<PAGE>
<PAGE> 1 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Form 10-K/A3
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
or
[ ] 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. 1-9344
AIRGAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-0732648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
259 Radnor-Chester Road, Suite 100
Radnor, Pennsylvania 19087-5240
(Address of principal executive offices) (Zip Code)
(610) 687-5253
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
______________________________________ _____________________
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
_____ ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the 57,075,279 shares of voting stock held
by non-affiliates of the registrant on May 30, 1997 was approximately $970
million. For purposes of this calculation, only executive officers and
directors were deemed to be affiliates.
The number of shares of Common Stock outstanding as of May 30, 1997 was
66,818,522.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for the Annual Meeting of Stockholders to be
held August 4, 1997 is partially incorporated by reference into Part III.
Those portions of the Proxy Statement included in response to Item 402(k) and
Item 402(l) of Regulation S-K are not incorporated by reference into Part III.
<PAGE> 2
AIRGAS, INC.
TABLE OF CONTENTS
PART I
ITEM PAGE NO.
_____ ________
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . .13
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . .13
PART II
5. Market for the Company's Common Stock and Related Stockholder Matters . 14
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 15
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . 27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . 27
PART III
10. Directors and Executive Officers of the Company . . . . . . . . . . . . 27
11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 27
12. Security Ownership of Certain Beneficial Owners and Management. . . . . 27
13. Certain Relationships and Related Transactions. . . . . . . . . . . . . 27
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K . . . . 27
<PAGE>
<PAGE> 3 PART I
ITEM 1. BUSINESS.
GENERAL
Airgas, Inc. ("Airgas" or the "Company") classifies its operations into
three business segments: Distribution, Direct Industrial and Manufacturing.
Sales for Airgas were $1.16 billion in fiscal 1997, and $838 and $688 million
in fiscal 1996, and 1995, respectively. Distribution sales represented 88% of
total sales and 85% of Airgas' operating income in fiscal 1997. Financial
information by business segment can be found in 1) Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Financial Statements and Supplementary Data", and 2) Note 22 to the Company's
consolidated financial statements for the three years ended March 31, 1997
under Item 8.
The Distribution business is conducted through approximately 600 locations
in 41 states, Canada and Mexico. Principal products distributed include:
industrial, medical and specialty gases and a wide selection of name-brand
welding equipment, accessories and industrial protective equipment
("hardgoods"), including electrode holders, welding wire, cable lugs and
connectors, hard hats, welding helmets, hearing protectors, goggles, face
shields, safety glasses, welding machines and electrodes. In connection with
the distribution of gases, Airgas rents industrial gas cylinders and bulk
storage tanks to its customers. In 1997, sales related to gases and rent
represent 50% of total distribution sales and sales related to hardgoods
business accounted for 50% of total distribution sales. Additionally,
acetylene gas is manufactured and sold as part of the Company's Distribution
business. Distribution sales on behalf of third parties are immaterial to the
Company's financial condition (see Note 22 of the Company's consolidated
financial statement under Item 8 for disclosure related to segment sales).
Since its formation, the Company's strategy has been to expand through the
acquisition of independent distributors. The Company believes that it is the
largest distributor of industrial, medical and specialty gases and related
equipment in North America.
During fiscal 1997, the Company acquired IPCO Safety Products Company
(IPCO) and Rutland Tool & Supply Co., Inc. (Rutland), which had historical
combined annual sales of approximately $120 million. IPCO and Rutland formed
the basis for the Company's Direct Industrial segment, Airgas Direct Industrial
("ADI"). ADI sells an expansive line of welding, metalworking, safety and
other MRO (Maintenance, Repair and Operations) products directly to end-users.
The Company believes ADI will help enable it to be a low cost supplier and
increase sales of other products and services by leveraging the Company's
strong local presence and the relationships with its existing customer base and
distribution network. Many of Airgas' customers use the same types of safety
products sold by IPCO. Rutland targets the same metal fabrication market which
also accounts for a large part of Airgas' current Distribution gas and
hardgoods sales.
Manufacturing operations include the production of carbon products,
calcium carbide, nitrous oxide and carbon dioxide. In connection with its
carbon dioxide business, Airgas has implemented a strategy to expand the
distribution of carbon dioxide. During 1997, the Company acquired Shell Land &
Energy Company's (Shell) interest in unitized leases producing carbon dioxide,
including Shell's 183 mile pipeline. The Company acquired its interest from
Shell by taking assignment of various leases to which Shell was a party, which
permit it to extract carbon dioxide from the Jackson Dome area, subject to the
payment of various fees and royalties. The carbon dioxide goes into the
Company's pipeline for delivery to various customers. In June 1997, the
Company closed the acquisition of Carbonic Industries Corporation ("CIC"), the
fourth largest producer of carbon dioxide in the United States.
<PAGE>
<PAGE> 4
THE DISTRIBUTION BUSINESS
Industry Background
The industrial gas distribution market is broad and includes customers
from most major industries. Airgas sells nitrogen, oxygen, argon, helium,
acetylene, carbon dioxide, nitrous oxide, hydrogen and welding gases and a
variety of medical and specialty gases to a diverse customer base. Gases are
distributed and stored in industrial gas cylinders and bulk storage tanks.
Hardgoods sold through its distribution network include: protective equipment,
such as hard hats, welding helmets, goggles, face shields and protective
glasses; welding machines and welding consumables; and accessories, such as
electrodes, electrode holders and cable connectors.
The United States market for industrial gases is approximately $7 billion
annually. Sales to major users of industrial gases that have the capacity to
accept large bulk shipments or pipeline deliveries are generally serviced
directly by industrial gas producers and account for approximately $3.5 billion
of such market. The remaining $3.5 billion of annual industrial gas sales are
made to small bulk users and cylinder gas customers. These small bulk users and
cylinder gas customers are also believed to purchase approximately $3.5 billion
of hardgoods annually. Small bulk users and cylinder gas customers are
primarily served by a fragmented distribution system of approximately 1,000
distributors, the majority of which are independently owned. The Company
concentrates on the small bulk, cylinder gas, welding and
protective equipment segment of the market. This segment is less capital
intensive, in part, because of the long useful lives of the fixed assets,
principally cylinders.
Acquisition Strategy
Since May 1986, the Company has acquired over 225 distributors of
industrial gases and related equipment. These distributors are organized into
three divisions with approximately 600 locations in 41 states, Canada and
Mexico which provide a national distribution network.
The Company acquired 47% of the voting capital stock of National Welders
Supply Company ("National Welders"), a large independent distributor of
industrial, medical and specialty gases and related equipment based in
Charlotte, North Carolina and simultaneously entered into a joint venture
agreement. The parties structured the transaction as a joint venture because
the majority shareholders of National Welders were unwilling to sell voting
control of National Welders. The purpose of the joint venture is to carry on
the business of National Welders, enhanced by its association with the Company
and its financial, purchasing and national marketing strengths, and to pursue
acquisition opportunities in the area currently served by National Welders.
In carrying on the business of National Welders, the Company makes available
various services to National Welders, including participation in national
accounts and marketing programs, access to, and participation in, purchasing
programs, assistance in negotiation of insurance relationships and consultation
related to income tax matters. In exchange for these services, the Company is
paid a service fee equal to .667% of National Welders' sales. Although the
Company does not have voting control of the joint venture, the long-standing
relationship between National Welders and the Company, including National
Welders' position as a substantial stockholder of the Company, was an important
factor in the Company's decision to enter into the transaction. Inasmuch as
National Welders is a joint venture, it represents a departure from Airgas'
usual method of expansion which is acquisitions. A former director of the
Company is the president and chief executive officer of National Welders.
<PAGE> 5
The Company's principal business strategy is to continue to expand its
distribution network through a program of acquiring independent distributors.
The industrial gas distribution industry continues to undergo a consolidation
process which Airgas believes will continue to present it with opportunities to
acquire industrial gas distributors.
The Company believes that its principal competitive advantages in
acquiring distributors are its extensive distribution network, its well-
organized acquisition program, flexibility in structuring acquisitions to meet
sellers' needs and the ability to offer sellers and their employees a
continuing management role in a decentralized entrepreneurial environment. In
seeking to acquire distributors, the Company competes with industrial gas
producers and other independent distributors.
The Company has made investments in industrial gas operations in Poland,
India and Thailand. At March 31, 1997, the total investment in these foreign
operations was approximately 1% of total assets. The Company will continue to
evaluate foreign industrial gas opportunities, although its principal focus
remains on North American expansion.
The Company has financed distributor acquisitions primarily with
internally generated funds and debt. The Company has been able to obtain debt
financing due, in part, to its ability to generate cash flow from operating
activities and the long useful lives and relatively stable market values of the
fixed assets, principally cylinders.
Operating Policies
The Company believes that its operations are best managed at the local
level by entrepreneurial, incentive-driven executives with backgrounds
principally in the industrial gas industry. The president of each distribution
subsidiary is typically a former owner or key employee of the acquired business
or an experienced executive recruited by management. The continuity afforded
by retaining the key employees of an acquired business combined with local
management is essential because the Company's distribution business is local in
nature and is dependent upon satisfied repeat customers.
Customer Base
The majority of the Company's gases are generally stored in bulk tanks at
the Company's cylinder fill plants and are pumped into cylinders for
distribution to customers or, in the case of bulk customers, in tanker trucks
or tube trailers for delivery into bulk tanks at the customer's business
location. The Company emphasizes sales to cylinder and small bulk gas
customers.
The distribution of industrial gases historically has been to customers
engaged in the business of welding and metal fabrication. In order to better
serve these customers, industrial gas distributors have traditionally sold
hardgood items through their distribution branch locations. As certain sectors
of the economy have grown, such as the electronics and chemicals industries,
and as new applications for gases have developed, the customer base of the gas
distribution business has broadened significantly to include businesses in
almost every major industry, from medical and high technology to consumer and
basic industries. For example, the food and beverage industry uses carbon
dioxide and nitrogen; the electronics industry uses oxygen, nitrogen, argon,
and hydrogen; the healthcare industry uses oxygen, nitrogen, and nitrous oxide;
and the chemical and fiber industries use nitrogen.
<PAGE> 6
Specialty gases, which are used in numerous industries, including the
electronic, healthcare, biotechnology and high technology industries, and in
laboratory applications, include rare gases, high-purity gases, and blended
multi-component gas mixtures. In fiscal 1997, the Company formed a new wholly-
owned subsidiary, Airgas Specialty Gases ("ASG"), to unify the operation and
manufacture of specialty gases in order to increase efficiency and quality
controls and facilitate marketing efforts nationwide. ASG operates nationally
within Airgas in connection with the operation of the Company's network of 24
specialty gas laboratories in the U.S., selling specialty gas through the
Company's subsidiaries. ASG operates four "A" laboratories, which produce
complicated gas mixtures, and oversees the Company's twenty (20) "B"
laboratories, which produce simple, pure gases and certain common mixtures.
The four "A" laboratories and the twenty (20) "B" laboratories are owned by
subsidiaries of the Company. ASG also assists the subsidiaries in growing
their specialty gas business and improving the responsiveness and quality of
the subsidiaries' specialty gas operations. The principal drivers for market
growth include: (1) environmental regulations, such as the Clean Air Act, water
testing and pollution remediation and testing and monitoring; (2) quality
control services using in-line chromatography and spectrography to analyze
samples; and (3) the growth of environmental, research and clinical
laboratories. The specialty gas business operating results are included in the
distribution segment.
The Company continues to concentrate its efforts in the small bulk gas
market. The primary gases that Airgas sells in bulk are liquid oxygen,
nitrogen, argon, and carbon dioxide, and gaseous hydrogen, helium and nitrogen.
The Company charges customers rent for the use of bulk tanks and tube trailers
which are placed on the customer's property. The Company believes there are
growth opportunities in marketing to these small bulk customers, which it can
serve more effectively than industrial gas producers.
The Company has undertaken selected initiatives to develop further its
industrial gas customer base to include customers which require large-volume
supplies of gases, such as nitrogen. The Company has entered into long-term
supply agreements with two customers which require the construction of two air
separation plants which will begin production late in calendar 1997. These two
plants will also produce liquid oxygen and argon which will be sold to Airgas'
Distribution customers. The Company views these investments as opportunities
and not as its principal investment strategy.
The Company's same-store sales, a comparison of current period sales to
the prior period's sales, adjusted for acquisitions, has historically followed
the real gross domestic product annual growth rate as published by the Commerce
Department. 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 economic downturns due to the
following factors: 1) gases frequently represent a fixed cost of operations
that do not necessarily decline with production levels; 2) gases are required
for maintenance and renovation activities which tend to increase during an
economic downturn; 3) industries less subject to the effects of an economic
downturn, such as the medical field, are major purchasers of gases; and 4) gas
purchases often represent a small portion of a typical user's overall cost of
operation and, therefore, do not typically represent a large cost-cutting item.
Management further believes that sales of certain lower margin nonconsumable
hard-goods equipment, such as welding machines, are more adversely impacted
during a downturn in the economy and are typically the fastest to rebound
during an economic recovery.
<PAGE> 7
Products
Gases distributed by Airgas include oxygen, nitrogen, hydrogen, argon,
helium, acetylene, carbon dioxide, nitrous oxide and specialty gases. In
addition to gases, the Company distributes a wide selection of name-brand
hardgoods, including electrode holders, welding wire, cable lugs and
connectors, hard hats, welding helmets, hearing protectors, goggles, face
shields, safety glasses, welding machines and electrodes. Of Airgas' fiscal
1997 sales from the Distribution segment, approximately 50% represent sales of
gases and rentals of cylinders and bulk tanks, and 50% represent hardgood
sales.
The Company intends to strategically broaden its product line in order to
increase sales in existing locations and to take advantage of its distribution
network. Recent product line additions have included returnable containers,
specialty gases and additional hardgoods (such as industrial safety products
and coatings). The Company believes the selective addition of complementary
product offerings through its distribution network and ADI will enable it to
better serve its diverse, expanding customer base.
Suppliers
The Company purchases industrial, medical and specialty gases pursuant to
requirements contracts from all four of the major producers of industrial gases
in the United States and three regional producers. The Company believes that
if a contractual arrangement with any supplier of gases were terminated, it
would be able to locate alternative sources of supply without significant cost
increases and with no disruption of service.
The Company purchases hardgoods from name-brand manufacturers and
suppliers. For certain products, the Company has negotiated favorable pricing
based on national purchasing arrangements and is reducing its investment in
hardgood inventories by consolidating vendors.
DIRECT INDUSTRIAL BUSINESS
During fiscal 1997, the Company acquired IPCO and Rutland. IPCO and
Rutland provided an industrial distribution infrastructure, additional product
lines and management talent to form the basis for ADI. IPCO is a distributor
of safety, industrial and environmental supplies, and utilizes a system of
regional warehouses and telemarketing centers to market its products. Rutland
is a distributor of industrial tools, MRO supplies and welding and safety
equipment, and markets its products through direct mail, catalogs and monthly
fliers. ADI's principal thrust is to sell directly to customers, through
outbound telemarketing and catalogs, and to build on Airgas' existing base of
approximately 650,000 Airgas customers and strong customer relationships. To
serve its customers, ADI has distribution centers located in key industrial
distribution markets,including Georgia, Pennsylvania, Texas, Wisconsin, New
York, Colorado, Illinois and California. ADI targets the same metal
fabrication market that accounts for a large part of Airgas' current
Distribution gas and hardgoods equipment sales. The safety and metalworking
tools market represents approximately $55 billion in annual revenues.
The Company's acquisition strategy with respect to ADI is to acquire
additional industrial distribution companies which comprise this highly
fragmented industry. Such acquisitions may provide for enhanced warehouse
logistics, information systems, new product lines, geographic expansion and
unique marketing concepts.
<PAGE> 8
Suppliers
The Company purchases safety, industrial and environmental supplies from
name- brand manufacturers and suppliers. For certain products, the Company has
negotiated national purchasing contracts. The Company believes that if a
contractual arrangement with any manufacturer or supplier were terminated, it
would be able to locate alternative sources of supply without significant cost
increases and with no disruption of service.
MANUFACTURING AND RELATED BUSINESS
Nitrous Oxide
The Company produces nitrous oxide which is used in various medical and
commercial applications. Nitrous oxide is used as an anesthetic in the medical
and dental fields, as a propellant in the packaged food business and is
utilized in the manufacturing process of certain high technology electronic
industries. The Company's nitrous oxide manufacturing facilities are located
in Yazoo City, Mississippi and Donora, Pennsylvania. Sales of nitrous oxide
were not material to total Distribution sales (see Note 22 of the Company's
consolidated financial statements under Item 8 for disclosure related to
segment sales).
Carbon Products
The Company manufactures carbon electrode paste, carbon ramming paste and
electrically calcined anthracite ("ECA") at its manufacturing facility located
in Keokuk, Iowa. The Company is the nation's primary manufacturer of carbon
electrode paste which is used as a consumable electrode in the production of
special alloy steel, nickel and other metals in the metals industry. ECA is
used as an ingredient in carbon mixes used in the aluminum industry and as an
additive in the production of certain metals.
Calcium Carbide
The Company is a partner with Elkem Metals Company ("Elkem") in a joint
venture (Elkem-American Carbide Company) which primarily sells calcium carbide
which is used in the production of acetylene gas. The Company and Elkem
receive certain fees, based on net sales, for acting as agents for the joint
venture. Additionally, as general manager of the joint venture, Elkem receives
a management fee based on net sales. The Company operates a manufacturing
facility in Pryor, Oklahoma which sells calcium carbide to the joint venture.
Calcium carbide is used by the industrial gas distribution market.
Carbon Dioxide
The Company is implementing a strategy to expand its carbon dioxide
business. In December 1996, the Company acquired Shell's interest in unitized
leases producing carbon dioxide, including Shell's 183 mile pipeline stretching
from the Northeast Jackson Dome area of Mississippi to White Castle, Louisiana
(the "Jackson Dome" properties). The pipeline services three major liquid
carbon dioxide producers (including CIC) and a major methanol producer, each
pursuant to a long-term supply contract, as well as a group of enhanced oil
recovery fields. Carbon dioxide is used in refrigeration, food processing,
beverage carbonation, chemical processing, crude oil recovery, metal
fabrication and agricultural fumigation industries.
<PAGE> 9
As part of its carbon dioxide strategy, the Company also made related
acquisitions of liquid carbon dioxide distributors and carbon dioxide beverage
companies during 1997. In June 1997, the Company closed the acquisition of
CIC, merged into a newly-formed subsidiary of the Company in exchange for a
combination of the Company's common stock and cash.
Suppliers
The Company purchases the raw materials utilized in its nitrous oxide,
carbon products and calcium carbide division of its manufacturing segment
pursuant to contracts from name-brand manufacturers and suppliers. The
Company's carbon dioxide requirements are obtained from the Jackson Dome carbon
dioxide reserves and purchased from all three of the major producers of carbon
dioxide in the United States. The Company believes that if a contractual
arrangement with any supplier were terminated, it would not have a material
adverse effect on the operation of the Company's manufacturing business.
COMPETITION
Each of the major business areas in which the Company participates is
highly competitive. Some competitors are larger than the Company and have
greater resources.
The Company's industrial gas distribution operations compete with
independent distributors and vertically integrated gas producers such as Air
Products and Chemicals, Inc. ("Air Products"), Praxair, Inc. ("Praxair"),
Liquid Air Corporation of America ("Air Liquide"), BOC Gases Group ("BOC
Gases") and others, all of which have distribution operations. The Company
also purchases industrial gases pursuant to requirements contracts from all
four of the above major producers of industrial gases.
Competition in the distribution market is based on customer service,
prompt delivery, price, consistent product quality, attention to safety
procedures, and employee and customer training in the uses of gases and
hardgoods. The Company believes its decentralized system allows competitive
decisions to be made on the local level which results in reduced costs and/or
improved service. In addition, the Company's distribution network allows it to
realize economies of scale in purchasing, training, marketing and information
systems.
Regarding the Company's carbon dioxide business strategy, the carbon
dioxide market includes suppliers of crude CO2 and three major carbon dioxide
companies: Praxair, BOC Gases and Air Liquide. These three companies produce
over 80% of the United States merchant carbon dioxide, develop most of the new
applications, and handle much of the distribution.
The ADI segment competes with small branch-based industrial distribution
companies at the local level. In addition, ADI also competes nationally with
large, branch-based and direct marketers, which include W.W. Grainger, Inc. and
MSC Industrial Direct, Inc. which sell through catalogs and stores, and Vallen
Corporation, a safety equipment distributor.
REGULATORY AND ENVIRONMENTAL MATTERS
The businesses of the Company's subsidiaries are subject to federal and
state laws and regulations adopted for the protection of the environment and
the health and safety of employees and users of the Company's products. The
Company has programs for the operation and design of its facilities to achieve
compliance with applicable environmental rules and regulations. The Company
believes that it is in compliance in all material respects with such laws and
<PAGE> 10
regulations. Expenditures for environmental purposes during the fiscal year
ended March 31, 1997 were not material.
INSURANCE
The Company's policy is to obtain liability and property insurance
coverage that is currently available at what management determines to be a fair
and reasonable price. As of March 31, 1997, the Company had a liability
insurance limit of $100 million. The liability insurance is subject to per-
occurrence deductible amounts of $1 million for product liability, general
liability and workers' compensation claims, and $500 thousand for motor vehicle
liability.
The nature of the Company's business may subject it to product and general
liability lawsuits. To the extent that the Company is subject to claims which
exceed its liability insurance coverage, such suits could have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
EMPLOYEES
On March 31, 1997, the Company employed approximately 6,400 people of whom
approximately 6% were covered by collective bargaining agreements. The Company
believes it has good relations with its employees and has not experienced a
strike or work stoppage in the past 10 years.
PATENTS, TRADEMARKS AND LICENSES
The Company holds trademark registrations for "Airgas", "Dyna-Switch" and
"Va-Weld", and a patent registration for the purification of acetonitrile. The
Company believes that its businesses as a whole are not materially dependent
upon any single patent, trademark or license.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
Peter McCausland (1) 47 Chairman of the Board, President and Chief
Executive Officer
Hermann Knieling 59 Executive Vice President and Group President -
Manufacturing, Business Engineering and
International Group
E. Pat Baker 57 Group President - Distribution
William A. Rice, Jr. 50 Group President - Airgas Direct Industrial
Alfred B. Crichton 49 Division President - West
Ronald B. Rush 53 Division President - South
John Musselman 48 Division President - East
Thomas C. Deas, Jr. 47 Vice President-Finance & Chief Financial Officer
Gordon L. Keen, Jr. 52 Senior Vice President - Law and Corporate
Development
William E. Sanford 36 Executive Vice President of Airgas Direct
Industrial
Thomas Mason 63 Senior Vice President
Scott M. Melman 40 Vice President - Administration
Rudi G. Endres 53 Vice President - International
Samuel H. Goldstein 38 Vice President - Information Systems
Andrew R. Cichocki 34 Vice President - Corporate Development
__________________
(1) Member of the Board of Directors
<PAGE> 11
Mr. McCausland has been a Director of the Company since June 1986, the
Chairman of the Board and Chief Executive Officer of the Company since May
1987, President from June 1986 to August 1988, from April 1, 1993 to November
30, 1995, and since April 1, 1997. Mr. McCausland has been Chairman and Chief
Executive Officer of US Airgas since its organization in February 1982. From
January 1982 until June 1990, Mr. McCausland was a partner in the law firm of
McCausland, Keen & Buckman, Radnor, Pennsylvania, which provides legal services
to the Company. In May 1997, Mr. McCausland was elected to the board of
directors of Hercules Inc., a worldwide manufacturer of chemical specialty
products.
Mr. Knieling has been Executive Vice President of the Company and Group
President - Manufacturing, Business Engineering and International since April
1, 1997. Prior to that, Mr. Knieling served as the President and Chief
Operating Officer of Airgas from December 1, 1995 to March 1997. Mr. Knieling
served as Division President - Southern Division from April 1, 1995 to November
30, 1995 and as Division President - Eastern Division from February 3, 1993 to
March 1995. Mr. Knieling served as a Regional Vice President from June 1990 to
February 1993 and as President of Gulf States Airgas from June 1989 to February
1993. Mr. Knieling owned and operated an industrial gas distributor which was
sold to the Company in 1989. Also, Mr. Knieling served in various capacities
for Hoechst AG during a period of 18 years, and, prior to his leaving Hoechst
in 1982 was President and Chief Executive Officer of its subsidiary, MG Burdett
Gas Products Company.
Mr. Baker has been Group President - Distribution since April 1, 1997.
Prior to that, Mr. Baker served as the Company's Division President - Eastern
Division from April 1, 1995 to March 1997. Mr. Baker served as a Regional Vice
President from May 1991 to February 1993 and President of Southwest Airgas
since the acquisition of Southwest Airgas (formerly West Texas Welders Supply),
in October 1988, to March 1995. Prior to joining the Company, Mr. Baker was
President and owner of West Texas Welders Supply from August 1981 to October
1988.
Mr. Rice has been Group President - Airgas Direct Industrial since April
1, 1997. Prior to that he served as Airgas' Division President - Industrial
Distribution and Purchasing from April 1, 1995 to March 1997 and served as Vice
President - Purchasing from August 1, 1993 to March 1995. Until August 1993,
Mr. Rice was President of Virginia Welding Supply, which was acquired by
the Company in July 1992. Mr. Rice has over 20 years of industry experience
and serves on the boards of various companies.
Mr. Crichton has been the Company's Division President - West since
February 3, 1993. Mr. Crichton served as a Regional Vice President from May
1991 to February 1993 and as President of Sierra Airgas since the acquisition
of Sierra Airgas (formerly Moore Bros.) in January 1987. Mr. Crichton was
employed by Union Carbide Industrial Gases (UCIG) from 1969 through 1986, and
prior to joining Moore Bros., was President of a subsidiary of UCIG.
Mr. Rush has been the Company's Division President - South since December
1, 1995. Mr. Rush served as President of Sooner Airgas from June 1, 1991 to
November 30, 1995 and as Vice President of Sales for Southwest Airgas from
September 1990 to May 31, 1991.
Mr. Musselman has been Division President - East since April 1, 1997.
Prior to that, Mr. Musselman served as President of Northeast Airgas from
January 1989 to March 1997.
<PAGE> 12
Mr. Deas has been the Vice President-Finance & Chief Financial Officer
since February 17, 1997. From March 1996 to February 1997, Mr. Deas served as
Chief Financial Officer of Maritrans, Inc., a New York Stock Exchange listed
shipping company headquartered in Philadelphia. Prior to that, Mr. Deas served
for 18 years in various positions at Scott Paper Company, a manufacturer of
tissue products, including Vice President, Treasury and Assistant Treasurer
from October 1988 to February 1996.
Mr. Keen has been Senior Vice President - Law and Corporate Development
since April 1, 1997. Prior to that, Mr. Keen served as Vice President -
Corporate Development from January 1, 1992 to March 1997. From January 1982
until December 1991, Mr. Keen was a partner in the law firm of McCausland, Keen
& Buckman, Radnor, Pennsylvania, which provides legal services to the Company.
Mr. Sanford has been Executive Vice President of Airgas Direct Industrial
since April 1, 1997. Prior to that, he served as the Company's Executive Vice
President from December 1, 1995 to March 1997 and Vice President - Sales and
Marketing since February 3, 1993. Mr. Sanford served as President of Cascade
Airgas from March 1989 to February 1993. From May 1984 to February 1989 Mr.
Sanford served as Vice President -- Sales and Marketing for Midwest Carbide.
Mr. Mason has been Senior Vice President since December 1, 1995. Mr.
Mason served as Assistant to the Chairman from January 1993 to November 1995.
Prior to that, Mr. Mason served as Executive Vice President of the Company from
March 1990 until January 1993 and served as President from August 1988 until
February 1990.
Mr. Melman has been Vice President - Administration since April 1, 1995.
Mr. Melman served as Vice President - Corporate Controller from August 1994 to
March 1995 and Corporate Controller from August 1986 to July 1994. Prior to
joining the Company, Mr. Melman was the Controller for Integrated Circuit
Systems, Inc. from November 1983 to July 1986, and prior to joining Integrated
Circuit Systems, Inc., was a Tax Manager for KPMG Peat Marwick LLP.
Mr. Endres has been Vice President - International since January 1993.
Mr. Endres served as Vice President - Marketing from July 1991 until December
1992. From February 1987, Mr. Endres served as General Manager and Vice
President for the western region of Airgas. Prior to joining Airgas, Mr.
Endres served for 18 years in various positions nationally and internationally
for Messer Griesheim, a major producer of industrial gases headquartered in
Germany. His last position was Vice President for Specialty Gases and
Chemicals at MG Industries in Valley Forge, PA.
Mr. Goldstein has been the Vice President-Information Systems of Airgas
since September 9, 1996. He joined Airgas from KPMG Peat Marwick LLP (KPMG)
where he served as a National Service Leader for their Consulting Division
since June 1991. Prior to 1991, he was a Senior Manager at KPMG. Mr.
Goldstein held a variety of consulting positions at Coopers & Lybrand LLP from
June 1986 to July 1989.
Mr. Cichocki has been Vice President - Corporate Development of Airgas
since April 1, 1997. Mr. Cichocki served as Assistant Vice President -
Corporate Development from August 1992 to March 1997. Prior to that, he served
in various corporate development and finance positions from April 1988 to July
1992.
ITEM 2. PROPERTIES.
The Company has offices, manufacturing and distribution facilities in 41
states, Canada and Mexico. The principal executive offices of the Company are
located in leased space in Radnor, Pennsylvania.
<PAGE> 13
The Company's Manufacturing segment produces carbon products at its
Keokuk, Iowa, facility; calcium carbide at its Pryor, Oklahoma, facility;
nitrous oxide at its Donora, Pennsylvania and Yazoo City, Mississippi
facilities; and carbon dioxide at the Jackson Dome production facility located
in Jackson, Mississippi. Manufacturing facility utilization, based on market
demand, has ranged from 65% to 100%.
The Keokuk and Pryor facilities are owned by the Company. The Donora
plant is located on property leased through the year 2006. The Yazoo City
property is owned by the Company; however, it will revert to the local
municipality if the plant terminates operations. The Keokuk, Pryor and Donora
facilities are pledged as collateral under industrial development board revenue
bonds.
The Company's Distribution segment conducts business from approximately
600 locations in 41 states, Canada and Mexico. These locations are either
owned or are leased from third parties or from employees of the Company who
were previous owners of businesses acquired on terms consistent with commercial
rental rates prevailing in the surrounding rental market. Fifteen (15)
distribution locations in eleven (11) states have acetylene manufacturing
plants. The Company's acetylene plants operate at an average production
capacity of approximately 65%.
The Company's Direct Industrial segment conducts its business from
locations strategically located throughout the United States. IPCO's principal
offices are located in leased space in Langhorne, Pennsylvania, with additional
warehouse locations in Pennsylvania, Texas, and California. Rutland's principal
offices are located in leased space in the City of Industry, California, and
also include warehouse locations in California, Arizona, Texas, Illinois, Ohio
and South Carolina.
The Company believes that its facilities are adequate for its present
needs and that its properties are generally in good condition, well maintained
and suitable for their intended use.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are parties to pending legal proceedings
arising out of their business operations. The proceedings involve claims for
personal injuries, breach of contract, product warranty and product design,
and claims involving employee relations and certain administrative
proceedings. Management does not believe that the eventual outcome of any
litigation to which the Company or its subsidiaries are parties would have a
material adverse effect on the consolidated financial position, 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 the majority shareholders of National
Welders by the Company in connection with the Company's formation of a joint
venture with National Welders. Praxair is seeking compensatory damages in
excess of $100 million and punitive damages. On February 24, 1997, the court
entered an order denying the Company's motion to dismiss for forum non
conveniens. The Company has filed a petition for writ of mandamus with the
Alabama Supreme Court requesting that the lower court's order be vacated or set
aside. The Company believes that Praxair's claims are without merit and
intends to defend vigorously against such claims.
<PAGE> 14
On September 9, 1996, the Company filed suit against Praxair in the Court
of Common Pleas of Philadelphia County, Pennsylvania. The complaint alleges
breach of contract, fraud, conversion and misappropriation of trade secrets
with respect to an agreement between Praxair and the Company, pursuant to which
Praxair induced the Company to provide Praxair valuable information and
conclusions developed by the Company concerning CBI Industries, Inc. ("CBI") in
exchange for Praxair's promise not to acquire CBI without the Company's
participation. The Company has alleged that it became entitled, pursuant to
such agreement, to acquire certain of CBI's assets having a value in excess of
$800 million. The Company is seeking compensatory and punitive damages. On
January 2, 1997, the court entered an order overruling Praxair's preliminary
objections to the Company's complaint and ordering Praxair to file an answer to
the complaint. Praxair has since filed an answer and asserted various
defenses.
The fraudulent breach of contract by a third-party supplier of refrigerant
gas was reported by the Company on December 23, 1996. On February 12, 1997,
the Company filed a lawsuit in the United States District Court for the
Southern District of Georgia against Discount Auto Parts, Inc. ("Discount"), an
employee of Discount and certain other business and individual defendants,
alleging that Discount and the other defendants engaged in racketeering
activity involving the fraudulent sale of smuggled and counterfeit R-12
refrigerant gas. The Company's complaint alleges that the racketeering
activity of the defendants caused damages to the Company in an amount not less
than $20 million. The complaint seeks treble damages under the Federal RICO
and Georgia RICO statutes, as well as monetary damages under other counts
alleging fraud, conspiracy and related wrongful conduct. The Company believes
there will be future recoveries, including cash in bank accounts frozen under
restraining orders, net assets of the refrigerant supplier which breached the
contract and insurance proceeds under Airgas' and the refrigerant supplier's
policies. The Company will continue to pursue vigorously all possible sources
of recovery.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE>
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange
(ticker symbol: ARG). The following table sets forth, for each quarter during
the last two fiscal years, the high and low sales prices as reported by the
New York Stock Exchange.
High Low
---- ---
1997 Fiscal (1)
First Quarter $22.38 $18.75
Second Quarter 25.50 17.38
Third Quarter 27.13 21.13
Fourth Quarter 24.50 16.50
1996 Fiscal (1)
First Quarter $13.88 $12.50
Second Quarter 15.00 13.31
Third Quarter 16.63 15.69
Fourth Quarter 20.06 19.81
________________
(1) Adjusted to reflect a two-for-one stock split effective on April 15, 1996
(See Note 10 to the Company's consolidated financial statements under Item
8). On May 30, 1997, there were approximately 13,000 holders of record of
the Company's Common Stock.
The present policy of the Company is to retain earnings to provide funds
for the operation and expansion of its business and not to pay cash dividends
on its Common Stock. Any payment of future dividends and the amounts thereof
will depend upon the Company's earnings, financial condition, loan covenants,
capital requirements and other factors deemed relevant by the Board of
Directors (See Note 9 to the Company's consolidated financial statements).
<PAGE>
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company is presented in the table below
and should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Item 7 and the
Company's consolidated financial statements included in Item 8 herein.
(amounts in thousands except per share amounts):
Years Ended March 31, (5)
___________________________________________
1997 1996 1995 1994 1993
(6)
____ ____ ____ ____ ____
Operating Results:
Net sales $1,158,894 $838,144 $687,983 $519,349 $410,771
Depreciation, depletion &
amortization(2) 62,491 45,762 36,868 30,571 28,045
Operating income 82,285 92,985 72,600 48,667 34,367
Interest expense, net 39,752 24,862 17,625 12,486 11,403
Income taxes(1) 21,080 28,522 23,894 16,027 10,811
Net earnings 23,266 39,720 31,479 20,290 12,469
Earnings Per Share(3) $ .34 $ .60 $ .48 $ .31 $ .19
Balance Sheet Data:
Working capital $ 124,849 $ 81,588 $ 54,084 $ 47,071 $ 40,253
Total assets 1,291,031 883,642 645,637 514,897 399,477
Current portion of long-term
debt 25,158 12,179 11,780 10,304 9,923
Long-term debt 629,931 385,832 259,970 205,311 158,629
Other non-current liabilities 29,565 34,490 11,116 6,635 762
Stockholders' equity(4) $ 336,657 $236,209 $189,652 $156,867 $127,571
_______________
(1) The Company retroactively adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" as of April 1, 1992.
(2) Effective April 1, 1993, the Company changed its estimate of the useful
lives of its acetylene and high pressure cylinders from 20 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 1994 by approximately $3.1 million and
increasing net earnings by $1.9 million or $.03 per share.
(3) See Notes 4 and 10 to the Company's consolidated financial statements for
information regarding earnings per share calculations and adjustment for
the stock split effective April 15, 1996.
(4) The Company has not paid any dividends on its common stock.
(5) During the fiscal years 1993 through 1997, the Company acquired 127
distributors.
(6) As discussed in Note 3 to the Company's consolidated financial statements,
during the fourth quarter of fiscal 1997, the Company recorded special
charges totaling $31.4 million ($20.2 million after tax) and incurred a
net loss of $780 thousand related to the sale of a medical home-care
business. Excluding the effects of the special charges and the loss,
operating income, net earnings and earnings per share were $113.7 million,
$44.3 million, and $.65 per share, respectively.<PAGE>
<PAGE> 17
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7.
OVERVIEW
The Company's sales for the year ended March 31, 1997 increased 38% to a
record $1.16 billion, compared to $838.1 million in the prior year. Net
earnings for the year, before fourth-quarter special charges and a loss
related to the sale of a medical business, increased by 11% to $44.3 million,
or $.65 per share, compared to $39.7 million or $.60 per share in the prior
year. Net earnings were $23.3 million or $.34 per share, after including the
special charges and loss. Cash flow, excluding the special charges and the
loss, also increased to record levels. After-tax cash flow (net earnings plus
depreciation, amortization and deferred income taxes) for the year, before
special charges and the loss, increased 22% to $117.3 million compared to $96.4
million in the prior year. These increases were attributable to the continued
success of the Company's acquisition growth strategies combined with internal
sales growth and continuous improvement in other areas. Offsetting this growth
was lower-than-expected performances at certain Distribution subsidiaries
caused by difficult consolidations, costs associated with an accelerated rate
of new branch start-ups and planned expenses related to the expansion of Airgas
Direct Industrial ("ADI"). Since April 1, 1995, the Company has completed 65
acquisitions with a combined annual revenue base of approximately $420 million.
During 1997, the Company completed 24 acquisitions with annual sales of $230
million.
The Company has successfully acquired, integrated and consolidated more
than 250 businesses over the past 15 years, creating a national network of hubs
and branches that form the largest distributor of industrial, medical and
specialty gases and welding-related equipment and supplies in North America.
With over 600 locations in 41 states, Canada and Mexico, the Company has
established a strong local presence and has developed high value-added
relationships with its 650,000 customers. The Company continues to remain
focused on improved profitability and cash flow fueled by operational
efficiencies, improved pricing and business development opportunities,
including acquisitions.
Growth in the Company's industrial gas distribution business during 1997
was helped by the acquisition of 21 businesses with annual sales of $102
million. Internal development and expansion of existing product
lines resulted in same-store sales growth of 3.4% and same-store gross profit
growth of 3.9%.
Among the Company's other initiatives which are helping to build its
industrial gas business include the acquisition of Shell Land & Energy
Company's Jackson Dome carbon dioxide reserves and 183-mile pipeline in the
Southeastern United States. Additionally, in June 1997, the Company closed the
Carbonic Industries Corporation acquisition, the fourth largest producer of
carbon dioxide in the United States. These two key acquisitions, combined with
related acquisitions of liquid carbon dioxide distributors and carbon dioxide
beverage companies, complement the Company's existing industrial gas business
and provide opportunities for future growth.
In addition, the Company entered into a 47% joint venture with
National Welders Supply Company, a premier independent distributor with annual
sales of $125 million.
<PAGE> 18
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
During 1997, the Company entered a new business segment and formed its ADI
Group with the acquisitions of IPCO Safety Products ("IPCO", effective April
1, 1996) and Rutland Tool & Supply Co., Inc. ("Rutland", effective September 1,
1996). These two ADI companies offer a multi-channel, direct mail, national
distribution infrastructure which broadens the line of hardgoods and positions
the Company for entry into the $55 billion safety and metalworking industrial
segment of the Maintenance, Repair and Operations ("MRO") market. The MRO
market encompasses the same metal fabrication market that also accounts for
approximately 28% of Airgas' current gas and hardgoods equipment sales. The
Company believes that ADI's direct channel of delivery will lower the costs to
customers by leveraging the Company's purchasing power, taking advantage of
economies of scale and reducing the number of times an order is handled before
products reach the customer.
ADI's focus is to build on the Company's existing base of 650,000 local
customers and strong customer relationships by selling more products to
existing customers. The Company believes ADI will also provide improved
customer services, such as next-day delivery, and will enhance the Company's
branch-based network's ability to obtain and service national accounts.
During the fourth quarter of fiscal 1997, the Company recorded special
charges totaling $31.4 million and a net loss of $780 thousand related to the
sale of a medical home-care business. The special charges consist of a non-
recurring charge of $26.4 million ($17 million after tax) for product losses
and costs associated with the Company's investigation into the fraudulent
breach of contract by a third-party supplier of refrigerant gas and a $5
million ($3.2 million after tax)non-cash charge related to the impairment
write-down of certain machinery and equipment, goodwill and other intangible
assets of two non-core product-line businesses.
The fraudulent breach of contract by a third-party supplier of refrigerant
gas was reported by the Company on December 23, 1996. On February 12, 1997, the
Company disclosed it had filed a lawsuit in the United States District Court
against Discount Auto Parts, Inc. ("Discount"), an employee of Discount, and
certain other business and individual defendants, alleging that Discount and
the other defendants engaged in racketeering activity involving the fraudulent
sale of smuggled and counterfeit R-12 refrigerant gas. Airgas' complaint
alleges that the racketeering activity of the defendants caused damages to
Airgas in an amount not less than $20 million. The complaint seeks treble
damages under the Federal RICO and Georgia RICO statutes, as well as monetary
damages under other counts alleging fraud, conspiracy and related wrongful
conduct. The Company believes there will be future recoveries, including cash
in bank accounts frozen under restraining orders, net assets of the refrigerant
supplier which breached the contract and insurance proceeds under Airgas' and
the refrigerant supplier's policies. The Company will continue to pursue
vigorously all possible sources of recovery. See Item 3, "Legal Proceedings,"
and Notes 3 and 19 to the Company's Consolidated Financial Statements under
Item 8.
<PAGE> 19
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS: 1997 COMPARED TO 1996
____________________________________________
Net sales increased 38% in 1997, compared to 1996:
<TABLE>
(in thousands)
<CAPTION> 1997 1996 Increase
____ ____ __________
<S> <C> <C> <C>
Distribution $1,018,704 $801,552 $217,152
Direct Industrial 99,216 -- 99,216
Manufacturing 40,974 36,592 4,382
_______ _______ _______
$1,158,894 $838,144 $320,750
======= ======= =======
</TABLE>
For the year ended March 31, 1997, Distribution sales increased
approximately $181 million resulting from the acquisition of 62 distributors
since April 1, 1995 and approximately $36 million from same-store sales growth.
The Company estimates that had all acquisitions during the year ended March 31,
1997 been consummated on April 1, 1996, sales for 1997 would have been
approximately $1.050 billion. The increase in same-store Distribution sales
of 3.4% was a result of growth in all three product groups: gases, hardgoods
and rent. The internal growth was attributable to higher sales volume and from
improved pricing. The Company continues to focus on internal sales growth
through the development of new gas products and product-line extensions,
including specialty gases, small bulk gases, carbon dioxide, replacement
refrigerants in returnable containers, expansion of rental welder fleets and
increased hardgoods business through ADI. The Company believes its same-store
sales growth is slightly understated since it does not reflect the Company's
decision to cease unprofitable sales to certain customers and other sales lost
during acquisition consolidation and integration activity. Airgas subsidiaries
without significant acquisition activity averaged approximately 5% same-store
sales growth. The Company estimates same-store sales based on a comparison of
current period sales to the prior period's sales, adjusted for acquisitions.
Future same-store sales growth is dependent on the economy and the Company's
ability to expand markets for new and existing products and to increase prices.
ADI's sales include welding, metalworking, safety and other MRO hardgoods.
The internal sales growth rate for ADI was approximately 12% during fiscal
1997. Pro forma unaudited sales for ADI, assuming that the Rutland acquisition
had been completed on April 1, 1996, would have been approximately $120
million. Sales to the Distribution segment totaled approximately $1 million.
The Manufacturing segment's sales increased 12% during fiscal 1997
primarily as a result of the December 1, 1996 acquisition of the Jackson Dome
carbon dioxide business. Sales related to carbide, carbon products and nitrous
oxide were essentially flat. Sales to the Distribution segment totaled
approximately $1.5 million.
The increase in Distribution gross profits of approximately $100 million
compared to the prior year resulted from acquisitions which contributed
approximately $81 million and from same-store gross profit growth of 3.9% or
<PAGE> 20
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
approximately $19 million. Same-store gross profit growth resulted from margin
improvement of $2 million and sales volume growth of $17 million. On a same-
store basis, the Distribution gross margin was 50.9% which represented an
improvement of .2% compared to the prior year. Same-store gross margins
improved as a result of selective price increases to customers, leveraging the
Company's purchasing power through national purchasing programs and
improvements in rent margins. Compared to the prior year, the Distribution
gross margin of 49.7% is down 100 basis points due primarily to acquisitions
which have an average gross margin of approximately 45%. Acquisitions have had
an average sales mix of 53% hardgoods/47% gas and rent compared to the
Company's sales mix for fiscal 1996 of 49% hardgoods/51% gas and rent.
The gross profit margin of 26.9% for ADI does not reflect a full year of
Rutland's operations which has historically had gross margins of approximately
40%. Gross margins for the fourth quarter of fiscal 1997 for ADI were 29.5%,
reflecting Rutland's operations for the full period.
Selling, distribution and administrative expenses ("SG&A") increased $91.4
million compared to the prior year primarily due to acquisitions. As a
percentage of net sales, SG&A expenses decreased 140 basis points to 32%
compared to the prior year. Excluding ADI which has a lower SG&A
expense-to-sales ratio, SG&A expenses as a percentage of net sales decreased
30 basis points compared to the prior year. The improvement in the SG&A
expenses relative to sales was somewhat offset by higher operating expenses
associated with the consolidation and integration of certain Distribution
acquisitions, costs associated with the start-up of new Distribution branches
and expenses related to the expansion of ADI. As the Company continues to
integrate such acquisitions and complete such start-up and expansion
activities, SG&A expenses relative to net sales should improve, although such
increased expenses could recur as a result of future acquisitions and expansion
activities.
Depreciation and amortization increased $16.7 million compared to the
prior year primarily due to acquisitions and from increased capital
expenditures. Of the $33.1 million increase in capital expenditures,
approximately 60% of the increase resulted from purchases of cylinders, bulk
tanks and machinery and equipment which are necessary to facilitate gas sales
growth and the integration of acquisitions. Depreciation, depletion and
amortization as a percentage of sales decreased 10 basis points as a result of
ADI which has depreciation and amortization relative to sales of 2.9% compared
to the Distribution segment of 5.7%.
Excluding special charges of $31.4 million, operating income increased 22%
in 1997 compared to 1996:
<TABLE>
(in thousands)
<CAPTION> 1997 1996 Increase
____ ____ __________
<S> <C> <C> <C>
Distribution $102,571 $ 86,130 $ 16,441
Direct Industrial 3,076 -- 3,076
Manufacturing 8,063 6,855 1,208
_______ _______ _______
$113,710 $ 92,985 $ 20,725
======= ======= =======
</TABLE>
<PAGE> 21
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Distribution segment's operating income margin decreased 60 basis
points to 10.1% compared to the prior year. The decrease was primarily the
result of recent industrial gas distribution acquisitions which have operating
margins averaging around 8% and from an increase in operating costs associated
with the integration and consolidation of certain acquisitions and new branch
start-ups. Excluding three subsidiaries undergoing difficult consolidations, a
product-line company which was written down during the Company's fourth quarter
and the new branch start-ups, the Distribution operating income margin
reflected a slight improvement compared to the prior year. Subject to the
effects of future acquisitions and the Company's ability to increase sales and
expand margins, the Company believes that its Distribution operating income
margin should improve.
The operating income margin for ADI was 3.1%. The Company believes that
ADI's operating income margin will continue to be impacted in the foreseeable
future by expansion costs related to information systems, logistics and
facility enhancements.
The Manufacturing segment's operating income increased $1.2 million
compared to the prior year primarily as a result of the Jackson Dome
acquisition. Higher operating margins related to the Jackson Dome acquisition
also accounted for the 100 basis point increase in operating margins compared
to the prior year.
Interest expense, net, increased $14.9 million compared to the prior year
primarily as a result of the increase in average outstanding debt associated
with the acquisition of businesses acquired since April 1, 1995, the joint
venture investment in National Welders Supply Company, costs associated with
the fraudulent breach of contract by a third-party refrigerant gas supplier and
the repurchase of Airgas common stock. As discussed in "Liquidity and Capital
Resources" below, the Company has hedged floating interest rates under certain
borrowings with interest rate swap agreements.
Equity in earnings of unconsolidated affiliates of $958 thousand is
primarily attributable to the Company's 45% interest in National Welders Supply
Company.
Income tax expense, excluding the special charges and the loss related to
the sale of a medical home-care business represented 41% of pre-tax earnings
for the year ended March 31, 1997 compared to 41.8% in the prior year. The
decrease in the effective income tax rate is primarily a result of equity
affiliate income which is recorded net-of-tax.
Net earnings for the year ended March 31, 1997, before fourth quarter
special charges and the loss on the sale of a medical home-care business,
increased 11% to $44.3 million, or $.65 per share, from $39.7 million, or $.60
per share in 1996. Net earnings for the year, after the special charges and the
loss, were $23.3 million, or $.34 per share.
<PAGE> 22
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS: 1996 COMPARED TO 1995
____________________________________________
Net sales increased 22% in 1996 compared to 1995:
<TABLE>
(in thousands)
<CAPTION> 1996 1995 Increase
____ ____ __________
<S> <C> <C> <C>
Distribution $801,552 $654,381 $147,171
Manufacturing 36,592 33,602 2,990
_______ _______ _______
$838,144 $687,983 $150,161
======= ======= =======
</TABLE>
For the year ended March 31, 1996, Distribution sales increased
approximately $133 million resulting from the acquisition of 66 distributors
of industrial, medical and specialty gases and related equipment since April
1, 1994 and approximately $14 million from same-store sales growth. The
Company estimates that had all acquisitions during the year ended March 31,
1996 been consummated on April 1, 1995, distribution sales for the year ended
March 31, 1996 would have increased by an additional $100 million. The
increase in same-store sales of approximately 2% was the result of slightly
higher prices based on selected price increases to certain customers and
increased volume within its gas, rental and hardgoods businesses. During 1996,
the Company's same-store sales increased 3% in the first quarter, 2% in the
second and third quarters and 1% in the fourth quarter. Excluding the impact
of the inclement weather, the Company estimates same-store sales growth during
the fourth quarter would have been approximately 2%. The Company estimates
same-store sales based on a comparison of current period sales to the prior
period's sales, adjusted for acquisitions.
Sales for the Company's Manufacturing operations increased 9% during the
year ended March 31, 1996 compared to the prior year, primarily as a result of
an increase in the volume of lower margin exports and increased demand for
carbon products and nitrous oxide.
The increase in Distribution gross profit of $72.6 million over 1995 was
attributable to increases associated with acquisitions of $62.7 million and
same-store gross profit growth of $9.9 million. The majority of the $9.9
million same-store gross profit growth was derived from volume growth in gas
and increases in cylinder rent. Higher gas volumes were partially attributable
to the success of gas marketing programs, principally small bulk and specialty
gases. On a same-store basis, distribution gross margins increased an
estimated 0.3% compared to 1995 primarily due to improved rent gross margins
combined with slightly higher margins in gases and hardgoods. Increased
volumes of lower margin bulk gases partially offset the gas margin
improvements.
<PAGE> 23
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, distribution and administrative expenses decreased as a
percentage of sales to 33.4% in 1996 compared to 34.3% in 1995. The decrease
was a result of acquisition consolidation efforts and lower operating costs,
such as a reduction in business insurance costs through improved claims
management and reduced incident rates. In addition, certain operating costs,
such as occupancy costs, are relatively fixed and do not increase
proportionately with the increase in same-store sales. Partially offsetting
these improvements were normal salary increases and slightly higher
distribution costs.
Operating income increased 28% in 1996 compared to 1995:
<TABLE>
(in thousands)
<CAPTION> 1996 1995 Increase
____ ____ __________
<S> <C> <C> <C>
Distribution $86,130 $66,521 $19,609
Manufacturing 6,855 6,079 776
______ ______ ______
$92,985 $72,600 $20,385
====== ====== ======
</TABLE>
Distribution operating income as a percentage of net distribution sales
increased to 10.7% for the year ended March 31, 1996 compared to 10.2% in 1995.
The increase in distribution operating income in 1996 was the result of the
increase in gross profits from higher same-store sales, improved gross profit
margins and operating income provided by acquisitions.
Manufacturing operating income increased $776 thousand in 1996 compared
to 1995 due to strong demand for carbon products and nitrous oxide, and lower
production and delivery costs related to calcium carbide and nitrous oxide
business, partially offset by an increase in lower margin sales of carbon
products.
Interest expense, net, increased $7.2 million in 1996 compared to 1995
primarily as a result of the increase in average outstanding debt associated
with the acquisition of industrial gas distributors since April 1, 1994,
interest costs associated with the repurchase of Company common stock and
slightly higher interest rates, partially offset by an increase in positive
cash flow. 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 41.8% of pre-tax earnings in 1996 compared
to 43.2% in 1995. The decrease in the effective income tax rate was primarily
due to an increase in pre-tax earnings relative to permanent differences and
as a result of the implementation of certain tax planning strategies.
Net earnings increased 26% to $39.7 million or $.60 per share in 1996 from
$31.5 million or $.48 per share in 1995.
<PAGE> 24
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 $81.2 million ($106.5 million
excluding the special charges and loss related to the sale of a medical home-
care business) for the year ended March 31, 1997. Depreciation, depletion and
amortization represented $62.5 million of cash flows from operating activities.
Cash flows from working capital components increased $1.7 million as a result
of a decrease in prepaid expenses and other current assets, an increase in
accounts payable and an increase in accrued expenses and other current
liabilities partially offset by an increase in accounts receivable associated
with higher same-store sales and an increase in inventory levels to meet
increased hardgoods and gas sales volumes. The increase in other assets and
liabilities, net, primarily related to amounts paid in connection with securing
product-supply agreements and a decrease in deferred interest related to
interest rate swap agreements. Days' sales outstanding and distribution
hardgoods days' supply of inventory improved slightly compared to March 31,
1996 levels. Total inventories have increased primarily as a result of an
increase in distribution inventories of approximately $3 million to support
sales growth and gases of approximately $9 million associated with specialty
gas sales initiatives.
Cash used by investing activities totaled $276.0 million in fiscal 1997,
which was primarily comprised of capital expenditures of $74.4 million and
acquisitions and investments totaling $202.7 million.
The Company's use of cash for capital expenditures was attributable to the
continued assimilation of certain acquisitions requiring capital expenditures
for 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. Approximately 60% of fiscal
1997's capital expenditures were for the purchase of cylinders, bulk tanks and
machinery and equipment. The Company estimates that its Distribution
maintenance capital expenditures are approximately 2% of net sales. The
Company considers the replacement of existing capital assets to be maintenance
capital expenditures.
The Company has undertaken initiatives to develop further its industrial
gas customer base to include customers which require large-volume supplies of
gases, such as nitrogen. For these customers, the Company plans to enter into
long-term supply contracts in conjunction with air separation plants which will
be built near customers' facilities. The Company has entered into agreements
with two customers which require the construction of two air separation plants
which will begin production late in calendar 1997. Capital costs incurred
during fiscal 1998 associated with these plants are estimated to total $40
million.
Financing activities provided cash of $194.8 million with total debt out-
standing increasing by $257.1 million from March 31, 1996. Funds from
financing activities were used primarily for the purchase of distributors,
equity investments, capital expenditures and the repurchase of Airgas common
stock.
<PAGE> 25
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 March 31, 1997, the Company had approximately $282
million in borrowings under the facility and approximately $76 million
committed under letters of credit, resulting in unused availability under the
facility of approximately $142 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%. In March 1997, the Company
issued $75 million of unsecured notes due March 2004 at a fixed rate of 7.14%.
The proceeds from the medium-term note issuances were used to repay bank debt.
The Company has a Canadian credit facility totalling C$50 million (US$37
million) with various commercial banks which matures on November 14, 1998. At
March 31, 1997, the Company had approximately C$41 million (US$30 million) in
borrowings outstanding under the facility, resulting in unused availability
under the facility of approximately C$9 million (US$7 million).
The Company also has unsecured line of credit agreements with various
commercial banks. At March 31, 1997, these agreements totaled $50 million,
under which the Company had no borrowings outstanding.
At March 31, 1997, the effective interest rate related to outstanding
borrowings under all credit lines was approximately 6.07%.
The Company's loan agreements contain covenants which include the
maintenance of a minimum equity level 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 23
interest rate swap agreements during the period from June 1992 through March
31, 1997. The swap agreements are with major financial institutions and
aggregate $358 million in notional principal amount at March 31, 1997.
Approximately $208 million of the notional principal amount of the swap
agreements require fixed interest payments based on an average effective rate
of 6.49% for remaining periods ranging between 1 and 8 years. Five swap
agreements require floating rates ($149.5 million notional amount at 5.72% at
March 31, 1997). Under the terms of seven of the swap agreements, the Company
has elected to receive the discounted value of the counterparty's interest
payments upfront. At March 31, 1997, approximately $18.7 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 its common stock, including
approximately 2.4 million treasury shares.
<PAGE> 26
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In June 1997, the Company closed the acquisition of CIC, which was merged
into a newly-formed subsidiary of the Company in exchange for a combination of
the Company's common stock and cash.
Subsequent to March 31, 1997, the Company has acquired six businesses,
including CIC, with aggregate annual sales of approximately $69 million for an
aggregate purchase price of approximately $82 million. In addition, the
Company has signed letters of intent for nine companies with annual sales of
approximately $107 million and an aggregate purchase price of approximately $56
million.
In December 1996, the Board of Directors authorized the repurchase of up
to 1,600,000 shares of Airgas Common Stock, and on April 16, 1997, the
Board of Directors authorized the repurchase of up to 1,000,000 additional
shares. The Company purchased 800,000 shares of Airgas common stock
during the year ended March 31, 1997. Subsequent to March 31, 1997, the
Company repurchased 1,154,000 shares, leaving a total of 646,000 shares
available under the repurchase programs. The Company's treasury shares will
be used to fund acquisitions and employee benefit programs and will be acquired
in open-market transactions, from time-to-time, depending on market conditions.
The Company has primarily financed its repurchase program with borrowings and
funds provided by operating activities. The cash used for the Company's
repurchase program during 1997 totalled $15.7 million.
The Company does not currently pay dividends.
Other
New Accounting Pronouncements
In the first quarter of fiscal 1997, Airgas 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.(See
Note 3 to the consolidated financial statements of the Company under Item 8.)
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. Airgas has elected to continue to use
existing accounting rules under APB 25. Accordingly, Airgas has presented the
required pro forma disclosure provisions for its fiscal year ended March 31,
1997. (See Note 11 to the consolidated financial statements of the Company
under Item 8.) As the Company will continue to account for stockbased
compensation using the intrinsic value method, this statement does 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
<PAGE> 27 AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
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.
In February 1997, the Financial Accounting Standards Board issued FASB
Statement No. 128 "Earnings Per Share." SFAS No. 128 establishes new standards
for computing and presenting earnings per share, effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. All prior periods will be restated to reflect the new Basic and
Diluted earnings per share amounts. The Company's Basic earnings per share is
essentially net income divided by the weighted shares outstanding, and the
Diluted earnings per share is not expected to be materially different than
currently reported earnings per share amounts. The Company will adopt SFAS No.
128 in the first quarter of fiscal 1998.
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 CIC);
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; the Company's
ability to recover assets in connection with the fraudulent breach of contract
related to refrigerant R-12 purchases; and the effects of, and changes in the
economy, monetary and fiscal policies, laws and regulations, inflation and
<PAGE> 28
monetary fluctuations and fluctuations in interest rates, both on a national
and international basis. The Company does not undertake to update any
forward-looking statement made herein or that may be made from time to time by
or on behalf of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and financial statement schedule of
the Company are set forth at pages F-1 to F-33 of the report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The biographical information relating to the Company's directors appearing
in the Proxy Statement relating to the Company's 1997 Annual Meeting of
Stockholders is incorporated herein by reference. Biographical information
relating to the Company's executive officers is set forth in Item 1 of Part I
of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information under "Board of Directors and Committees," "Executive
Compensation" and "Certain Transactions" appearing in the Proxy Statement
relating to the Company's 1997 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is set forth in the section headed
"Security Ownership" appearing in the Company's Proxy Statement relating to the
Company's 1997 Annual Meeting of Stockholders and such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under "Certain Transactions" appearing in the Proxy
Statement relating to the Company's 1997 Annual Meeting of Stockholders is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2):
The response to this portion of Item 14 is submitted as a separate section of
this report beginning on page F-1. All other schedules have been omitted as
inapplicable, or not required, or because the required information is included
in the Consolidated Financial Statements or notes thereto.
(a)(3) Exhibits. The exhibits required to be filed as part of this annual
report on Form 10-K are listed in the attached Index to Exhibits.
(b) Reports on Form 8-K.
On January 24,1997, the Company filed a current report on Form 8-K to
<PAGE> 29
announce, under Item 5, that its earnings for the third quarter ended December
31, 1996.
On February 5, 1997, the Company filed a current report on Form 8-K, to
announce, under Item 5, that it named Thomas C. Deas, Jr., as its Chief
Financial Officer, effective February 24, 1997.
On March 18, 1997, the Company filed a current report on Form 8-K to
announce, under Item 5, certain organizational changes and management
appointments.
(c) Index to Exhibits and Exhibits filed as a part of this report.
3.1 Amended and Restated Certificate of Incorporation of Airgas, Inc. dated
as of August 7, 1995 (Incorporated by reference to Exhibit 3.1 to the
Company's September 30, 1995 Quarterly Report on Form 10-Q).
3.2 Airgas, Inc. By-Laws Amended and Restated November 29, 1994.
(Incorporated by reference to Exhibit 3.2 to the Company's March 31,
1996 report on Form 10-K).
**4.1 Eighth Amended and Restated Loan Agreement dated September 27, 1996
between Airgas, Inc. and certain banks and Nationsbank of North
Carolina, N.A. ($500,000,000 credit facility).
4.2 Indenture dated as of August 1, 1996 of Airgas, Inc. to Bank of New
York, Trustee. (Incorporated by reference to Exhibit 4.5 to the
Company's Registration Statement on Form S-4 No. 333-23651 dated March
20, 1997).
4.3 Form of Airgas, Inc. Medium-Term Note (Fixed Rate). (Incorporated by
reference to Exhibit 4.6 to the Company's Registration Statement on Form
S-4 No. 333-23651 dated March 20, 1997).
4.4 Form of Airgas, Inc. Medium-Term Note (Floating Rate). (Incorporated by
reference to Exhibit 4.7 to the Company's Registration Statement on Form
S-4 No. 333-23651 dated March 20, 1997).
There are no other instruments with respect to long-term debt of the
Company that involve indebtedness or securities authorized thereunder
exceeding 10 percent of the total assets of the Company and its
subsidiaries on a consolidated basis. The Company agrees to file a copy
of any instrument or agreement defining the rights of holders of long-
term debt of the Company upon request of the Securities and Exchange
Commission.
4.5 Form of Rights Agreement, dated as of August 1, 1988, between Airgas,
Inc. and The Philadelphia National Bank, which includes as Exhibit a
thereto the Form of Rights Certificate: (Incorporated by reference to
Exhibit (1) (2) to the Company's Form 8-A dated August 11, 1988.)
4.6 Rights Agreement, dated as of April 1, 1997, between Airgas, Inc. and
The Bank of New York, N.A., as Rights Agent, which includes as Exhibit A
thereto the Form of Right Certificate. (Incorporated by reference to
Exhibit 1.1 to the Company's Form 8-A filed on April 28, 1997.)
4.7 First Amendment to the Rights Agreement Dated as of August 1, 1988,
dated as of April 1, 1997, between Airgas, Inc. and The Bank of New
York. (Incorporated by reference to Exhibit 1.2 to the Company's Form
8-A filed on April 28, 1997.)
<PAGE> 30
* 10.1 Agreement between the Company and Peter McCausland, dated January 8,
1991, and form of Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 10.16 to the Company's March 31, 1992 report on
Form 10-K).
* 10.2 Amended and Restated 1984 Stock Option Plan, as amended effective May
22, 1995 (Incorporated by reference to Exhibit 10.1 to the Company's
September 30, 1995 Quarterly Report on Form 10-Q).
* 10.3 1989 Non-Qualified Stock Option Plan for Directors (Non-Employees),
as amended. (Incorporated by reference to Exhibit 10.7 to the
Company's March 31, 1992 report on Form 10-K).
* 10.4 Amendment to the 1989 Non-Qualified Stock Option Plan for Directors
(Non-Employees) as amended through August 7, 1995 (Incorporated by
reference to Exhibit 10.2 to the Company's September 30, 1995
Quarterly Report on Form 10-Q).
* 10.5 1994 Employee Stock Purchase Plan. (Incorporated by reference to
exhibit 10.19 to the Company's March 31, 1993 report on Form 10-K).
* 10.6 Amended and Restated Joint Venture Agreement dated March 31, 1992
between American Carbide and Carbon Corporation and Elkem Metals
Company. (Incorporated by reference to Exhibit 10.5 to the Company's
March 31, 1992 report on Form 10-K).
* 10.7 Airgas, Inc. Management Incentive Plan (Incorporated by reference to
Exhibit 10.3 to the Company's September 30, 1995 Quarterly Report on
Form 10-Q).
* 10.8 Joint Venture Agreement dated June 28, 1996 between Airgas, Inc. and
National Welders Supply Company, Inc. and J.A. Turner, III, and
Linerieux B. Turner and Molo Limited Partnership, Turner (1996)
Limited partnership, Charitable Remainder Unitrust for James A.
Turner, Jr. and Foundation for the Carolinas (Incorporated by
reference to Exhibit 2.1 to the Company's June 28, 1996 Report on
Form 8-K).
*/** 10.9 Letter dated July 24, 1992 between Airgas, Inc. (on behalf of
the Nominating and Compensation Committee) and Peter McCausland
regarding the severance agreement between the Company and Peter
McCausland.
<PAGE>
<PAGE> 31
**(11) Statement re: computation of earnings per share.
**(21) Subsidiaries of the Company.
**(23.1) Consent of KPMG Peat Marwick LLP (Form 10-K)
**(23.2) Consent of KPMG Peat Marwick LLP (Form 11-K - 401 (K) Plan)
**(23.3) Consent of KPMG Peat Marwick LLP (Form 11-K - Employee Stock Purchase
Plan)
**(23.4) Consent of Arthur Andersen LLP
**(23.5) Report of Independent Public Accountants - Arthur Andersen LLP
**(27) Financial data schedule
**(99.1) Form 11-K for the Registrant's 401(K) Plan
**(99.2) Form 11-K for the Registrant's Employee Stock Purchase Plan
_____________
* A management contract or compensatory plan required to be filed by Item
14(c) of this Report.
** Previously filed
<PAGE>
<PAGE> 32
Signatures
__________
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Airgas, Inc.
By: /s/ SCOTT M. MELMAN
_______________________________
Vice President - Administration
Date: _____________
<PAGE> 33
AIRGAS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
Reference In
Report on
Form 10-K
_________
Independent Auditors' Report . . . . . . . . . . . . . . . . . . F-2
Statement of Management's Financial Responsibility . . . . . . . F-3
Consolidated Balance Sheets at March 31, 1997 and 1996 . . . . . F-4
Consolidated Statements of Earnings for the Years Ended
March 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1996 and 1995. . . . . . . . . .. . . . . . . . F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts . . . . . . F-33
All other schedules for which provision is made in the applicable accounting
regulations promulgated by the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
F-1
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Airgas, Inc.:
We have audited the consolidated financial statements of Airgas, Inc. and
subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits. We
did not audit the financial statements of National Welders Supply Company, Inc.
(National Welders), (a 45% percent-owned investee company). The Company's
investment in National Welders at December 31, 1997 was $49,800,000, and its
equity in earnings of National Welders was $935,000 for the year ended 1997.
The financial statements of National Welders were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for National Welders, is based solely on the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Airgas, Inc. and subsidiaries as
of March 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the years in the three-year period ended March 31, 1997, in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth thereon.
Philadelphia, Pennsylvania KPMG PEAT MARWICK LLP
May 8, 1997
F-2
<PAGE>
<PAGE> 35
STATEMENT OF MANAGEMENT'S FINANCIAL RESPONSIBILITY
Management has prepared and is responsible for the integrity and
objectivity of the consolidated financial statements and related financial
information in this Annual Report. The statements are prepared in conformity
with generally accepted accounting principles. The financial statements
reflect management's informed judgment and estimation as to the effect of
events and transactions that are accounted for or disclosed.
Management maintains a system of internal control at each business unit.
This system, which undergoes periodic evaluation, is designed to provide
reasonable assurance that assets are safeguarded and records are adequate for
the preparation of reliable financial data. In determining the extent of the
system of internal control, management recognizes that the cost should not
exceed the benefits derived. The evaluation of these factors requires
estimates and judgment by management.
The Company's financial statements have been audited by KPMG Peat Marwick
LLP, independent auditors. Their Independent Auditors' Report, which is based
on an audit made in accordance with generally accepted auditing standards is
presented on the previous page. In performing their audit, KPMG Peat Marwick
LLP considers the Company's internal control structure to the extent they deem
necessary in order to plan their audit, determine the nature, timing and extent
of tests to be performed and issue their report on the consolidated financial
statements.
The Audit Committee of the Board of Directors meets with the independent
auditors and management to satisfy itself that they are properly discharging
their responsibilities. The auditors have direct access to the Audit
Committee.
Airgas, Inc.
/s/ Thomas C. Deas, Jr. /s/ Peter McCausland
________________________ _______________________
Thomas C. Deas, Jr. Peter McCausland
Vice President, Chairman, President and
Chief Financial Officer Chief Executive Officer
May 8, 1997
F-3
<PAGE>
<PAGE> 36
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS March 31,
________________
(In thousands, except per share amounts) 1997 1996
________________________________________ ____ ____
ASSETS
Current Assets
Trade receivables, less allowances for doubtful
accounts of $4,443 in 1997 and $3,396 in 1996 . . . . .$ 151,053 $120,811
Inventories (Note 5) . . . . . . . . . . . . . . . . . . 129,372 86,162
Prepaid expenses and other current assets. . . . . . . . 31,574 11,601
_______ _______
Total current assets. . . . . . . . . . . . . . . . 311,999 218,574
_______ _______
Plant and Equipment, at cost (Note 6). . . . . . . . . . 736,083 586,328
Less accumulated depreciation. . . . . . . . . . . . . . (183,922) (147,451)
_______ _______
Plant and equipment, net . . . . . . . . . . . . . . . 552,161 438,877
_______ _______
Other Non-current Assets (Note 7) . . . . . . . . . . . 132,257 60,948
Goodwill, net of accumulated amortization
of $29,503 in 1997 and $19,552 in 1996. . . . . . . . . 294,614 165,243
_______ _______
$1,291,031 $883,642
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note 9) . . . . . . .$ 25,158 $ 12,179
Accounts payable, trade. . . . . . . . . . . . . . . . . 74,329 52,528
Accrued expenses and other current liabilities (Note 8). 87,663 72,279
_______ _______
Total current liabilities . . . . . . . . . . . . . 187,150 136,986
_______ _______
Long-Term Debt (Note 9). . . . . . . . . . . . . . . . . 629,931 385,832
Deferred Income Taxes (Note 15). . . . . . . . . . . . . 104,266 88,400
Other Non-current Liabilities (Note 9) . . . . . . . . . 29,565 34,490
Minority Interest in Subsidiaries (Note 21). . . . . . . 3,462 1,725
Commitments and Contingencies (Note 19)
Stockholders' Equity (Note 10)
Preferred stock, no par value, 200,000 shares authorized,
no shares issued or outstanding in 1997 and 1996 - -
Common Stock, par value $.01 per share, 200,000 shares
authorized, 68,762 and 66,314 shares issued in
1997 and 1996, respectively . . . . . . . . . . . . . . 688 663
Capital in Excess of Par Value . . . . . . . . . . . . . 155,543 91,512
Retained Earnings. . . . . . . . . . . . . . . . . . . . 196,626 173,360
Cumulative Translation Adjustments . . . . . . . . . . . (468) (410)
Treasury Stock, 800 and 2,355 common shares at cost
in 1997 and 1996, respectively. . . . . . . . . . . . . (15,732) (28,916)
_______ _______
Total stockholders' equity. . . . . . . . . . . . . 336,657 236,209
_______ _______
$1,291,031 $883,642
======= =======
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 37
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended March 31,
(In thousands, except per share amounts) ______________________________
_______________________________________ 1997 1996 1995
____ ____ ____
Net Sales
Distribution . . . . . . . . . . . . . . . .$1,018,704 $801,552 $654,381
Direct Industrial. . . . . . . . . . . . . . 99,216 -- --
Manufacturing . . . . . . . . . . . . . . . 40,974 36,592 33,602
________ _______ _______
Total net sales . . . . . . . . . . . . 1,158,894 838,144 687,983
________ _______ _______
Costs and Expenses
Cost of products sold (excluding depreciation,
depletion and amortization)
Distribution . . . . . . . . . . . . . . . 512,309 395,370 320,800
Direct Industrial. . . . . . . . . . . . . 72,543 -- --
Manufacturing. . . . . . . . . . . . . . . 26,531 24,121 22,076
Selling, distribution and administrative
expenses . . . . . . . . . . . . . . . . . 371,310 279,906 235,639
Depreciation, depletion and amortization . . 62,491 45,762 36,868
Special charges (Note 3) . . . . . . . . . . 31,425 -- --
________ _______ _______
Total costs and expenses. . . . . . . . 1,076,609 745,159 615,383
________ _______ _______
Operating Income
Distribution. . . . . . . . . . . . . . . . 102,571 86,130 66,521
Distribution - special charges. . . . . . . (31,425) -- --
Direct Industrial . . . . . . . . . . . . . 3,076 -- --
Manufacturing. . . . . . . . . . . . . . . . 8,063 6,855 6,079
________ _______ _______
Total operating income . . . . . . . . 82,285 92,985 72,600
Interest expense, net (Note 13). . . . . . . (39,752) (24,862) (17,625)
Other income, net (Note 14). . . . . . . . . 1,672 782 1,067
Equity in earnings of unconsolidated
affiliates (Note 12) . . . . . . . . . . . 958 -- --
Minority interest (Note 21). . . . . . . . . (817) (663) (669)
_________ _______ _______
Earnings before income taxes. . . . . 44,346 68,242 55,373
Income taxes (Note 15) . . . . . . . . . . . 21,080 28,522 23,894
_________ _______ _______
Net earnings. . . . . . . . . . . . .$ 23,266 $ 39,720 $ 31,479
========= ======= =======
Earnings Per Share (Notes 4 and 10). . . . .$ .34 $ .60 $ .48
========= ======= =======
Weighted average shares. . . . . . . . . . . 68,640 66,215 65,525
========= ======= =======
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<PAGE> 38
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Years Ended March 31, 1997, 1996 and 1995
_________________________________________
Shares of Capital in
Common Stock Common Excess of
(In thousands) $.01 Par Value Stock Par Value
______________ ______________ ______ __________
Balance--April 1, 1994. . . . . . . . . 65,794.2 $658 $56,001
Net earnings . . . . . . . . . . . . . .
Foreign currency translation adjustment.
Retirement of treasury stock . . . . . . (3,754.4) (37) (1,445)
Purchase of treasury stock (Note 10) . .
Issuance of stock in connection
with acquisitions . . . . . . . . . . . 123.2 1 1,436
Stock warrants and options exercised . . 538.9 5 1,265
Tax benefit associated with exercise
of stock options and warrants (Note 15) 1,859
Shares issued in connection with
Employee Stock Purchase Plan (Note 11). 300.2 3 2,704
________ ___ ______
Balance--March 31, 1995. . . . . . . . . 63,002.1 $630 $61,820
Net earnings . . . . . . . . . . . . . .
Foreign currency translation adjustment.
Purchase of treasury stock (Note 10) . .
Issuance of stock in connection
with acquisitions . . . . . . . . . . . 843.7 9 11,435
Stock warrants and options exercised . . 1,841.6 17 3,705
Tax benefit associated with exercise
of stock options and warrants (Note 15) 7,613
Shares issued upon acquisition of minority
interests (Note 21) 258.1 3 3,547
Shares issued in connection with
Employee Stock Purchase Plan (Note 11). 368.2 4 3,392
________ ___ ______
Balance--March 31, 1996. . . . . . . . . 66,313.7 $663 $91,512
Net earnings . . . . . . . . . . . . . .
Foreign currency translation adjustment.
Purchase of treasury stock (Note 10) . .
Reissuance of treasury stock . . . . . .
Issuance of stock in connection
with acquisitions . . . . . . . . . . . 1,102.9 11 49,556
Stock warrants and options exercised . . 872.6 9 3,370
Tax benefit associated with exercise
of stock options and warrants (Note 15) 4,229
Shares issued upon acquisition of minority
interests (Note 21). . . . . . . . . . 76.5 1 1,724
Shares issued in connection with
Employee Stock Purchase Plan (Note 11). 395.9 4 5,152
________ ___ ______
Balance--March 31, 1997 . . . . . . . . 68,761.6 $688 $155,543
======== === ======
COLUMNS CONTINUED ON NEXT PAGE
F-6
<PAGE>
<PAGE> 39 AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY - (Continued)
Years Ended March 31, 1997, 1996 and 1995
_________________________________________
Cumulative
Retained Translation Treasury
(In thousands) Earnings Adjustments Stock
______________ _________ ___________ ________
Balance--April 1, 1994. . . . . . . . . .$102,161 $(471) $(1,482)
Net earnings. . . . . . . . . . . . . . . 31,479
Foreign currency translation adjustment . 2
Retirement of treasury stock. . . . . . . 1,482
Purchase of treasury stock (Note 10). . . (5,969)
Issuance of stock in connection
with acquisitions. . . . . . . . . . . .
Stock warrants and options exercised. . .
Tax benefit associated with exercise
of stock options and warrants (Note 15).
Shares issued in connection with
Employee Stock Purchase Plan (Note 11) .
_______ ____ ______
Balance--March 31, 1995 . . . . . . . . .$133,640 $(469) $(5,969)
Net earnings. . . . . . . . . . . . . . . 39,720
Foreign currency translation adjustment . 59
Purchase of treasury stock (Note 10). . . (22,947)
Issuance of stock in connection
with acquisitions. . . . . . . . . . . .
Stock warrants and options exercised. . .
Tax benefit associated with exercise
of stock options and warrants (Note 15).
Shares issued upon acquisition of minority
interests (Note 21). . . . . . . . . . .
Shares issued in connection with
Employee Stock Purchase Plan (Note 11) .
________ ____ ______
Balance--March 31, 1996 . . . . . . . . .$173,360 $(410) $(28,916)
Net earnings. . . . . . . . . . . . . . . 23,266
Foreign currency translation adjustment . (58)
Purchase of treasury stock (Note 10). . . (15,732)
Reissuance of treasury stock. . . . . . . 28,916
Issuance of stock in connection
with acquisitions. . . . . . . . . . . .
Stock warrants and options exercised. . .
Tax benefit associated with exercise
of stock options and warrants (Note 15).
Shares issued upon acquisition of minority
interests (Note 21). . . . . . . . . . .
Shares issued in connection with
Employee Stock Purchase Plan (Note 11) .
________ ____ _______
Balance--March 31, 1997 . . . . . . . . $196,626 $(468) $(15,732)
======== ==== =======
See accompanying notes to consolidated financial statements.
F-6, Continued
<PAGE> 40 AIRGAS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended March 31,
1997 1996 1995
____ ____ ____
Cash Flows From Operating Activities
Net earnings . . . . . . . . . . . . . . . . . . $ 23,266 $39,720 $31,479
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . 62,491 45,762 36,868
Depreciation and amortization - special charges 3,930 -- --
Deferred income taxes. . . . . . . . . . . . . (170) 10,868 11,549
Equity in earnings of unconsolidated affiliates. (2,314) (1,428) (840)
Gain on sale of investment in CBI Industries, Inc. -- -- (560)
Gain on divestiture of medical home-care business. (770) -- --
(Gain)/Loss on sale of plant and equipment. . . 1,386 (12) 110
Minority interest in earnings . . . . . . . . . 817 663 669
Stock issued for employee benefit plan expense 5,156 3,396 2,707
Changes in assets and liabilities, excluding
effects of business acquisitions and divestiture:
Trade receivables, net. . . . . . . . . . . (6,661) (5,300) (1,179)
Inventories, net. . . . . . . . . . . . . . (12,090) (2,509) (1,874)
Prepaid expenses and other current assets . 3,687 (960) 198
Accounts payable, trade. . . . . . . . . . 10,534 (1,461) 2,934
Accrued expenses and other current liabilities. 6,247 4,485 1,332
Other assets and liabilities, net . . . . . (14,262) (1,202) (3,441)
_______ ______ ______
Net cash provided by operating activities. 81,247 92,022 79,952
_______ ______ ______
Cash Flows From Investing Activities
Capital expenditures . . . . . . . . . . . . . . (74,358) (41,236) (36,712)
Proceeds from sale of plant and equipment. . . . 3,551 3,968 2,563
Proceeds from divestiture of medical business. . 6,586 -- --
Business acquisitions, net of cash acquired. . . (168,666)(142,776) (79,202)
Business acquisitions, holdback settlements. . . (7,943) (7,381) (3,643)
Investment in unconsolidated affiliates. . . . . (33,995) (3,448) (3,497)
Purchase of investment in CBI Industries, Inc. . -- -- (17,026)
Proceeds from sale of investment in CBI
Industries, Inc. . . . . . . . . . . . . . . . -- -- 17,892
Dividends from joint venture . . . . . . . . . . 1,729 1,037 550
Other, net . . . . . . . . . . . . . . . . . . . (2,949) (121) (439)
________ ______ ______
Net cash used by investing activities. . . . (276,045)(189,957) (119,514)
Cash Flows From Financing Activities ________ _______ ______
Proceeds from borrowings . . . . . . . . . . . . 916,677 692,414 394,193
Repayment of debt. . . . . . . . . . . . . . . . (707,401)(594,931) (359,253)
Financing costs. . . . . . . . . . . . . . . . . (2,261) (136) (230)
Repurchase of treasury stock, net. . . . . . . . (14,419) (22,947) (5,969)
Exercise of options and warrants . . . . . . . . 3,162 3,722 1,270
Net overdraft. . . . . . . . . . . . . . . . . . (960) 4,068 4,591
Other financing activities . . . . . . . . . . . -- 15,745 4,960
________ ______ ______
Net cash provided by financing activities. . 194,798 97,935 39,562
________ ______ ______
Cash Increase (Decrease) . . . . . . . . . . . . -- -- --
Cash--Beginning of year. . . . . . . . . . . . . -- -- --
_______ ______ ______
Cash--End of Year. . . . . . . . . . . . . . . . $ -- $ -- $ --
======= ====== ======
For supplemental cash flow disclosures see Note 20.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 41
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of Airgas, Inc.
and subsidiaries (the "Company"). Unconsolidated affiliates are accounted for
on the equity method and generally consist of 20-50% owned operations where
control does not exist or is considered temporary. The excess of the cost of
these affiliates over the Company's share of their net assets at the
acquisition date is being amortized over 40 years. Intercompany accounts and
transactions are eliminated in consolidation.
The Company has made estimates and assumptions relating to the reporting
of assets and liabilities and disclosure of contingent assets and liabilities
to prepare these statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(b) Inventories
Inventories are stated at the lower of cost or market with cost for
approximately 87% and 81% of the inventories at March 31, 1997 and 1996,
respectively, determined by the first-in, first-out (FIFO) method. Cost for
the remainder of inventories was determined using the last-in, first-out (LIFO)
method.
(c) 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.
Depletion of the cost of carbon dioxide production facilities, well equipment
and leases are computed on the unit-of-production method.
During 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. As discussed in Note 3,
the Company recorded a write-down related to certain machinery and equipment,
goodwill and other intangible assets of two non-core, distribution product-line
businesses.
F-8
<PAGE>
<PAGE> 42 AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(d) Other Assets
Costs related to the acquisition of long-term debt are deferred and
amortized over the term of the related debt. Costs and payments pursuant to
noncompetition arrangements entered into in connection with business
acquisitions are amortized over the terms of the arrangements which are
principally over 5 years. The Company assesses the recoverability of
noncompetition arrangements by determining whether the amortization of the
asset balance can be recovered through projected undiscounted future cash flows
over its remaining life.
(e) Goodwill
Goodwill represents costs in excess of net assets of businesses acquired
and is amortized on a straight-line basis over the expected periods to be
benefited, which currently ranges from 20 to 40 years. The Company assesses
the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through projected undiscounted future cash flows.
Approximately 94% of the Company's goodwill is assigned a useful life of
40 years. In assessing the recoverability of goodwill the Company evaluates
the performance of the underlying business which gives rise to such goodwill.
The assets acquired in connection with acquisitions relate to long life assets
primarily cylinders, which management believes have a useful life in excess of
40 years. The long life assets acquired continue to contribute a significant
portion of the Company's recurring net sales, operating income and cash flow.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
(g) Foreign-Currency Translation
The functional currency of the Company's foreign operations is the
applicable local currency. The translation of foreign currencies into U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using
average exchange rates during each reporting period. The gains or losses, net
of applicable deferred income taxes, resulting from such translations are
included in stockholders' equity. Gains and losses arising from foreign
currency transactions are reflected in the consolidated statements of earnings
as incurred.
F-9
<PAGE> 43 AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(h) Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk are limited due to the Company's large number of
customers and their dispersion across many industries. Credit terms granted to
customers are generally net 30 days.
(i) Revenue Recognition
Sales are recorded upon shipment to the customer.
(j) Financial Instruments
In hedging interest rate exposure, the Company enters into interest rate
swap agreements. These instruments are not entered into for trading purposes
and the Company has the ability and intent to hold these instruments to
maturity. The Company only uses non-leveraged instruments. When interest
rates change, the difference to be paid or received is accrued and recognized
as interest expense over the life of the agreement. The fair values of the
Company's financial instruments are estimated based on quoted market prices for
the same or similar issues.
The carrying amounts for accounts receivable and accounts payable
approximate fair value because of the short-term maturity of these financial
instruments.
(k) Insurance Coverage
The Company has established insurance programs to cover workers'
compensation, business automobile, general and products liability. These
programs have self-insured retentions of $1,000,000 per occurrence for workers'
compensation, general and products liability, and a self-insured retention
limit of $500,000 per occurrence for business automobile liability, with
certain maximum aggregate policy limits per claim year. Losses are accrued
based upon the Company's estimates of the aggregate liability for claims
incurred, claims incurred but not reported and based on Company experience.
The Company does not deem its self-insured retention exposure to be material.
(l) Reclassifications
Certain reclassifications have been made to previously issued financial
statements to conform to the current presentation.
(2) ACQUISITIONS
During 1997, the Company acquired IPCO Safety Products Company ("IPCO")
and Rutland Tool & Supply Co., Inc. ("Rutland"), to form the base for the
Company's Direct Industrial segment, ADI. Also, in connection with its carbon
dioxide business, the Company acquired Shell Land & Energy Company's ("Shell")
interest in unitized leases producing carbon dioxide, including Shell's 183
mile pipeline ("Northeast Jackson Dome"). The Company also made certain
related acquisitions of carbon dioxide distributors. In June 1997, the Company
acquired Carbonic Industries Corporation ("CIC"), in a merger.
Acquisitions have been recorded using the purchase method of accounting,
and, accordingly, results of their operations have been included in the
F-10
<PAGE> 44
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) ACQUISITIONS - (Continued)
Company's consolidated financial statements since the effective dates of the
respective acquisitions. Also, as discussed in Note 21, the Company has
accounted for the acquisition of subsidiary minority interests in 1997, 1996
and 1995 using the purchase method of accounting.
1997 - During 1997, the Company purchased 24 businesses. The largest of
these acquisitions and their effective dates included IPCO (April 1, 1996),
American Welding Supply (June 1, 1996), Rutland (September 1, 1996), Findley
Welding Supply (October 1, 1996), and Northeast Jackson Dome (December 1,
1996). The aggregate purchase price for these acquisitions amounted to
approximately $233 million. The purchase price for the remaining 19 businesses
amounted to approximately $76 million.
1996 - During 1996, the Company purchased 42 businesses. The largest of
these acquisitions and their effective dates included Tech-Weld, Inc. (April 3,
1995), Trinity Welding Supply, Inc. (May 1, 1995), Red-D-Arc, Limited (June 29,
1995), Capital Welding Supply, Inc. (August 1, 1996), Langdon Oxygen Company
(October 5, 1995), Acetylene Gas Company (January 1, 1996), Iatech Sales Co.
(January 1, 1996), Welders Equipment Company (February 1, 1996) and Braun
Welding Supply, Inc. (March 1, 1996). The aggregate purchase price for
these acquisitions amounted to approximately $164 million. The purchase price
for the remaining 33 businesses amounted to approximately $73 million.
1995--During 1995, the Company purchased 25 businesses. The largest of
these acquisitions and their effective dates included The Jimmie Jones Company
(August 1, 1994) and Post Welding Supply (November 1, 1994). The aggregate
purchase price for these acquisitions amounted to approximately $83 million.
The purchase price for the remaining 23 businesses amounted to approximately
$44 million.
In connection with the above business acquisitions, the total purchase
price, fair value of assets acquired, cash paid and liabilities assumed were as
follows:
Years Ended March 31,
___________________________
(In thousands) 1997 1996 1995
______________ ____ ____ ____
Cash paid . . . . . . . . . . . . . . . . . . $168,666 $142,776 $ 79,202
Issuance of Airgas common stock . . . . . . . 78,671 11,443 775
Notes issued to sellers . . . . . . . . . . . 30,104 24,242 11,340
Notes payable and capital leases assumed. . . 2,103 4,073 9,067
Other liabilities assumed and accrued
acquisition costs. . . . . . . . . . . . . . 29,733 54,223 22,935
______ ______ ______
Total purchase price allocated to assets
acquired. . . . . . . . . . . . . . . . . . $309,277 $236,757 $123,319
======= ======= =======
Included in the 1997 aggregate purchase price is the issuance of
approximately 3.4 million shares of the Company's common stock(which includes
approximately 2.4 million shares which were issued out of treasury stock),
issued in connection with the September 1996 acquisition of Rutland.
In connection with three acquisitions, the Company is required to issue
shares of Airgas common stock if the Airgas common stock price at certain dates
F-11
<PAGE> 45 AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) ACQUISITIONS - (Continued)
during fiscal 1999 is less than a previously established price. Shares of the
Company become issuable if the Airgas common stock price falls below a range of
$12.96 to $14.13 per share. At March 31, 1997, based on the Airgas common
stock price, no shares were contingently issuable. Subsequently issued common
stock will reduce additional paid in capital and increase common stock for the
par value of the additional number of shares of common stock.
The purchase price for business acquisitions and minority interests were
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Costs in excess of net assets acquired (goodwill) for
1997, 1996 and 1995 amounted to $144.0 million,$81.3 million and $40.8 million
respectively.
The following presents unaudited estimated pro forma operating results as
if the 1997 and 1996 acquisitions had been consummated on April 1, 1995. These
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisitions been
made as of April 1, 1995 or of results which may occur in the future.
Years Ended March 31,
_____________________
(In thousands except per share amounts) 1997 1996
_______________________________________ ____ ____
Net sales . . . . . . . . . . . . . . . . . . . $1,221,584 $1,158,591
Net earnings. . . . . . . . . . . . . . . . . . 21,463 34,404
Earnings per share: . . . . . . . . . . . . . . .31 .49
Subsequent to March 31, 1997, the Company has acquired six businesses,
including CIC, with aggregate annual sales of approximately $69 million for an
aggregate purchase price of approximately $82 million. In addition, the
Company has signed letters of intent for nine companies with aggregate annual
sales of $107 million for an aggregate purchase price of approximately $56
million.
(3) SPECIAL CHARGES
On December 23, 1996, the Company announced it was the victim of a
fraudulent breach of contract by a third-party supplier of refrigerant gas. In
connection with the fraud, the Company recorded a non-recurring pre-tax charge
during the fourth quarter of $26.4 million (approximately $17 million after
tax) for product losses and costs associated with the Company's investigation
into the fraud. The Company believes there will be recoveries, including cash
in bank accounts frozen under restraining orders, net assets of the refrigerant
supplier which breached the contract and insurance proceeds under Airgas' and
the refrigerant supplier's policies. The Company will continue to pursue
vigorously all possible sources of recovery. (See Note 19 for further
discussion of legal proceedings pending against the supplier).
The Company has decided to divest its ownership of a breathing air services
subsidiary and to restructure its welding machine rental operations. The
Company recorded a pre-tax, non-cash charge of approximately $5 million
(approximately $3.2 million after tax) related to the write-down of certain
machinery and equipment, goodwill and other intangible assets of two non-core,
distribution product-line businesses. The write-down was based on an
evaluation of the estimated fair value of the assets associated with these two
non-core businesses which indicated that these assets were impaired. Fair
F-12
<PAGE> 46
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(3) SPECIAL CHARGES - (Continued)
value was based on the estimated future undiscounted cash flows to be generated
from the sale of these assets. The sale of the breathing air subsidiary is
expected to be completed in the first quarter of fiscal 1998.
(4) EARNINGS PER SHARE
Primary and fully diluted earnings per share amounts were determined using
the Treasury Stock method.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes new standards for
computing and presenting earnings per share, effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
All prior periods will be restated to reflect the new Basic and Diluted
earnings per share amounts. The Company's Basic earnings per share is
essentially net income divided by the weighted shares outstanding, and the
Diluted earnings per share is not expected to be materially different than
currently reported earnings per share amounts. The Company will adopt SFAS No.
128 in the first quarter of fiscal 1998.
(5) INVENTORIES
Inventories consist of: March 31,
_______________________
(In thousands) 1997 1996
______________ ____ ____
Finished goods. . . . . . . . . . . . . . . . . . .$129,218 $85,626
Raw materials . . . . . . . . . . . . . . . . . . . 1,526 1,879
______ ______
130,744 87,505
Less reduction to LIFO cost . . . . . . . . . . . . (1,372) (1,343)
______ ______
$129,372 $86,162
====== ======
(6) PLANT AND EQUIPMENT
The major classes of plant and equipment, at cost, are as follows:
March 31,
_______________________
(In thousands) 1997 1996
______________ ____ ____
Land and land improvements . . . . . . . . . . . . $ 21,676 $ 20,066
Buildings and leasehold improvements . . . . . . . 66,659 58,153
Cylinders. . . . . . . . . . . . . . . . . . . . . 365,253 321,770
Machinery and equipment, including bulk tanks. . . 241,275 151,098
Transportation equipment . . . . . . . . . . . . . 39,264 33,724
Construction in progress . . . . . . . . . . . . . 1,956 1,517
_______ _______
$ 736,083 $586,328
======= =======
Depreciation, depletion and amortization of plant and equipment charged to
operations amounted to $39.1 million, $32.0 million and $26.3 million in 1997,
1996 and 1995, respectively.
F-13
<PAGE> 47
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(7) OTHER NON-CURRENT ASSETS
Other non-current assets include:
March 31,
_______________________
(In thousands) 1997 1996
______________ ____ ____
Investment in unconsolidated affiliates (Note 12). $ 64,992 $ 9,332
Noncompete agreements and other intangible
assets, at cost, net of accumulated
amortization of $59.8 million in 1997
and $46.7 million in 1996 . . . . . . . . . . . . 54,794 47,530
Other assets. . . . . . . . . . . . . . . . . . . . 12,471 4,086
_______ ______
$132,257 $60,948
======= ======
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include:
March 31,
_______________________
(In thousands) 1997 1996
______________ ____ ____
Cash overdraft. . . . . . . . . . . . . . . . . . . $ 14,746 $15,706
Insurance payable and related reserves. . . . . . . 5,224 5,297
Customer cylinder deposits. . . . . . . . . . . . . 8,185 7,058
Other accrued expenses and current liabilities. . . 59,508 44,218
______ ______
$ 87,663 $72,279
====== ======
The cash overdraft is attributable to the float of the Company's outstanding
checks.
F-14
<PAGE> 48 AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) INDEBTEDNESS
(a) Long-term debt consists of the following:
March 31,
_______________________
(In thousands) 1997 1996
______________ ____ ____
Revolving credit borrowings . . . . . . . . . . . . $311,877 $314,804
Medium-term notes . . . . . . . . . . . . . . . . . 225,000 --
Acquisition and investment notes. . . . . . . . . . 87,426 50,392
All other notes, at various rates and maturities. . 30,786 32,815
_______ _______
Total long-term debt. . . . . . . . . . . . . . . . 655,089 398,011
Less current installments . . . . . . . . . . . . . (25,158) (12,179)
_______ _______
Long-term debt, excluding current installments. . . $629,931 $385,832
======= =======
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 March 31, 1997, under the revolving credit facility,
$175 million of LIBOR-based borrowings were outstanding with effective interest
rates of 5.99%, and $107 million of money market based borrowings were
outstanding with effective interest rates of 5.88%.
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%. In March 1997, the Company
issued $75 million of unsecured notes due March 2004 at a fixed rate of 7.14%.
The proceeds from the medium-term note issuances were used to repay bank debt.
The Company has a C$50 million Canadian credit facility (US$37 million)
with various commercial banks which matures on November 14, 1998. At March 31,
1997, the Company had approximately C$41 million (US$30 million) in borrowings
outstanding under the facility with an effective interest rates of 4.8%,
resulting in unused availability under the facility of approximately C$9
million (US$7 million).
The Company also has unsecured line of credit agreements with various
commercial banks. At March 31, 1997, these agreements totaled $50 million,
under which the Company had no borrowings outstanding.
F-15
<PAGE> 49
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) INDEBTEDNESS - (Continued)
Acquisition notes represent notes issued to sellers of businesses acquired
and are repayable in periodic installments including interest at an average
rate of 7.5%. Some acquisition notes require balloon payments which are
included in the aggregate maturity schedule.
Certain of the Company's credit facility agreements contain restrictive
covenants which include the maintenance of a minimum equity level, maintenance
of certain financial ratios and restrictions on additional borrowings and
dividend payments.
The aggregate maturities of long-term debt for the five years ending March
31, 2003 and thereafter are as follows (in thousands):
Years Ending March 31, Aggregate Maturity
______________________ __________________
1998 . . . . . . . . . . . . . . . . . . . $ 25,158
1999 . . . . . . . . . . . . . . . . . . . 45,142
2000 . . . . . . . . . . . . . . . . . . . 17,713
2001 . . . . . . . . . . . . . . . . . . . 6,750
2002 . . . . . . . . . . . . . . . . . . . 349,021
2003 and thereafter. . . . . . . . . . . . 211,305
_________
$ 655,089
=========
The fair value of long-term debt as of March 31, 1997 was approximately $656
million based on current rates offered to the Company by financial institutions
for similar type instruments.
(b) Swap Agreements
In managing interest rate exposure, principally under the Company's
floating rate revolving credit facilities, the Company has entered into 23
interest rate swap agreements during the period from June 1992 through March
31, 1997, including two forward starting swaps. The interest rate swap
agreements are with major financial institutions having a total notional
principal amount of $358 million at March 31, 1997.
F-16
<PAGE>
<PAGE> 50
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) INDEBTEDNESS - (Continued)
Approximately $208 million of the swap agreements require fixed interest
payments based on an average effective rate of 6.49% for remaining periods
ranging between 1 and 8 years. Five swap agreements require floating rates
($149.5 million notional amount at 5.72% at March 31, 1997). The effect of the
swap agreements was to increase interest expense $1.4 million and $1.3 million
in 1997 and 1996, respectively. 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 March 31, 1997, approximately
$18.7 million of such payments were included in other non-current liabilities.
The Company continually monitors its positions and the credit ratings of
its counterparties, and does not anticipate nonperformance by the
counterparties. The fair market value of these swaps was $807 thousand below
their carry value at March 31, 1997.
The aggregate maturities of the Company's interest rate swaps by type of
swap for the five years ending March 31, 2002 and thereafter are as follows (in
thousands):
Notional Principal Amounts
__________________________
Years Ending March 31, Pay-Fixed Receive-Fixed
______________________ _________ _____________
1998 . . . . . . . . . . . . . $ 30,000 $ 0
1999 . . . . . . . . . . . . . 12,500 7,500
2000 . . . . . . . . . . . . . 26,113 12,000
2001 . . . . . . . . . . . . . 66,113 0
2002 . . . . . . . . . . . . . 27,500 50,000
2003 and thereafter. . . . . . 46,113 80,000
_______ ______
$208,339 $149,500
======= ======
(10) STOCKHOLDERS' EQUITY
(a) Common Stock
On March 22, 1996, the Company's Board of Directors declared a two-for-one
stock split to stockholders of record on April 1, 1996, payable on April 15,
1996. All earnings per share data reflects this two-for-one stock split.
(b) Preferred Stock and Redeemable Preferred Stock
The Company is authorized to issue 20 million shares of preferred stock.
Of the 20 million shares authorized, 200,000 shares have been designated as
Series A Junior Participating Preferred Stock and 200,000 shares have been
designated as Series B Junior Participating Preferred Stock (see Note 10(e) for
further discussion). At March 31, 1997 and 1996, no shares of the preferred
stock were outstanding. The preferred stock may be issued from time to time by
the Board of Directors in one or more series, and the Board of Directors is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, rights and terms of redemption, liquidation preferences, and any other
rights, preferences, privileges and restrictions of any series of Preferred
Stock, and the number of shares constituting each such series and designation
thereof.
F-17
<PAGE> 51 AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(10) STOCKHOLDERS' EQUITY - (Continued)
Additionally, the Company is authorized to issue 30,000 shares of
redeemable preferred stock. At March 31, 1997 and 1996, no shares were
outstanding.
(c) Treasury Stock
In December 1996, the Board of Directors authorized the repurchase of up
to 1,600,000 shares of Airgas common stock, and on April 16, 1997, the Board of
Directors authorized the repurchase of up to 1,000,000 additional shares. The
Company purchased 800,000 shares of Airgas common stock through March 31, 1997
Subsequent to March 31, 1997 and through May 30, 1997, the Company repurchased
1,154,000 shares, leaving a total of 646,000 shares available under the
repurchase program. The Company has reissued 1,102,865 shares of Treasury
stock in 1997 in connection with its acquisition program. When treasury shares
are reissued, the Company uses an average cost method and the excess of the
repurchase cost over the reissuance price is treated as a charge to additional-
paid-in-capital. The Company's treasury shares will be used to fund
acquisitions and employee benefit programs and will be acquired in open market
transactions, from time-to-time, depending on market conditions.
(d) Stock Purchase Warrants
The Company and the Chairman of the Company were parties to a Stock and
Warrant Issuance Agreement, as amended (the "Warrant Agreement"), which was
entered into in connection with the Company's acquisition of US Airgas, Inc.,
of which the Chairman was the majority shareholder, in May 1986. Pursuant to
the Warrant Agreement, the Chairman received warrants to purchase a total of
14,127,432 shares of the Company's common stock. Subsequent to the grant
dates, the Chairman transferred warrants to purchase 2,976,800 shares of common
stock to employees of the Company and to certain other individuals. As of May
1, 1996, all warrants had been exercised or had expired.
The following table summarizes the activity of the stock purchase warrants
during the three years ended March 31, 1997.
Number Price Per
of Shares Share
__________ _________
March 31, 1995
Outstanding, beginning of year . . . . . . . . 1,624,280 $ 1.68 -$ 2.19
Exercised. . . . . . . . . . . . . . . . . . . (114,800) 1.76 - 2.19
March 31, 1996
Outstanding, beginning of year . . . . . . . . 1,509,480 1.76 - 2.19
Exercised. . . . . . . . . . . . . . . . . . . (1,252,568) 1.76 - 2.19
Cancelled. . . . . . . . . . . . . . . . . . . (12,712)
March 31, 1997
Outstanding, beginning of year . . . . . . . . 244,200 1.76 - 2.19
Exercised. . . . . . . . . . . . . . . . . . . (244,200) $ 1.76 -$ 2.19
Outstanding, end of year . . . . . . . . . . . 0
(e) Shareholder Rights Plan
Effective April 1, 1997, the Board of Directors adopted a new stockholder
rights plan(the "Plan"). Pursuant to the Plan, the Board declared a dividend
distribution of one right for each share of common stock outstanding on April
29, 1997. Each right entitles the holder to purchase from the company one one-
thousandth of a share Series B Junior Participating Preferred Stock at an
initial exercise price of $100 per share.
F-18
<PAGE> 52
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(10) STOCKHOLDERS' EQUITY - (Continued)
Rights become exercisable only following the acquisition by a person or
group of 15 percent (or 20 percent in the case of the Chairman and certain of
his affiliates) or more of the Company's common stock or after the announcement
of a tender offer or exchange offer to acquire 15 percent (or 20 percent in the
case of the Chairman and certain of his affiliates) or more of the outstanding
common stock. If such a person or group acquires 15 percent or more (or 20
percent or more, as the case may be) of the common stock, each right (other
than such person's or group's rights, which will become void) will entitle the
holder to purchase, at the exercise price, common stock having a market value
equal to twice the exercise price. In certain circumstances, the rights may be
redeemed by the Company. If not redeemed, they will expire on April 1, 2007.
On August 1, 1988, the Company Board of Directors adopted a preferred
share purchase rights plan (the "1988 Plan") that entitled Company stockholders
to purchase from the Company a unit consisting of one-hundredth of a share of
Series A Junior Participating Preferred Shares, or a combination of securities
and assets of equivalent value, at a purchase price of $65.00 per unit, subject
to adjustment. The 1988 Plan will expire in August 1998. In view of, among
other things, the impending expiration of the 1988 Plan, the Board adopted the
Plan. Pending its expiration in 1998, the Board amended the 1988 Plan to
provide that it will not take effect if the Plan is triggered.
(11) STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", effective for fiscal years beginning after December 15, 1995.
This statement establishes financial accounting and reporting standards for
stock-based employee compensation plans, which include the Company's stock
option plans and employee stock purchase plan.
The Company has elected to continue to account for its stock-based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued", as permitted by SFAS 123. Accordingly, no
compensation expense has been recognized for its stock option plans and its
stock purchase plan. However, pro forma information regarding net income and
earnings per share is required by SFAS 123. Had compensation expense for the
Company's stock-based compensation plans been determined based on the fair
value at the grant date in accordance with SFAS 123, the Company's pro forma
net income and earnings per share for 1997 and 1996 would be as follows (in
thousands, except per share data):
F-19
<PAGE> 53
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Years Ended March 31,
_____________________
1997 1996
_______ ________
Net income As reported $23,266 $39,720
Pro forma $20,028 $37,925
Earnings per share As reported $ .34 $ .60
Pro forma $ .29 $ .57
At March 31, 1997, the Company had three stock-based compensation plans, which
are described below.
(a) 1984 Stock Option Plan
The Company has a stock option plan for officers and key employees. Under
the 1984 Stock Option Plan, the Company has reserved 14,080,000 shares.
Options are granted on terms and conditions determined by a committee of the
Board of Directors. At March 31, 1997, 3,161,941 options were available for
issuance with 785,685 options granted in fiscal 1997 with an exercise price
equal to the market price at the date of grant. Options are generally granted
in May each year, vest 25% annually and have a maximum term of ten years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for 1997 and 1996 option grants, respectively:
expected volatility of 38.5% for both periods, risk-free interest rate of 6.42%
and 6.46%, and expected life of 4.37 years for both periods. The weighted
average fair value of the options granted during 1997 and 1996 was $8.95 and
$5.11, respectively.
The following table summarizes the activity of the plan during the three
years ended March 31, 1997:
Number Price Per
of Shares Share
__________ _________
March 31, 1995
Outstanding, beginning of year . . . . . . . . 5,250,900 $ 1.46 -$ 8.57
Granted. . . . . . . . . . . . . . . . . . . . 1,004,600 11.32 - 14.71
Exercised. . . . . . . . . . . . . . . . . . . (424,060) 1.46 - 7.89
Expired. . . . . . . . . . . . . . . . . . . . (2,500) 3.30 - 6.32
March 31, 1996
Outstanding, beginning of year . . . . . . . . 5,828,940 1.83 - 14.71
Granted. . . . . . . . . . . . . . . . . . . . 974,020 11.44 - 17.31
Exercised. . . . . . . . . . . . . . . . . . . (589,010) 1.83 - 11.32
Expired. . . . . . . . . . . . . . . . . . . . (14,490) 3.30 - 13.32
March 31, 1997
Outstanding, beginning of year . . . . . . . . 6,199,460 1.83 - 17.31
Granted. . . . . . . . . . . . . . . . . . . . 785,685 11.44 - 23.25
Exercised. . . . . . . . . . . . . . . . . . . (530,390) 1.83 - 17.31
Expired. . . . . . . . . . . . . . . . . . . . (173,080) 3.30 - 22.00
Outstanding, end of year . . . . . . . . . . . 6,281,675 $ 1.83 -$23.25
Options for 4,077,069 and 3,497,340 shares were exercisable at March 31, 1997
and 1996, respectively.
F-20
<PAGE> 54 AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(b) Board of Directors Stock Option Plan
The Company also maintains a stock option plan covering directors who are not
employees, which has 800,000 shares reserved. At March 31, 1997, 368,000
options for issuance, with 32,000 options granted in fiscal 1997.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for fiscal 1997 and 1996 option grants, respectively: expected
volatility of 37.8% for both periods, risk-free interest rate of 6.42% and
6.46%, and expected life of 5.35 years for both periods. The weighted average
fair value of the stock options granted during 1997 and 1996 was $8.68 and
$6.10, respectively.
The following table summarizes the activity of the plan during the three years
ended March 31, 1997:
Number Price Per
of Shares Share
__________ ____________
March 31, 1995
Outstanding, beginning of year . . . . . . . . 272,000 $ 2.10 -$ 8.57
Granted. . . . . . . . . . . . . . . . . . . . 40,000 13.82
March 31, 1996
Outstanding, beginning of year . . . . . . . . 312,000 2.10 - 13.82
Granted. . . . . . . . . . . . . . . . . . . . 40,000 13.50
March 31, 1997
Outstanding, beginning of year . . . . . . . . 352,000 2.10 - 13.82
Granted. . . . . . . . . . . . . . . . . . . . 32,000 19.25
Exercised. . . . . . . . . . . . . . . . . . . (98,000) 2.09 - 13.82
Outstanding, end of year . . . . . . . . . . . 286,000 $ 2.09 - $19.25
Options for 286,000 and 352,000 shares were exercisable at March 31, 1997 and
1996, respectively.
The following table summarizes information about options outstanding and
exercisable for the 1984 Stock Option Plan and the Board of Directors Stock
Option Plan at March 31, 1997:
Options Outstanding
____________________________________
Range of
Weighted Average Number Exercise
Remaining Life Outstanding Prices
________________ ___________ _________
4.15 692,370 $ 1.83 - $ 1.83
2.50 1,024,800 1.95 - 2.36
4.25 32,000 2.89 - 3.30
5.12 956,450 3.30 - 3.30
5.36 47,700 3.48 - 4.16
6.12 823,840 6.31 - 6.31
6.73 854,015 6.32 - 11.32
8.15 669,245 11.44 - 13.50
6.81 678,750 13.69 - 17.31
9.18 788,505 18.06 - 23.25
____ _________ _________________
5.91 6,567,675 $1.83 - $23.25
==== ========= =================
F-21
<PAGE> 55
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Number of Options Weighted Average
Exercisable Exercise Price
__________________ __________________
692,370 $ 1.83
1,024,800 2.24
32,000 2.97
956,450 3.30
47,700 4.05
593,700 6.31
505,155 9.59
188,144 13.34
290,500 15.19
32,250 19.24
_________ ______
4,363,069 $5.30
========= ======
(c) 1994 Employee Stock Purchase Plan
Under the 1994 Employee Stock Purchase Plan (the "ESPP Plan"), the Company
has established an employee stock purchase plan to encourage and assist
employees to acquire equity interest in the Company. The ESPP Plan is
authorized to issue up to 2,000,000 shares of Airgas, Inc. common stock.
Generally, employees may elect to have up to 15% of their annual gross earnings
withheld to purchase Airgas, Inc. common stock at 85 to 95 percent of the
market price of the common stock, depending on base salary levels. Market
value under the ESPP Plan is either the employees' enrollment date market value
or the quarterly purchase date market value, whichever is lower. An employee
may lock-in a purchase price for up to 27 months. The ESPP Plan is designed to
comply with the requirement of Section 423 of the Internal Revenue Code. Under
the ESPP Plan, the Company issued 395,889, 368,194, and 300,204 shares at an
average purchase price of $13.02, $9.22 and $9.02 per share during 1997, 1996,
and 1995, respectively.
Compensation cost under SFAS No. 123 is estimated for the fair value of
the employees' option to purchase shares of common stock, which was estimated
using the Black-Scholes model with the following assumptions for fiscal 1997
and 1996, respectively: expected volatility of 38% for both periods, risk-free
interest rate of 6.2% and 5.7%, and expected term of 27 months for both
periods. The weighted average fair value of the purchase options granted in
fiscal 1997 and 1996 was $6.51 and $4.57, respectively.
(12) INVESTMENT IN UNCONSOLIDATED AFFILIATES
On June 28, 1996, based on the terms of a joint venture agreement, the
Company acquired 47% of the voting capital stock of National Welders Supply
Company, Inc.("National Welders"), for a payment in cash and notes of
approximately $47.6 million. National Welders is a premier distributor of
industrial, medical and specialty gases and related equipment based in
Charlotte, North Carolina. The purpose of the joint venture is to carry on the
business of National Welders, enhanced by its association with the Company and
its acquisition opportunities in the area currently served by National Welders.
F-22
<PAGE> 56
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At March 31, 1997, the Company's investment in all other unconsolidated
affiliates totaled approximately $15 million and consists of a 55% interest in
Elkem-American Carbide Company (U.S.), a 25.5% interest in Bhoruka Gases, Ltd.
(India) and a 25.5% interest in Superior Air Products, Ltd. (India). The
Company accounted for these investments by the equity method of accounting.
The Company's share of earnings from all unconsolidated affiliates was $2.3
million, $1.4 million and $840 thousand for the years ended March 31, 1997,
1996 and 1995, respectively. Equity in earnings from Elkem American Carbide
Company of $1.4 million, $1.2 million and $840 thousand in 1997, 1996, and 1995
are included in Manufacturing net sales. As of March 31, 1997, the investment
in unconsolidated affiliates includes goodwill of approximately $30 million
which is being amortized into income over 40 years.
A summary of financial information for its investments in unconsolidated
affiliates for the fiscal year ended March 31, 1997 is as follows:
(In thousands) March 31, 1997
______________
Current Assets $ 45,936
Non-Current Assets 132,240
_________
Total Assets 178,176
=========
Current Liabilities 27,543
Non-Current Liabilities 92,598
Mandatory Redeemable Preferred Stock 57,577
Stockholders' Equity 458
_________
Total Liabilities and Stockholders' Equity $178,176
=========
Year ended
March 31, 1997
_________________
Net Sales $134,972
Cost of Sales 95,334
________
Gross Profit 39,638
========
Operating Income 7,742
========
Income before taxes 8,691
========
Net income 6,243
Preferred stock dividends and equity
adjustments $ (3,929)
________
Company share of net income $ 2,314
========
F-23
<PAGE> 57 AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(13) INTEREST EXPENSE, NET
Interest expense, net, consists of:
Years Ended March 31,
___________________________
(In thousands) 1997 1996 1995
______________ ____ ____ ____
Interest expense. . . . . . . . . . . . . . . $ 41,777 $25,854 $18,476
Interest and finance charge income. . . . . . (2,025) (992) (851)
______ ______ ______
$ 39,752 $24,862 $17,625
====== ====== ======
(14) OTHER INCOME, NET
Other income, net, consists of:
Years Ended March 31,
___________________________
(In thousands) 1997 1996 1995
______________ ______ ____ ____
Gain on sale of investment in CBI
Industries, Inc. . . . . . . . . . . . . . . $ -- $ -- $ 560
Gain on sale of medical home-care business. . 770 -- --
Other income,net . . . . . . . . . . . . . . 902 782 507
______ _____ ___
$ 1,672 $ 782 $1,067
====== ===== ===
(15) INCOME TAXES
Pre-tax earnings were derived from the following sources:
Years Ended March 31,
___________________________
(In thousands) 1997 1996 1995
______________ ____ ____ ____
United States . . . . . . . . . . . . . . . . $ 44,199 $66,810 $54,239
Foreign . . . . . . . . . . . . . . . . . . . 147 1,432 1,134
______ ______ ______
$ 44,346 $68,242 $55,373
====== ====== ======
Income tax expense consisted of:
Years Ended March 31,
___________________________
(In thousands) 1997 1996 1995
______________ ____ ____ ____
Current:
Federal . . . . . . . . . . . . . . . . . $ 17,337 $14,657 $ 9,997
Foreign . . . . . . . . . . . . . . . . . 1,224 699 573
State . . . . . . . . . . . . . . . . . . 2,689 2,298 1,775
______ ______ ______
21,250 17,654 12,345
______ ______ ______
Deferred:
Federal . . . . . . . . . . . . . . . . . . (1,483) 9,660 9,829
Foreign . . . . . . . . . . . . . . . . . . 634 34 47
State . . . . . . . . . . . . . . . . . . . 679 1,174 1,673
______ ______ ______
(170) 10,868 11,549
______ ______ ______
$ 21,080 $28,522 $23,894
====== ====== ======
F-24
<PAGE> 58
(15) INCOME TAXES - (Continued)
Significant differences between taxes computed at the federal statutory
rate and the provision for income taxes were:
Years Ended March 31,
___________________________
1997 1996 1995
____ ____ ____
Taxes at U.S. federal statutory rate . . . . . . 35.0% 35.0% 35.0%
Increase in income taxes resulting from:
State income taxes, net of federal benefit . . . 3.2% 3.3 4.0
Amortization of non-deductible goodwill. . . . . 2.6% 1.8 1.8
Special charges (Note 3) . . . . . . . . . . . . 3.7% -- --
Sale of medical home-care business . . . . . . . 1.7% -- --
Other, net . . . . . . . . . . . . . . . . . . . 1.3% 1.7 2.4
____ ____ ____
47.5% 41.8% 43.2%
==== ==== ====
The tax effects of cumulative temporary differences that gave rise to the
significant portions of the deferred tax liability and deferred tax asset were
as follows:
March 31,
_______________________
(In thousands) 1997 1996
______________ ____ ____
Deferred Tax Assets:
____________________
Inventories . . . . . . . . . . . . . . . . . . $ 2,666 $ 1,396
Accounts receivable . . . . . . . . . . . . . . 1,123 553
Deferred rental income. . . . . . . . . . . . . 581 809
Insurance reserves. . . . . . . . . . . . . . . 1,793 1,339
Special charges . . . . . . . . . . . . . . . . 9,586 --
Other reserves. . . . . . . . . . . . . . . . . 3,028 2,487
AMT credit carryforwards. . . . . . . . . . . . -- 2,184
Intangible assets . . . . . . . . . . . . . . . 1,207 --
Other . . . . . . . . . . . . . . . . . . . . . 1,874 1,151
______ ______
21,858 9,919
______ ______
Deferred Tax Liabilities:
_________________________
Property and equipment. . . . . . . . . . . . . (106,331) (91,371)
Intangible assets . . . . . . . . . . . . . . . -- (605)
Other. . . . . . . . . . . . . . . . . . . . . (5,385) (3,412)
_______ ______
(111,716) (95,388)
______ ______
Net Deferred Tax Liability . . . . . . . . . . . $(89,858) $(85,469)
====== ======
The Company has recorded tax benefits amounting to $4.2 million, $7.6
million, and $1.9 million in 1997, 1996 and 1995, respectively, resulting from
the exercise of stock options and warrants. This benefit has been recorded in
capital in excess of par value.
F-25
<PAGE> 59
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(15) INCOME TAXES - (Continued)
The Internal Revenue Service is currently conducting an examination of
the Company's federal income tax returns for the years ended March 31, 1993 and
1994. Management believes that the results of this examination will not have a
material effect on the Company's earnings, financial condition, or liquidity.
(16) BENEFIT PLANS
(a) Pension and Profit Sharing Plans
The Company has a defined contribution 401(k) plan covering substantially
all full-time employees. Under the terms of the plan, the Company makes
matching contributions up to two percent of participants' wages plus additional
discretionary profit sharing contributions based upon the profitability of the
Company. Amounts expensed under the plan for 1997, 1996 and 1995 were $5.9
million, $5.1 million and $4.7 million, respectively.
During 1993, the Company authorized termination of two defined benefit
pension plans effective December 31, 1992. At December 31, 1996, the plans'
projected benefit obligations approximate the plans' net assets available for
benefits. The settlement of the vested benefit obligations by the purchase of
nonparticipating annuity contracts or lump-sum payments for covered employees
is not expected to result in a significant gain or loss.
Certain subsidiaries of the Company participate in multi-employer pension
plans which provide defined benefits to union employees. Contributions are
made to the plans in accordance with negotiated labor contracts. The Company
has not taken any action to terminate or withdraw from these plans. Management
believes that the Company's liability, if any, for multi-employer plan
withdrawal liability will not have a material effect on the Company's financial
position, results of operations, or liquidity. Amounts expensed under these
plans for 1997, 1996 and 1995 were $751 thousand, $482 thousand and $418
thousand respectively.
F-26
<PAGE> 60
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(16) BENEFIT PLANS - (Continued)
(b) Other Employee Benefits
The Company sponsors a multi-employer post retirement medical benefit plan
for certain employees of one subsidiary under a collective bargaining
agreement. The net postretirement benefit expense related to this plan was
$106 thousand, $98 thousand and $88 thousand for the years ended March 31,
1997, 1996 and 1995, respectively. The Company's unfunded accumulated
postretirement benefit obligation("APBO") was $962 thousand and $896 thousand
at March 31, 1997, and 1996, respectively.
In determining the APBO, the discount rate used to estimate the actuarial
present value of other postretirement benefits was 7.75% and 7.50% at March 31,
1997 and 1996, respectively. The assumed rate of increase in the health care
cost trend rate for employees less than age 65 was 6.75% and 8.25% for March
31, 1997 and 1996, declining gradually to 5.25%, respectively, over the next
four years. For employees 65 and older, the assumed rate of increase was 5.71%
and 6.16% for March 31, 1997 and 1996, declining gradually to 5.25%,
respectively, over the next four years. A 1% increase in the healthcare cost
trend rate would have increased net postretirement benefit expense
approximately $21 thousand and the APBO approximately $142 thousand at March
31, 1997.
(17) RELATED PARTIES
A member of the Company's board of directors is the president and CEO of
National Welders (See Note 12). During the years ended March 31, 1997, 1996
and 1995, National Welders paid $1.1 million, $987 thousand and $914 thousand,
respectively, to a joint venture of the Company for the purchase of calcium
carbide. In addition, National Welders paid $574 thousand, $604 thousand and
$546 thousand to the Company for other gas purchases in 1997, 1996 and 1995,
respectively.
F-27
<PAGE> 61
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(18) LEASES
The Company leases certain distribution facilities and equipment under
long-term operating leases with varying terms. Most leases contain renewal
options and in some instances, purchase options. Rentals under these long-term
leases for the years ended March 31, 1997, 1996 and 1995, amounted to $24.0
million, $17.8 million and $14.5 million, respectively. At March 31, 1997, the
Company had a contingent guarantee of $3.8 million related to equipment under
such leases. Additionally, the Company leases certain operating facilities at
market rates from employees of the Company who were previous owners of
businesses acquired.
The Company has entered into certain operating leases for real estate
with a trust established by a commercial bank. The trust is committed to
purchase real estate properties up to an aggregate amount of $25 million. The
trust holds title to the properties and leases the properties to the Company.
The rental payments are based on LIBOR plus an applicable margin and the cost
of the property acquired by the trust. The Company has entered into interest
rate swap agreements in a notional principal amount of $10 million to hedge the
effects of fluctuations in the Libor based rental rate. At the expiration of
the leases in 1999, the Company has the option to purchase the real properties
at fair value or assist in the sale of the properties to a third party. The
Company intends to repay the commercial bank in the first quarter of fiscal
1998 funds advanced under the existing trust of approximately $10.9 million
related to the construction of air separation plants. Excluding the air
separation plants, the Company has guaranteed a portion of the debt outstanding
against these properties in the event the proceeds of a sale are not sufficient
to cover the trust's investment in the properties. At March 31, 1997, the
Company had a contingent guarantee of approximately $10.7 million related to
these leased facilities.
At March 31, 1997, future minimum lease payments under noncancelable
operating leases are as follows: (in thousands)
____________
1998 . . . . . . . . . . . . . . . . . . $26,016
1999 . . . . . . . . . . . . . . . . . . 20,547
2000 . . . . . . . . . . . . . . . . . . 16,447
2001 . . . . . . . . . . . . . . . . . . 12,551
2002 . . . . . . . . . . . . . . . . . . 8,989
2003 and thereafter. . . . . . . . . . . 15,137
______
$99,687
======
(19) COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal and regulatory 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 consolidated financial position, results of operations or liquidity.
F-28
<PAGE> 62
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(19) COMMITMENTS AND CONTINGENCIES - (Continued)
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 by the Company in connection with the Company's formation of a joint
venture with National Welders. Praxair is seeking compensatory damages in
excess of $100 million and punitive damages. On February 24, 1997, the court
entered an order denying the Company's motion to dismiss for forum non
conveniens. The Company has filed a petition for writ of mandamus with the
Alabama Supreme court requesting that the lower court's order be vacated or set
aside. The Company believes that Praxair's claims are without merit and
intends to defend vigorously against such claims.
On September 9, 1996, the Company filed suit against Praxair in the Court
of Common Pleas of Philadelphia County, Pennsylvania. The complaint alleges
breach of contract, fraud, conversion and misappropriation of trade secrets
with respect to an agreement between Praxair and the Company, pursuant to which
Praxair induced the Company to provide Praxair valuable information and
conclusions developed by the Company concerning CBI Industries, Inc. ("CBI") in
exchange for Praxair's promise not to acquire CBI without the Company's
participation. The Company has alleged that it became entitled, pursuant to
such agreement, to acquire certain of CBI's assets having a value in excess of
$800 million. The Company is seeking compensatory and punitive damages. On
January 2, 1997, the court entered an order overruling Praxair's preliminary
objections to the Company's complaint and ordering Praxair to file an answer to
the complaint. Praxair has since filed an answer and asserted various
defenses.
On December 23, 1996, the Company had reported that it had been a victim
of a fraudulent breach of contract by a supplier. On February 12, 1997, the
Company filed a lawsuit in the United States District Court for the Southern
District of Georgia against Discount Auto Parts, Inc. ("Discount"), an employee
of Discount, and certain other businesses and individual defendants, alleging
that Discount and the other defendants engaged in racketeering activity
involving the fraudulent sale of smuggled and counterfeit R-12 refrigerant gas.
The Company's complaint alleges that the racketeering activity of the
defendants caused damages to the Company in an amount not less than $20
million. The complaint seeks treble damages under the Federal RICO and Georgia
RICO statutes, as well as monetary damages under other counts alleging fraud,
conspiracy and related wrongful conduct. (See Note 3 for discussion of special
charges recorded in connection with the fraud.
F-29
<PAGE> 63
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(20) CASH FLOWS
Cash paid for interest expense and income taxes was as follows:
Years Ended March 31,
___________________________
(In thousands) 1997 1996 1995
______________ ______ ____ ____
Interest . . . . . . . . . . . . . . . . . . . $ 38,993 $25,107 $19,011
Income taxes (net of refunds). . . . . . . . . 13,254 10,325 11,411
====== ====== ======
The total purchase price, fair value of assets acquired, cash paid and
liabilities assumed for business acquisitions is presented in Note 2.
During 1997 and 1996 the Company entered into capital lease obligations
for approximately $567 thousand and $912 thousand, respectively.
(21) MINORITY INTEREST IN SUBSIDIARIES
Minority interests in subsidiaries represent the minority shareholders'
proportionate share of the equity and the results of operations of certain
subsidiaries. The Company sold minority interests in certain of its
subsidiaries to employees based on the estimated fair market value of the
subsidiary shares. These sales of subsidiary shares were accounted for as
capital transactions and, therefore, no gain or loss was recorded. Under the
terms of exchange rights agreements between the Company and minority
shareholders, the Company, under certain circumstances, may require or permit
exchange of the minority interests of a subsidiary for common stock of the
Company. The agreements provide the minority shareholders with the right to
exchange their subsidiary shares for common stock of the Company at certain
exchange dates designated by the Board of Directors. Each exchange will be
based on the fair value of the subsidiary's shares and the market price of the
Company's common stock as of a valuation date designated by the Board of
Directors.
On December 31, 1996 and August 31, 1995, in connection with optional
exchanges, certain minority shareholders elected to exchange their minority
interests for an aggregate of 76,556 and 258,116 shares of common stock,
respectively. The market price of the Company's common stock on December 31,
1996 and August 31, 1995 was $22.00 and $13.75 per share, respectively. The
acquisition of the minority interests has been recorded using the purchase
method of accounting.
(22) SUMMARY BY BUSINESS SEGMENT
The Company's operations are conducted principally in North America
through three related business segments: 1) the distribution of industrial,
medical and specialty gases, and related equipment (the "Distribution"
segment); 2) the distribution of industrial, safety and environmental supplies
and metal working and industrial tools and supplies (the "ADI" segment); and 3)
the manufacture of products for the industrial gas and metals industries (the
"Manufacturing" segment). The Distribution segment operates through the
Company's subsidiaries which have locations in 41 states, Canada and Mexico.
ADI distributes products to its customers utilizing outbound telemarketing,
direct mail and catalogs. The Manufacturing segment's products include nitrous
oxide, a gas with applications in the medical, food packaging and certain high
technology electronic industries and calcium carbide, carbon products for the
F-30
<PAGE> 64
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
production of acetylene gas and for the non-ferrous metal industry, and carbon
dioxide, which is used in refrigeration, food processing, beverage carbonation,
chemical processing, crude oil recovery, metal fabrication and agricultural
fumigations.
Total export sales amounted to approximately $7.5 million and $4.3 million
in 1997 and 1996, respectively.
(In thousands) Distribution ADI Manufacturing Total
______________ ____________ _____ ___________ _____
1997
Net sales . . . . . . . . . . . .$1,018,704 $ 99,216 $ 40,974 $1,158,894
Intersegment Sales . . . . . . . . -- 967 1,464 2,431
Operating income . . . . . . . . . 71,146 3,076 8,063 82,285
Assets . . . . . . . . . . . . . . 1,084,939 138,059 68,033 1,291,031
Depreciation and amortization. . . 58,059 2,984 1,448 62,491
Additions to plant and equipment
excluding business acquisitions . 69,934 669 3,755 74,358
1996
Net sales . . . . . . . . . . . .$ 801,552 $ -- $ 36,592 $ 838,144
Intersegment Sales . . . . . . . . -- -- 997 997
Operating income . . . . . . . . . 86,130 -- 6,855 92,985
Assets . . . . . . . . . . . . . . 846,129 -- 37,513 883,642
Depreciation and amortization. . . 44,386 -- 1,376 45,762
Additions to plant and equipment
excluding business acquisitions. . 39,755 -- 1,481 41,236
1995
Net sales. . . . . . . . . . . . . $ 654,381 $ -- $ 33,602 $ 687,983
Intersegment sales . . . . . . . . -- -- 862 862
Operating income . . . . . . . . . 66,521 -- 6,079 72,600
Assets . . . . . . . . . . . . . . 613,320 -- 32,317 645,637
Depreciation and amortization. . . 35,548 -- 1,320 36,868
Additions to plant and equipment
excluding business acquisitions. . 35,961 -- 751 36,712
F-31
<PAGE> 65
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(22) SUMMARY BY BUSINESS SEGMENT - (continued)
Corporate operating expenses are allocated between the Company's
Distribution, ADI and Manufacturing business segments based on relative sales
dollars.
(23) SUPPLEMENTARY INFORMATION (UNAUDITED)
Summary By Quarter
This table summarizes the unaudited results of operations for each quarter
of 1997 and 1996:
(In thousands, except per share data) First Second Third Fourth (c)
_____________________________________ _____ ______ _____ __________
1997
Net sales . . . . . . . . . . . . . . . $274,098 $278,712 $297,203 $308,881
Operating income (loss) . . . . . . . . 27,321 29,008 29,379 (3,423)
Net earnings (loss) . . . . . . . . . . 11,150 11,310 10,960 (10,154)
Net earnings (loss) per share (a) . . . $ .17 .17 .16 (.15)
1996
Net sales . . . . . . . . . . . . . . . $194,272 $199,030 $208,549 $236,293
Operating income. . . . . . . . . . . . 22,037 22,144 22,984 25,820
Net earnings. . . . . . . . . . . . . . 9,454 9,335 9,817 11,114
Net earnings per share (a), (b):. . . . $ .15 $ .14 $ .15 $ .17
__________________
(a) Earnings per share calculations for each of the quarters are based on the
weighted average number of shares outstanding in each period. Therefore,
the sum of the quarters do not necessarily equal the full year earnings per
share.
(b) See Notes 4 and 10 to the Company's consolidated financial statements for
information regarding earnings per share calculations and adjustment for
the stock split effective April 15, 1996.
(c) See Note 3 to the Company's consolidated financial statements for
information regarding a special charge of approximately $31.4 million
recorded in the fourth quarter of fiscal 1997.
F-32
<PAGE> 66
SCHEDULE II
CONSOLIDATED
AIRGAS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 1997, 1996 and 1995
(In thousands of dollars)
Column A Column B Column C
________ ________ ________
Additions
_________
Charged
Balance at Charged to (Credited)
Beginning Cost and to Other
Description of Period Expense Accounts
____________ _________ __________ ____________
1997 Accounts Receivable --
Allowance for doubtful accounts . . $ 3,396 $ 3,860 $ 1,081 (1)
Inventory reserves. . . . . . . . . 6,217 298 2,490
Insurance reserves. . . . . . . . . 5,297 27,821 (1,750)
1996 Accounts Receivable --
Allowance for doubtful accounts . . $ 4,161 $ 2,719 $ 1,313 (1)
Inventory reserves. . . . . . . . . 5,490 (241) 968
Insurance reserves. . . . . . . . . 6,304 19,510 262
1995 Accounts Receivable --
Allowance for doubtful accounts . . $ 4,207 $ 3,102 $ 1,033 (1)
Inventory reserves. . . . . . . . . 4,666 (193) 1,017
Insurance reserves. . . . . . . . . 5,341 17,038 132
(COLUMNS CONTINUED ON NEXT PAGE)
F-33
<PAGE> 67
SCHEDULE II
CONSOLIDATED
AIRGAS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 1997, 1996 and 1995
(In thousands of dollars)
(Columns Continued)
Column A Column D Column E
________ ________ ________
Balance
at End of
Description Deductions Period
____________ ______________ ________
1997 Accounts Receivable --
Allowance for doubtful accounts . . . $ (3,894) $ 4,443
Inventory reserves. . . . . . . . . . -- (2) 9,005
Insurance reserves. . . . . . . . . . (26,144) 5,224
1996 Accounts Receivable --
Allowance for doubtful accounts . . . $ (4,797) (2) $ 3,396
Inventory reserves. . . . . . . . . . -- 6,217
Insurance reserves. . . . . . . . . . (20,779) 5,297
1995 Accounts Receivable --
Allowance for doubtful accounts . . . $ (4,181) (2) $ 4,161
Inventory reserves. . . . . . . . . . -- 5,490
Insurance reserves. . . . . . . . . . (16,207) 6,304
________
(1) Includes collections on accounts previously written-off and allowances for
doubtful accounts of businesses acquired less the allowance for doubtful
accounts of businesses sold.
(2) Write-off of uncollectible accounts.
F-33, Continued
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 151,053
<ALLOWANCES> 4,443
<INVENTORY> 129,372
<CURRENT-ASSETS> 311,999
<PP&E> 736,083
<DEPRECIATION> 183,922
<TOTAL-ASSETS> 1,291,031
<CURRENT-LIABILITIES> 25,158
<BONDS> 629,931
<COMMON> 688
0
0
<OTHER-SE> 335,969
<TOTAL-LIABILITY-AND-EQUITY> 1,291,031
<SALES> 1,158,894
<TOTAL-REVENUES> 1,158,894
<CGS> 611,383
<TOTAL-COSTS> 611,383
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,752
<INCOME-PRETAX> 44,345
<INCOME-TAX> 21,080
<INCOME-CONTINUING> 23,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,266
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
