
participation. The Company has alleged that it became entitled, pursuant to
such agreement, to acquire certain of CBI's assets having a value in excess of
$800 million. The Company is seeking compensatory and punitive damages. On
January 2, 1997, the court entered an order overruling Praxair's preliminary
objections to the Company's complaint and ordering Praxair to file an answer
to the complaint. Praxair has since filed an answer and asserted various
defenses.
The fraudulent breach of contract by a third-party supplier of
refrigerant gas was reported by the Company on December 23, 1996. On February
12, 1997, the Company filed a lawsuit in the United States District Court for
the Southern District of Georgia under the Federal RICO and Georgia RICO
statutes against Discount Auto Parts, Inc. ("Discount"), an employee of
Discount and certain other business and individual defendants, alleging that
Discount and the other defendants engaged in racketeering activity involving
the fraudulent sale of smuggled and counterfeit R-12 refrigerant gas. The
Company's complaint alleged that the racketeering activity of the defendants
caused damages to the Company in an amount not less than $20 million. On July
28, l997 the Company reported that it had reached a comprehensive settlement
with all of the defendants in the litigation described above. Under the terms
of the settlement, the defendants have agreed to pay the Company approximately
$20 million to compensate it for most of the product losses and costs it
recognized with a pre-tax charge in the fourth quarter of its fiscal year
ended March 31, 1997. The settlement, which requires court approval in
bankruptcy proceedings for two of the defendants, resulted in a suspension of
the trial which was scheduled to begin on August 4, 1997. The Company will
reflect the settlement within its financial statements upon the conclusion of
the bankruptcy court approvals and when the receipt of payment from the
defendants is assured. The Company will continue to pursue insurance claims
for the balance of its product losses and related expenses.
22
PART II - OTHER INFORMATION - CONTINUED
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
________
4.1 Credit Agreement dated June 30, 1997 between Airgas, Inc. and
certain banks and Nationsbank N.A. ($125,000,000 credit facility).
11. Calculation of earnings per share.
b. Reports on Form 8-K
___________________
On April 17, 1997, the Company filed a current report on Form 8-K to
announce, under Item 5, special charges and its earnings outlook for the
fourth quarter of its fiscal year ended March 31, 1997.
On April 21, 1997, the Company filed a current report on Form 8-K, to
announce, under Item 5, that its Board of Directors authorized the repurchase
of up to one million shares of Airgas, Inc. common stock.
On April 29, 1997, the Company filed a current report on Form 8-K, which
reported, under Item 5, that the Company's Board of Directors adopted a
stockholder rights plan on April 16, 1997, which contemplates the issuance of
preferred stock purchase rights to the Company's common stockholders of record
as of April 29, 1997.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 12, 1997 /s/ Thomas C. Deas, Jr.
_______________ _______________________
Date Thomas C. Deas, Jr.
Vice President and
Chief Financial Officer