1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
Commission file number: 1-9344
AIRGAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-0732648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
259 North Radnor-Chester Road, Suite 100
Radnor, PA 19087-5283
(Address of principal executive offices) (ZIP code)
(610) 687-5253
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Common Stock outstanding at November 5, 1999: 70,209,648 shares
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AIRGAS, INC.
FORM 10-Q
September 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings
for the Three and Six Months Ended September 30, 1999 and 1998 (Unaudited)...3
Consolidated Balance Sheets
as of September 30, 1999 (Unaudited) and March 31, 1999......................4
Consolidated Statements of Cash Flows
for the Six Months Ended September 30, 1999 and 1998 (Unaudited).............5
Notes to Consolidated Financial Statements (Unaudited).......................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................29
Item 4. Submission of Matters to a Vote of Security Holders.................29
Item 5. Other Information...................................................30
Item 6. Exhibits and Reports on Form 8-K....................................31
SIGNATURES...................................................................32
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
Net sales
Distribution $ 346,973 $ 354,208 $ 692,940 $ 714,761
Gas Operations 40,316 42,384 73,842 82,604
Total net sales 387,289 396,592 766,782 797,365
Costs and expenses
Cost of products sold (excluding
depreciation and amortization)
Distribution 186,647 192,789 375,079 390,140
Gas Operations 16,200 17,755 29,035 37,507
Selling, distribution and
administrative expenses 129,185 132,509 256,146 262,153
Depreciation and amortization 22,953 21,748 45,119 43,345
Special charge - - - (1,000)
Total costs and expenses 354,985 364,801 705,379 732,145
Operating income
Distribution 26,408 26,072 52,668 54,612
Gas Operations 5,896 5,719 8,735 9,608
Special charge - - - 1,000
Total operating income 32,304 31,791 61,403 65,220
Interest expense, net (14,435) (15,720) (28,218) (30,526)
Other income, net 15,183 709 15,405 831
Equity in earnings of unconsolidated affiliates 725 1,222 1,725 1,976
Earnings before income taxes and the
cumulative effect of an accounting change 33,777 18,002 50,315 37,501
Income tax expense 14,865 7,522 21,728 15,746
Earnings before the cumulative effect of
an accounting change 18,912 10,480 28,587 21,755
Cumulative effect of an accounting change,
net of taxes -- -- (590) --
Net earnings $ 18,912 $ 10,480 $ 27,997 $ 21,755
Basic earnings per share:
Earnings per share before the cumulative
effect of an accounting change $ .27 $ .15 $ .41 $ .31
Cumulative effect per share of an
accounting change -- -- (.01) --
Net earnings per share $ .27 $ .15 $ .40 $ .31
Diluted earnings per share:
Earnings per share before the cumulative
effect of an accounting change $ .27 $ .15 $ .40 $ .30
Cumulative effect per share of an
accounting change -- -- (.01) --
Net earnings per share $ .27 $ .15 $ .39 $ .30
Weighted average shares outstanding:
Basic 69,700 70,000 69,800 70,100
Diluted 71,200 71,700 71,200 71,800
Comprehensive income $ 18,965 $ 10,329 $ 28,199 $ 21,619
See accompanying notes to consolidated financial statements.
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AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
September 30, March 31,
1999 1999
ASSETS
Current Assets
Trade receivables, less allowances for
doubtful accounts of $6,483 at September 30,
1999 and $6,092 at March 31, 1999 $ 199,796 $ 195,708
Inventories, net 157,418 154,424
Deferred income tax asset, net 7,783 7,549
Prepaid expenses and other current assets 21,326 21,161
Total current assets 386,323 378,842
Plant and equipment, at cost 1,034,201 993,496
Less accumulated depreciation (304,390) (275,637)
Plant and equipment, net 729,811 717,859
Goodwill, net of accumulated amortization of
$61,659 at September 30, 1999 and $54,986 at
March 31, 1999 427,846 428,349
Other non-current assets 136,309 173,422
Total assets $1,680,289 $1,698,472
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 71,698 $ 85,486
Accrued expenses and other current liabilities 106,454 108,295
Current portion of long-term debt 8,875 19,645
Total current liabilities 187,027 213,426
Long-term debt 835,015 847,841
Deferred income taxes 148,586 142,675
Other non-current liabilities 20,366 23,585
Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, no par, 20,000 shares
authorized, no shares issued or outstanding at
September 30, 1999 and March 31, 1999 -- --
Common stock, par value $.01 per share,
200,000 shares authorized, 72,615 and
72,024 shares issued at September 30, 1999
and March 31, 1999, respectively 726 720
Capital in excess of par value 194,892 190,175
Retained earnings 317,087 289,090
Accumulated other comprehensive loss (708) (910)
Treasury stock, 671 and 130 common shares at
cost at September 30, 1999 and March 31, 1999,
respectively (8,368) (1,129)
Employee benefits trust, 1,451 and 826 common
shares at cost at September 30, 1999 and March 31,
1999, respectively (14,334) (7,001)
Total stockholders' equity 489,295 470,945
Total liabilities and stockholders' equity $1,680,289 $1,698,472
See accompanying notes to consolidated financial statements.
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AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended Six Months Ended
September 30, 1999 September 30, 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 27,997 $ 21,755
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 45,119 43,345
Deferred income taxes 6,750 5,511
Equity in earnings of unconsolidated affiliates (1,725) (2,563)
Gain on divestiture (14,369) --
(Gain) loss on sales of plant and equipment 7 (292)
Minority interest in earnings (51) 39
Stock issued for employee benefit plans 2,707 3,109
Other non-cash charges 1,027 (1,000)
Changes in assets and liabilities, excluding
effects of business acquisitions and divestitures:
Trade receivables, net (1,618) (16,308)
Inventories, net (697) (10,758)
Prepaid expenses and other current assets (139) 756
Accounts payable, net (14,274) (1,865)
Accrued expenses and other current liabilities 3,792 (986)
Other assets and liabilities, net (3,302) (8,526)
Net cash provided by operating activities 51,224 32,217
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (30,841) (56,528)
Proceeds from sale of plant and equipment 955 1,152
Proceeds from divestitures 46,596 10,463
Business acquisitions, net of cash acquired (23,377) (42,307)
Business acquisitions, holdback settlements (830) (1,564)
Investment in unconsolidated affiliates (30) (139)
Dividends from unconsolidated affiliates 1,897 1,697
Other, net (358) 4,831
Net cash used by investing activities (5,988) (82,395)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 77,985 258,505
Repayment of debt (102,461) (182,733)
Purchase of treasury stock (15,345) (13,982)
Exercise of stock options 904 356
Cash overdraft (6,319) (11,968)
Net cash provided (used) by fiancing activities (45,236) 50,178
Cash Increase (Decrease) $ -- $ --
Cash - beginning of period -- --
Cash - end of period $ -- $ --
Cash paid during the period for:
Interest $ 29,067 $ 31,292
Income taxes (net of refunds) $ 5,427 $ 3,000
See accompanying notes to consolidated financial statements.
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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Airgas, Inc.
and its subsidiaries (the "Company"). Unconsolidated affiliates are
accounted for on the equity method and generally consist of 20 - 50% owned
operations where control does not exist or is considered temporary. The
excess of the cost of these affiliates over the Company's share of their
net assets at the acquisition date is being amortized over 20 to 40 years.
Intercompany accounts and transactions are eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles. These
statements do not include all disclosures required for annual financial
statements. These financial statements should be read in conjunction with
the more complete disclosures contained in the Company's audited
consolidated financial statements for the fiscal year ended March 31, 1999.
The financial statements reflect, in the opinion of management, all
adjustments necessary to present fairly the Company's financial position,
results of operations and cash flows for the periods presented. Such
adjustments are of a normal, recurring nature except for the impact of
acquisitions, divestitures and the accounting change which are discussed in
the notes to the accompanying financial statements. The interim operating
results are not necessarily indicative of the results to be expected for an
entire year.
Certain reclassifications have been made to previously issued financial
statements to conform to the current presentation.
(2) ACCOUNTING CHANGE
The Company adopted Statement of Position 98-5 "Reporting on the Costs of
Start-up Activities" ("SOP 98-5"), as required, in the first quarter of
fiscal year 2000 resulting in a charge to net earnings of $590 thousand, or
$.01 per diluted share. In accordance with SOP 98-5, the charge has been
reflected on a separate line entitled "Cumulative effect of an accounting
change, net of taxes", on the consolidated statement of earnings. The
charge primarily resulted from the write-off of start-up costs capitalized
in connection with the Company's two air separation units constructed
during fiscal 1998 and 1999.
(3) ACQUISITIONS AND DIVESTITURES
During the quarter ended September 30, 1999, the Company acquired three
distributors of industrial gas and related equipment with aggregate sales
of approximately $24 million.
On August 4, 1999, the Company completed its previously announced
divestiture of its operations in Poland and Thailand to Linde AG. The
divestiture resulted in a non-recurring gain of $14.4 million ($7.6 million
after-tax, or $.11 per diluted share) which was recognized in "other
income, net." Cash proceeds from the sale were $46.2 million ($38.4
million after taxes and closing costs). The operations in Poland and
Thailand had combined sales and operating losses in fiscal 2000 as follows:
Three Months Ended Six Months Ended
(In thousands) September 30, 1999 September 30, 1999
Sales $7,141 $12,724
Operating loss $ (29) $ (550)
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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company divested two non-core businesses during the quarter ended June
30, 1998. Consideration for the divestitures included the assumption of
certain liabilities and cash proceeds of approximately $10.5 million.
Divestiture reserves, established during the fourth quarter of fiscal 1998,
were adjusted by $1 million ($575 thousand after-tax) to reflect
differences between the original loss estimates and the actual loss on the
divestitures. The divested non-core businesses had combined sales and
operating income for the three months ended June 1998 of $4.6 million and
$121 thousand, respectively.
(4) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net earnings by the
weighted average number of shares of the Company's Common Stock outstanding
during the period. Diluted earnings per share is calculated by adjusting
the weighted average common shares outstanding for the dilutive effect of
common stock equivalents related to stock options and contingently issuable
shares.
The table below reconciles basic weighted average common shares
outstanding to diluted weighted average common shares outstanding for the
three and six months ended September 30, 1999 and 1998:
Three Months Ended Six Months Ended
September 30, September 30,
(In thousands) 1999 1998 1999 1998
Weighted average common shares
outstanding:
Basic 69,700 70,000 69,800 70,100
Stock options 1,300 1,600 1,200 1,600
Contingently issuable shares 200 100 200 100
Diluted 71,200 71,700 71,200 71,800
(5) INVENTORIES
Inventories consist of:
(Unaudited)
September 30, March 31,
(In thousands) 1999 1999
Finished goods FIFO $ 132,039 $ 129,501
Finished goods LIFO 25,999 25,652
Raw materials 935 853
LIFO reserve (1,555) (1,582)
$ 157,418 $ 154,424
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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(6) OTHER NON-CURRENT ASSETS
Other non-current assets include:
(Unaudited)
September 30, March 31,
(In thousands) 1999 1999
Investments in unconsolidated
affiliates $ 73,848 $ 100,834
Non-compete agreements and other
intangible assets, at cost, net
of accumulated amortization of
$91.6 million at September 30,
1999 and $85.5 million at
March 31, 1999 51,922 55,894
Other assets 10,539 16,694
$ 136,309 $ 173,422
The decrease in investments in unconsolidated affiliates is primarily due
to the divestiture of operations in Poland and Thailand.
(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include:
(Unaudited)
September 30, March 31,
(In thousands) 1999 1999
Cash overdraft $ 10,640 $ 16,959
Restructuring reserves 4,723 5,087
Insurance payable and
related reserves 10,474 9,584
Customer cylinder deposits 8,117 8,233
Accrued interest 12,208 12,331
Other accrued expenses and
current liabilities 60,292 56,101
$ 106,454 $ 108,295
The cash overdraft is attributable to the float of the Company's
outstanding checks.
Restructuring reserves primarily relate to pending divestitures.
(8) LEASE TRANSACTION
In October 1999, the Company renewed a lease of real estate with a trust
established by a commercial bank. The original operating lease was amended
to include the sale leaseback of certain equipment. The appraised value of
the real estate and equipment under the lease totaled approximately $46
million. The lease has a five-year term and has been accounted for as an
operating lease. The Company has guaranteed a residual value of the real
estate and the equipment at the end of the lease term of approximately $31
million. A gain of approximately $12 million on the equipment portion of
the transaction has been deferred until the expiration of the Company's
guarantee of the residual value. Cash proceeds received from the
transaction were used to repay debt outstanding under the Company's
revolving credit facility.
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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(9) STOCKHOLDERS' EQUITY
Changes in stockholders' equity were as follows:
Employee
Shares of Common Treasury Benefits
(In thousands of shares) Stock $.01 Par Value Stock Trust
Balance-April 1, 1999 72,024 130 826
Common Stock issuance (a) 591 -- --
Purchase of treasury stock -- 1,214 --
Reissuance of treasury stock (b) -- (48) --
Sale of treasury stock to Trust (c) -- (625) 625
Balance-September 30, 1999 72,615 671 1,451
Accumulated
Capital in Other Employee Compre-
Common Excess of Retained Comprehensive Treasury Benefits hensive
(In thousands of dollars) Stock Par Value Earnings Loss Stock Trust Income
Balance-April 1, 1999 $720 $190,175 $289,090 $ (910) $ (1,129) $(7,001) $ --
Net earnings -- -- 27,997 -- -- -- 27,997
Common Stock issuance (a) 6 3,473 -- -- -- -- --
Foreign currency
translation adjustments -- -- -- 202 -- -- 202
Purchase of treasury stock -- -- -- -- (14,317) -- --
Reissuance of
treasury stock (b) -- (247) -- -- 424 -- --
Sale of treasury
stock to Trust (c) -- 679 -- -- 6,654 (7,333) --
Tax benefit from stock
options exercises -- 812 -- -- -- -- --
Balance-September 30, 1999 $726 $194,892 $317,087 $ (708) $ (8,368) $(14,334) $28,199
(a) Issuance of Common Stock for stock option exercises and for the Company's Employee Stock Purchase Plan.
(b) Reissuance of Common Stock in connection with stock option exercises.
(c) Sale of Common Stock from treasury to the Employee Benefits Trust.
On October 12, 1999, the Employee Benefits Trust purchased 671 thousand
shares of Common Stock from the Company at fair market value.
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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(10) COMMITMENTS AND CONTINGENCIES
(a) Litigation
In July 1996, Praxair, Inc. ("Praxair") filed suit against the Company in
the Circuit Court of Mobile County, Alabama. The complaint alleged tortious
interference with business or contractual relations with respect to
Praxair's Right of First Refusal contract with the majority shareholders of
National Welders Supply Company, Inc. ("National Welders") by the Company
in connection with the Company's formation of a joint venture with National
Welders. In June 1998, Praxair filed a motion to dismiss its own action in
Alabama and commenced another action in the Superior Court of Mecklenburg
County, North Carolina, alleging substantially the same tortious
interference by the Company. The North Carolina action also alleges breach
of contract against National Welders and certain shareholders of National
Welders and unfair trade practices and conspiracy against all the
defendants. In the North Carolina action Praxair seeks compensatory
damages in excess of $10 thousand, punitive damages and other unspecified
relief. The Company believes that Praxair's North Carolina claims are
without merit and intends to defend vigorously against such claims.
The Company is involved in various legal and regulatory proceedings
that have arisen in the ordinary course of its business and have not been
finally adjudicated. These actions, when ultimately concluded and
determined, will not, in the opinion of management, have a material adverse
effect upon the Company's consolidated financial condition, results of
operations or liquidity.
(b) Insurance Coverage
The Company has established insurance programs to cover workers'
compensation, business automobile, general and product liability. These
programs have self-insured retentions of $500,000 per occurrence. Losses
are accrued based upon the Company's estimates, developed with third party
insurance adjusters, of the aggregate liability for claims incurred, claims
incurred but not reported and on Company experience. The Company has
established insurance reserves that management believes are adequate.
The nature of the Company's business may subject it to product and
general liability lawsuits. To the extent that the Company is subject to
claims that exceed its liability insurance coverage of $100 million, such
suits could have a material adverse effect on the Company's financial
position, results of operations or liquidity.
11
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(11) SUMMARY BY BUSINESS SEGMENT
Information related to the Company's operations by business segment for
the three months ended September 30, 1999 and 1998 is as follows:
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
(In thousands) Gas Gas
Distribution Operations Combined Distribution Operations Combined
Gas and rent $ 145,314 $ 39,369 $ 184,683 $ 143,223 $ 34,759 $ 177,982
Hardgoods 201,659 947 202,606 210,985 484 211,469
Other (1) -- -- -- -- 7,141 7,141
Total net sales 346,973 40,316 387,289 354,208 42,384 396,592
Intersegment sales -- 7,726 7,726 -- 7,594 7,594
Gross profit 160,326 24,116 184,442 161,419 24,629 186,048
Gross profit margin 46.2% 59.8% 47.6% 45.6% 58.1% 46.9%
Operating income 26,408 5,896 32,304 26,072 5,719 31,791
Earnings before
income taxes 15,267 18,510 33,777 14,110 3,892 18,002
EBITDA (2) 45,814 9,443 55,257 44,501 9,038 53,539
EBITDA margin 13.2% 23.4% 14.3% 12.6% 21.3% 13.5%
Assets 1,458,402 221,887 1,680,289 1,450,791 269,240 1,720,031
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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(11) SUMMARY BY BUSINESS SEGMENT - (Continued)
Information related to the Company's operations by business segment for
the six months ended September 30, 1999 and 1998 is as follows:
Six Months Ended Six Months Ended
September 30, 1999 September 30, 1998
(In thousands) Gas Gas
Distribution Operations Combined Distribution Operations Combined
Gas and rent $ 288,095 $ 71,895 $ 359,990 $ 285,715 $ 67,561 $ 353,276
Hardgoods 404,845 1,947 406,792 429,046 790 429,836
Other (1) -- -- -- -- 14,253 14,253
Total net sales 692,940 73,842 766,782 714,761 82,604 797,365
Intersegment sales -- 16,385 16,385 -- 13,523 13,523
Gross profit 317,861 44,807 362,668 324,621 45,097 369,718
Gross profit margin 45.9% 60.6% 47.3% 45.4% 54.6% 46.4%
Operating income,
excluding special
charge in 1998 52,668 8,735 61,403 54,612 9,608 64,220
Earnings before
income taxes,
excluding special
charge in 1998 and
cumulative effect of
an accounting change
in 1999 30,931 19,384 50,315 30,765 5,736 36,501
EBITDA (2) 90,910 15,612 106,522 91,588 15,977 107,565
EBITDA margin 13.1% 21.1% 13.9% 12.8% 19.3% 13.5%
Assets 1,458,402 221,887 1,680,289 1,450,791 269,240 1,720,031
A reconciliation of the combined operating segments to the applicable
line items on the consolidated financial statements for the six months
ended September 30, 1998 is as follows:
Six Months Ended
(In thousands) September 30, 1998
Segment operating income $ 64,220
Special charge 1,000
Operating income $ 65,220
Segment earnings before income taxes $ 36,501
Special charge 1,000
Earnings before income taxes $ 37,501
(1) Represents sales of calcium carbide and carbon products.
(2) EBITDA - Operating income, excluding special charges, plus depreciation
and amortization, is a measure of the Company's ability to generate cash
flow and should be considered in addition to, but not as a substitute
for, other measures of financial performance reported in accordance with
generally accepted accounting principles.
13
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
INCOME STATEMENT COMMENTARY
Net Sales
Net sales decreased 2.3% in the quarter ended September 30, 1999 ("current
quarter") compared to the quarter ended September 30, 1998 ("prior year
quarter").
Three Months Ended
(In thousands) September 30,
Net Sales 1999 1998 Decrease
Distribution $346,973 $354,208 $(7,235) (2.0%)
Gas Operations 40,316 42,384 (2,068) (4.9%)
$387,289 $396,592 $(9,303) (2.3%)
The Distribution segment's principal products and services include
hardgoods; industrial medical and specialty gases; and equipment rental.
Hardgoods consist of welding supplies and equipment, safety products, and
industrial tools and supplies. Industrial gases consist of packaged and
small bulk gases. Equipment rental fees are generally charged on cylinders,
cryogenic liquid containers, bulk tanks and welding equipment.
Distribution sales decreased $7.2 million primarily as a result of a
decline in same-store hardgoods sales, partially offset by acquisitions.
Distribution same-store sales decreased $11.5 million (-3.2%) as a result
of lower sales of hardgoods of $12.1 million (-5.7%), offset by gas and
rent sales growth of $600 thousand (.4%). Hardgoods sales were negatively
impacted in the current quarter by the continued slowness in certain
manufacturing and industrial markets including: metal fabrication, petro-
chemical, agriculture, mining and shipbuilding. Gas and rent sales growth
was partially attributable to the expansion of its rental welder fleet and
strategic product sales, particularly sales related to refrigerants and
medical gases. Acquisition and divestiture activity accounted for a net
increase of $4.3 million in sales as the acquisition of eight distributors
since July 1, 1998 were partially offset by a divestiture during fiscal
1999.
Gas Operations' sales primarily include dry ice and carbon dioxide
that are used for cooling and beverage applications. In addition, the
segment includes the Company's foreign operations and businesses that
produce and distribute specialty gases and nitrous oxide. Prior to the
divestiture in December 1998, the segment also included sales of calcium
carbide and carbon products ("calcium carbide and carbon operations").
Although the Company's operations in Poland and Thailand were divested in
August 1999, the current period includes a full quarter of operating
results due to delayed financial reporting. Sales decreased $2.1 million
compared to the prior year quarter as a result of the calcium carbide and
carbon operations divestiture, partially offset by same-store sales growth
and acquisitions. Sales decreased $8.4 million primarily due to the
divestiture of the calcium carbide and carbon operations. Gas Operations'
same-store sales increased $1.7 million (4.5%) from higher liquid carbon
dioxide and nitrous oxide volumes. Seasonality and a stable supply of
product helped liquid carbon dioxide volumes. Sales of specialty gases
also increased primarily due to higher refrigerant sales during the summer
months. Three dry ice acquisitions completed since July 1, 1998
contributed sales of $4.6 million over the prior year quarter.
14
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company estimates same-store sales based on a comparison of
current period sales to the prior period sales, adjusted for acquisitions
and divestitures. Future same-store sales growth is dependent on the
economy, competition and the Company's ability to implement price
increases and sell additional products and services to existing and new
customers.
Gross Profits
Gross profits decreased .9% during the current quarter compared to the
prior year quarter.
Three Months Ended
(In thousands) September 30,
Gross Profits 1999 1998 Decrease
Distribution $160,326 $161,419 $(1,093) (.7%)
Gas Operations 24,116 24,629 (513) (2.1%)
$184,442 $186,048 $(1,606) (.9%)
The decrease in Distribution gross profits of $1.1 million resulted
from a same-store gross profits decline of $3.3 million (-2%), offset by
net acquisition and divestiture activity of $2.2 million. Declines in
same-store gross profits consisted of decreases in hardgoods of $3.9
million (-6.7%), partially offset by gas and rent gross profits growth of
$600 thousand (.6%). The decrease in hardgoods same-store gross profits
resulted primarily from reduced sales to certain manufacturing and
industrial markets. Additionally, competitive pricing pressures have
impacted hardgoods gross margins. However, centralized purchasing and
distribution and private label products have helped support hardgoods
margins. The increase in gas and rental same-store gross profits resulted
primarily from increased rental revenue from an expanded rental welder
fleet and from increases in gas storage containers. Acquisition and
divestiture activity resulted in a net increase in gross profits of $2.2
million from eight distribution acquisitions since July 1, 1998, offset by
a divestiture in fiscal 1999. The Distribution gross profit margin of
46.2% in the current quarter increased 60 basis points from 45.6% in the
prior year quarter as a result of a shift in sales mix more heavily
weighted towards higher margin gas and rental revenues.
The decrease in Gas Operations' gross profits of $513 thousand
resulted from the divestiture of calcium carbide and carbon operations on
December 31, 1998, which had gross profits of $2.5 million in the prior
year quarter, offset by gross profits of $2 million from three dry ice
acquisitions completed since July 1, 1998. Gas Operations' gross profit
margin, excluding the divestiture which had lower margins, decreased from
65% in the prior year quarter to 60% in the current quarter primarily due
to lower dry ice margins. Increased production costs, from higher
electricity rates and lower operating efficiencies at peak production
levels during the summer months, impacted margins. Margins on foreign
operations were also down.
15
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Expenses
Selling, distribution and administrative expenses ("operating
expenses") consist of personnel and related costs, distribution and
warehouse costs, occupancy expenses and other selling, general and
administrative expenses. Operating expenses decreased $3.3 million (-2.5%)
compared to the prior year quarter primarily resulting from the Company's
cost reduction program initiated during the third and fourth quarters of
fiscal 1999 and from the elimination of certain repositioning expenses
recognized in the prior year. The Company believes its cost reduction
program combined with the elimination of certain repositioning expenses
will lower operating expenses by approximately $12 - $15 million on an
annual basis. The cost reductions have impacted many areas of the
Company's expense structure, including headcount reductions and
administrative cost reductions from the consolidation of back office
functions. As a percentage of net sales, operating expenses remained
unchanged at 33.4% compared to the prior year quarter.
Depreciation and amortization totaled $23 million in the current
quarter, an increase of $1.2 million (5.5%) compared to the prior year
quarter. Depreciation and amortization expense relative to sales was 5.9%
in the current quarter compared to 5.5% in the prior year quarter.
Depreciation and amortization expense increased primarily as a result of
acquisitions and capital expenditures since July 1, 1998.
Operating Income
Operating income increased 1.6% compared to the prior year quarter
primarily due to lower operating expenses resulting from cost reductions
and acquisitions, partially offset by lower gross profits from a decline in
hardgoods sales.
Three Months Ended
(In thousands) September 30,
Operating Income 1999 1998 Increase
Distribution $ 26,408 $ 26,072 $ 336 1.3%
Gas Operations 5,896 5,719 177 3.1%
$ 32,304 $ 31,791 $ 513 1.6%
The Distribution segment's operating income margin increased 20 basis
points to 7.6% in the current quarter compared to 7.4% in the prior year
quarter. Gas Operations' operating income margin, excluding the divested
calcium carbide and carbon operations, increased 200 basis points to 14.6%
in the current quarter from 12.6% in the prior year as a result of
operating cost reductions and acquisitions.
Interest Expense
Interest expense, net, totaled $14.4 million and reflects a decrease
of $1.3 million (8.2%) compared to the prior year quarter. The decrease in
interest expense resulted from lower interest rates and lower average
outstanding debt levels. The decrease in debt is primarily due to the
after-tax proceeds from the divestitures of the calcium carbide and carbon
operations and operations in Poland and Thailand. As discussed in
"Liquidity and Capital Resources" and in Item 3 "Quantitative and
Qualitative Disclosures About Market Risk", the Company manages interest
rate exposure of certain borrowing instruments through participation in
interest rate swap agreements.
16
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Other Income, net
Other income, net, totaled $15.2 million in the current quarter and
included a $14.4 million gain from the divestiture of operations in Poland
and Thailand. Other income, net, totaled $709 thousand in the prior year
quarter.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates of $725 thousand
decreased $497 thousand compared to the prior year quarter primarily as a
result of lower earnings from the Company's liquid carbon dioxide joint
venture and from joint venture earnings from National Welders Supply
("National Welders"). The liquid carbon dioxide joint venture incurred
higher electric costs related to peak production during the summer months.
National Welders' earnings were impacted by a slowdown in certain
industrial markets that it serves and from the impact of hurricane Floyd.
Income Tax Expense
Income tax expense, excluding the taxes on the gain from the
divestiture of operations in Poland and Thailand, represented 41.5% of pre-
tax earnings for the current quarter compared to 41.8% in the prior year
quarter. Including the gain on the divestiture, income tax expense
represented 44% of pre-tax earnings in the current quarter.
Net Earnings
Net earnings for the quarter ended September 30, 1999 were $18.9
million, or $.27 per diluted share, compared to $10.5 million, or $.15 per
diluted share, in the prior year quarter. Net earnings in the current
quarter, excluding the gain on the divestiture of operations in Poland and
Thailand, were $11.4 million, or $.16 per diluted share.
EBITDA
Operating income, plus depreciation and amortization ("EBITDA"), was
$55.3 million in the current quarter compared to $53.5 million in the prior
year quarter. EBITDA as a percentage of sales of 14.3% in the current
quarter increased from 13.5% in the prior year quarter primarily due to
cost reductions and acquisitions.
17
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS: SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
SIX MONTHS ENDED SEPTEMBER 30, 1998
INCOME STATEMENT COMMENTARY
Net Sales
Net sales decreased 3.8% for the six months ended September 30, 1999
("current period") compared to the six months ended September 30, 1998
("prior year period").
Six Months Ended
(In thousands) September 30,
Net Sales 1999 1998 Decrease
Distribution $692,940 $714,761 $(21,821) (3.1%)
Gas Operations 73,842 82,604 (8,762) (10.6%)
$766,782 $797,365 $(30,583) (3.8%)
Distribution sales decreased $21.8 million as a result of a same-store
sales decline of $25.5 million (-3.6%), offset by a net sales increase of
$3.7 million, representing the net effect of acquisition and divestiture
activity. The decrease in same-store sales resulted from a $28.4 million
(-6.6%) decline in hardgoods sales, partially offset by gas and rent
same-store sales growth of $2.9 million (1%). The lower hardgoods sales
resulted from the continued slowness in certain manufacturing and industrial
markets. Gas and rent same-store sales growth was partially attributable to
the Company's expansion of its rental welder fleet and strategic product
sales, particularly sales related to refrigerants and medical gases. Sales
of $12.6 million from fourteen distributor acquisitions since April 1, 1998
were offset by the divestiture of three businesses during fiscal 1999 which
had sales of $8.9 million in the prior year period.
Gas Operations' sales decreased $8.8 million in the current period as
a result of divestitures which had sales of approximately $16.3 million in
the prior year period, partially offset by sales of $7.5 million from four
dry ice acquisitions completed since April 1, 1998. The divestitures
primarily consisted of the fiscal 1999 divestiture of the Company's calcium
carbide and carbon operations.
18
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Gross Profits
Gross profits decreased 1.9% in the current period compared to the prior
year period.
Six Months Ended
(In thousands) September 30,
Gross Profits 1999 1998 Decrease
Distribution $317,861 $324,621 $(6,760) (2.1%)
Gas Operations 44,807 45,097 (290) (.6%)
$362,668 $369,718 $(7,050) (1.9%)
The decrease in Distribution gross profits of $6.8 million resulted
from a same-store gross profit decline of $8.2 million (-2.5%), partially
offset by acquisition and divestiture activity. The decline in same-store
gross profits consisted of a decrease in hardgoods of $10 million (-8.5%),
partially offset by gas and rent gross profit growth of $1.8 million (.9%).
The decrease in hardgoods same-store gross profits resulted primarily from
the continued slowness in certain manufacturing and industrial markets and
from price concessions in certain regions to retain customers in response
to competition. The increase in gas and rental same-store gross profits
resulted primarily from increased rental revenue from an expanded rental
welder fleet and from increases in gas storage containers. Gross profits
of $5.9 million from fourteen distributor acquisitions since April 1, 1998
were partially offset by the divestiture of three businesses during fiscal
1999 which had gross profits of $4.5 million in the prior year period. The
overall Distribution gross profit margin of 45.9% in the current period
increased 50 basis points from 45.4% in the prior year period as a result
of a shift in sales mix more heavily weighted towards higher margin gas and
rental revenues.
The decrease in Gas Operations gross profits of $290 thousand resulted
from the divestiture of the Company's calcium carbide and carbon operations
during fiscal 1999 offset by four dry ice acquisitions completed since
April 1, 1998. Excluding the impact of the divestiture of calcium carbide
and carbon operations, the current period gross profit margin of 61% was
flat compared to the prior year period.
Operating Expenses
Selling, distribution and administrative expenses ("operating
expenses") decreased $6 million (-2.3%) compared to the prior year period
primarily resulting from the Company's cost reduction program initiated
during the third and fourth quarters of fiscal 1999 and from the elimination
of certain repositioning expenses recognized in the prior year. The Company
believes its cost reduction program combined with the elimination of certain
repositionng expenses will lower operating expenses by approximately
$12 - $15 million on an annual basis. The cost reductions have impacted many
areas of the Company's expense structure, including headcount reductions and
administrative cost reductions from the consolidation of back office
functions. As a percentage of net sales, operating expenses increased 50
basis points to 33.4% compared to the prior year period. The increase in
the ratio of operating expenses relative to sales resulted from the decrease
in sales, which was larger than the Company's reduction of operating expenses.
Depreciation and amortization totaled $45.1 million in the current period
representing an increase of $1.8 million (4.1%) compared to the prior year
period. Depreciation and amortization expense increased primarily as a
result of acquisitions and capital expenditures since April 1, 1998.
Depreciation and amortization expense relative to sales was 5.9% for the
current period compared to 5.4% in the prior year period.
19
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Income
Excluding special charges, operating income decreased 4.4% compared to
the prior year period. The decrease in operating income was primarily due
to lower gross profits from the decline in hardgoods sales, partially
offset by a reduction in operating expenses.
Six Months Ended
(In thousands) September 30,
Operating Income 1999 1998 Decrease
Distribution $ 52,668 $ 54,612 $(1,944) (3.6%)
Gas Operations 8,735 9,608 (873) (9.1%)
Special Charges -- 1,000 (1,000) --
$ 61,403 $ 65,220 $(3,817) (5.9%)
The Distribution segment's operating income margin of 7.6% was flat
compared to the prior year period. Gas Operations' operating income margin
of 11.8% increased 30 basis points compared to the prior year period,
excluding the calcium carbide and carbon operations. The increase in Gas
Operations' operating income margin was primarily due to operating cost
reductions and dry ice acquisitions.
Interest Expense
Interest expense, net, totaled $28.2 million representing a decrease
of $2.3 million (-7.6%) compared to the prior year period. The decrease in
interest expense was primarily attributable to lower interest rates and
lower average outstanding debt levels. As discussed in "Liquidity and
Capital Resources" and in Item 3 "Quantitative and Qualitative Disclosures
About Market Risk", the Company manages interest rate exposure of certain
borrowing instruments through participation in interest rate swap
agreements.
Other Income, net
Other income, net, totaled $15.4 million in the current period and
included a $14.4 million gain from the divestiture of operations in Poland
and Thailand. Other income, net, totaled $831 thousand in the prior year
period.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates of $1.7 million
decreased $251 thousand (-12.7%) compared to the prior year period
primarily from lower liquid carbon dioxide joint venture earnings. Higher
electric costs associated with peak production during the summer months
adversely impacted earnings.
20
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Income Tax Expense
Income tax expense, excluding the taxes on the gain from the
divestiture of operations in Poland and Thailand, represented 41.5% of pre-
tax earnings for the current period compared to 42% in the prior year
period. Including the gain on the divestiture, income tax expense
represented 43.2% of pre-tax earnings in the current period.
Net Earnings
Net earnings in the current period were $28 million, or $.39 per
diluted share, compared to $21.8 million, or $.30 per diluted share, in the
prior year period. Net earnings, excluding special items (the current
period cumulative effect of an accounting change and a gain on the
divestiture of the Company's Poland and Thailand operations and the special
charge in the prior period), were $21 million, or $.30 per diluted share,
compared to $21.2 million, or $.29 per diluted share, in the prior year
period.
EBITDA
Operating income, excluding special charges, plus depreciation and
amortization ("EBITDA"), was $106.5 million in the current period compared
to $107.6 million in the prior year period. EBITDA as a percentage of
sales increased to 13.9% compared to 13.5% in the prior year period.
21
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash flows from operating activities totaled $51.2 million for the six
months ended September 30, 1999. Adjustments to reconcile net income to
net cash provided by operating activities included depreciation and
amortization of $45.1 million and deferred income taxes of $6.8 million
from temporary differences, offset by a $14.4 million gain on the
divestiture of operations in Poland and Thailand. Additionally, cash flows
from working capital components decreased $12.9 million largely as a result
of a decrease in accounts payable of $14.3 million related to the timing of
payments to vendors. Accounts receivable increased $1.6 million with days'
sales outstanding increasing to 49 days from 47 days at March 31, 1999. The
increase in accounts receivable has resulted from the effects of computer
conversions, changes in administrative personnel and from a slowing in
certain manufacturing and industrial markets. Inventories increased $697
thousand with hardgoods days' supply of inventory increasing to 86 days
from 77 days at March 31, 1999. The increase in hardgoods days' supply of
inventory is primarily due to an increase in safety and welding product
inventories in connection with centralized purchasing and distribution.
After-tax cash flow (net earnings, excluding the cumulative effect of
an accounting change, a gain from a divestiture and a special charge, plus
depreciation, amortization and deferred income taxes) increased 4.3% to
$72.9 million compared to $69.9 million in the prior year period.
Cash used by investing activities totaled $6 million during the six
months ended September 30, 1999. Activities that used cash during the
period primarily included capital expenditures of $30.8 million and three
distributor acquisitions totaling $23.4 million. The divestiture of
operations in Poland and Thailand provided cash of $46.2 million ($38.4
million after taxes and closing costs).
Capital expenditures during the current period were 45% lower compared
to the prior year period. Capital expenditures associated with the
purchase of cylinders, bulk tanks, rental welders and machinery and
equipment totaled approximately $23 million or 75% of the total capital
expenditures during the current period. Management continues to focus on
improving asset utilization and believes that fiscal 2000 capital spending
will total less than $75 million.
Financing activities used cash of $45.2 million primarily for the
repayment of debt and the repurchase of the Company's Common Stock.
Additionally, cash overdraft, the float of the Company's outstanding
checks, decreased by $6.3 million since March 31, 1999.
The Company will continue to look for appropriate acquisitions of
distributors. Future acquisitions and capital expenditures are expected to
be funded through cash flows from operations, debt, Common Stock for
certain acquisitions, funds from the divestiture of certain businesses and
other available sources. The Company believes that its sources of
financing are adequate for its anticipated needs and that it could arrange
additional sources of financing for unanticipated requirements. The cost
and terms of any future financing arrangement will depend on the market
conditions and the Company's financial position at that time.
The Company does not currently pay dividends.
22
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Financial Instruments
The Company has unsecured revolving credit facilities totaling $725
million and $100 million Canadian (US$68 million) under a credit agreement
with a final maturity date of December 5, 2002. The credit agreement
contains covenants that include the maintenance of certain financial
ratios, restrictions on additional borrowings and limitations on dividends.
At September 30, 1999, the Company had borrowings under the credit
agreement of approximately $515 million and $42 million Canadian (US$29
million). The Company also had commitments under letters of credit
supported by the credit agreement of approximately $57 million.
Availability under the credit facilities was approximately $192 million at
September 30, 1999. At September 30, 1999, the effective interest rate on
borrowings under the credit facilities averaged 5.79% (5.84% on U.S.
borrowings and 4.86% on Canadian borrowings).
At September 30, 1999, the Company had the following long-term debt
outstanding under medium-term notes: $50 million of unsecured notes due
September 2001 bearing interest at a fixed rate of 7.15%; $75 million of
unsecured notes due March 2004 bearing interest at a fixed rate of 7.14%;
and $100 million of unsecured notes due September 2006 bearing interest at
a fixed rate of 7.75%. Additionally, at September 30, 1999, long-term debt
of the Company included acquisition notes and other long-term debt
instruments of approximately $75 million with interest rates ranging from
6% to 9%. The Company also has a shelf registration statement which is
currently effective under applicable federal securities laws and may be
used to issue debt and other types of securities up to an aggregate of
approximately $175 million.
In managing interest rate exposure, principally under the Company's
floating rate revolving credit facilities, the Company participates in 25
interest rate swap agreements. The swap agreements are with major
financial institutions and aggregate $568 million in notional principal
amount at September 30, 1999. Eighteen swap agreements with approximately
$331 million in notional principal amount require fixed interest payments
based on an average effective rate of 6.35% for remaining periods ranging
between one and five years. Seven swap agreements with approximately $237
million in notional principal amount require variable interest payments
based on an average rate of 5.57% at September 30, 1999. Under the terms
of five swap agreements, the Company has elected to receive the discounted
value of the counterparties' interest payments up-front. At September 30,
1999, approximately $6.6 million of such payments were included in other
non-current liabilities. The Company monitors its positions and the credit
ratings of its counterparties, and does not anticipate non-performance by
the counterparties.
Share Repurchase Program
In March 1999, the Company's Board of Directors authorized the
repurchase of up to seven million shares of the Company's outstanding
Common Stock. The shares may be repurchased in the open market or in
privately negotiated transactions depending on market conditions and other
factors. The Company has financed its repurchase programs with borrowings
and funds provided by operating activities. During the six months ended
September 30, 1999, the Company repurchased 1.2 million shares at an
average cost of $11.78 per share, including 175 thousand shares to complete
a previous repurchase program. The effect of the share repurchases on
earnings per share for the current quarter was not material. Subsequent to
September 30, 1999, the Company repurchased approximately 300 thousand
shares at an average cost of $9.82 per share. As of November 5, 1999, the
remaining shares authorized for repurchase under the repurchase program
totaled approximately 5.7 million shares.
<PAGE 23>
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Employee Benefits Trust
On October 12, 1999, the Employee Benefits Trust purchased 671 thousand
shares of Common Stock from the Company at fair market value.
<PAGE 24>
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
YEAR 2000 READINESS DISCLOSURE
Year 2000 Issues
The Company is aware of the issues associated with the Year 2000
matter. The "Year 2000" matter relates to whether computer hardware and
software and equipment will properly recognize date sensitive information
referring to the Year 2000. Potential computer system and equipment
failures arising from years beginning with "20" rather than "19" are a
known risk. The Company's exposure to Year 2000 issues rests primarily in
three main areas: information systems hardware and application software,
embedded chip technology which may be found in a wide variety of operating
equipment and third party Year 2000 readiness.
Information Systems Hardware and Application Software
With respect to information systems hardware and application software,
the Company's businesses generally do not utilize "home grown" programs or
systems that require programming to become Year 2000 compliant. The
Company typically uses "out of the box" or "shrink wrap" software for its
business needs. Implementation of standardized software and computer
systems has been substantially completed across the Company in connection
with the Company's Repositioning Plan. Although vendors for such software
have advised the Company that their software is Year 2000 compliant, the
Company has reviewed time dimensional testing performed by a third party on
one critical system with no significant compliance exceptions identified.
The Company intends to complete internal time dimensional testing for the
other critical system by the end of November 1999. Although execution of
the Repositioning Plan addresses certain significant Year 2000 issues, it
was not undertaken primarily as a remediation initiative. The Company
believes that standardized operating platforms will help provide for an
effective multi-channel distribution network. Expenditures related to the
system conversion and standardization project have totaled approximately
$18 million over the duration of the project, of which approximately $12
million represented new capital equipment and software. While the
Company's standardization project will continue into the Year 2000,
management believes that the critical operating systems utilized by the
Company are Year 2000 compliant. Although it is considered unlikely by
management that the Company's information systems hardware and application
software will result in a Year 2000 problem, the Year 2000 matter could
have a material impact on the business, results of operations and financial
condition of the Company as well as on customers of the Company. The
Company has not determined the extent to which its business and customers
might be affected in that event.
In conjunction with the Repositioning Plan, the Company has established
a national data center equipped with systems hardware and application
software that its vendors have indicated are Year 2000 compliant. Time
dimensional testing of data center hardware has been completed with no
significant compliance exceptions identified. In addition, the Company has
substantially completed testing of its desktop personal computers with very
few failures noted.
Embedded Chips
The Company's Year 2000 project team includes designated operating
company managers responsible for directing Year 2000 remediation efforts.
These managers, in cooperation with the Company's national information
services personnel, have completed inventories, risk assessments and
testing of critical manufacturing processes and related equipment
containing embedded chips. No significant instances of non-compliance were
identified. The Year 2000 project team has also completed the process of
contacting certain suppliers to obtain Year 2000 readiness product
information for less significant equipment containing embedded chips.
Through this inquiry, the Company identified certain non-compliant phone
systems for repair or replacement. The Company anticipates completing the
necessary repairs and replacements by December 1999. Management has
developed contingency plans for the affected phone systems and believes the
contingency plans are sufficient such that operations will not be
materially impacted if the phone system repairs and replacements are not
completed by December 1999. The Company estimates expenditures for Year
2000 remediation, including the replacement of non-compliant embedded chip
equipment, will total approximately $1 million. Of this total, the Company
expects approximately $800 thousand will be for capital upgrades and
replacements. The Company believes it will complete the remediation of
embedded chip equipment and processes prior
25
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
to the year 2000. However, if repair, replacement or contingency plans are
not completed before the Year 2000 or if contingency plans are inadequate,
then the Year 2000 matter could have a material impact on the business,
results of operations and financial condition of the Company.
Third Parties
The Company's Year 2000 issues relate not only to its own business
systems and equipment but also to those of its customers, vendors and
suppliers. To mitigate the risk to the Company arising from third parties,
the Company has contacted significant suppliers, customers and other
critical business partners to determine if they have effective Year 2000
plans in place. The Company anticipates that this evaluation will be
ongoing through the remainder of calendar year 1999. Most of the Company's
key suppliers have indicated that they have active Year 2000 compliance
programs. As a contingency plan, alternative suppliers have been
identified as deemed necessary. In addition, audits of certain key
suppliers to confirm Year 2000 readiness have been completed with no
significant issues identified. However, there can be no assurance that the
Company's customers, vendors, suppliers and other third parties will
successfully resolve their own Year 2000 issues in a timely manner
sufficient to prevent impact to the Company.
Contingency Plans
The Company believes that its most reasonably likely worst case
scenario changes over time. The Company has developed certain contingency
plans to address currently identified Year 2000 issues. These plans
address potential disruptions of the Company's business including
administrative and supply chain functions. Administrative contingency
plans provide for back-up data processing facilities, which have been
tested and found to be Year 2000 compliant, and encompass the national data
center, critical business software and communications networks. Supply
chain contingency plans include identifying alternative suppliers and
arranging for back-up or alternative transportation for shipping the
Company's products. Contingency plans will continue to be developed and
refined through the remainder of calendar year 1999, as deemed necessary.
Additionally, as of January 1, 2000, the Company intends to begin providing
24-hour information services support through the use of manned call centers
to assist the Company's various locations with any internal Year 2000
related problems. The Company anticipates that information services
support will continue until all critical systems have been determined to be
fully operational.
Resources
The Company is funding the computer conversion and standardization
project as well as non-compliant equipment repairs and replacements from
cash flow generated by operations and other available financing sources.
Substantially all of the effort to accomplish the remediation objectives
with regard to the computer conversion and standardization project,
embedded chip equipment, and evaluation of third party readiness has been
performed by internal Company personnel.
26
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Forward-looking Statements
This report contains statements that are forward-looking, as that term
is defined by the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in rules, regulations and releases. The
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. All forward-looking statements are based on
current expectations regarding important risk factors, and the making of
such statements should not be regarded as a representation by the Company
or any other person that the results expressed therein will be achieved.
Important factors that could cause actual results to differ materially from
those contained in any forward-looking statement include, but are not
limited to, underlying market conditions, growth in same-store sales, the
Company's ability to reduce costs and capital spending, the Company's
efforts to improve asset utilization, implementation and standardization of
information systems projects, any potential problems relating to Year 2000
matters (including without limitation, those relating to the Company's
ability to identify and timely remediate Year 2000 problems, unanticipated
remediation costs, timely resolution of Year 2000 problems by significant
vendors, suppliers, customers and other similar third parties, and the
Company's ability to develop and implement contingency plans, if
necessary), the success and timing of acquisitions and divestitures, the
effects of competition from independent distributors and vertically
integrated gas producers on products and pricing, growth and acceptance of
new product lines through the Company's sales and marketing programs,
changes in product prices from gas producers and name-brand manufacturers
and suppliers of hardgoods, uncertainties regarding accidents or litigation
which arise in the ordinary course of business and the effects of, and
changes in the economy, monetary and fiscal policies, laws and regulations,
inflation and monetary fluctuations and fluctuations in interest rates,
both on a national and international basis. The Company does not undertake
to update any forward-looking statement made herein or that may be made
from time to time by or on behalf of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's primary market risk exposure is from changes in interest
rates. The Company's policy is to manage interest rate risk exposure
through the use of a combination of fixed and floating rate debt and
interest rate swap agreements. The Company maintains the ratio of fixed to
variable rate debt within parameters established by management under
policies approved by the Board of Directors. At September 30, 1999, the
ratio of fixed versus floating debt was 44% - 56%. In addition, the Company
monitors its positions and the credit ratings of its counterparties,
thereby minimizing the risk of non-performance by the counterparties. The
Company does not enter into derivative financial instruments for trading
purposes.
The table below summarizes the Company's market risks associated with
long-term debt obligations and interest rate swaps as of September 30,
1999. For long-term debt obligations, the table presents cash flows
related to payments of principal and interest by expected fiscal year of
maturity. For interest rate swaps, the table presents the notional amounts
underlying the interest rate swaps by year of maturity. The notional
amounts are used to calculate contractual payments to be exchanged and are
not actually paid or received. Fair values were computed using market
quotes, if available, or based on discounted cash flows using market
interest rates as of the end of the period.
PAGE <27>
Expected Fiscal Year of Maturity
____________________________________________________
(In millions)
Fair
Fixed Rate Debt: 2000 2001 2002 2003 2004 2005 Thereafter Total Value
Medium-term notes $ -- $ -- $ 50 $ -- $ 75 $ -- $100 $225 $208
Interest expense $ 17 $ 17 $ 15 $ 13 $ 10 $ 8 $ 7 $ 87
Average interest rate 7.41% 7.41% 7.45% 7.49% 7.49% 7.75% 7.75%
Acquisition notes $ 5 $ 13 $ 21 $ 1 $ 20 $ -- $ 2 $ 62 $ 59
Interest expense $ 5 $ 4 $ 3 $ 2 $ 1 $ -- $ -- $ 15
Average interest rate 7.47% 7.47% 7.47% 7.47% 7.47% 7.47% 7.47%
Other notes $ 2 $ 1 $ 1 $ 1 $ -- $ -- $ -- $ 5 $ 5
Average interest rate 6.90% 6.90% 6.90% 6.90%
Variable Rate Debt:
Revolving credit
facilities $ -- $ -- $ -- $544 $ -- $ -- $ -- $544 $544
Interest expense $ 31 $ 31 $ 31 $ 31 $ -- $ -- $ -- $124
Interest rate (a) 5.79% 5.79% 5.79% 5.79%
Other notes $ -- $ 1 $ 7 $ -- $ -- $ -- $ -- $ 8 $ 8
Average interest rate 8.75% 8.75%
US $ denominated Swaps:
15 Swaps Receive
Variable/Pay Fixed $ 15 $ 55 $120 $ 93 $ -- $ 40 $ -- $323 $ (7)
Variable Receive rate
(3 month LIBOR) = 5.36%
Weighted average
pay rate = 6.35%
7 Swaps Receive
Fixed/Pay Variable $ 57 $ 50 $ 50 $ -- $ 30 $ -- $ 50 $237 $ 2
Weighted average
receive rate = 6.60 %
Variable pay rate
(6 month LIBOR) = 5.57%
Canadian $ denominated Swaps:
3 Swaps Receive
Variable/Pay Fixed $ 3 $ 3 $ 2 $ -- $ -- $ -- $ -- $ 8 $ --
Variable Receive rate
(3 month CAD BA) = 4.88% (b)
Weighted average
pay rate = 6.66%
Other LIBOR based agreements:
Operating leases
with trust $ 13 $ -- $ -- $ -- $ -- $ -- $ -- $ 13 $ 13
Variable rate
(3 month LIBOR plus 110
basis points = 6.46%)
28
(a) The variable rate of long-term debt obligations is based on the London
Interbank Offered Rate ("LIBOR") as of September 30, 1999. For future
periods, the variable interest rate is assumed to remain at 5.79% with the
principal balance of long-term debt obligations held constant at $544
million. However, the variable rate and borrowing levels of long-term debt
may fluctuate materially from those presented above.
(b) The variable receive rate for Canadian dollar denominated interest
rate swaps is the rate on Canadian Bankers' acceptances ("CAD BA").
Limitations of the tabular presentation
As the table incorporates only those interest rate risk exposures that
exist as of September 30, 1999, it does not consider those exposures or
positions that could arise after that date. In addition, actual cash flows
of financial instruments in future periods may differ materially from
prospective cash flows presented in the table due to future fluctuations in
variable interest rates and Company debt levels.
Foreign Currency Rate Risk
Certain subsidiaries of the Company are located in foreign countries.
The Company does not hedge its exposure to translation gains and losses
relating to foreign currency net asset exposures. The Company considers
its exposure to foreign currency exchange fluctuations to be immaterial to
its consolidated results of operations.
29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding certain litigation, reference is made to the
Company's Form 10-Q for the quarter ended June 30, 1999, which is
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the stockholders of the Company was held on August 2,
1999, where the following actions were taken:
(a) The stockholders voted to elect John A.H. Shober, Lee M. Thomas, and
Robert L. Yohe to the Board of Directors. The votes cast for each
Director were as follows:
No. of Shares
For Withheld/Against
John A.H. Shober 65,359,222 1,098,178
Lee M. Thomas 65,363,551 1,093,849
Robert L. Yohe 65,442,801 1,014,599
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, Rajiv L. Gupta, Peter McCausland, and Robert E. Naylor, Jr.
Subsequently, Mr. Gupta and Dr. Naylor both retired from the
Board.
(b) The stockholders voted to ratify the selection of KPMG LLP as the
Company's independent auditors. The votes cast in regard to the action
were as follows:
No. of Shares
For Withheld/Against Abstain
65,699,974 665,048 92,378
30
Item 5. Other Information
Board of Directors Appointments
On September 7, 1999, the Company announced the appointment of Paula A.
Sneed and David M. Stout to the Company's board of directors to fill the
seats vacated by Mr. Gupta and Mr. Stott who retired from the board during
fiscal 2000 and fiscal 1999, respectively. On October 20, 1999, the
Company announced the appointment of James W. Hovey to the board to suceed
Dr. Naylor who retired.
Ms. Sneed, age 51, is executive vice president, Kraft Foods and president
of Kraft's e-commerce division. Ms. Sneed earned a Masters of Business
Administration from Harvard University and an undergraduate degree from
Simmons College. She was also the recipient of an Honorary Doctorate of
Business Administration degree from Johnson and Whales University in 1991.
Ms. Sneed is also a director of Hercules, Inc. and Westchester/Fairfield
Inroads, Inc.
Mr. Stout, age 45, is president, SmithKline Beecham Pharmaceuticals-North
America. Prior to joining Smith-Kline, Mr. Stout was president of Schering
Laboratories, the U.S. pharmaceutical operation of Schering-Plough
Corporation. Mr. Stout received a Bachelor or Arts degree in biology from
Western Maryland College in 1976. He also serves on the Board of Trustees
for both Western Maryland College and Magee Rehabilitation Hospital.
Mr. Hovey, age 54, is president of The Fox Companies, a diversified real
estate development firm. Mr. Hovey earned a Masters degree in City
Planning from the University of Pennsylvania and a Bachelor of Science
degree in economics from the Wharton School at the University of
Pennsylvania. Mr. Hovey currently serves as an overseer of the Graduate
School of Fine Arts at the University of Pennsylvania, a director of the
National Association of Industrial and Office Properties, a member of the
Advisory Board of the Wharton School Real Estate Center, a trustee of
Eisenhower Exchange Fellowships, Inc., and a trustee of the World Affairs
Council in Philadelphia, Pennsylvania.
Chief Financial Officer Appointment
On November 1, 1999, the Company announced the appointment of Roger F.
Millay as senior vice president and chief financial officer, effective
November 29, 1999. Mr. Millay succeeds Scott Melman who will be assuming a
new role at the Company.
Prior to joining the Company, Mr. Millay, age 42, was senior vice
president and chief financial officer at Transport International Pool, a
$2 billion division of General Electric Capital Corporation ("GE Capital").
Other positions during his twelve-year career at General Electric included
chief financial officer roles at GE Capital Mexico and Colony Advisors,
Inc., a GE Capital joint venture. Mr. Millay earned a graduate degree from
Georgetown University's school of business and an undergraduate degree from
the University of Virginia.
31
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are being filed as part of this Quarterly
Report on Form 10-Q:
Exhibit No. Description
3 By-Laws (Amended and Restated August 2, 1999)
10 Airgas, Inc. 401(k) Plan (Amended and Restated)
11 Calculation of earnings per share
27 Financial Data Schedules as of September 30, 1999 and
1998
b. Reports on Form 8-K
On July 30, 1999, the Company filed a Form 8-K pursuant to Item 5,
reporting its earnings for the first quarter ended June 30, 1999.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Airgas, Inc.
(Registrant)
Date: November 11, 1999 /s/ Scott M. Melman
Scott M. Melman
Senior Vice President and
Chief Financial Officer