<PAGE> 1
================================================================================
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, 1999
[ ] 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 14, 1999
----- ---------------------------
Common stock, $0.001 par value 9,372,584
================================================================================
<PAGE> 2
VALLEY NATIONAL GASES INCORPORATED
----------------------------------
TABLE OF CONTENTS
-----------------
Page
----
PART I FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Balance Sheets as of June 30, 1998
And March 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1999 5
Condensed Consolidated Statements of Operations for the
Nine Months Ended March 31, 1998 and 1999 6
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and 1999 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
- 2 -
<PAGE> 3
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
VALLEY NATIONAL GASES INCORPORATED
----------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
A S S E T S
-----------
June 30, March 31,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 589,170 $ 491,789
Accounts receivable, net of allowance for doubtful accounts of
$345,000 and $409,986, respectively
11,657,659 12,416,754
Inventory 8,731,834 10,645,719
Prepaids and other 1,242,799 930,830
------------ ------------
Total current assets 22,221,462 24,485,092
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 49,786 49,786
Buildings and improvements 3,957,774 4,210,790
Equipment 49,212,815 55,853,515
Transportation equipment 8,520,471 9,944,515
Furniture and fixtures 3,341,977 4,169,170
------------ ------------
Total property, plant and equipment 65,082,823 74,227,776
Accumulated depreciation (26,580,317) (29,457,428)
------------ ------------
Net property, plant and equipment 38,502,506 44,770,348
OTHER ASSETS:
Intangibles, net of amortization of $6,888,902 and $9,163,896,
respectively 34,706,927 36,387,973
Deposits and other assets 1,628,161 1,665,243
------------ ------------
Total other assets 36,335,088 38,053,216
------------ ------------
TOTAL ASSETS $ 97,059,056 $107,308,656
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE> 4
<TABLE>
<CAPTION>
VALLEY NATIONAL GASES INCORPORATED
----------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, March 31,
------------------------------------ 1998 1999
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 5,611,714 $ 6,355,606
Bank overdraft 393,530 603,961
Accounts payable, trade 4,584,388 3,606,399
Accrued compensation and employee benefits 3,177,180 2,614,026
Other current liabilities 1,271,817 1,068,919
----------- ------------
Total current liabilities 15,038,629 14,248,911
LONG-TERM DEBT, less current maturities 48,655,869 58,599,967
DEFERRED TAX LIABILITY 5,933,192 6,335,033
OTHER LONG-TERM LIABILITIES 1,368,766 1,460,246
----------- ------------
Total liabilities 70,996,456 80,644,157
----------- ------------
REDEEMABLE COMMON STOCK, par value, $.001
per share, issued 235,000 shares and 0
shares, respectively 1,880,000 --
STOCKHOLDERS' EQUITY:
Common stock, par value, $.001 per share-
Authorized, 30,000,000 shares
Issued, 9,385,084 and 9,620,084 shares,
respectively 9,385 9,620
Paid-in-capital 17,162,396 19,269,338
Retained earnings 7,010,819 9,648,969
Treasury stock at cost, 0 and 272,500 shares,
respectively -- (2,263,428)
----------- ------------
Total stockholders' equity 24,182,600 26,664,499
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $97,059,056 $107,308,656
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE> 5
<TABLE>
<CAPTION>
VALLEY NATIONAL GASES INCORPORATED
----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Three Months Ended
March 31,
--------------------------------
1998 1999
----------- -----------
<S> <C> <C>
NET SALES $25,795,443 $28,027,430
COST OF PRODUCTS SOLD, excluding depreciation and amortization 11,818,429 12,711,518
----------- -----------
Gross profit 13,977,014 15,315,912
----------- -----------
EXPENSES:
Operating and administrative 8,936,220 10,247,292
Depreciation and amortization 2,458,686 2,102,076
----------- -----------
Total expenses 11,394,906 12,349,368
----------- -----------
Income from operations 2,582,108 2,966,544
INTEREST EXPENSE 895,961 1,002,027
OTHER INCOME (EXPENSE) NET 68,514 62,958
----------- -----------
EARNINGS BEFORE INCOME TAXES 1,754,661 2,027,475
PROVISION FOR INCOME TAXES 719,410 831,264
NET EARNINGS $ 1,035,251 $ 1,196,211
=========== ===========
ACCRETION OF REDEEMABLE COMMON STOCK -- 131,353
----------- -----------
NET EARNINGS AVAILABLE FOR COMMON STOCK $ 1,035,251 $ 1,064,858
=========== ===========
BASIC EARNINGS PER SHARE $ 0.11 $ 0.11
DILUTED EARNINGS PER SHARE 0.11 0.11
WEIGHTED AVERAGE SHARES:
Basic 9,620,084 9,535,278
Diluted 9,666,465 9,535,278
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE> 6
<TABLE>
<CAPTION>
VALLEY NATIONAL GASES INCORPORATED
----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Nine Months Ended
March 31,
--------------------------------
1998 1999
----------- -----------
<S> <C> <C>
NET SALES $70,306,595 $75,853,143
COST OF PRODUCTS SOLD, excluding depreciation and amortization 32,281,466 34,185,287
----------- -----------
Gross profit 38,025,129 41,667,856
----------- -----------
EXPENSES:
Operating and administrative 24,681,675 27,985,380
Depreciation and amortization 6,503,278 6,079,907
----------- -----------
Total expenses 31,184,953 34,065,287
----------- -----------
Income from operations 6,840,176 7,602,569
INTEREST EXPENSE 2,151,173 2,940,057
OTHER INCOME (EXPENSE) NET 189,230 193,974
----------- -----------
EARNINGS BEFORE INCOME TAXES 4,878,233 4,856,486
PROVISION FOR INCOME TAXES 2,000,075 1,991,159
----------- -----------
NET EARNINGS $ 2,878,158 $ 2,865,327
=========== ===========
ACCRETION OF REDEEMABLE COMMON STOCK -- 227,178
----------- -----------
NET EARNINGS AVAILABLE FOR COMMON STOCK $ 2,878,158 $ 2,638,149
=========== ===========
BASIC EARNINGS PER SHARE $ 0.30 $ 0.28
DILUTED EARNINGS PER SHARE $ 0.30 $ 0.27
WEIGHTED AVERAGE SHARES
Basic 9,620,084 9,591,656
Diluted 9,665,025 9,603,731
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 6 -
<PAGE> 7
<TABLE>
<CAPTION>
VALLEY NATIONAL GASES INCORPORATED
----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
Nine Months Ended
March 31,
-----------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 8,464,825 $ 6,591,520
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of assets 767,159 8,922
Purchases of property and equipment (3,868,815) (5,261,115)
Business acquisitions, net of cash acquired (22,483,564) (7,496,390)
------------ ------------
Net cash used by investing
activities (25,585,220) (12,748,583)
Cash flows from financing activities:
Proceeds from borrowings 22,216,037 17,824,049
Principal payments on loans (6,026,737) (9,500,939)
Purchase of treasury shares -- (2,263,428)
------------ ------------
Net cash provided by
financing activities 16,189,300 6,059,682
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (931,095) (97,381)
CASH AND CASH EQUIVALENTS, beginning of period 1,551,949 589,170
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 620,854 $ 491,789
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 2,170,562 $ 2,944,963
============ ============
Cash payments for income taxes $ 1,067,755 $ 1,316,284
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 7 -
<PAGE> 8
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, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
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,
1998 1999
---------- -----------
(Unaudited)
Hardgoods $7,651,443 $ 9,272,420
Gases 1,080,391 1,373,299
----------- -----------
$8,731,834 $10,645,719
=========== ===========
PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation is provided on the
straight-line basis over the estimated useful lives of the related assets.
Effective July 1, 1998, the Company changed its estimate of the useful lives
of its cylinders and tanks from 12 to 30 years. This change was made to better
reflect the estimated periods during which these assets will remain in service.
The change had the effect of reducing depreciation expense in the nine months
ended March 31, 1999 by approximately $1.7 million and increasing net earnings
by $1.0 million or $.10 per share.
- 8 -
<PAGE> 9
The Company changed the estimated useful life of cylinders as a result of
thorough studies and analyses. The studies considered technological advances in
cylinders, empirical data obtained from cylinder manufacturers and other
industry experts and experience gained from the Company's maintenance of a
cylinder population of approximately 375,000 cylinders.
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, 1999, the Company purchased five
businesses. The largest of these acquisitions and their effective dates were
Altoona Welding Supply Company, Inc. (September 1998), Keen Welding Supply, Inc.
(January 1999), Dlouhy Welding Supply, Inc. (January 1999) and Holshoy Welding
Supply, Inc. (March 1999).
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,
1999
-----------
(Unaudited)
Cash paid $ 5,522,043
Notes issued to sellers 2,198,360
Notes payable and capital leases assumed 7,027
Other liabilities assumed and acquisition costs 2,368,857
-----------
Total purchase price allocated to assets acquired $10,096,287
===========
- 9 -
<PAGE> 10
4. LONG-TERM DEBT:
---------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Revolving note, interest at LIBOR plus 1.625%
payable monthly through January 2001. Secured
by the assets of the Company $ 26,831,036 $ 37,756,726
Termnote, interest at LIBOR plus 1.625% payable
monthly through October 2003. Secured by the
assets of the Company 13,431,245 11,512,490
Note payable, interest at 6.6% payable annually
through October 2003. Secured by certain
assets of the Company 4,098,447 3,415,372
Individuals and corporations, mortgages and
notes, interest at 3.7% to 10.00%, payable
at various dates through 2010 10,087,261 12,433,731
------------ ------------
54,447,989 65,118,319
Original issue discount (180,406) (162,746)
Current maturities (5,611,714) (6,355,606)
------------ ------------
Total long-term debt $ 48,655,869 $ 58,599,967
============ ============
</TABLE>
Prime rate was 7.75% and LIBOR was 5.19% at March 31, 1999.
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
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 6.8% as of March 31, 1999. As of March 31, 1999,
availability under the revolving loan was approximately $30.0 million, with
outstanding borrowings of approximately $37.8 million and outstanding letters of
credit of approximately $7.5 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.
- 10 -
<PAGE> 11
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,
----------------------------------- ------------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings available for common stock $1,035,251 $1,064,858 $2,878,158 $2,638,149
========== ========== ========== ==========
Basic earnings per common share:
Weighted average common shares 9,620,084 9,535,278 9,620,084 9,591,656
========== ========== ========== ==========
Basic earnings per common share $0.11 $0.11 $0.30 $0.28
========== ========== ========== ==========
Diluted earnings per common share:
Weighted average common shares 9,620,084 9,535,278 9,620,084 591,656
Shares issuable from assumed
conversion of common stock
equivalents 46,381 -- 44,941 12,075
---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares 9,666,465 9,535,278 9,665,025 9,603,731
========== ========== ========== ==========
Diluted earnings per common share $0.11 $0.11 $0.30 $0.27
========== ========== ========== ==========
</TABLE>
For the calculations for the three month and nine month periods ended March
31, 1999, options, in addition to those shown in the table, to purchase 232,400
shares of common stock at $10.75 to $5.625 per share were outstanding during the
periods but were not included in the computation of diluted earnings per share
because the options exercise price was greater than the average market price of
the common shares. These options, which expire in 2007 and 2009 were still
outstanding at March 31, 1999.
- 11 -
<PAGE> 12
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 eleven 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 $100.6 million for the last twelve
months. In fiscal 1998, gases accounted for approximately 40% of net sales,
welding equipment and supplies accounted for approximately 47% of net sales, and
cylinder and tank rental accounted for approximately 13% of net sales.
The Company believes it has been successful in executing its strategy of
growth through acquisitions, having completed 41 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. Seasonality of total
sales has increased as propane sales as a percentage of total sales have
increased.
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 seasonality of sales mentioned above and the
generally fixed nature of these expenses.
- 12 -
<PAGE> 13
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, in some cases, has decreased in comparison to
prior years. Future acquisitions may affect this pattern depending upon the
product mix of the acquired businesses.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1999 and 1998
- --------------------------------------------------------
Net sales increased 8.7%, or $2.2 million, to $28.0 million from $25.8
million for the three months ended March 31, 1999 and 1998, respectively.
Acquisitions made during the preceeding twelve months contributed $2.8 million
of the increase in net sales, while same store sales declined $.6 million. Same
store sales decreased 2.1% versus the same quarter last year reflecting reduced
sales to steel related businesses, reflecting reduced capacity utilization in
the steel industry as a result of the high level of imports and reduced sales at
its branches in Southwest Ohio impacted by the actions of former employees who,
in the Company's opinion, acted in violation of covenants not to compete. Gases
and cylinder revenue represented 57.1% of net sales for the three months ended
March 31, 1999, with hard goods representing 42.9%. In comparison, net sales for
the three months ended March 31, 1998 reflected gases and cylinder revenue as
53.3% and hard goods as 46.7%. This change in sales mix reflects the effect of
acquisitions made during the preceding twelve months and the before mentioned
factors that affected same store sales.
Gross profit, which excludes depreciation and amortization, increased 9.6%,
or $1.3 million, to $15.3 million from $14.0 million for the three months ended
March 31, 1999 and 1998, respectively. Acquisitions made during the preceeding
twelve months contributed $1.3 million of the increase in gross profit, while
the base business remained the same. Gross profit as a percentage of net sales
was 54.6% for the three months ended March 31, 1999, compared to 54.2% for the
three months ended March 31, 1998. This change reflected an increase in the
proportion of gas and cylinder rent sales, which have a higher gross profit
margin as a percentage of net sales than hardgoods.
Operating and administrative expenses increased 14.7%, or $1.3 million, to
$10.2 million from $8.9 million for the three months ended March 31, 1999 and
1998, respectively. Of this increase, $0.8 million was related to acquired
businesses while base business increased $0.5 million. Operating and
administrative expenses as a percentage of sales was 36.6% for the three months
ended March 31, 1999, as compared to 34.6% for the same quarter in 1998,
reflecting the addition of operating expenses related to acquired businesses as
a percentage of sales offset by the effect of the decline in the same store
sales.
- 13 -
<PAGE> 14
Depreciation and amortization expense decreased $0.4 million for the three
months ended March 31, 1999 compared to the same period in 1998, reflecting the
increase from acquisitions made during the last twelve months offset by the
impact of the company's change in its estimate of useful lives related to
cylinders and tanks from twelve to thirty years.
Interest expense increased $0.1 million for the quarter, reflecting the
financing of acquisitions made during the last twelve months, partially reduced
by lower interest rates.
Net earnings increased 15.5% to $1.2 million for the three months ended March
31, 1999 compared to $1.0 million for the prior year quarter.
Comparison of Nine Months Ended March 31, 1999 and 1998
- -------------------------------------------------------
Net sales increased 7.9%, or $5.5 million, to $75.8 million from $70.3
million for the nine months ended March 31, 1999 and 1998, respectively.
Acquisitions made during the preceding twelve months contributed $9.3 million of
the increase in net sales, while same store sales declined $3.8 million. Same
store sales decreased 5.4% versus the same period last year reflecting reduced
sales to steel related businesses, reflecting reduced capacity utilization in
the steel industry as a result of the high level of imports and reducted sales
at its branches in Southwest Ohio impacted by the actions of former employees
who, in the Company's opinion acted in violation of covenants not to compete.
Gases and cylinder revenue represented 56.1% of net sales for the nine months
ended March 31, 1999, with hard goods representing 43.9%. In comparison, net
sales for the nine months ended March 31, 1998 reflected gases and cylinder
revenue as 53.7% and hard goods as 46.3%. This change in sales mix reflects the
effect of acquisitions made during the preceding twelve months and the before
mentioned factors that affected same store sales.
Gross profit, which excludes depreciation and amortization, increased 9.6%,
or $3.6 million, to $41.6 million from $38.0 million for the nine months ended
March 31, 1999 and 1998, respectively. Acquisitions made during the preceeding
twelve months contributed $4.3 million of the increase in gross profit, while
the gross profit in the base business decreased $0.7 million. Gross profit as a
percentage of net sales was 54.9% for the nine months ended March 31, 1999,
compared to 54.1% for the nine months ended March 31, 1998. This change
reflected an increase in the proportion of gas and cylinder rent sales, which
have a higher gross profit margin as a percentage of net sales than hardgoods.
Operating and administrative expenses increased 13.4%, or $3.3 million, to
$28.0 million from $24.7 million for the nine months ended March 31, 1999 and
1998, respectively. Of this increase, $2.6 million was related to acquired
businesses and the remaining $0.7 million reflected increases on a same store
basis. Operating and administrative expenses as a percentage of sales was 36.9%
for the nine months ended March 31, 1999, as compared to 35.1% for the same
period in 1998, reflecting the addition of operating expenses related to
acquired businesses as a percentage of sales offset by the effect of the decline
in the same store sales.
Depreciation and amortization expense decreased $0.4 million for the nine
months ended March 31, 1999 compared to the same period in 1998, reflecting the
increase from acquisitions made during the last twelve months offset by a
decrease of $1.7 million due to the company's change in its estimate of useful
lives related to cylinders and tanks from twelve to thirty years.
- 14 -
<PAGE> 15
Interest expense increased $0.8 million for the nine months, reflecting the
financing of acquisitions made during the last twelve months, partially reduced
by lower interest rates.
Net earnings remained the same at $2.9 million for the nine months ended
March 31, 1999 compared to the same period last year.
YEAR 2000 COMPLIANCE
The Company's work on the Year 2000 ("Y2K") computer compliance issue began
in 1996. The Company's Y2K compliance program consists of five parts: inventory,
assessment, renovation, testing and implementation. The Company has conducted an
inventory and assessment of remediation required for business-critical
information technology applications. Project plans have been created, and
progress is being monitored on an ongoing basis. The Company's business-critical
information technology applications are now Y2K compliant. The Company is also
in the process of completing Company-wide inventory, assessment and remediation
project plans for business-critical personal computers and software, user
applications and embedded-chip systems. The Company's goal is to have these
business-critical components Y2K compliant by June 30, 1999.
The Company is investigating the Y2K compliance status of its vendors,
suppliers and affiliates via the Company's own internal vendor compliance
effort. The Company will carry out this task through a Company-wide effort to
address internal issues, and jointly with industry trade groups, to address
issues related to third parties which are common to the industry.
The Company estimates that expenses incurred and expenses still to be
incurred for programming, internal staff costs and other expenses related to its
Y2K efforts will be less than $100,000.
While the Company believes it is taking all appropriate steps to achieve Y2K
compliance, its Y2K issues and any potential future business interruptions,
costs, damages or losses related thereto, are dependent, to a significant
degree, upon the Y2K compliance of third parties, both domestic and
international, such as government agencies, customers, vendors and suppliers.
The Y2K problem is pervasive and complex, as virtually every computer operation
will be affected in some way. Consequently, no assurance can be given that Y2K
compliance can be achieved without significant additional costs. The products
sold by the Company can be purchased through multiple vendors. Given these
multiple sources of supply, along with the Company's inventory, the Company
believes that disruptions in supply caused by Y2K problems would not have a
significant impact on its results of operations.
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, 1999, the Company had working capital of approximately $10.3
million. Funds provided by operations for the nine months ended March 31, 1999
were approximately $6.6 million. Funds used for investing activities were
approximately
- 15 -
<PAGE> 16
$12.7 million for the nine months ended March 31, 1999, consisting primarily of
capital spending and financing for acquisitions. Sources of funds from financing
activities for the nine months ended March 31, 1999 were approximately $6.0
million from net borrowings. The Company's cash balance decreased $0.1 million
during the nine months to $0.5 million.
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
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 6.8% as of March 31, 1999. As of March 31, 1999,
availability under the revolving loan was approximately $30.0 million, with
outstanding borrowings of approximately $37.8 million and outstanding letters of
credit of approximately $7.5 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 3.7%
to 10.0% per annum, and maturities through 2010. The outstanding balance of
these notes as of March 31, 1999 was $15.8 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
- 16 -
<PAGE> 17
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. On August 28, 1998, the Company entered into an interest rate swap
agreement with Bank One to reduce the impact of changes in interest rates. This
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 5.40%
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
Company is exposed to credit loss in the event of nonperformance by the bank.
However, the Company does not anticipate nonperformance by the bank.
The Company has entered into a put/call option agreement with an independent
distributor for the purchase of its business. This option becomes exercisable
beginning in the year 2002 and ending in the year 2008. The Company believes
that it will have adequate capital resources available to fund this acquisition
at such time that the option is exercised.
INTEREST RATE SENSITIVITY
There was no significant change to the composition of the Company's fixed and
variable rate long term debt during the quarter ended March 31, 1999. During the
quarter, the Company increased its fixed to variable interest rate swaps, as
mentioned above, to a total notional principal amount of $35 million. As of
March 31, 1999 the Company's average pay rate for these swaps was 5.51% compared
to its average receive rate of 5.06%.
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 are higher for the second and third quarters
than for the first and fourth quarters of the fiscal year.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way that public business enterprises report
financial and descriptive information about their reportable operating segments.
As required by SFAS No. 131, the Company will adopt the new statement in the
fiscal year ended June 30, 1999 and apply it to interim financial statements in
subsequent fiscal years.
- 17 -
<PAGE> 18
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and other Postretirment Benefits," which standardizes disclosures for
pensions and other postretirement benefits to the extent practicable, which
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis and eliminate
other disclosures no longer useful as prescribed in previous standards. The
Company does not have any pension or other postretirement benefit plans impacted
by SFAS No. 132.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair value. As required by SFAS No. 133, the Company expects to adopt the new
statement in the first quarter of Fiscal 2000. The effect of this statement on
the Company's financial statements has not been determined.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See the Exhibit Index on page 20.
(b) Reports on Form 8-K:
No reports on Form 8-K were made during the quarter.
- 18 -
<PAGE> 19
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 14, 1999 /s/ ROBERT D. SCHERICH
------------------------------------
Robert D. Scherich
Chief Financial Officer
- 19 -
<PAGE> 20
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)
- 20 -
<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-30-1999 JUN-30-1999
<PERIOD-START> JAN-01-1999 JUL-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1999
<CASH> 491,789 491,789
<SECURITIES> 0 0
<RECEIVABLES> 12,416,754 12,416,754
<ALLOWANCES> 409,986 409,986
<INVENTORY> 10,645,719 10,645,719
<CURRENT-ASSETS> 24,485,092 24,485,092
<PP&E> 74,227,776 74,227,776
<DEPRECIATION> 29,457,428 29,457,428
<TOTAL-ASSETS> 107,308,556 107,308,656
<CURRENT-LIABILITIES> 14,248,911 14,248,911
<BONDS> 58,599,967 58,599,967
0 0
0 0
<COMMON> 9,620 9,620
<OTHER-SE> 26,654,879 26,654,879
<TOTAL-LIABILITY-AND-EQUITY> 107,308,656 107,308,656
<SALES> 28,027,430 75,853,143
<TOTAL-REVENUES> 28,027,430 75,853,143
<CGS> 12,711,518 34,185,287
<TOTAL-COSTS> 12,711,518 34,185,287
<OTHER-EXPENSES> 12,349,368 34,065,287
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,002,027 2,940,057
<INCOME-PRETAX> 2,027,475 4,856,486
<INCOME-TAX> 831,264 1,991,159
<INCOME-CONTINUING> 1,064,858 2,638,149
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,064,858 2,638,149
<EPS-PRIMARY> .11 .28
<EPS-DILUTED> .11 .27
</TABLE>
