<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NO. 000-29226
VALLEY NATIONAL GASES INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2888240
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
67 43RD STREET
WHEELING, WEST VIRGINIA 26003
(Address of principal executive offices)
(304) 232-1541
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 1998
----- ---------------------------
Common stock, $0.001 par value 9,620,084
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VALLEY NATIONAL GASES INCORPORATED
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Balance Sheets as of June 30, 1997
And March 31, 1998 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1998 5
Condensed Consolidated Statements of Operations for the
Nine Months Ended March 31, 1997 and 1998 6
Condensed Consolidated Statements of Changes in
Stockholders Equity for the Year Ended June 30, 1997 and
the Nine Months Ended March 31, 1998 7
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1997 and 1998 8
Notes to Condensed Consolidated Financial Statements 9
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
June 30, March 31,
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,551,949 $ 620,854
Accounts receivable, net of allowance for doubtful accounts of
$200,750 10,299,100 11,812,144
Inventory 6,822,171 9,307,595
Prepaids and other 1,604,181 908,828
----------- -----------
Total current assets 20,277,401 22,649,421
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 70,842 49,786
Buildings and improvements 3,578,332 3,945,035
Equipment 38,946,506 48,025,232
Transportation equipment 6,670,016 8,075,060
Furniture and fixtures 2,590,373 3,158,029
----------- -----------
Total property, plant and equipment 51,856,069 63,253,142
Accumulated depreciation (21,786,762) (26,353,122)
----------- -----------
Net property, plant and equipment 30,069,307 36,900,020
----------- -----------
OTHER ASSETS:
Intangibles, net of amortization of $3,666,793 and $5,913,618,
respectively 17,130,777 31,961,037
Deposits and other assets 328,610 700,863
----------- -----------
Total other assets 17,459,387 32,661,900
----------- -----------
TOTAL ASSETS $67,806,095 $92,211,341
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, March 31,
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,928,387 $ 6,875,497
Accounts payable, trade 2,984,658 4,059,836
Accrued compensation and employee benefits 2,965,676 2,333,451
Other current liabilities 713,684 1,618,747
----------- -----------
Total current liabilities 10,592,405 14,887,531
LONG-TERM DEBT, less current maturities 28,787,064 46,224,591
DEFERRED TAXES AND OTHER LONG-TERM LIABILITIES 5,317,031 5,111,466
----------- -----------
Total liabilities 44,696,500 66,223,588
----------- -----------
REDEEMABLE COMMON STOCK, par value, $.001
Per share, issued 235,000 shares 1,880,000 1,880,000
STOCKHOLDERS' EQUITY:
Common stock, par value, $.001 per share-
Authorized, 30,000,000 shares
Issued, 9,385,084 shares 9,385 9,385
Paid-in-capital 17,162,396 17,162,396
Retained earnings 4,057,814 6,935,972
----------- -----------
Total stockholders' equity 21,229,595 24,107,753
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $67,806,095 $92,211,341
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1997 1998
----------- -----------
<S> <C> <C>
NET SALES $20,271,994 $25,795,443
COST OF PRODUCTS SOLD, excluding depreciation
and amortization 9,421,847 11,818,429
----------- -----------
Gross profit 10,850,147 13,977,014
EXPENSES:
Operating and administrative 7,139,159 8,936,220
Depreciation and amortization 1,764,032 2,458,686
----------- -----------
Total expenses 8,903,191 11,394,906
----------- -----------
Income from operations 1,946,956 2,582,108
INTEREST EXPENSE 614,923 895,961
OTHER INCOME (EXPENSE) NET 174,410 68,514
----------- -----------
EARNINGS BEFORE INCOME TAXES 1,506,443 1,754,661
===========
PROVISION FOR INCOME TAXES 719,410
-----------
NET EARNINGS $ 1,035,251
===========
BASIC EARNINGS PER SHARE $ 0.11
DILUTED EARNINGS PER SHARE $ 0.11
WEIGHTED AVERAGE SHARES 9,620,084
DILUTED AVERAGE SHARES 9,666,465
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Information
(Unaudited)
-----------
1997
-----------
<S> <C>
EARNINGS BEFORE INCOME TAXES $1,506,443
PRO FORMA INCOME TAXES 602,577
-----------
PRO FORMA NET EARNINGS $ 903,866
===========
PRO FORMA BASIC EARNINGS PER SHARE $ 0.13
PRO FORMA DILUTED EARNINGS PER SHARE $ 0.12
PRO FORMA WEIGHTED AVERAGE SHARES 7,000,000
PRO FORMA DILUTED AVERAGE SHARES 7,267,074
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------------
1997 1998
----------- -----------
<S> <C> <C>
NET SALES $54,049,282 $70,306,595
COST OF PRODUCTS SOLD, excluding depreciation and amortization
24,926,122 32,281,466
----------- -----------
Gross profit 29,123,160 38,025,129
EXPENSES:
Operating and administrative 19,706,352 24,681,675
Depreciation and amortization 4,698,272 6,503,278
----------- -----------
Total expenses 24,404,624 31,184,953
----------- -----------
Income from operations 4,718,536 6,840,176
INTEREST EXPENSE 1,607,774 2,151,173
OTHER INCOME (EXPENSE) NET 324,425 189,230
----------- -----------
EARNINGS BEFORE INCOME TAXES 3,435,187 4,878,233
===========
PROVISION FOR INCOME TAXES 2,000,075
-----------
NET EARNINGS $ 2,878,158
===========
BASIC EARNINGS PER SHARE $ 0.30
DILUTED EARNINGS PER SHARE $ 0.30
WEIGHTED AVERAGE SHARES 9,620,084
DILUTED AVERAGE SHARES 9,665,025
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Information
(Unaudited)
-----------
1997
-----------
<S> <C>
EARNINGS BEFORE INCOME TAXES $ 3,435,187
PRO FORMA INCOME TAXES 1,374,075
-----------
PRO FORMA NET EARNINGS 2,061,112
===========
PRO FORMA BASIC EARNINGS PER SHARE $ 0.29
PRO FORMA DILUTED EARNINGS PER SHARE $ 0.28
PRO FORMA WEIGHTED AVERAGE SHARES 7,000,000
PRO FORMA DILUTED AVERAGE SHARES 7,267,074
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 7
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1997 AND
THE NINE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------ -------------- Total
Paid-in- Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
---------- -------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30,
1996 18,300,653 $ 18,301 11,300,653 $(3,705,000) $ 95,914 $19,961,877 $16,371,092
Net loss -- -- -- -- -- (844,897) (844,897)
Issuance of
common stock 2,218,000 2,218 -- -- 15,730,059 -- 15,732,277
Issuance of
stock pursuant
to compensation
agreements 267,084 267 -- -- 2,136,323 -- 2,136,590
Conversion of
debt to
equity 135,000 135 -- -- 1,079,865 -- 1,080,000
Reclassification
of redeemable
common stock
outside of
shareholders'
equity (235,000) (235) -- -- (1,879,765) -- (1,880,000)
Retirement of
treasury stock (11,300,653) (11,301) (11,300,653) 3,705,000 -- (3,693,699) --
Dividends paid -- -- -- -- -- (11,365,467) (11,365,467)
---------- -------- ---------- ----------- ----------- ----------- -----------
BALANCE, June 30,
1997 9,385,084 9,385 -- -- 17,162,396 4,057,814 21,229,595
Net earnings -- -- -- -- -- 2,878,158 2,878,158
---------- -------- ---------- ----------- ----------- ----------- -----------
BALANCE, March 31,
1998 9,385,084 $ 9,385 -- -- $17,162,396 $ 6,935,972 $24,107,753
(Unaudited) ========== ======== ========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 8
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-----------------------------------
1997 1998
----------- ------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,953,035 $ 8,464,825
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets 42,302 767,159
Purchases of property and equipment (2,841,855) (3,868,815)
Business acquisitions, net of cash acquired (4,961,045) (22,483,564)
Change in restricted cash 400,000 --
----------- ------------
Net cash used by investing activities (7,360,598) (25,585,220)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 5,511,102 22,216,037
Principal payments on loans (2,191,673) (6,026,737)
Dividends paid (783,430) --
----------- ------------
Net cash provided by financing activities 2,535,999 16,189,300
----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (871,564) (931,095)
CASH AND CASH EQUIVALENTS, beginning of period 4,148,546 1,551,949
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,276,982 $ 620,854
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 1,450,925 $ 2,170,562
=========== ============
Cash payments for income taxes $ 0 $ 1,067,755
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 9
VALLEY NATIONAL GASES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements of Valley National Gases Incorporated (the Company)
presented herein are unaudited. Certain information and footnote disclosures
normally prepared in accordance with generally accepted accounting principles
have been either condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. Although the Company believes that all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation have been made, interim periods are not necessarily indicative
of the financial results of operations for a full year. As such, these financial
statements should be read in conjunction with the financial statements and notes
thereto included or incorporated by reference in the Company's audited financial
statements for the period ending June 30, 1997.
2. INVENTORY:
Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
The components of inventory are as follows:
June 30, March 31,
1997 1998
---------- ----------
(Unaudited)
Hardgoods $6,043,962 $8,042,129
Gases 778,209 1,265,466
---------- ----------
$6,822,171 $9,307,595
========== ==========
3. ACQUISITIONS:
The Company acquires businesses engaged in the distribution of industrial,
medical and specialty gases and related welding supplies and accessories.
Acquisitions have been recorded using the purchase method of accounting and,
accordingly, results of their operations have been included in the Company's
financial statements since the effective dates of the respective acquisitions.
During the nine months ended March 31, 1998, the Company purchased five
businesses. The largest of these acquisitions and their effective dates included
Doansco, Inc. (July, 1997), Goss Brothers Welding Supply, Inc.
(September, 1997) and Buckeye Welder Services, Inc.(December, 1997).
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<PAGE> 10
In connection with these acquisitions, the total purchase price, fair value of
assets acquired, cash paid and liabilities assumed were as follows:
Nine Months Ended
March 31, 1998
-------------
(Unaudited)
Cash paid $ 19,761,872
Notes issued to sellers 2,727,800
Notes payable and capital leases assumed 847,530
Other liabilities assumed and acquisition costs 4,977,136
-------------
Total purchase price allocated to assets acquired $ 28,314,338
=============
On October 10, 1996, the Company purchased substantially all of the assets of
Weldco Inc. (Weldco) pursuant to a Purchase and Sale Agreement (the Weldco
Purchase Agreement) for approximately $11.1 million. Approximately $7.9 million
of the purchase price was paid by promissory notes from the Company. In
conjunction with the Company's initial public offering, Weldco shareholders
converted a portion of the Company's promissory notes to shares of the Company's
common stock at the initial public offering price. The Company prepaid
$1,720,000 under the Company's promissory notes and issued 135,000 shares of
common stock to Weldco shareholders immediately prior to the closing of the
Offering in exchange for the cancellation of indebtedness in the amount of
$2,800,000. Additionally, certain Weldco shareholders purchased 100,000 shares
of common stock in the Offering. The Weldco Purchase Agreement further grants
Weldco shareholders the right to cause the Company to purchase the 235,000
shares of common stock issued to Weldco shareholders pursuant to the conversion
of indebtedness for a period of three years following the closing of the
Offering at the initial public offering price plus interest from the date of
issuance at the rate of 6.6% per annum. Accordingly, such shares are not
classified as shareholders' equity. The Company's payment obligation is secured
by a letter of credit.
4. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Revolving note,interest at LIBOR plus 1.625% payable monthly through October
1999 and October 2000, respectively. Secured by the assets of the
Company. $ 9,075,154 $24,555,585
Term note, interest at LIBOR plus 1.625% payable monthly through October
2003. Secured by the assets of the Company. 11,607,143 14,070,830
Notepayable, interest at 6.6% payable annually through October 2003. Secured by
certain assets of the Company. 4,781,521 4,098,447
Individuals and corporations, mortgages and notes, interest at 2.978% to 10.00%, 7,456,419 10,561,641
payable at various dates through 2010. ----------- -----------
32,920,237 53,286,503
Original issue discount (204,786) (186,415)
Current maturities (3,928,387) (6,875,497)
----------- -----------
Total long-term debt $28,787,064 $46,224,591
=========== ===========
</TABLE>
Prime rate was 8.5% and LIBOR was 5.69% at March 31, 1998.
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<PAGE> 11
On December 23, 1997, the Company entered into two interest rate swap agreements
with Bank One to reduce the impact of changes in interest rates. The first
agreement was for a period of seven years, cancelable by the bank at the end of
five years, whereby the Company agreed to pay the bank a fixed rate of 5.90% per
annum on the notional principal amount of $5.0 million and the bank agreed to
pay the Company the one month LIBOR rate on the same notional amount. The second
agreement was for a period of five years, cancelable by the bank at the end of
three years, whereby the Company agreed to pay the bank a fixed rate of 5.80%
per annum on the notional principal amount of $5.0 million and the bank agreed
to pay the Company the one month LIBOR rate on the same notional amount.
On January 15, 1998, the Company entered into two interest rate swap agreements
with Bank One to reduce the impact of changes in interest rates. The first
agreement was for a period of seven years, cancelable by the bank at the end of
five years, whereby, the Company agreed to pay the bank a fixed rate of 5.43%
per annum on the notional principal amount of $10.0 million and the bank agreed
to pay the Company the one month LIBOR rate on the same notional amount. The
second agreement was for a period of five years, cancelable by the bank at the
end of three years, whereby, the Company agreed to pay the bank a fixed rate of
5.29% per annum on the notional principal amount of $10.0 million and the bank
agreed to pay the Company the one month LIBOR rate on the same notional amount.
The Company is exposed to credit loss in the event of nonperformance by the
bank. However, the Company does not anticipate nonperformance by the bank.
On February 5, 1998 the Company entered into an amended and restated credit
facility with Bank One, as agent. The new credit facility increased the maximum
revolving note borrowings to $75.3 million, including a letter of credit
sublimit of $25.0 million, and refinanced the term note at the existing balance
of $14.7 million. The new scheduled maturity date of the term note is October 4,
2003. The new scheduled maturity date of the revolving note is January 16, 2001.
The Company pays a fee for the unused portion of the revolving loan. The loan
agreement for the credit facility contains various financial covenants
applicable to the Company, including covenants requiring minimum fixed charge
coverage maximum funded debt to EBITDA, and minimum net worth.
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<PAGE> 12
5. EARNINGS PER SHARE
Basic earnings per share were computed based on the weighted average number of
common shares issued and outstanding during the relevant periods. Diluted
earnings per common share were computed based on the weighted average number of
common shares issued and outstanding plus additional shares assumed to be
outstanding to reflect the dilutive effect of common stock equivalents using the
treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings for per common
share computation
(1997 pro forma - see Note 7) $ 903,866 $1,035,251 $2,061,112 $2,878,158
========== ========== ========== ==========
Basic earnings per common share:
Weighted average common shares 7,000,000 9,620,084 7,000,000 9,620,084
========== ========== ========== ==========
Basic earnings per common share $0.13 $0.11 $0.29 $0.30
========== ========== ========== ==========
Diluted earnings per common share:
Weighted average common shares 7,000,000 9,620,084 7,000,000 9,620,084
Shares issuable from assumed conversion of
common stock equivalents 267,074 46,381 267,074 44,941
---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares 7,267,074 9,666,465 7,267,074 9,665,025
========== ========== ========== ==========
Diluted earnings per common share $0.12 $0.11 $0.28 $0.30
========== ========== ========== ==========
</TABLE>
6. SUBSEQUENT EVENTS:
On May 15, 1998 the Company acquired the assets of Miller's LP Gas, Inc., a
propane supply distributor having approximately $2.8 million in annualized
sales. The Company financed this transaction from its credit facility and notes
with the Seller.
7. PRO FORMA INFORMATION (UNAUDITED):
The pro forma adjustments for income taxes included in the accompanying
condensed consolidated statement of operations for the three months and nine
months ended March 31, 1997 are based upon the statutory rates in effect for C
Corporations during the periods presented. Pro forma earnings per share were
calculated by dividing pro forma earnings by the weighted average shares
outstanding for the period. The weighted average number of shares outstanding
used to calculate the pro forma net income per share is based on the historical
weighted average number of shares outstanding using an offering price of $8 per
share.
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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Financial Statements and the Notes thereto.
OVERVIEW
The Company is a leading packager and distributor of industrial, medical and
specialty gases, welding equipment and supplies, and propane in ten states in
the mid-Atlantic and midwestern regions of the United States. The Company's net
sales have grown, primarily as a result of acquisitions, at a compound annual
rate of approximately 17% per year since the Company started business in 1958,
increasing from $190,000 in that year to $90.2 million for the last twelve
months. In fiscal 1997, gases accounted for approximately 42% of net sales,
welding equipment and supplies accounted for approximately 44% of net sales, and
cylinder and tank rental accounted for approximately 14% of net sales.
The Company believes it has been successful in executing its strategy of growth
through acquisitions, having completed 33 acquisitions since 1990. Some
acquisitions have had, and the Company expects some future acquisitions may
have, a dilutive effect upon the Company's income from operations and net income
before tax for a short period following consummation. This temporary dilution
occurs because some of the benefits of acquisitions, such as leveraging of
operating and administrative expenses, improved product gross margins and real
sales growth, occur over a period ranging from two to eight quarters, depending
upon the complexity of integrating each acquisition into the Company's existing
operations. The consideration for most acquisitions includes a combination of a
cash payment at closing, seller financing and payments under covenants not to
compete and consulting agreements. In most cases, operating cash flow of an
acquired business is positive in a relatively short period of time. For many
acquisitions, the Company believes that projections of future cash flows justify
payment of amounts in excess of the book or market value of the assets acquired,
resulting in goodwill being recorded.
The Company's results are subject to moderate seasonality, primarily due to
fluctuations in the demand for propane, which is highest during winter months
falling in the Company's second and third fiscal quarters.
Operating and administrative expenses are comprised primarily of salaries,
benefits, transportation equipment operating costs, facility lease expenses and
general office expenses. These expenses are generally fixed on a quarter-
to-quarter basis. The Company believes that changes in these expenses as a
percentage of sales should be evaluated over the long term rather than on a
quarter-to-quarter basis due to the moderate seasonality of sales mentioned
above and the generally fixed nature of these expenses.
Historically, the Company's gross profit margins as a percentage of sales have
been higher on the sale of gases than on the sale of welding equipment and
supplies ("hard goods"). As a result of recent acquisitions of some distributors
with a higher proportion of hard goods to gas sales, the Company's average gross
profit as a percentage of sales has decreased in comparison to prior years.
Future acquisitions may affect this pattern depending upon the product mix of
the acquired businesses.
Until April 10, 1997, the Company was treated as an S Corporation for federal
and state income tax purposes. As a result, the Company was not subject to
federal and state income taxes. The Company terminated its S Corporation
election in connection with its initial public offering of stock and become a C
Corporation. As a result of termination of the S Corporation election, the
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<PAGE> 14
Company recognized $3.9 million of deferred income taxes in the fourth quarter
of fiscal year 1997.
In 1997 the Company began modifying its computer system programming to process
transactions in the year 2000. Spending for this modification is being expensed
as incurred and is not expected to have a significant impact on the Company's
ongoing results of operations.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1998 and 1997
Net sales increased 27.2%, or $5.5 million, to $25.8 million from $20.3 million
for the three months ended March 31, 1998, and 1997, respectively. Acquisitions
made during the proceeding twelve months contributed $6.2 million of the
increase in net sales, while same store sales declined $0.6 million. The
decrease in same store sales reflects the lower demand and price realization for
propane, resulting primarily from the effect of warm weather on the home heating
season. Absent this effect on propane sales, same store sales increased $0.3
million versus the same quarter last year. Gases and cylinder revenue
represented 53.1% of net sales for the three months ended March 31, 1998, with
hard goods representing 46.9%. In comparison, net sales for the three months
ended March 31, 1997 reflected gases and cylinder revenue at 55.6% and hard
goods at 44.4%. This change in sales mix reflects the effect of acquisitions
made during the preceding twelve months.
Gross profit, which excludes depreciation and amortization, increased 28.8%, or
$3.1 million, to $14.0 million from $10.9 million for the three months ended
March 31, 1998 and 1997, respectively. Acquisitions made during the proceeding
twelve months contributed $3.1 million of the increase in gross profit, while
the gross profit for the base business remained the same. Gross profit as a
percentage of net sales was 54.2% for the three months ended March 31, 1998,
compared to 53.5% for the three months ended March 31, 1997. This change
reflected the improvement in product margins, partially offset by the increase
in the mix of hard goods to total sales.
Operating and administrative expenses increased 25.2%, or $1.8 million, to $8.9
million from $7.1 million for the three months ended March 31, 1998 and 1997,
respectively. Of this increase, $1.7 million was related to acquired businesses
and the remaining $0.1 million reflected increases on a same store basis.
Operating and administrative expenses as a percentage of sales decreased to
34.6% for the three months ended March 31, 1998, as compared to 35.2% for the
same quarter in 1997, reflecting the addition of operating expenses related to
acquired businesses as a percentage of sales at a rate lower than the Company
average before the acquisitions were made.
Depreciation and amortization expense increased $0.7 million for the three
months ended March 31, 1998 compared to the same period in 1997, primarily as a
result of acquisitions made during the last twelve months.
Interest expense increased $0.3 million for the quarter, reflecting the
financing of acquisitions made during the last twelve months, partially reduced
by lower interest rates and reductions in debt as a result of the Company's
initial public offering of stock in April 1997.
Net earnings increased 14.5%, or $0.1 million, to $1.0 million from pro forma
net earnings of $0.9 million for the three months ended March 31, 1998 and 1997,
respectively.
Comparison of Nine months Ended March 31, 1998 and 1997
- 14 -
<PAGE> 15
Net sales increased 30.1%, or $16.3 million, to $70.3 million from $54.0 million
for the nine months ended March 31, 1998, and 1997, respectively. Acquisitions
made during the proceeding twelve months contributed $15.3 million of the
increase in net sales, while same store growth contributed $1.0 million of the
increase. Gases and cylinder revenue represented 53.5% of net sales for the nine
months ended March 31, 1998, with hard goods representing 46.5%. In comparison,
net sales for the nine months ended March 31, 1997 reflected gases and cylinder
revenue at 56.7% and hard goods as 43.3%. This change in sales mix primarily
reflects the effect of acquisitions made during the preceding twelve months.
Gross profit, which excludes depreciation and amortization, increased 30.6%, or
$8.9 million, to $38.0 million from $29.1 million for the nine months ended
March 31, 1998 and 1997, respectively. Acquisitions made during the proceeding
twelve months contributed $7.9 million of the increase in gross profit, while
the base business contributed $1.0 million of the increase. Gross profit as a
percentage of net sales was 54.1% for the nine months ended March 31, 1998,
compared to 53.9% for the nine months ended March 31, 1997. This change
reflected the improvement in product margins partially offset by the increase in
the mix of hard goods to total sales.
Operating and administrative expenses increased 25.2%, or $5.0 million, to $24.7
million from $19.7 million for the nine months ended March 31, 1998 and 1997,
respectively. Of this increase, $4.6 million was related to acquired businesses
and the remaining $0.4 million reflected increases on a same store basis.
Operating and administrative expenses as a percentage of sales decreased to
35.1% for the nine months ended March 31, 1998, as compared to 36.5% for the
same period in 1997, reflecting the addition of operating expenses related to
acquired businesses as a percentage of sales at a rate lower than the Company
average before the acquisitions were made.
Depreciation and amortization expense increased $1.8 million for the nine months
ended March 31, 1998 compared to the same period in 1997, primarily as a result
of acquisitions made during the last twelve months.
Interest expense increased $0.5 million for the nine months, reflecting the
financing of acquisitions made during the last twelve months, partially reduced
by lower interest rates and reductions in debt as a result of the Company's
initial public offering of stock in April 1997.
Net earnings increased 39.6%, or $0.8 million, to $2.9 million from pro forma
net earnings of $2.1 million for the nine months ended March 31, 1998 and 1997,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations, capital expenditures and
debt service with funds provided from operating activities. Acquisitions have
been financed by a combination of seller financing, bank borrowings and funds
generated from operations.
At March 31, 1998, the Company had working capital of approximately $7.8
million. Funds provided by operations for the nine months ended March 31, 1998
were approximately $8.5 million. Funds used for investing activities were
approximately $25.5 million for the nine months ended March 31, 1998, consisting
primarily of capital spending and financing for acquisitions. Sources of funds
from financing activities for nine months ended March 31, 1998 were
approximately $16.1 million from net borrowings.
On February 5, 1998 the Company entered into an amended and restated credit
facility with Bank One, as agent. The new credit facility increased the
- 15 -
<PAGE> 16
maximum revolving note borrowings to $75.3 million, including a letter of credit
sublimit of $25.0 million, and refinanced the term note at the existing balance
of $14.7 million. The new scheduled maturity date of the term note is October 4,
2003. The new scheduled maturity date of the revolving note is January 16, 2001.
The Company pays a fee for the unused portion of the revolving loan. The
revolving loan is used primarily to fund acquisitions. The Company is not
required to make principal payments on outstanding balances of the revolving
loan as long as certain covenants are satisfied. Interest is charged on both the
term loan and the revolving loan at either the lender's prime rate or various
LIBOR rates, at the Company's discretion, plus an applicable spread. The
weighted average interest rate for substantially all of the borrowings under the
credit facility was 7.3% as of March 31, 1998. As of March 31, 1998,
availability under the revolving loan was approximately $43.5 million, with
outstanding borrowings of approximately $24.6 million and outstanding letters of
credit of approximately $7.2 million. The credit facility is secured by all of
the Company's assets.
The loan agreement for the credit facility contains various financial covenants
applicable to the Company, including covenants requiring minimum fixed charge
coverage, maximum funded debt to EBITDA, and minimum net worth. The Company is
in compliance with these covenants and believes that it will continue to be in
compliance through at least the next twelve months.
The Company is obligated under various promissory notes related to the financing
of acquisitions that have various rates of interest, ranging from 3.0% to 10.0%
per annum, and maturities through 2010. The outstanding balance of these notes
as of March 31, 1998 was $14.7 million. Some of these notes are secured by
assets related to the applicable acquisition, some are unsecured, and some are
backed by bank letters of credit issued under the Company's credit facility.
On December 23, 1997, the Company entered into two interest rate swap agreements
with Bank One to reduce the impact of changes in interest rates. The first
agreement was for a period of seven years, cancelable by the bank at the end of
five years, whereby the Company agreed to pay the bank a fixed rate of 5.90% per
annum on the notional principal amount of $5.0 million and the bank agreed to
pay the Company the one month LIBOR rate on the same notional amount. The second
agreement was for a period of five years, cancelable by the bank at the end of
three years, whereby the Company agreed to pay the bank a fixed rate of 5.80%
per annum on the notional principal amount of $5.0 million and the bank agreed
to pay the Company the one month LIBOR rate on the same notional amount. On
January 15, 1998, the Company entered into two interest rate swap agreements
with Bank One to reduce the impact of changes in interest rates. The first
agreement was for a period of seven years, cancelable by the bank at the end of
five years, whereby, the Company agreed to pay the bank a fixed rate of 5.43%
per annum on the notional principal amount of $10.0 million and the bank agreed
to pay the Company the one month LIBOR rate on the same notional amount. The
second agreement was for a period of five years, cancelable by the bank at the
end of three years, whereby, the Company agreed to pay the bank a fixed rate of
5.29% per annum on the notional principal amount of $10.0 million and the bank
agreed to pay the Company the one month LIBOR rate on the same notional amount.
The Company is exposed to credit loss in the event of nonperformance by the
bank. However, the Company does not anticipate nonperformance by the bank.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company generally has experienced higher sales activity during its second
and third quarters as a result of seasonal sales of propane, with corresponding
lower sales for the first and fourth quarters. As a result, income from
operations and net income typically is higher for the second and third quarters
than for the first and fourth quarters of the fiscal year.
- 16 -
<PAGE> 17
INFLATION
The impact of inflation on the Company's operating results has been moderate in
recent years, reflecting generally low rates of inflation in the economy and the
Company's historical ability to pass purchase price increases to its customers
in the form of sales price increases. While inflation has not had, and the
Company does not expect that it will have, a material impact upon operating
results, there is no assurance that the Company's business will not be affected
by inflation in the future.
SUBSEQUENT EVENTS
On May 15, 1998 the Company acquired the assets of Miller's LP Gas, Inc., a
propane supply distributor having approximately $2.8 million in annualized
sales. The Company financed this transaction from its credit facility and notes
with the Seller.
RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standard Board Statement No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) was issued in February 1997
and is effective for periods ending after December 15, 1997. This statement
requires all companies to provide specific disclosure regarding the entities
capital structure. SFAS No. 129 specifies the disclosures, for all companies,
including descriptions of the securities comprising the capital structure and
the contractual rights of the holders of such securities. The Company adopted
SFAS No. 129 during the quarter ended December 31, 1997.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See the Exhibit Index on page 19.
(b) Reports on Form 8-K:
Form 8-K dated January 2, 1998 reporting under Item 2 the
acquisition of Buckeye Welder Services, Inc.
- 17 -
<PAGE> 18
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.
VALLEY NATIONAL GASES INCORPORATED
May 15, 1998 /s/ ROBERT D. SCHERICH
----------------------
Robert D. Scherich
Chief Financial Officer
- 18 -
<PAGE> 19
EXHIBIT INDEX
Exhibit Number Description
- -------------- -------------------------------------------------------------
3.1 Articles of Amendment of the Company, incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 under the Securities Act of 1933, as
amended, (File No. 333-19973)
3.2 Bylaws of the Company, incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 under
the Securities Act of 1933, as amended, (File No. 333-19973)
27.1 Financial Data Schedule (provided for the information of the
U.S. Securities and Exchange Commission only)
- 19 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR VALLEY NATIONAL GASES INCORPORATED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001030715
<NAME> VALLEY NATIONAL GASES INCORPORATED
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> JAN-01-1998 JUL-01-1997
<PERIOD-END> MAR-31-1998 DEC-31-1997
<CASH> 620,854 620,854
<SECURITIES> 0 0
<RECEIVABLES> 12,012,894 12,012,894
<ALLOWANCES> 200,750 200,750
<INVENTORY> 9,307,595 9,307,595
<CURRENT-ASSETS> 22,649,421 22,649,421
<PP&E> 63,253,142 63,253,142
<DEPRECIATION> 26,353,122 26,353,122
<TOTAL-ASSETS> 92,211,341 92,211,341
<CURRENT-LIABILITIES> 14,887,531 92,211,341
<BONDS> 46,224,591 46,224,591
0 0
0 0
<COMMON> 9,385 9,385
<OTHER-SE> 24,098,368 24,098,368
<TOTAL-LIABILITY-AND-EQUITY> 92,211,341 92,211,341
<SALES> 25,795,443 70,306,595
<TOTAL-REVENUES> 25,795,443 70,306,595
<CGS> 11,818,429 32,281,466
<TOTAL-COSTS> 11,818,429 32,281,466
<OTHER-EXPENSES> 11,394,906 31,184,953
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 895,961 2,151,173
<INCOME-PRETAX> 1,754,661 4,878,233
<INCOME-TAX> 719,410 2,000,075
<INCOME-CONTINUING> 1,035,251 2,878,158
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,035,251 2,878,158
<EPS-PRIMARY> 0.11 0.30
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