<PAGE>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: September 30, 1996
_____________________________
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.)
5 Radnor Corporate Center, Suite 550
100 Matsonford Road
Radnor, PA 19087-4579
_______________________________________ ________________
(Address of principal executive offices) (ZIP code)
(610) 687-5253
__________________________________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
______ ______
Common Stock outstanding at November 1, 1996: 68,217,251 shares
<PAGE> 2
AIRGAS, INC.
FORM 10-Q
September 30, 1996
INDEX
PART I - FINANCIAL INFORMATION
______________________________
Consolidated Balance Sheets as of September 30, 1996
and March 31, 1996....................................................3
Consolidated Statements of Earnings
for the Three Months Ended September 30, 1996 and 1995................5
Consolidated Statements of Earnings
for the Six Months Ended September 30, 1996 and 1995..................6
Consolidated Statements of Cash Flows
for the Six Months Ended September 30, 1996 and 1995..................7
Notes to Consolidated Financial Statements.................................8
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................12
PART II - OTHER INFORMATION
___________________________
Legal Proceedings.........................................................22
Submission of Matters to a vote of Security Holders.......................23
Exhibits and Reports on Form 8-K..........................................23
Signatures................................................................24
<PAGE> 3
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
AIRGAS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
September 30, March 31,
1996 1996
(Unaudited)
_____________ ________
<S> <C> <C>
ASSETS
____________________________________________
Current Assets
Trade receivables, less allowances for
doubtful accounts of $4,062 at September 30,
1996 and $3,396 at March 31, 1996 $144,054 $120,811
Inventories 134,489 86,162
Prepaid expenses and other current assets 18,480 11,601
_________ _______
Total current assets 297,023 218,574
_________ _______
Plant and Equipment, at cost 638,190 586,328
Less accumulated depreciation and amortization (166,143) (147,451)
_________ _______
Plant and equipment, net 472,047 438,877
Other Non-current Assets 131,931 60,948
Goodwill, net of accumulated amortization of
$22,866 at September 30, 1996 and $19,552
at March 31, 1996 280,673 165,243
_________ _______
Total assets $1,181,674 $883,642
========= =======
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
AIRGAS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share amounts)
<CAPTION>
September 30, March 31,
1996 1996
(Unaudited)
___________ ________
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current Liabilities
Current portion of long-term debt $ 18,546 $ 12,179
Accounts payable, trade 54,459 52,528
Accrued expenses and other current liabilities 78,497 72,279
_________ _______
Total current liabilities 151,502 136,986
_________ _______
Long-Term Debt 557,367 385,832
Deferred Income Taxes 92,616 88,400
Other Non-current Liabilities 35,157 34,490
Minority Interest in Subsidiaries 2,105 1,725
Stockholders' Equity
Common stock $.01 par value, 200,000 shares
authorized, 68,201 and 66,314
shares issued at September 30, 1996 and
March 31, 1996, respectively 684 663
Capital in excess of par value 146,823 91,512
Retained earnings 195,820 173,360
Cumulative translation adjustment (400) (410)
Treasury stock, 2,355 common shares at
cost at March 31, 1996 - (28,916)
_________ _______
Total stockholders' equity 342,927 236,209
_________ _______
Total liabilities and stockholders' equity $1,181,674 $ 883,642
========= =======
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
AIRGAS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
__________________ __________________
<S> <C> <C>
Net sales:
Distribution $249,150 $190,456
Direct Industrial 20,437 -
Manufacturing 9,125 8,574
_______ _______
Total net sales 278,712 199,030
_______ _______
Costs and expenses:
Cost of products sold
(excluding depreciation and
amortization)
Distribution 123,753 93,424
Direct Industrial 15,537 -
Manufacturing 5,847 5,293
Selling, distribution and
administrative expenses 89,544 66,997
Depreciation and amortization 15,023 11,172
_______ _______
Total costs and expenses 249,704 176,886
_______ _______
Operating income:
Distribution 26,578 20,260
Direct Industrial 638 -
Manufacturing 1,792 1,884
_______ _______
29,008 22,144
Interest expense, net (9,753) (5,867)
Other income, net 70 155
Equity in earnings of unconsolidated
affiliate 114 -
Minority interest (152) (174)
_______ _______
Earnings before income taxes 19,287 16,258
Income taxes 7,977 6,923
_______ _______
Net earnings $ 11,310 $ 9,335
======= =======
Earnings per share $ .17 $ .14
======= =======
Weighted average common and
common equivalent shares 67,660 65,352
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 6
<TABLE>
AIRGAS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Six Months Ended Six Months Ended
September 30, 1996 September 30, 1995
__________________ __________________
<S> <C> <C>
Net sales:
Distribution $497,279 $376,090
Direct Industrial 36,889 -
Manufacturing 18,642 17,212
_______ _______
Total net sales 552,810 393,302
_______ _______
Costs and expenses:
Cost of products sold
(excluding depreciation and
amortization)
Distribution 250,343 184,345
Direct Industrial 28,969 -
Manufacturing 12,177 11,029
Selling, distribution and
administrative expenses 175,731 132,134
Depreciation and amortization 29,261 21,613
_______ _______
Total costs and expenses 496,481 349,121
_______ _______
Operating income:
Gas Distribution 51,522 40,739
Industrial Distribution 1,182 -
Manufacturing 3,625 3,442
_______ _______
56,329 44,181
Interest expense, net (18,034) (11,455)
Other income, net 351 366
Equity in earnings of unconsolidated
affiliate 114 -
Minority interest (381) (365)
_______ _______
Earnings before income taxes 38,379 32,727
Income taxes 15,919 13,938
_______ _______
Net earnings $ 22,460 $ 18,789
======= =======
Earnings per share $ .33 $ .29
======= =======
Weighted average common and
common equivalent shares 67,350 65,212
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 7
AIRGAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended Six Months Ended
September 30, 1996 September 30, 1995
__________________ __________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 22,460 $ 18,789
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 29,261 21,613
Deferred income taxes 4,776 5,924
Equity in earnings of unconsolidated
affiliates (749) (683)
Loss on sale of plant and equipment 101 13
Minority interest in earnings 381 365
Stock issued for employee benefit plan 2,353 1,603
Changes in assets and liabilities,
excluding effects of business
acquisitions:
Trade receivables, net (2,681) (1,777)
Inventories (20,458) (632)
Prepaid expenses and other
current assets (2,912) (3,876)
Accounts payable, trade (6,649) (8,943)
Accrued expenses and other current
liabilities 1,777 1,403
Other assets and liabilities, net (6,001) (710)
_______ _______
Net cash provided by operating activities 21,659 33,089
_______ _______
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (31,101) (19,414)
Proceeds from sale of plant and
equipment 1,313 1,501
Business acquisitions, net of cash acquired (92,348) (35,163)
Investment in unconsolidated affiliates (33,849) -
Dividend from joint venture 413 293
Other, net (2,378) (440)
_______ _______
Net cash used by investing activities (157,950) (53,223)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 667,681 303,305
Repayment of debt (528,546) (268,857)
Financing costs (1,667) (56)
Repurchase of treasury stock - (15,540)
Exercise of options and warrants 2,444 2,991
Net overdraft (3,621) (1,709)
_______ _______
Net cash provided by financing
activities 136,291 20,134
_______ _______
CHANGE IN CASH $ 0 $ 0
Cash - beginning of period 0
_______ _______
Cash - end of period $ 0 $ 0
======= =======
See accompanying notes to consolidated financial statements.
<PAGE> 8
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
_____________________
The consolidated financial statements include the accounts of Airgas,
Inc. and its subsidiaries (the "Company"). Unconsolidated affiliates are
accounted for on the equity method and generally consist of 20 - 50% owned
operations where control does not exist or is considered temporary.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to interim
financial statements. These statements do not include all disclosures
required for annual financial statements. These financial statements should
be read in conjunction with the more complete disclosures contained in the
Company's audited consolidated financial statements for the year ended March
31, 1996.
The financial statements reflect, in the opinion of management, all
adjustments (normal recurring adjustments) necessary to present fairly the
Company's consolidated balance sheets at September 30, 1996 and March 31,
1996; the consolidated statements of earnings for the three and six months
ended September 30,1996 and 1995; and the consolidated statements of cash
flows for the six months ended September 30, 1996 and 1995. The interim
operating results are not necessarily indicative of the results to be expected
for an entire year.
(2) ACQUISITIONS
____________
From April 1, 1996 to September 30, 1996, the Company acquired thirteen
businesses engaged in the distribution of industrial, medical and specialty
gases and welding supplies and two distributors of safety and industrial tools
and supplies, with aggregate annual sales of approximately $184 million. The
aggregate purchase price, including amounts related to non-competition and
confidentiality agreements, amounted to approximately $211 million and
includes cash and real estate acquired of $281 thousand and $2 million,
respectively. Included in the aggregate purchase price is the issuance of
approximately 3.4 million shares of the Company's common stock, (which
includes approximately 2.4 million treasury shares), issued in connection with
the acquisition of Rutland Tool & Supply Co., Inc. Acquisitions have been
recorded using the purchase method of accounting, and, accordingly, results of
their operations have been included in the Company's consolidated financial
statements since the effective dates of the respective acquisitions.
Subsequent to September 30, 1996, the Company acquired distributor
businesses with annual sales of approximately $26 million. In addition, on
October 29, 1996, the Company announced that it signed a letter of intent to
acquire Carbonic Industries Corporation ("Carbonic Industries"). In the
proposed transaction, Carbonic Industries will be merged into a newly-formed
subsidiary of the Company in exchange for a combination of the Company's
common stock and cash, and is expected to close on February 1, 1997. In a
separate transaction which was also announced on October 29, 1996, the Company
agreed to acquire Shell Land & Energy Company ("Shell") interests in unitized
leases producing carbon dioxide in the Northeast Jackson Dome area of
Mississippi and Shell's 183-mile pipeline from the Northeast Jackson Dome area
to White Castle, Louisiana. The Shell transaction is scheduled to close in
November 1996.
<PAGE> 9
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
(3) INVENTORIES
___________
Inventories consist of:
<TABLE>
(In thousands)
<CAPTION>
September 30, March 31,
1996 1996
___________ ________
<S> <C> <C>
Finished goods $134,422 $ 85,626
Raw materials 1,546 1,879
_______ _______
135,968 87,505
Less reduction to LIFO cost ( 1,479) (1,343)
_______ _______
$134,489 $ 86,162
======= =======
</TABLE>
(4) PLANT AND EQUIPMENT
___________________
The major classes of plant and equipment are as follows:
<TABLE>
(In thousands)
<CAPTION> September 30 March 31,
1996 1996
_____________ _________
<S> <C> <C>
Land and land improvements $ 21,401 $ 20,066
Building and leasehold improvements 60,441 58,153
Machinery and equipment, including
cylinders 516,800 472,868
Transportation equipment 37,447 33,724
Construction in progress 2,101 1,517
_______ _______
$638,190 $586,328
======= =======
</TABLE>
<PAGE> 10
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
(5) OTHER NON-CURRENT ASSETS
_______________________
Other non-current assets include:
<TABLE>
(In thousands)
<CAPTION> September 30, March 31,
1996 1996
_____________ _________
<S> <C> <C>
Investment in unconsolidated
affiliates $ 63,537 $ 9,332
Noncompete agreements and other
intangible assets, at cost, net
of accumulated amortization of
$52.6 million at September 30, 1996
and $46.7 million at March 31, 1996 59,152 47,530
Other assets 9,242 4,086
_______ _______
$131,931 $ 60,948
======= =======
Investment in unconsolidated affiliates at September 30, 1996 includes the
Company's investment of approximately $47.6 million in cash and notes related
to the June 28, 1996 purchase of 45% of the voting capital stock of National
Welders Supply Company, Inc. As of September 30, 1996, the investment in
unconsolidated affiliates includes goodwill of approximately $30 million which
is being amortized into income over 40 years.
</TABLE>
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
______________________________________________
Accrued expenses and other current liabilities include:
<TABLE>
(In thousands)
<CAPTION> September 30, March 31,
1996 1996
_____________ _________
<S> <C> <C>
Cash overdraft $ 12,085 $ 15,706
Insurance payable and related
reserves 7,598 5,297
Customer cylinder deposits 8,080 7,058
Other accrued expenses and current
liabilities 50,734 44,218
_______ _______
$ 78,497 $ 72,279
======= =======
</TABLE>
<PAGE> 11
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
(7) INDEBTEDNESS
____________
On August 8, 1996, the Company commenced a medium term note program
pursuant to a registration statement filed with the Securities and Exchange
Commission on July 15, 1996, which provides for the issuance of its securities
with an aggregate public offering price of up to $450 million. In September
1996, the Company issued the following long-term debt under the medium term
note program: (a) $100 million of unsecured notes due September 2006 bearing
interest at a fixed rate of 7.75%; and (b) $50 million of unsecured notes due
September 2001 bearing interest at a fixed rate of 7.15%. The proceeds from
the medium term note issuances were used to repay bank debt. In connection
with the issuance of the notes, the Company entered into three reverse
interest rate swap agreements.
(8) EARNINGS PER SHARE
__________________
Earnings per share amounts were determined using the treasury
stock method. This method assumes the exercise of all dilutive outstanding
options and warrants and the use of the aggregate proceeds therefrom to
acquire the Company's outstanding common stock.
(9) COMMITMENTS AND CONTINGENCIES
_____________________________
The Company is involved in various legal proceedings which have arisen in
the ordinary course of its business and have not been finally adjudicated.
These actions, when ultimately concluded and determined, will not, in the
opinion of management, have a material adverse effect upon the Company's
financial condition, results of operations or liquidity.
On July 26, 1996, Praxair, Inc. ("Praxair") filed suit against the
Company in the Circuit Court of Mobile County, Alabama. The complaint alleges
tortious interference with business or contractual relations with respect to
Praxair's Right of First Refusal contract with National Welders Supply
Company, Inc. ("National Welders") by the Company in connection with the
Company's formation of a joint venture with the majority shareholders of
National Welders. Praxair is seeking compensatory damages in excess of $100
million and punitive damages. The Company believes that Praxair's claims are
without merit and intends to defend vigorously against such claims.
<PAGE> 12
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW
________________
OVERVIEW
________
The Company's financial results for the quarter ended September 30, 1996
reflect substantial growth compared with the second quarter last year. Net
sales of $278.7 million, net earnings of $11.3 million and earnings per share
of $.17 represent increases over the prior period of 40%, 21% and
21%,respectively. Net sales increased during the quarter compared to the
prior period primarily as a result of the acquisition of 44 distribution
companies since July 1, 1995 and an increase in same-store distribution sales
of approximately 3%.
The increase in net earnings was primarily due to an increase in gross
profits from higher same-store distribution sales, distribution gross margin
expansion and earnings and cash flow generated by the 44 distribution
businesses acquired since July 1, 1995. Somewhat offsetting the Company's
earnings growth were costs to consolidate the 60 distribution acquisitions
which have been completed over the past 18 months. Also, earnings in the
current quarter were diluted by the interest costs associated the Company's
joint venture investment in National Welders.
The Company's growth strategy through acquisitions continued through the
second quarter. During the current fiscal year, the Company has acquired
industrial gas distributors with annual sales of approximately $90 million.
During the current fiscal year, the Company has also acquired IPCO Safety
Products Company (IPCO) and Rutland Tool & Supply Co., Inc. (Rutland) which
have aggregate annual sales of $120 million. IPCO and Rutland provides
additional product lines and management talent to form the base for the
Company's industrial distribution segment which is called Airgas Direct
Industrial ("ADI").
On October 29, 1996, the Company announced that it had signed a letter of
intent to acquire Carbonic Industries Corporation ("Carbonic Industries"), the
fourth largest producer of carbon dioxide in the United States, in a merger
scheduled for completion by February 1, 1997. Carbonic Industries will be
merged into a newly-formed subsidiary of the Company in exchange for a
combination of the Company's common stock and cash. The Company also announced
on October 29, 1996 that it has agreed to acquire Shell Land & Energy
Company's interest in unitized leases producing carbon dioxide in the
Northeast Jackson Dome area of Mississippi and Shell's 183-mile carbon dioxide
pipeline which originates at the Northeast Jackson Dome area and extends to
White Castle, Louisiana. Closing with Shell is scheduled during November
1996. The Carbonic Industries and Shell acquisitions will become part of the
Company's Manufacturing segment.
<PAGE> 13
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company intends to continue to grow through acquisitions while
exploring ways to leverage its broad geographic presence by selling additional
products and services to existing customers through its network of more than
600 distribution locations in 41 states, Canada and Mexico. Recent product
line additions have included returnable containers, specialty gases (such as
refrigerants and sterilizing gases) and additional hardgoods (such as
industrial supplies, safety products and coatings). The Company believes the
selective addition of complementary products will enable it to better serve
its diverse, expanding customer base.
After tax cash flow (net earnings plus depreciation, amortization and
deferred income taxes) increased 22% to the record level of $28.7 million from
$23.6 million in the prior year. After tax cash flow is an important
measurement of the Company's ability to repay debt through operations and
provides the Company with the ability to pursue investment alternatives such
as acquisitions and the repurchase of Company stock.
RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1995
________________________________
Net sales increased 40% during the quarter ended September 30, 1996
compared to the same quarter in the prior year:
<TABLE>
(in thousands)
<CAPTION> 1996 1995 Increase
____ ____ __________
<S> <C> <C> <C>
Distribution $249,150 $190,456 $ 58,694
Direct Industrial 20,437 - 20,437
Manufacturing 9,125 8,574 551
_______ _______ _______
$278,712 $199,030 $ 79,682
======= ======= =======
</TABLE>
For the quarter ended September 30, 1996, Distribution sales increased
approximately $50 million resulting from the acquisition of 42 distributors
since July 1, 1995 and approximately $9 million from same-store sales growth.
The increase in same-store Distribution sales of approximately 3% was a result
growth in all three product groups: gases, hardgoods and rent. The growth was
attributable to selective price increases and the Company's gas sales
initiatives related to small bulk, specialty and refrigerant gases. The
Company believes its same-store sales growth is slightly understated since it
does not reflect the Company's decision to cease unprofitable sales to certain
customers and other sales lost during the consolidation and integration of
acquisitions.
<PAGE> 14
Item 2.
AIRGAS, INC.
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's sales, adjusted for acquisitions. Future
same-store sales growth is dependent on the economy, and, to a lesser extent,
the Company's ability to expand markets for new and existing products and to
increase prices.
Sales related to the Company's ADI segment increased approximately 13%
during the quarter ended September 30, 1996 compared to historical sales
results of the prior year.
Sales for the Company's Manufacturing segment increased 6% during the
quarter ended September 30, 1996 as a result of a new carbon paste product and
export sales of calcined coal, offset by slightly lower sales of nitrous
oxide.
The increase in Distribution gross profits of approximately $28 million
compared to the prior period resulted from acquisitions which contributed
approximately $22 million and from same-store gross profit growth of
approximately $6 million. The same-store gross profit growth is attributable
to expansion of gross margins through selective price increases and better
buying through national purchasing programs combined with increased sales of
lower margin hardgoods, increased sales of gases related to the Company's
small bulk and refrigerant programs and growth in cylinder and other equipment
rental income. Compared to the prior year, the Company's Distribution gross
margin of 50.3% is down 60 basis points primarily due to industrial gas
distribution acquisitions which have an average gross margin of approximately
45%.
Selling, distribution and administrative expenses as a percentage of
gross profits increased 20 basis points to 67% compared to the prior year.
The increase is partially attributable to higher operating costs associated
with consolidating the 60 acquisitions which were completed over the past 18
months. Until such acquisitions are fully integrated, the Company expects
that it will continue to incur additional operating expenses. The Company has
undertaken plans to address acquisition consolidations, and significant
progress is being achieved.
Operating income increased 31% during the quarter ended September 30,
1996 compared to the same quarter in 1995:
<TABLE>
(in thousands)
<CAPTION> Increase
1996 1995 (Decrease)
____ ____ __________
<S> <C> <C> <C>
Distribution $26,578 $20,260 $ 6,318
Direct Industrial 638 - 638
Manufacturing 1,792 1,884 (92)
______ ______ ______
$29,008 $22,144 $ 6,864
====== ====== ======
</TABLE>
<PAGE> 15
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Distribution operating income margin increased 10 basis points to
10.7% compared to the prior year. The improvement more than offset the effects
of consolidation costs and recent industrial gas distribution acquisitions
which have operating margins averaging around 8%. Subject to the effects of
future acquisitions, the Company believes that its distribution operating
margins should continue to improve as it integrates acquisitions.
The operating income margin related to the ADI segment was 3.1%.
Operating margins were impacted by certain division start-up costs. The
Company believes that its ADI operating margins will improve as it cross-sells
to current distribution hub customers and realizes cost savings related to
more efficient warehousing and shipping.
Manufacturing operating income decreased $92 thousand compared to the
prior year as a result of a shift in sales more towards lower margin exports
of calcined coal versus domestic coal sales.
Interest expense, net, increased $3.9 million compared to the prior year
primarily as a result of the increase in average outstanding debt associated
with the acquisition of distribution businesses acquired since July 1, 1995
and interest costs associated with the Company's investment in National
Welders Supply, offset by slightly lower interest rates. As discussed in
"Liquidity and Capital Resources" below, the Company has hedged floating
interest rates under certain borrowings with interest rate swap agreements.
Income tax expense represented 41.4% of pre-tax earnings in the current
quarter compared to 42.6% in the prior year. The decrease in the effective
income tax rate was a result of state tax planning strategies which were
implemented late in fiscal 1996 and the effect of reporting joint venture
earnings related to National Welders on a net-of-tax basis.
<PAGE> 16
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS: SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE SIX
MONTHS ENDED SEPTEMBER 30, 1995
________________________________
Net sales increased 41% during the six months ended September 30, 1996
compared to the prior year:
<TABLE>
(in thousands)
<CAPTION> 1996 1995 Increase
____ ____ __________
<S> <C> <C> <C>
Distribution $497,279 $376,090 $121,189
Direct Industrial 36,889 - 36,889
Manufacturing 18,642 17,212 1,430
_______ _______ _______
$552,810 $393,302 $159,508
======= ======= =======
</TABLE>
For the six months ended September 30, 1996, Distribution sales
increased approximately $103 million resulting from the acquisition of 60
distributors since April 1, 1995 and approximately $18 million from same-store
sales growth. The Company estimates that had all acquisitions during the six
months ended September 30, 1996 been consummated on April 1, 1996,
Distribution sales for 1996 would have been approximately $7 million higher.
The increase in same-store Distribution sales of approximately 3.5% was a
result of growth in all three product groups: gases, hardgoods and rent. The
growth was attributable to strong sales of lower margin hardgoods during the
quarter ended June 30, 1996 combined with selective price increases and the
Company's gas sales initiatives related to small bulk, specialty and
refrigerant gases. The Company believes its same-store sales growth is
slightly understated since it does not reflect the Company's decision to cease
unprofitable sales to certain customers and other sales lost during the
consolidation and integration of acquisitions.
The Company estimates same-store sales based on a comparison of current
period sales to the prior period's sales, adjusted for acquisitions. Future
same-store sales growth is dependent on the economy, and, to a lesser extent,
the Company's ability to expand markets for new and existing products and to
increase prices. Management believes the Company's broad customer base and
geographic diversity help to reduce the adverse effects of an economic
downturn on the Company. Also, management believes that the gas portion of
its Distribution business is somewhat resistant to an economic downturn.
Management further believes that sales of certain lower margin non-consumable
hardgoods equipment, such as welding machines, are more likely to be adversely
impacted during a downturn in the economy and, conversely, are typically the
fastest to rebound during an economic recovery.
Sales related to the Company's ADI segment increased approximately 15%
during the six months ended September 30, 1996 compared to historical sales
results of the prior year.
<PAGE> 17
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Sales for the Company's Manufacturing segment increased 8% during the six
months ended September 30, 1996 as a result of a new carbon paste product and
export sales of calcined coal.
The increase in Distribution gross profit of approximately $55 million
compared to the prior period resulted from acquisitions which contributed
approximately $46 million and from same-store gross profit growth of
approximately $9 million. The same-store gross profit growth is attributable
to expansion of gross margins through selective price increases and better
buying through national purchasing programs combined with increased sales of
lower margin hardgoods, increased sales of gases related to the Company's
small bulk and refrigerant programs and growth in cylinder and other equipment
rental income. Compared to the prior year, the Company's Distribution gross
margin of 49.7% is down 130 basis points primarily due to industrial gas
distribution acquisitions which have an average gross margin of approximately
45% and strong first quarter sales of lower margin hardgoods.
Selling, distribution and administrative expenses as a percentage of
gross profits increased 40 basis points to 67.2% compared to the prior year.
The increase is partially attributable to higher operating costs associated
with consolidating the 60 acquisitions which were completed over the past 18
months. Until such acquisitions are fully integrated, the Company expects
that it will continue to incur additional operating expenses. The Company has
undertaken plans to address acquisition consolidations, and significant
progress is being achieved.
Operating income increased 27% during the six months ended September 30,
1996 compared to the prior year:
<TABLE>
(in thousands)
<CAPTION>
1996 1995 Increase
____ ____ __________
<S> <C> <C> <C>
Distribution $51,522 $40,739 $10,783
Direct Industrial 1,182 - 1,182
Manufacturing 3,625 3,442 183
______ ______ ______
$56,329 $44,181 $12,148
====== ====== ======
</TABLE>
The Distribution operating income margin decreased 40 basis points to
10.4% compared to the prior year. The decrease was a result of lower gross
margins during the first quarter, the effects of consolidation costs and
recent industrial gas distribution acquisitions which have operating margins
averaging around 8%. Subject to the effects of future acquisitions, the
Company believes that its distribution operating margins should continue to
improve as it integrates acquisitions.
The operating income margin related to the ADI segment was 3.2%.
Operating margins were impacted by certain division start-up costs. The
Company believes that its ADI operating margins will improve as it cross-sells
to current distribution hub customers and realizes cost savings related to
more efficient warehousing and shipping.
<PAGE> 18
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Manufacturing operating income increased $183 thousand compared to the
prior year as a result of strong demand for carbon products offset by a shift
in sales more towards lower margin exports of calcined coal versus domestic
coal sales and slightly lower nitrous oxide sales.
Interest expense, net, increased $6.6 million compared to the prior year
primarily as a result of the increase in average outstanding debt associated
with the acquisition of distribution businesses acquired since July 1, 1995
and interest costs associated with the Company's investment in National
Welders Supply, offset by slightly lower interest rates. As discussed in
"Liquidity and Capital Resources" below, the Company has hedged floating
interest rates under certain borrowings with interest rate swap agreements.
Income tax expense represented 41.5% of pre-tax earnings in the six
months ended September 30, 1996 compared to 42.6% in the prior year. The
decrease in the effective income tax rate was a result of state tax planning
strategies which were implemented late in fiscal 1996 and the effect of
reporting joint venture earnings related to National Welders on a net-of-tax
basis.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
The Company has primarily financed its operations, capital expenditures,
stock repurchases, and acquisitions with borrowings, the issuance of common
stock and funds provided by operating activities.
Cash flows from operating activities totaled $21.6 million for the six
months ended September 30, 1996. Depreciation and amortization represent
$29.3 million of cash flows from operating activities. Deferred income taxes
of $4.8 million resulted from temporary differences. Working capital
components of cash flow increased $30.9 million as a result of an increase in
accounts receivable associated with higher same store sales, an increase in
inventory levels to meet increased hardgoods and refrigerant gas sales volumes
and an increase in prepaid expenses and other current assets. The increase in
other assets and liabilities, net, primarily relates to amounts paid in
connection with securing a product supply agreement. Days-sales outstanding
is comparable to the March 31, 1996 level. Distribution hardgoods days supply
of inventory is comparable to the March 31, 1996 level. Total inventories
have increased primarily as a result of an increase in refrigerant gas
inventories and the addition of new product lines from the acquisition of IPCO
and Rutland, respectively.
Cash used by investing activities totaled $158.4 million which was
primarily comprised of $31.1 million for capital expenditures, $92.3 million
related to acquisitions and $33.8 million related to the Company's investment
in unconsolidated affiliates ($27.9 related to the joint venture with National
Welders and $5.3 million related to foreign operations).
The Company's use of cash for capital expenditures was
attributable to the continued assimilation of certain acquisitions which has
required the Company to make capital expenditures in areas such as combining
cylinder fill plants, improving truck fleets and purchasing cylinders in order
to return cylinders which were rented from third parties. Additionally,
capital expenditures include the purchase of cylinders and bulk tanks
necessary to facilitate gas sales growth. The Company estimates that its
maintenance capital expenditures are approximately 2% of net sales. The
<PAGE> 19
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Company considers the replacement of existing capital assets to be maintenance
capital expenditures.
In addition, the Company has recently undertaken initiatives to further
develop its industrial gas customer base to selectively include customers
which require large volume supplies of gases, such as nitrogen. For these
customers, the Company will enter into a long-term supply contract in
conjunction with an air separation plant which will be built near the
customer's facility or facilities. The Company has entered into agreements
with two customers which requires the construction of two air separation
plants which will begin production during fiscal 1998. Upon completion, as
lessee, the Company intends to lease the plants under long-term operating
leases.
Financing activities provided cash of $136.7 million with total debt
outstanding increasing by $177.9 million from March 31, 1996. Debt incurred
in connection with the acquisition of distribution businesses and the
Company's investment in National Welders and other foreign operations,
totalled $126.2 million.
The Company's primary source of borrowing is a $500 million unsecured
revolving credit facility with various commercial banks which matures on
September 30, 2001. At September 30, 1996, the Company had approximately $273
million in borrowings under the facility and approximately $83 million
committed under letters of credit, resulting in unused availability under the
facility of approximately $144 million.
On August 8, 1996, the Company commenced a medium term note program
pursuant to a registration statement filed with the Securities and Exchange
Commission on July 15, 1996, which provides for the issuance of its securities
with an aggregate public offering price of up to $450 million. In September
1996, the Company issued the following long-term debt under the medium term
note program: $100 million of unsecured notes due September 2006 bearing
interest at a fixed rate of 7.75%; $50 million of unsecured notes due
September 2001 bearing interest at a fixed rate of 7.15%. The proceeds from
the medium term note issuances were used to repay bank debt.
The Company has a CDN $50 million Canadian credit facility ($37 million
U.S.) with various commercial banks which matures on November 14, 1998. At
September 30, 1996, the Company had approximately CDN $41 million ($30 million
U.S.) in borrowings outstanding under the facility, resulting in unused
availability under the facility of approximately CDN $9 million ($7 million
U.S.).
The Company also has unsecured line of credit agreements with various
commercial banks. At September 30, 1996, these agreements totaled $50
million, under which the Company had aggregate outstanding borrowings of $10
million.
At September 30, 1996, the effective interest rate related to
outstanding borrowings under all credit lines was approximately 5.99%. The
Company's loan agreements contain covenants which include the maintenance of a
minimum equity level, and maintenance of certain financial ratios.
In managing interest rate exposure, principally under the Company's
floating rate revolving credit facilities, the Company has entered into
21 interest rate swap agreements during the period from June 1992
<PAGE> 20
Item 2. AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
through September 30, 1996. The swap agreements are with major financial
institutions and aggregate $324 million in notional principal amount at
September 30, 1996. Approximately $205 million of the notional principal
amount of the swap agreements require fixed interest payments based on an
average effective rate of 6.53% for remaining periods ranging between 1 and 8
years. Five swap agreements require floating rates ($119.5 million notional
amount at 5.75% at September 30, 1996). Under the terms of seven of the swap
agreements, the Company has elected to receive the discounted value of the
counterparty's interest payments upfront. At September 30, 1996,
approximately $20.8 million of such payments were included in other
liabilities. The Company continually monitors its positions and the credit
ratings of its counterparties, and does not anticipate nonperformance by the
counterparties.
The Company will continue to look for appropriate acquisitions and
expects to fund such acquisitions, future capital expenditure requirements and
commitments related to foreign investments primarily through the use of cash
flow from operations, debt, common stock for certain acquisition candidates
and other available sources. In connection with the acquisition of Rutland,
the Company issued approximately 3.4 million shares of the Company's common
stock, including approximately 2.4 million treasury shares.
Subsequent to September 30, 1996, the Company acquired distributor
businesses with annual sales of approximately $26 million. In addition, on
October 29, 1996, the Company announced that it signed a letter of intent to
acquire Carbonic Industries Corporation ("Carbonic Industries"). In the
proposed transaction, Carbonic Industries will be merged into a newly-formed
subsidiary of the Company in exchange for a combination of the Company's
common stock and cash, and is expected to close on February 1, 1997. In a
separate transaction which was also announced on October 29, 1996, the Company
agreed to acquire Shell Land & Energy Company ("Shell") interests in unitized
leases producing carbon dioxide in the Northeast Jackson Dome area of
Mississippi and Shell's 183-mile pipeline from the Northeast Jackson Dome area
to White Castle, Louisiana.
The Company does not currently pay dividends.
<PAGE>
<PAGE> 21
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER
_____
New Accounting Pronouncements
In the first quarter of fiscal 1997, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The statement requires the recognition of an impairment
loss for an asset held for use when the estimate of undiscounted future cash
flows expected to be generated by the asset is less than its carrying amount.
Measurement of the impairment loss is based on fair value of the asset.
Management believes that the adoption of this statement did not have a
material impact on earnings, financial condition or liquidity of the Company.
The Company accounts for stock options according to the provisions of
Accounting Principles Board Opinion 25 (APB 25), "Accounting for Stock Issued
to Employees." In October 1995, the Financial Accounting Standards Board
issued FASB Statement No. 123, "Accounting for Stock-Based Compensation." The
new standard defines a fair value method of accounting for stock options and
similar equity instruments. Companies may elect to continue to use existing
accounting rules or adopt the fair value method for expense recognition.
Companies that elect to continue to use existing accounting rules are required
to provide pro-forma disclosures of net income and earnings per share assuming
the fair value method was adopted. The Company has elected to continue to use
existing accounting rules. Accordingly, the Company will present the required
pro-forma disclosure provisions for its fiscal year ending March 31, 1997. As
the Company will continue to account for stock-based compensation using the
intrinsic value method, this statement will not have a material impact on
earnings, financial condition or liquidity of the Company.
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Under the financial-components approach, after a transfer of financial assets,
an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The financial-
components approach focuses on the assets and liabilities that exist after the
transfer. If a transfer does not meet the criteria for a sale, the transfer
is accounted for as a secured borrowing with pledge of collateral. This
statement is effective for transfer and servicing of financial assets and
extinguishments of liabilities for fiscal years beginning after December 15,
1996 and is to be applied prospectively. Management believes that the
adoption of this statement will not have a material impact on earnings,
financial condition or liquidity of the Company.
<PAGE> 22
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1 (SOP), which prescribes generally accepted
accounting principles for environmental remediation liabilities. This SOP
more specifically identifies future, long-term monitoring and administration
expenditures as remediation liabilities that need to be accrued on the balance
sheet as an existing obligation. This SOP is effective for fiscal years
beginning after December 15, 1996. Management believes that the adoption of
this statement will not have a material impact on earnings, financial
condition or liquidity of the Company.
Forward-looking Statements
This report contains forward-looking statements. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, there are certain important factors that could cause the Company's
actual results to differ materially from those included in such forward-
looking statements. Some of the important factors which could cause actual
results to differ materially from those projected include, but are not limited
to: the Company's ability to continue to identify, complete and integrate
strategic acquisitions to enter new markets and expand existing business
(including Carbonic Industries and the Northeast Jackson Dome); continued
availability of financing to provide additional sources of funding for future
acquisitions; capital expenditure requirements and foreign investments; the
effects of competition from independent distributors and vertically integrated
gas producers on products and pricing, growth and acceptance of new product
lines through the Company's sales and marketing programs; changes in product
prices from gas producers and name-brand manufacturers and suppliers of
hardgoods; uncertainties regarding accidents or litigation which may arise in
the ordinary course of business; 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 26, 1996, Praxair, Inc. ("Praxair") filed suit against the
Company in the Circuit Court of Mobile County, Alabama. The complaint
alleges tortious interference with business or contractual relations with
respect to Praxair's Right of First Refusal contract with the majority
shareholders of National Welders Supply Company, Inc. ("National
Welders") by the Company in connection with the Company's formation of a
joint venture with National Welders. Praxair is seeking compensatory
damages in excess of $100 million and punitive damages. The Company
believes that Praxair's claims are without merit and intends to defend
vigorously against such claims.
<PAGE> 23
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 5, 1996, the Registrant held its Annual Meeting of
Stockholders. The stockholders voted to elect three members to the Board
and to ratify the selection of KPMG Peat Marwick LLP as the Company's
independent auditors for the fiscal year ending March 31, 1997.
Elected to the Board of Directors were Argeris N. Karabelas (57,092,752
shares voted for election and 3,249,014 shares were withheld), John A.H.
Shober (57,094,918 shares voted for election and 3,246,848 shares were
withheld) and Merrill L. Stott (57,075,552 shares voted for election
and 3,266,214 shares were withheld). In addition to the board members
elected at the Annual Meeting, the following are directors whose terms
in office as directors continued after the meeting; Erroll C. Sult,
Robert E. Naylor, Jr., Robert L. Yohe, W. Thacher Brown, Frank B. Foster
III, and Peter McCausland.
Also at the Annual Meeting, 59,740,321 shares voted to ratify the
selection of KPMG Peat Marwick LLP as independent auditors, with 21,106
shares voting against the ratification and 580,339 shares abstaining.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
________
11. Calculation of earnings per share.
b. Reports on Form 8-K
___________________
On July 11, 1996, the Company filed a Form 8-K/A amendment to the June
28, 1996 current report on 8-K, which described the Company's 45%
investment in National Welders Supply Company, Inc. This Form 8-K/A
provided under Item 7, audited financial statements as of September 30,
1995 and September 24, 1994 and for the years then ended and pro forma
information for National Welders which were previously unavailable
pursuant to Item 7(a)(4).
On July 31, 1996, the Company filed a current report on Form 8-K
pursuant to Item 5, announcing the filing of a suit on July 26, 1996
against the Company by Praxair, Inc. in the Circuit Court of Mobile
County, Alabama.
On August 5, 1996, the Company filed a current report on Form 8-K
pursuant to Item 5, announcing it had signed a letter of intent to
acquire Rutland Tool & Supply Co., Inc.
On August 22, 1996, the Company filed a current report on Form 8-K which
provided under Item 5, audited financial statements and pro forma
information for IPCO Safety Products Company, Inc., an individually
insignificant business acquisition, in accordance with Regulation S-X,
Rule 3-05 (b)1(i).
<PAGE>
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 12, 1996 /s/ Jeffrey P. Cornwell
_________________ _______________________
Date Jeffrey P. Cornwell
Vice President Finance and
Corporate Controller
<PAGE>
<PAGE> 25
<TABLE>
EXHIBIT 11
AIRGAS, INC.
EARNINGS PER SHARE CALCULATIONS
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1996 1995 1996 1995
____ ____ ____ ____
<S> <C> <C> <C> <C>
Adjustment of Weighted Average
Shares Outstanding:
Shares of common stock
outstanding - weighted 65,490,000 62,489,000 64,700,000 62,191,000
Add: Net common stock
equivalents 3,081,000 2,863,000 3,105,000 3,021,000
Less: Airgas shares held by
National Welders Supply -
weighted (911,000) -- (455,000) --
__________ __________ __________ __________
Adjusted shares outstanding 67,660,000 65,352,000 67,350,000 65,212,000
========== ========== ========== ==========
Net earnings $11,310,000 $ 9,335,000 22,460,000 18,789,000
========== ========== ========== ==========
Earnings per share $ .17 $ .14 $ .33 $ .29
========== ========= ========== =========
</TABLE>
Earnings per share amounts were determined using the treasury stock method.
This method assumes the exercise of all dilutive outstanding options and
warrants and the use of the aggregate proceeds therefrom to acquire the
Company's outstanding common stock. Net earnings were divided by the weighted
average number of shares outstanding adjusted for the assumed exercise of the
options and warrants outstanding and repurchase of common stock to calculate
per share amounts.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 144,054
<ALLOWANCES> 4,062
<INVENTORY> 134,489
<CURRENT-ASSETS> 297,023
<PP&E> 638,190
<DEPRECIATION> 166,143
<TOTAL-ASSETS> 1,181,674
<CURRENT-LIABILITIES> 151,502
<BONDS> 557,367
<COMMON> 684
0
0
<OTHER-SE> 342,243
<TOTAL-LIABILITY-AND-EQUITY> 1,181,674
<SALES> 552,810
<TOTAL-REVENUES> 552,810
<CGS> 291,489
<TOTAL-COSTS> 291,489
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,034
<INCOME-PRETAX> 38,379
<INCOME-TAX> 15,919
<INCOME-CONTINUING> 22,460
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,460
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<PAGE>
</TABLE>
