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: September 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 November 1, 1997: 70,978,802 shares
2
AIRGAS, INC.
FORM 10-Q
September 30, 1997
INDEX
PART I - FINANCIAL INFORMATION
______________________________
Consolidated Balance Sheets as of September 30, 1997
and March 31, 1997....................................................3
Consolidated Statements of Earnings
for the Three Months Ended September 30, 1997 and 1996................5
Consolidated Statements of Earnings
for the Six Months Ended September 30, 1997 and 1996..................6
Consolidated Statements of Cash Flows
for the Six Months Ended September 30, 1997 and 1996..................7
Notes to Consolidated Financial Statements.................................8
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................14
PART II - OTHER INFORMATION
___________________________
Legal Proceedings.........................................................26
Submission of Matters to a Vote of Security Holders.......................27
Exhibits and Reports on Form 8-K..........................................27
Signatures................................................................28
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
AIRGAS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, March 31,
1997 1997
(Unaudited)
_____________ ________
ASSETS
____________________________________________
Current Assets
Trade receivables, less allowances for
doubtful accounts of $4,882 at September 30,
1997 and $4,443 at March 31, 1997 $175,360 $151,053
Inventories 146,109 129,372
Prepaid expenses and other current assets 39,406 31,574
_________ _________
Total current assets 360,875 311,999
_________ _________
Plant and Equipment, at cost 839,188 736,083
Less accumulated depreciation and amortization (204,679) (183,922)
_________ _________
Plant and equipment, net 634,509 552,161
Other Non-current Assets, net 148,023 132,257
Goodwill, net of accumulated amortization of
$34,455 at September 30, 1997 and $29,503
at March 31, 1997 347,087 294,614
_________ _________
Total assets $1,490,494 $1,291,031
========= =========
See accompanying notes to consolidated financial statements.
4
AIRGAS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share amounts)
September 30, March 31,
1997 1997
(Unaudited)
___________ ________
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current Liabilities
Current portion of long-term debt $ 26,348 $ 25,158
Accounts payable, trade 73,071 74,329
Accrued expenses and other current liabilities 91,030 87,663
_________ _________
Total current liabilities 190,449 187,150
_________ _________
Long-Term Debt 743,718 629,931
Deferred Income Taxes 126,653 104,266
Other Non-current Liabilities 29,569 29,565
Minority Interest in Subsidiaries 4,079 3,462
Stockholders' Equity
Common stock $.01 par value, 200,000 shares
authorized, 69,750 and 68,762
shares issued at September 30, 1997 and
March 31, 1997, respectively 698 688
Capital in excess of par value 167,040 155,543
Retained earnings 230,527 196,626
Cumulative translation adjustment (567) (468)
Treasury stock, 100 and 800 common shares at
cost at September 30, 1997 and March 31, 1997 (1,672) (15,732)
_________ _________
Total stockholders' equity 396,026 336,657
_________ _________
Total liabilities and stockholders' equity $1,490,494 $1,291,031
========= =========
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
September 30, 1997 September 30, 1996
__________________ __________________
Net sales:
Distribution $268,168 $244,701
Direct Industrial 61,216 20,437
Manufacturing 30,972 13,574
_______ _______
Total net sales 360,356 278,712
_______ _______
Costs and expenses:
Cost of products sold
(excluding depreciation,
depletion and amortization)
Distribution 135,011 121,490
Direct Industrial 44,966 15,537
Manufacturing 14,404 8,110
Selling, distribution and
administrative expenses 114,199 89,544
Depreciation, depletion and
amortization 18,776 15,023
Recovery of refrigerant losses (14,500) -
_______ _______
Total costs and expenses 312,856 249,704
_______ _______
Operating income:
Distribution 27,182 26,133
Direct Industrial 1,343 638
Manufacturing 4,475 2,237
Recovery of refrigerant losses 14,500 -
_______ _______
47,500 29,008
Interest expense, net (13,670) (9,753)
Other income, net 1,573 70
Equity in earnings of unconsolidated
affiliates 434 114
Minority interest (309) (152)
_______ _______
Earnings before income taxes 35,528 19,287
Income tax expense 13,853 7,977
_______ _______
Net earnings $ 21,675 $ 11,310
======= =======
Earnings per share $ .31 $ .17
======= =======
Weighted average common and
common equivalent shares 70,950 67,660
======= =======
See accompanying notes to consolidated financial statements.
6 AIRGAS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended Six Months Ended
September 30, 1997 September 30, 1996
__________________ __________________
Net sales:
Distribution $539,437 $487,755
Direct Industrial 98,061 36,889
Manufacturing 54,270 28,166
_______ _______
Total net sales 691,768 552,810
_______ _______
Costs and expenses:
Cost of products sold
(excluding depreciation,
depletion and amortization)
Distribution 272,474 245,305
Direct Industrial 70,971 28,969
Manufacturing 25,690 17,215
Selling, distribution and
administrative expenses 219,542 175,731
Depreciation, depletion and amortization 36,591 29,261
Recovery of refrigerant losses (14,500) -
_______ _______
Total costs and expenses 610,768 496,481
_______ _______
Operating income:
Distribution 55,876 50,888
Industrial Distribution 2,448 1,014
Manufacturing 8,176 4,427
Recovery of refrigerant losses 14,500 -
_______ _______
81,000 56,329
Interest expense, net (25,778) (18,034)
Other income, net 2,046 351
Equity in earnings of unconsolidated
affiliates 319 114
Minority interest (618) (381)
_______ _______
Earnings before income taxes 56,969 38,379
Income taxes 23,068 15,919
_______ _______
Net earnings $ 33,901 $ 22,460
======= =======
Earnings per share $ .48 $ .33
======= =======
Weighted average common and
common equivalent shares 70,100 67,350
======= =======
See accompanying notes to consolidated financial statements.
7 AIRGAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) Six Months Ended Six Months Ended
September 30, 1997 September 30, 1996
__________________ __________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 33,901 $ 22,460
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation, depletion and amortization 36,591 29,261
Deferred income taxes 11,374 4,776
Equity in earnings of unconsolidated
affiliates (1,061) (749)
(Gain) loss on sale of plant and equipment (25) 101
Gain on divestiture of non-core business (1,452) -
Minority interest in earnings 618 381
Stock issued for employee benefit plan
expense 2,945 2,353
Changes in assets and liabilities,
excluding effects of business
acquisitions:
Trade receivables, net (7,081) (2,681)
Inventories (3,626) (20,458)
Prepaid expenses and other
current assets (5,400) (2,912)
Accounts payable, trade (14,266) (6,649)
Accrued expenses and other current
liabilities 391 1,777
Other assets and liabilities, net 1,488 (6,001)
_______ _______
Net cash provided by operating activities 54,397 21,659
_______ _______
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (65,419) (31,101)
Proceeds from sale of plant and
equipment 1,245 1,313
Proceeds from divestiture of non-core business 4,000 -
Business acquisitions, net of cash acquired (67,599) (87,969)
Business acquisitions-hold back settlements (3,174) (4,379)
Investment in unconsolidated affiliates (9,147) (33,849)
Dividends from unconsolidated affiliates 870 413
Other, net 364 (2,378)
_______ _______
Net cash used by investing activities (138,860) (157,950)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 224,593 667,681
Repayment of debt (124,674) (528,546)
Financing costs (8) (1,667)
Repurchase of treasury stock (18,363) -
Exercise of options and warrants 2,427 2,444
Net overdraft 488 (3,621)
_______ _______
Net cash provided by financing activities 84,463 136,291
_______ _______
CHANGE IN CASH $ 0 $ 0
Cash - beginning of period 0 0
_______ _______
Cash - end of period $ 0 $ 0
======= =======
See accompanying notes to consolidated financial statements.
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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 September 30, 1997 and March 31,
1997; the consolidated statements of earnings for the three and six months
ended September 30, 1997 and 1996; and the consolidated statements of cash
flows for the six months ended September 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. Four businesses with
annual sales of approximately $40 million which were previously reported with
the Distribution segment are now reported with the Manufacturing segment.
(2) ACQUISITIONS
____________
From April 1, 1997 to September 30, 1997, the Company acquired ten
industrial gas distributors with aggregate annual sales of approximately $15
million, two industrial products distributors with annual sales of
approximately $106 million, and three carbon dioxide distributors with annual
sales of approximately $60 million. The aggregate purchase price, including
amounts related to non-competition and confidentiality agreements, amounted to
approximately $149 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 Carbonic Industries Corporation ("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 September 30, 1997, the Company acquired six industrial
gas distributors with annual sales of approximately $45 million, and one
carbon dioxide distributor with annual sales of approximately $15 million.
9
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
(3) NON-RECURRING GAINS
___________________
On December 23, 1996, the Company announced it was the victim of a
fraudulent breach of contract by a third-party supplier of refrigerant gas.
In connection with the fraud, the Company recorded a non-recurring pre-tax
charge during the fourth quarter of fiscal 1997 of $26.4 million
(approximately $17 million after-tax) for product losses and costs associated
with the Company's investigation into the fraud. The Distribution subsidiary
which reported the special charge in fiscal 1997 is reported with the
Manufacturing segment in fiscal 1998. On July 28, 1997, the Company reported
that it had negotiated a comprehensive settlement with all the defendants in
this litigation. The terms of the settlement were approved by the bankruptcy
court on September 5, 1997. As a result of the recovery, the Company recorded
a non-recurring pre-tax gain during the second quarter of 14.5 million
(approximately $9.4 million after- tax). The recovery of $14.5 million
represents cash received of $18.2 million, a receivable of $1.5 million
expected to be collected in the third quarter, offset by additional costs and
expenses incurred year-to-date, estimated future out-of-pocket costs and other
reserves which totalled $5.2 million. The Company continues to pursue
additional recoveries in connection with the liquidation of a bankrupt
business and through coverage under insurance policies. (See Note 10 for
further discussion of legal proceedings with respect to the refrigerant fraud
litigation).
The Company also recorded a pre-tax gain, included in other income, in
the second quarter of approximately $1.5 million (approximately $980 after-
tax) related to the sale of a non-core business.
(4) 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.
10
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
(5) INVENTORIES
___________
Inventories consist of:
(In thousands)
September 30, March 31,
1997 1997
___________ ________
Finished goods $144,651 $127,765
Raw materials 2,909 2,979
_______ _______
147,560 130,744
Less reduction to LIFO cost ( 1,451) (1,372)
_______ _______
$146,109 $129,372
======= =======
(6) PLANT AND EQUIPMENT
___________________
The major classes of plant and equipment are as follows:
(In thousands)
September 30 March 31,
1997 1997
_____________ _________
Land and land improvements $ 22,779 $ 21,676
Building and leasehold improvements 76,187 66,659
Cylinders 376,585 365,253
Machinery and equipment, including
bulk tanks 288,961 241,275
Transportation equipment 43,269 39,264
Construction in progress 31,407 1,956
_______ _______
$839,188 $736,083
======= =======
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AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
(7) OTHER NON-CURRENT ASSETS
_______________________
Other non-current assets include:
(In thousands)
September 30, March 31,
1997 1997
_____________ _________
Investment in unconsolidated
affiliates $ 83,468 $ 64,992
Noncompete agreements and other
intangible assets, at cost, net
of accumulated amortization of
$66.3 million at September 30, 1997
and $59.8 million at March 31, 1997 53,961 54,794
Other assets 10,594 12,471
_______ _______
$148,023 $132,257
======= =======
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
______________________________________________
Accrued expenses and other current liabilities include:
(In thousands)
September 30, March 31,
1997 1997
_____________ _________
Cash overdraft $ 15,234 $ 14,746
Accrued Interest 7,172 5,425
Insurance payable and related
reserves 6,646 5,224
Customer cylinder deposits 8,874 8,185
Other accrued expenses and current
liabilities 53,104 54,083
_______ _______
$ 91,030 $ 87,663
======= =======
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AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
(9) STOCKHOLDERS' EQUITY
____________________
Changes in stockholders' equity were as follows:
(In thousands of shares)
Shares of Common Treasury
Stock $.01 Par Value Stock
____________________ _________
Balance--April 1, 1997 68,762 800
Common stock issuance (a) 988
Purchase of treasury stock 1,154
Reissuance of treasury stock (b) (1,854)
______ ______
Balance--September 30, 1997 69,750 100
====== ======
(In thousands of dollars)
Capital in Cumulative
Common Excess of Retained Translation Treasury
Stock Par Value Earnings Adjustment Stock
______ ___________ _________ ___________ ________
Balance--April 1, 1997 $688 $155,543 $196,626 $(468) $(15,732)
Net earnings -- -- 33,901 -- --
Common stock issuance (a) 10 11,497 -- -- --
Translation adjustments -- -- -- (99) --
Purchase of treasury
stock -- -- -- -- (17,049)
Reissuance of treasury
stock (b) -- -- -- -- 31,109
____ _______ _______ ____ ______
Balance--September 30,1997 $698 $167,040 $230,527 $(567) $ (1,672)
==== ======= ======= ==== ======
(a) Related to the issuance of common stock for stock option exercises,
(525 thousand shares) acquisitions (259 thousand shares) and the
Company's Employee Stock Purchase Plan (204 thousand shares).
(b) Reissued in connection with the acquisition of CIC.
(10) 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 National Welders by the Company
in connection with the Company's formation of a joint venture with the
majority shareholders of 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.
13
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
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. Thereafter, Praxair filed a motion for judgement on the pleadings.
On July 31, 1997, the court entered an order denying that motion.
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 negotiated a comprehensive settlement
with all of the defendants in the litigation described above. The terms of
the settlement were approved by the bankruptcy court on September 5, 1997. As
a result of the recovery, the Company recorded a non-recurring pre-tax gain
during the second quarter of $14.5 million (approximately $9.4 million after-
tax). The Company continues to pursue additional recoveries in connection
with the liquidation of a bankrupt business, and through coverage under
insurance policies. (See Note 3 for further discussion of the non-recurring
gain recorded for the partial recovery of refrigerant losses).
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.
14
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 second quarter ended September
30, 1997 reflect continued growth compared with the second quarter last year.
Net sales increased 29% to $360.4 million from $278.7 million in the second
quarter last year. After-tax cash flow (net earnings plus depreciation,
depletion, amortization and deferred taxes), before non-recurring gains on the
sale of a non-core business and a partial recovery of refrigerant losses,
increased by 13% to a record $32.4 million, or $.46 per share, compared to
$28.7 million, or $.42 per share for the same quarter last year. Including a
$1.5 million ($980 thousand after-tax) gain on the sale of a non-core
business, and a $14.5 million ($9.4 million after-tax) gain from the partial
recovery of refrigerant losses, net earnings for the second quarter were $21.7
million, or $.31 per share. Net earnings (before non-recurring gains) were
$11.3 million, or $.16 per share, compared to $11.3 million, or $.17 per share
a year ago, principally the result of flat August 1997 sales in the
Distribution segment. The Company believes that the UPS strike had a direct
adverse effect on its distribution businesses resulting in reduced shipments
to customers and increased distribution expenses, as well as indirect effects,
including slowdowns in customers' businesses.
Growth in the industrial gas distribution business was assisted by the
acquisition of ten industrial gas distributors from April 1, 1997 to September
30, 1997, with annual sales of approximately $15 million. Subsequent to
September 30, 1997, the Company completed the acquisition of six industrial
gas distributors with annual sales of approximately $45 million. Internal
growth and expansion of existing product lines resulted in same-store sales
growth of 5.0% and same-store gross profit growth of 4.7% compared to the same
period in the prior year.
Since April 1, 1997, Airgas Direct Industrial ("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 $90 million. These two acquisitions strengthen ADI's
position 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, ADI realized same-store sales and same-store gross
profit growth of approximately 15%, respectively, compared to the same period
in the prior year.
The Manufacturing segment's expansion into carbon dioxide continued,
with the acquisition of four carbon dioxide distributors since April 1, 1997,
with aggregate annual sales of approximately $74 million, including Carbonic
Reserves.
With these acquisitions, the Company's combined annual sales of carbon
dioxide and dry ice products total in excess of $100 million. These
acquisitions, combined with other businesses acquired in fiscal 1997 enhance
the Company's ability to supply carbon dioxide and dry ice products through
its distribution network.
15
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 against Discount Auto Part, 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. In connection with the fraud, the Company
recorded a non-recurring pre-tax charge during the fourth quarter of fiscal
1997 of $26.4 million (approximately $17 million after-tax) for product losses
and costs associated with the Company's investigation into the fraud. On July
28, 1997, the Company reported that it had negotiated a comprehensive
settlement with all defendants in the litigation described above. The terms
of the settlement were approved by the bankruptcy court on September 5, 1997.
As a result of the recovery, the Company recorded a non-recurring gain in the
second quarter of $14.5 million (approximately $9.4 million after-tax). The
recovery of $14.5 million represents cash received of $18.2 million, a
receivable of $1.5 million expected to be collected in the third quarter,
offset by additional costs and expenses incurred year-to-date, estimated
future out-of-pocket costs and other reserves which totalled $5.2 million.
The Company continues to pursue additional recoveries in connection with the
liquidation of a bankrupt business, and through coverage under insurance
policies.
16
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1996
_____________________________________
Net sales increased 29% during the quarter ended September 30, 1997
compared to the same quarter in the prior year:
(in thousands)
1997 1996 Increase
____ ____ __________
Distribution $268,168 $244,701 $ 23,467
Direct Industrial 61,216 20,437 40,779
Manufacturing 30,972 13,574 17,398
_______ _______ _______
$360,356 $278,712 $ 81,644
======= ======= =======
For the quarter ended September 30, 1997, Distribution sales increased
approximately $10 million resulting from the acquisition of 20 distributors
since July 1, 1996 and approximately $13 million from same-store sales.
Although August sales were flat, largely the result of the UPS strike, sales
for the remainder of the quarter reflected solid growth. The increase in
same-store Distribution sales of 5% were more heavily weighted towards lower
margin hardgoods with internal growth primarily attributable to higher sales
volumes. Within the Distribution segment, the Western region of the United
States realized continued growth in hardgoods and gases with same-store sales
growth of approximately 8%. The Upper Midwest and Northeast regions increased
same-store sales approximately 2% and also improved sequentially. The
Southern region reflected a more widespread slowdown in August 1997. In the
Southern region, the prior period also included the benefit of non-recurring
specialty and refrigerant gas sales. 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. 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 Maintenance,
Repair and Operations ("MRO") hardgoods. The internal sales growth rate for
ADI was approximately 15% during the second quarter of 1998. Despite the
nationwide UPS strike, ADI still achieved strong growth by arranging alternate
carriers, although at a higher distribution expense, enabling the Company to
continue shipments to its customers. In addition, ADI has completed two
acquisitions in fiscal 1998 to expand product lines, geographic coverage and
enhance marketing and service capabilities. Sales to the Distribution segment
totaled approximately $803 thousand.
17
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Manufacturing segment's sales increased $17.4 million during the
second quarter primarily as a result of recent acquisitions, which amounted to
approximately $16.8 million. Strong sales of calcium carbide and nitrous
oxide were offset slightly by lower shipments of certain carbon products to
one customer. Four businesses with annual sales of approximately $40 million
which were previously reported with the Distribution segment are now reported
with the Manufacturing segment. Sales to the Distribution segment totaled
approximately $2.8 million.
The increase in Distribution gross profits of approximately $9.9 million
over the same quarter in the prior year resulted from acquisitions which
contributed approximately $4.0 million and from same-store gross profit growth
of 4.7% or approximately $5.9 million. Same-store gross profit growth
resulted primarily from sales volume growth. On a same-store basis, the
Distribution gross margin was 49.7% which decreased slightly compared to the
same period in the prior year as a result of a shift in sales mix more towards
lower margin hardgoods. Hardgoods accounted for 52% of total sales compared to
50.4% in the same period last year. Acquired companies had a low proportion
of gas sales at 15%. Additionally, the prior quarter included the benefit of
non-recurring specialty and refrigerant gas sales. 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 continued to help
improve same-store gross profits.
For the quarter, ADI's gross margin of 26.5% compared favorably to the
same quarter last year as a result of the September 1, 1996 acquisition of
Rutland Tool & Supply Company ("Rutland"), which has a gross margin of
approximately 40%. Same-store gross profit growth of approximately $2.1
million resulted from sales volume growth.
For the quarter, the Manufacturing gross margin of 53.5% compared
favorably to the same quarter last year as a result of acquisitions.
Selling, distribution, and administrative expenses ("SG&A") increased
$24.6 million compared to the same quarter last year primarily due to
acquisitions. SG&A expenses as a percentage of sales decreased 40 basis
points to 31.7% compared to the same period in the prior quarter primarily as
a result of ADI acquisitions which have a lower expense-to-sales ratio than
the Distribution and Manufacturing segments. The improvement in SG&A expenses
relative to sales was somewhat offset by higher-than-expected medical
insurance costs, increased distribution expense resulting from the UPS strike,
costs associated with the start-up operations in Eastern Canada, and planned
increases in corporate operating expenses. Subject to future acquisitions,
the Company believes that as it continues to integrate acquisitions and
complete start-up and expansion activities, SG&A expenses relative to net
sales should improve. The Company anticipates additional operating costs
resulting from the integration and standardization of information systems
during fiscal years 1998, 1999 and 2000. As a result of the standardization
of information systems, the Company believes Year 2000 issues will be
mitigated.
Depreciation, depletion and amortization increased $3.7 million compared
to the same period in the prior quarter due to acquisitions and from increased
capital expenditures.
18
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Excluding a non-recurring gain of $14.5 million, operating income
increased 14% in 1997 compared to 1996:
(in thousands)
1997 1996 Increase
____ ____ __________
Distribution $27,182 $26,133 $ 1,049
Direct Industrial 1,343 638 705
Manufacturing 4,475 2,237 2,238
______ ______ ______
$33,000 $29,008 $ 3,992
====== ====== ======
The Distribution segment's operating margin decreased 60 basis points to
10.1% compared with the same period in the prior year. The decrease resulted
primarily from the slowdown in the month of August combined with higher
operating costs and expenses. Subject to the effects of future acquisitions
and the Company's ability to increase sales and expand gross margins, the
Company continues to focus on improving its operating margin by implementing
selective price increases, reducing costs by leveraging its national
purchasing power and continuing to integrate acquisitions.
The operating income margin for ADI decreased 90 basis points to 2.2%
compared with the same quarter last year. The decrease resulted partially
from higher distribution costs attributable to the UPS strike and higher
operating costs. The Company believes that ADI's operating income margin will
continue to be impacted by expansion costs related to information systems, and
infrastructure and facility enhancements. ADI is establishing a new
distribution center in Southern California which will consolidate four other
ADI warehouses. The Company expects the distribution center to be fully
operational in January 1998.
The Manufacturing segment's operating income increased $2.2 million
compared to the same quarter last year primarily as a result of acquisitions.
During the second quarter ended September 30, 1997, the Company recorded
a non-recurring pre-tax gain of approximately $14.5 million (approximately
$9.4 million after-tax). See Note 3 and 10 to the Company's consolidated
financial statements for further discussion of the non-recurring gain.
Interest expense, net, increased $3.9 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 July 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.
Income tax expense, excluding the non-recurring gains, represented 42.4%
of pre-tax earnings in 1998 compared to 41.4% in 1997. The increase in the
effective income tax rate was primarily a result of non-deductible goodwill
from recent acquisitions.
19
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS: SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE SIX
MONTHS ENDED SEPTEMBER 30, 1996
________________________________
Net sales increased 25% during the six months ended September 30, 1997
compared to the prior year:
(in thousands)
1997 1996 Increase
____ ____ __________
Distribution $539,437 $487,755 $ 51,682
Direct Industrial 98,061 36,889 61,172
Manufacturing 54,270 28,166 26,104
_______ _______ _______
$691,768 $552,810 $138,958
======= ======= =======
For the six months ended September 30, 1997, Distribution sales
increased approximately $28 million resulting from the acquisition of 29
distributors since April 1, 1996 and approximately $24 million from same-store
sales. The increase in same-store Distribution sales of 4.7% was a result of
growth in all three product groups: gases, hardgoods and rent. The internal
growth was primarily attributable to higher sales volume. Although August
1997 sales were essentially flat, largely the result of the UPS strike, sales
for the remainder of the six-month period reflected solid growth. 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. 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 14.2% for
the six months ended September 30, 1997. Despite the nationwide UPS strike in
the second quarter, ADI still achieved strong growth by arranging alternate
carriers, although at a higher distribution expense, enabling the Company to
continue shipments to its customers. Sales to the Distribution segment
totaled approximately $1.6 million.
The Manufacturing segment's sales increased $26.1 million during the six
months ended September 30, 1997, primarily as a result of acquisitions.
Strong sales of calcium carbide and nitrous oxide were offset slightly by
lower shipments of certain carbon products to one customer. Four businesses
with annual sales of approximately $40 million which were previously reported
with the Distribution segment are now reported with the Manufacturing segment.
Sales to the Distribution segment totaled approximately $6.7 million.
20
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The increase in Distribution gross profits of approximately $24.5
million compared to the prior period resulted from acquisitions which
contributed approximately $11.6 million and from same-store gross profit
growth of 5.1% or approximately $12.9 million. Same-store gross profit growth
resulted primarily from sales volume growth of $12.0 million. On a same-store
basis, the Distribution gross margin was 49.5% which decreased slightly
compared to the same period in the prior year, primarily as a result of a
shift in sales mix more towards lower margin hardgoods. Hardgoods accounted
for 51.8% of total sales compared to 51.1% in the prior period. This decrease
was offset by favorable gas pricing and gas programs such as small bulk and
specialty gases, along with higher sales volumes and margins on hardgoods
combined with higher hardgoods rebates. 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 continued to help improve same-
store gross profits.
For the six months ended September 30, 1997, ADI's gross margin of 27.6%
compared favorably to the prior year as a result of the September 1, 1996
acquisition of Rutland, which has a historical gross margin of approximately
40%. Same-store gross profit of approximately $3.3 million resulted primarily
from sales volume growth.
For the six months ended September 30, 1997, the Manufacturing gross
margin of 52.7% compared favorably to the prior period as a result of
acquisitions.
Selling, distribution, and administrative expenses ("SG&A") increased
$43.8 million compared to the same period last year primarily due to
acquisitions. SG&A expenses as a percentage of sales decreased slightly to
31.7% compared to the same period in the prior year, primarily as a result of
ADI acquisitions which have a lower expense-to-sales ratio than the
Distribution and Manufacturing segments. The improvement in SG&A expenses
relative to sales was somewhat offset by 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, higher-than-expected medical insurance
costs, increased distribution expense resulting from the UPS strike, and
planned increases in corporate operating expenses. Subject to future
acquisitions, the Company believes that as it continues to integrate
acquisitions and complete start-up and expansion activities, SG&A expenses
relative to net sales should improve. The Company anticipates additional
operating costs resulting from the integration and standardization of
information systems during fiscal years 1998, 1999 and 2000. As a result of
the standardization of information systems, the Company believes Year 2000
issues will be mitigated.
Depreciation, depletion and amortization increased $7.3 million compared
to the same period in the prior year due to acquisitions and from increased
capital expenditures.
21
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Excluding a non-recurring gain of $14.5 million, operating income
increased 18.1% in 1997 compared to 1996:
(in thousands)
1997 1996 Increase
____ ____ __________
Distribution $55,876 $50,888 $ 4,988
Direct Industrial 2,448 1,014 1,434
Manufacturing 8,176 4,427 3,749
______ ______ ______
$66,500 $56,329 $10,171
====== ====== ======
The Distribution segment's operating margin was essentially flat at 10.6%
compared with last year. The increase during the first quarter from higher
same-store gross profits was offset by the slowdown in August combined with
higher operating expenses. Subject to the effects of future acquisitions and
the Company's ability to increase sales and expand margins, the Company
continues to focus on improving its operating margin by implementing selective
price increases, reducing costs by leveraging its national purchasing power
and continuing to integrate acquisitions.
For the six months ended September 30, 1997, the operating income margin
for ADI decreased 20 basis points to 2.5% compared with last year. The
decrease resulted partially from higher distribution costs attributable to the
UPS strike and higher operating costs. The Company believes that ADI's
operating income margin will continue to be impacted by expansion costs
related to information systems, and infrastructure and facility enhancements.
ADI is establishing a new distribution center in Southern California which
will consolidate four other ADI warehouses. The Company expects the
distribution center to be operational in January 1998.
The Manufacturing segment's operating income increased $3.7 million
compared to last year primarily as a result of acquisitions.
Interest expense, net, increased $7.7 million compared to the prior year
primarily as a result of the increase in average outstanding debt associated
with the acquisition of distribution businesses acquired since April 1, 1996
the joint venture investment in National Welders, interest costs and 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, excluding non-recurring gains, represented 42.7% of
pre-tax earnings in the six months ended September 30, 1997 compared to 41.5%
in the prior year. The increase in the effective income tax rate was primarily
a result of non-deductible goodwill from recent acquisitions.
22
Item 2.
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, stock
repurchases, and acquisitions with borrowings, the issuance of common stock
and funds provided by operating activities.
Cash flows from operating activities totaled $54.4 million ($39.9
million excluding the non-recurring gain from partial recovery of refrigerant
losses) for the six months ended September 30, 1997. Depreciation, depletion
and amortization represent $36.6 million of cash flows from operating
activities. Deferred income taxes of $11.4 million resulted from temporary
differences. Cash flows from working capital components decreased $30 million
as a result of a decrease in accounts payable due to the timing of invoice
payments, 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 are comparable to the March 31, 1997 levels and
distribution hardgoods days' supply of inventory has improved approximately
15% since March 31, 1997.
Cash used by investing activities totaled $138.9 million which was
primarily comprised of $65.4 million for capital expenditures, and $79.9
million related to acquisitions and investments in unconsolidated affiliates.
The Company's use of cash for capital expenditures was attributable to
the construction of two air separation plants, the continued assimilation of
acquisitions which require expenditures for combining cylinder fill plants,
improving truck fleets, purchasing cylinders in order to return cylinders
rented from third parties and the purchase of cylinders and bulk tanks
necessary to facilitate gas sales growth. 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. Through September 30, 1997, the Company incurred capital expenditures
of approximately $29.8 million related to the construction of air separation
plant construction and expects additional capital expenditures of
approximately $7 to $10 million to complete plant construction. For the six
months ended September 30, 1997, approximately $24.8 million of capital
expenditures were for the purchase of cylinders, bulk tanks and machinery and
equipment. 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.
Financing activities provided cash of $84.5 million with total debt
outstanding increasing by $115 million from March 31, 1997. Funds from
financing activities were used primarily for 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 September 30, 1997, the Company had approximately $396
million in borrowings under the facility and approximately $72 million
committed under letters of credit, resulting in unused availability under the
facility of approximately $32 million.
23
Item 2. AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 September 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 December
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
September 30, 1997, the Company had approximately C$44 million (US$32 million)
in borrowings outstanding under the facility, resulting in unused availability
under the facility of approximately C$6 million (US$4 million). On July 8,
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. At September 30, 1997, the Company had approximately C$13
million (US$9 million) in borrowings outstanding under the facility resulting
in unused availability under the facility of approximately C$2 million
(US$2 million). The Company intends to terminate its C$50 million and C$15
million facilities in conjunction with an anticipated increase in the
Company's $500 million revolving credit facility in December 1997.
The Company also has unsecured line of credit agreements with various
commercial banks. At September 30, 1997, these agreements totaled $50
million, under which the Company had no borrowings outstanding.
At September 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 September 30, 1997. The swap agreements are with major financial
institutions and aggregate $403 million in notional principal amount at
September 30, 1997. Approximately $253 million of the notional principal
amount of the swap agreements require fixed interest payments based on an
average effective rate of 6.63% for remaining periods ranging between 1 and 8
years. Six swap agreements require floating rates ($149.5 million notional
amount at 5.72% at September 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 September 30, 1997,
approximately $16.5 million of such payments were included in other
liabilities. The Company continually monitors its positions and the credit
24
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 September 30, 1997, the Company
acquired six industrial gas distributors with annual sales of $45 million and
one carbon dioxide distributor with annual sales of approximately $15 million.
As the Company integrates and standardizes information systems during fiscal
1998, 1999 and 2000, the Company expects to enter into obligations and
purchase certain capital equipment aggregating an estimated $15 to $20
million. As a result of standardizing information systems, the Company
believes Year 2000 issues will be mitigated.
In October 1997, the Airgas Board of Directors approved the repurchase
of up to an additional 2,000,000 shares of common stock from time-to-time to
offset share issuances for stock options, the Employee Stock Purchase Plan,
and acquisitions. Together with previously granted authority, this increases
the total repurchase program to a potential 2,646,000 shares. Through
September 30, 1997, the Company repurchased 1,154,000 shares under previous
repurchase programs. Approximately 1.8 million shares were reissued in
connection with the acquisition of Carbonic Industries Corporation.
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.
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 had
no material impact on earnings, financial condition or liquidity of the
Company.
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.
25
Item 2. AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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
manufacturers and suppliers of hardgoods; uncertainties regarding accidents or
litigation which may arise in the ordinary course of business; the Company's
ability to recover additional assets 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. The Company does not undertake to
update any forward-looking statement made herein or that may be made from time
to time by or on behalf of the Company.
26
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 Supply Company, Inc. ("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. Thereafter, Praxair filed a motion for
judgement on the pleadings. On July 31, 1997, the Court entered an order
denying that motion.
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. In connection
with fraud, the Company recorded a non-recurring pre-tax charge during
the fourth quarter of fiscal 1997 of $26.4 million (approximately $17
million after-tax) for product losses and costs associated with the
Company's investigation into the fraud. On July 28, l997 the Company
reported that it had negotiated a comprehensive settlement with all of
the defendants in the litigation described above. The terms of the
settlement were approved by the bankruptcy court on September 5, 1997.
As a result of the recovery, the Company recorded a non-recurring pre-tax
gain during the second quarter of $14.5 million (approximately $9.4
million after-tax). The Company continues to pursue additional
recoveries in connection with the liquidation of a bankrupt business, and
through coverage under insurance policies.
27
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 4, 1997, the Registrant held its Annual Meeting of
Stockholders. The stockholders voted to elect three members to the Board
of Directors, voted upon a proposal to approve the 1997 Stock Option
Plan, voted upon a proposal to approve the 1997 Directors' Stock Option
Plan and voted on a proposal to ratify the selection of KPMG Peat Marwick
LLP as the Company's independent auditors for the fiscal year ending
March 31, 1998.
Elected to the Board of Directors were Robert E. Naylor, Jr. (58,297,598
shares voted for election and 1,283,679 shares withheld), Robert L. Yohe
(58,288,879 shares voted for election and 1,292,398 shares withheld) and
Rajiv L. Gupta (58,308,509 shares voted for election and 1,272,768 shares
were withheld). In addition to the board members elected at the Annual
Meeting, the following are directors whose terms in office as directors
continued after the meeting: W. Thacher Brown, Frank B. Foster III,
Peter McCausland, John A.H. Shober, Merril L. Stott and Argeris N.
Karabelas.
Also at the Annual Meeting, 43,289,198 shares voted to approve the 1997
Stock Option Plan, with 8,706,146 shares voted withheld/against and
172,287 shares abstaining. Second, 45,168,953 shares voted to approve
the 1997 Directors' Stock Option Plan, with 6,787,459 shares voted
withheld/against and 211,219 shares abstaining. Finally, 58,827,492
shares voted to ratify the selection of KPMG Peat Marwick LLP as
independent auditors, with 60,190 voted withheld/against and 693,595
shares abstaining.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
________
10.1. 1997 Stock Option Plan
10.2. 1997 Directors' Stock Option Plan
11. Calculation of earnings per share.
27. Financial Data schedule
b. Reports on Form 8-K
___________________
On July 28, 1997, the Company filed a Form 8-K pursuant to Item 5,
announcing the Company had reached a comprehensive settlement with all
defendants in the refrigerant gas litigation.
On August 11, 1997, the Company filed a Form 8-K pursuant to Item 5,
announcing its financial performance for the first quarter ended
June 30, 1997.
28
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.
November 12, 1997 /s/ Thomas C. Deas, Jr.
_________________ _______________________
Date Thomas C. Deas, Jr.
Vice President &
Chief Financial Officer