<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1998
Commission file number: 1-9344
AIRGAS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 56-0732648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
259 North Radnor-Chester Road, Suite 100
Radnor, PA 19087-5283
(Address of principal executive offices) (ZIP code)
(610) 687-5253
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
Common Stock outstanding at February 4, 1999: 71,032,380 shares
<PAGE> 2
AIRGAS, INC.
FORM 10-Q
December 31, 1998
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 (Unaudited)
and March 31, 1998..........................................................3
Consolidated Statements of Earnings
for the Three and Nine Months Ended December 31, 1998 and 1997 (Unaudited)..4
Consolidated Statements of Cash Flows
for the Nine Months Ended December 31, 1998 and 1997 (Unaudited)............5
Notes to Consolidated Financial Statements (Unaudited)......................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................27
Item 5. Other Information..................................................27
Item 6. Exhibits and Reports on Form 8-K...................................28
SIGNATURES .................................................................29
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
AIRGAS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<CAPTION>
(Unaudited)
December 31, March 31,
1998 1998
<S> <C> <C>
ASSETS
Current Assets
Trade receivables, less allowances for
doubtful accounts of $5,955 at December 31,1998
and $5,676 at March 31, 1998 $ 192,129 $ 186,342
Inventories, net 164,471 154,937
Prepaid expenses and other current assets 31,185 25,555
Total current assets 387,785 366,834
Plant and equipment, at cost 981,993 923,635
Less accumulated depreciation, depletion
and amortization (265,431) (236,331)
Plant and equipment, net 716,562 687,304
Goodwill, net of accumulated amortization of
$51,675 at December 31, 1998 and $42,147
at March 31, 1998 431,849 410,753
Other non-current assets 174,676 176,583
Total assets $1,710,872 $1,641,474
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 74,395 $ 84,602
Accrued expenses and other current liabilities 133,608 128,806
Current portion of long-term debt 16,138 12,150
Total current liabilities 224,141 225,558
Long-term debt 861,554 830,845
Deferred income taxes 132,452 121,356
Other non-current liabilities 29,640 36,842
Stockholders' Equity
Preferred stock, no par value, 20,000 shares authorized,
no shares issued or outstanding at December 31, 1998
and March 31, 1998, respectively -- --
Common stock, par value $.01 per share, 200,000 shares
authorized, 71,834 and 71,357 shares issued at
December 31, 1998 and March 31, 1998, respectively 718 714
Capital in excess of par value 194,139 192,358
Retained earnings 281,009 237,166
Accumulated other comprehensive loss (965) (779)
Treasury stock, 918 and 176 common shares at cost at
December 31, 1998 and March 31, 1998, respectively (11,816) (2,586)
Total stockholders' equity 463,085 426,873
Total liabilities and stockholders' equity $1,710,872 $1,641,474
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
AIRGAS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales:
Distribution $ 279,669 $ 272,958 $ 860,628 $ 812,395
Direct Industrial 59,954 61,372 193,756 159,433
Manufacturing 40,700 33,480 123,304 87,750
Total net sales 380,323 367,810 1,177,688 1,059,578
Costs and expenses:
Cost of products sold (excluding
depreciation, depletion and amortization)
Distribution 140,085 136,309 431,487 408,783
Direct Industrial 43,837 43,795 142,575 114,766
Manufacturing 15,755 15,847 49,963 41,537
Selling, distribution and administrative
expenses 132,969 118,939 398,421 338,481
Depreciation, depletion and amortization 22,504 20,218 65,849 56,809
Special charges -- -- (1,000) (14,500)
Total costs and expenses 355,150 335,108 1,087,295 945,876
Operating income:
Distribution 20,282 26,902 73,081 82,778
Direct Industrial 352 2,463 2,165 4,911
Manufacturing 4,539 3,337 14,147 11,513
Special charges -- -- 1,000 14,500
Total operating income 25,173 32,702 90,393 113,702
Interest expense, net (15,701) (13,456) (46,227) (39,234)
Other income, net 24,370 442 25,240 2,488
Equity in earnings of unconsolidated
affiliates 2,862 943 4,838 1,262
Minority interest (12) (219) (51) (837)
Earnings before income taxes 36,692 20,412 74,193 77,381
Income tax expense 14,604 8,586 30,350 31,654
Net earnings $ 22,088 $ 11,826 $ 43,843 $ 45,727
Basic earnings per share $ .32 $ .17 $ .63 $ .67
Diluted earnings per share $ .31 $ .17 $ .61 $ .65
Weighted average shares outstanding:
Basic 69,700 69,600 70,000 68,200
Diluted 71,600 71,500 71,700 70,500
Comprehensive income $ 22,038 $ 11,641 $ 43,657 $ 45,443
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
AIRGAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
(In thousands)
Nine Months Ended Nine Months Ended
December 31, 1998 December 31, 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 43,843 $ 45,727
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation, depletion and amortization 65,849 56,809
Deferred income taxes 7,478 13,778
Equity in earnings of unconsolidated affiliates (5,706) (2,372)
Gain on sales of plant and equipment (397) (398)
Minority interest in earnings 51 837
Gain on divestitures of non-core businesses (23,968) (1,452)
Stock issued for employee stock purchase plan 4,270 4,483
Changes in assets and liabilities, excluding effects
of business acquisitions and divestitures:
Trade receivables, net (6,992) 3,287
Inventories, net (13,279) (12,693)
Prepaid expenses and other current assets (1,502) (2,098)
Accounts payable, trade (9,854) (21,218)
Accrued expenses and other current liabilities 15,074 4,583
Other assets and liabilities, net (12,743) (1,248)
Net cash provided by operating activities 62,124 88,025
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (82,076) (93,579)
Proceeds from sales of plant and equipment 1,655 2,056
Proceeds from divestitures of non-core businesses 48,816 4,000
Business acquisitions, net of cash acquired (43,969) (101,210)
Business acquisitions, holdback settlements (3,619) (4,130)
Investment in unconsolidated affiliates (140) (16,086)
Dividends from unconsolidated affiliates 2,788 1,984
Other, net 4,409 2,732
Net cash used by investing activities (72,136) (204,233)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 393,833 309,949
Repayment of debt (360,789) (172,011)
Financing costs (21) (362)
Repurchase of treasury stock (13,982) (31,905)
Exercise of stock options 1,325 3,217
Cash overdraft (10,354) 7,320
Net cash provided by financing activities 10,012 116,208
CASH INCREASE (DECREASE) $ 0 $ 0
Cash - Beginning of period 0 0
Cash - End of period $ 0 $ 0
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 6
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Airgas, Inc.
and its subsidiaries (the "Company"). Unconsolidated affiliates are accounted
for on the equity method and generally consist of 20% - 50% owned operations
where control does not exist or is considered temporary. The 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 accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. These statements
do not include all disclosures required for annual financial statements.
These financial statements should be read in conjunction with the more
complete disclosures contained in the Company's audited consolidated
financial statements for the year ended March 31, 1998.
The Company adopted Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" in the quarter ended June 30, 1998, as
required. The financial statements as of December 31, 1997 and March 31,
1998 have been restated to conform to the current presentation.
The financial statements reflect, in the opinion of management, all
adjustments necessary to present fairly the Company's financial position,
results of operations and cash flows for the periods presented. Such
adjustments are of a normal, recurring nature except for the impact of
acquisitions, divestitures, and special charges which are discussed in the
notes to the accompanying financial statements. The interim operating
results are not necessarily indicative of the results to be expected for an
entire year.
(2) ACQUISITIONS AND DIVESTITURES
From April 1, 1998 to December 31, 1998, the Company acquired 11
distributors of industrial gas and related equipment (Distribution segment)
with aggregate annual sales of approximately $31 million and four
manufacturers and distributors of dry ice (Manufacturing segment) with annual
sales of approximately $20 million. The aggregate purchase price, including
amounts related to non-competition agreements, totaled approximately $64
million ($48 million cash and $16 million assumed liabilities). Acquisitions
have been recorded using the purchase method of accounting, and, accordingly,
results of their operations are included in the Company's consolidated
financial statements since the effective dates of the respective
acquisitions.
On December 31, 1998, the Company completed its previously announced
divestiture of its calcium carbide and carbon products manufacturing
operations to Elkem Metals Company L.P. ("Elkem"), a subsidiary of Elkem ASA.
In conjunction with the sale, the Company and Elkem terminated the Elkem-
American Carbide Company joint venture which marketed calcium carbide
throughout the United States. The divestiture resulted in a non-recurring
gain of $23.9 million ($14.1 million after-tax, or $.20 per diluted share)
which is recognized in "other income, net." The calcium carbide and carbon
products operations generated annual sales of approximately $30 million
included in the Company's Manufacturing Segment ($7.8 million and $22.1
million in sales for the three and nine months ended December 31, 1998,
respectively). Through a long-term contract, the Company will continue to
purchase its calcium carbide requirements from Elkem.
In January 1999, the Company announced the signing of a letter of intent
with Linde AG ("Linde"), for the purchase by Linde of the Company's
operations in Poland and Thailand for approximately $50 million. The
transactions are subject to regulatory approvals, completion of due diligence
and definitive documentation.
<PAGE> 7
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
As also discussed in Note (3), the Company divested two non-core
businesses in the first quarter of fiscal 1999. The consideration for the
sales of the businesses included cash proceeds of approximately $10.5 million
and the assumption of certain liabilities. The businesses had combined
annual net sales in 1998 and 1999 of approximately $17 million and $4.6
million, respectively.
During the second quarter ended September 30, 1997, the Company recorded
a gain, included in other income, of $1.5 million (approximately $980
thousand after-tax) related to the sale of a non-core business.
(3) SPECIAL CHARGES
During the fourth quarter of fiscal 1998, the Company announced its
"Repositioning Airgas for Growth" restructuring plan (the "Repositioning
Plan"). The Company recorded accruals of approximately $11 million in the
fourth quarter of 1998 related to the pending divestiture of several non-core
businesses, facility exit costs and severance. As discussed in Note (2), the
Company completed the divestiture of two non-core businesses during the first
quarter of 1999. As a result of these divestitures, accruals were reduced by
$2.8 million, including $1 million ($570 thousand after-tax) which
represented accruals which were no longer required. The Company estimated
that facility exit costs and severance would require a use of cash of $4.2
million. Through December 31, 1998, the Company has paid amounts totaling
$2.2 million related to facility exit costs and severance. At December 31,
1998, the Company believes its remaining accruals of $6 million ($4 million
for divestitures and $2 million for facility exit costs and severance) are
adequate.
During the third quarter ended December 31, 1998, equity earnings of
unconsolidated affiliates includes a $1.8 million non-recurring gain from
insurance proceeds recorded by an equity affiliate.
On July 28, 1997, the Company reported that it had negotiated a
comprehensive settlement with all defendants in litigation related to the
fraudulent breach of contract by a third-party supplier of refrigerant gas
which was reported by the Company in December 1996. The Company recorded a
non-recurring pre-tax charge during the fourth quarter of fiscal 1997 of
$26.4 million (after-tax $17 million) for product losses and costs associated
with the Company's investigation into the fraud and recovery of damages. As
a result of the July 28, 1997 settlement, the Company recorded a gain of
$14.5 million (after-tax $9.4 million) during the second quarter ended
September 30, 1997.
(4) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net earnings by the
weighted average number of shares of the Company's Common Stock outstanding
during the period. Diluted earnings per share is calculated by adjusting the
weighted average common shares outstanding for the dilutive effect of common
stock equivalents related to stock options and contingently issuable shares.
<PAGE> 8
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The table below reconciles basic weighted average common shares
outstanding to diluted weighted average common shares outstanding for the
three and nine month periods ended December 31, 1998 and 1997:
<TABLE>
(In thousands)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Weighted average common shares outstanding:
Basic..................................... 69,700 69,600 70,000 68,200
Stock Options............................. 1,300 1,900 1,500 2,300
Contingently issuable shares.............. 600 -- 200 --
Diluted................................... 71,600 71,500 71,700 70,500
</TABLE>
(5) INVENTORIES
Net inventories consist of:
<TABLE>
(In thousands)
<CAPTION>
(Unaudited)
December 31, March 31,
1998 1998
<S> <C> <C>
Finished goods $164,748 $154,003
Raw materials 1,178 2,380
165,926 156,383
Less reduction to LIFO cost (1,455) (1,446)
$164,471 $154,937
</TABLE>
<PAGE> 9
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(6) PLANT AND EQUIPMENT
The major classes of plant and equipment, at cost, are as follows:
<TABLE>
(In thousands)
<CAPTION>
(Unaudited)
December 31, March 31,
1998 1998
<S> <C> <C>
Land and land improvements $ 24,283 $ 26,050
Buildings and leasehold improvements 90,382 88,130
Cylinders 419,996 404,198
Machinery and equipment, including bulk tanks 321,854 300,599
Computers and furniture and fixtures 62,751 52,051
Transportation equipment 51,336 48,720
Construction in progress 11,391 3,887
$981,993 $923,635
</TABLE>
(7) OTHER NON-CURRENT ASSETS
Other non-current assets include:
<TABLE>
(In thousands)
<CAPTION>
(Unaudited)
December 31, March 31,
1998 1998
<S> <C> <C>
Investment in unconsolidated affiliates $ 96,863 $ 98,522
Non-compete agreements and other intangible
assets, at cost, net of accumulated
amortization of $83.1 million at
December 31, 1998 and $73.2 million at
March 31, 1998 59,258 63,205
Other assets 18,555 14,856
$174,676 $176,583
</TABLE>
<PAGE> 10
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include:
<TABLE>
(In thousands)
<CAPTION>
(Unaudited)
December 31, March 31,
1998 1998
<S> <C> <C>
Cash overdraft $ 20,585 $ 31,621
Repositioning accruals 5,985 10,429
Accrued interest 14,142 8,918
Insurance and related reserves 10,130 7,248
Customer cylinder deposits 8,731 8,668
Accrued federal and state taxes 12,805 1,149
Other accrued expenses and current liabilities 61,230 60,773
$133,608 $128,806
The cash overdraft is attributable to the float of the Company's outstanding checks.
</TABLE>
(9) STOCKHOLDERS' EQUITY
Changes in stockholders' equity were as follows:
(In thousands of shares)
Shares of Common Treasury
Stock $.01 Par Value Stock
Balance--April 1, 1998 71,357 176
Common stock issuance (a) 477 --
Purchase of treasury stock -- 1,100
Reissuance of treasury stock -- (358)
Balance--December 31, 1998 71,834 918
<PAGE> 11
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
<TABLE>
<CAPTION>
(In thousands of dollars) Accumulated
Capital in Other
Common Excess of Retained Comprehensive Treasury Comprehensive
Stock Par Value Earnings Loss Stock Income
<S> <C> <C> <C> <C> <C> <C>
Balance--April 1, 1998 $714 $192,358 $237,166 $(779) $ (2,586) $ --
Net earnings -- -- 43,843 -- -- 43,843
Common stock issuance (a) 4 4,266 -- -- -- --
Foreign currency translation
adjustments -- -- -- (186) -- (186)
Purchase of treasury stock -- -- -- -- (13,982) --
Reissuance of treasury stock (b) -- (3,442) -- -- 4,752 --
Tax benefit from stock option
exercises -- 957 -- -- -- --
Balance--December 31,1998 $718 $194,139 $281,009 $(965) $(11,816) $43,657
(a) Related to the issuance of common stock for the Company's Employee Stock Purchase Plan.
(b) Treasury stock is reissued at average cost with the excess of the repurchase cost over the
reissuance price treated as a charge to capital in excess of par value.
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
(a) Litigation
In July 1996, Praxair, Inc. ("Praxair") filed suit against the Company
in the Circuit Court of Mobile County, Alabama. The complaint alleged
tortious interference with business or contractual relations with respect
to Praxair's Right of First Refusal contract with the majority shareholders
of National Welders by the Company in
<PAGE> 12
AIRGAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
connection with the Company's formation of a joint venture with National
Welders. Praxair sought compensatory damages in excess of $100 million and
punitive damages. In June 1998, Praxair filed a motion to dismiss its own
action in Alabama and commenced another action in the Superior Court of
Mecklenburg County, North Carolina, alleging substantially the same
tortious interference by the Company. The North Carolina action also
alleges breach of contract against National Welders and certain
shareholders of National Welders and unfair trade practices and conspiracy
against all the defendants. In the North Carolina action Praxair seeks
compensatory damages in excess of $10,000, punitive damages and other
unspecified relief. The Company believes that all of 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.
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.
(b) 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 $500,000 per occurrence for
workers' compensation, business automobile, and general and products
liability. 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 has established insurance
reserves that management believes to be adequate.
<PAGE> 13
Item 2.
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW
OVERVIEW
Net sales increased 3% to $380 million in the quarter ended December
31, 1998 ("current quarter"), from $368 million in the prior year. Net
earnings in the current quarter were $22.1 million, or $.31 per diluted
share compared to $11.8 million, or $.17 per share, a year ago. Excluding
non-recurring gains, net earnings in the current quarter were $6.1 million
or $.09 per diluted share.
Net earnings in the current quarter were impacted by a general slowing
in the manufacturing and industrial sectors and higher operating expenses,
including expenses associated with the Company's "Repositioning Airgas for
Growth" initiative (the "Repositioning Plan"). As more fully described in
the Company's Form 10-K for the year ended March 31, 1998, the
Repositioning Plan includes the consolidation of subsidiaries into larger
regional companies, the conversion of information systems, the
implementation of a national computer center and communications system,
the build-out of regional distribution centers and the divestiture of
several non-core businesses. Repositioning expenses were estimated to total
$1.6 million in the current quarter and resulted from computer conversions,
relocation and other personnel expenses and facility-related costs.
Furthermore, the Company recognized additional operating expenses of $2.5
million during the quarter, which were directly related to the
repositioning (ongoing costs of operating a national computer center and
communications system, regional distribution centers, higher depreciation
expense related to new capital equipment and additional salary expense
related to new product line sales personnel). The Company believes that
these repositioning expenses will be offset by savings associated with
consolidating computer systems and back-office functions.
In response to lower same-store sales growth, the Company has embarked
on a Company-wide cost improvement program that the Company believes will
yield in excess of $15 million in annual savings beginning in fiscal year
2000. The cost improvements are far reaching and are expected to impact
all areas of the Company's expense structure including administrative cost
reductions, consolidation of back offices, the closure of unprofitable
branch locations, working capital improvements and reduced capital
expenditures.
On December 31, 1998, the Company completed its previously announced
divestiture of its calcium carbide and carbon products manufacturing
operations to Elkem Metals Company L.P. ("Elkem"), a subsidiary of Elkem
ASA. In conjunction with the sale, the Company and Elkem terminated the
Elkem-American Carbide Company joint venture which marketed calcium
carbide throughout the United States. The divestiture resulted in a non-
recurring gain of $23.9 million ($14.1 million after-tax, or $.20 per
diluted share) which is recognized in "other income, net." The calcium
carbide and carbon products operations generated annual sales of
approximately $30 million included in the Company's Manufacturing Segment
($7.8 million and $22.1 million in sales for the three and nine months
ended December 31, 1998, respectively). Through a long-term contract, the
Company will continue to purchase its calcium carbide requirements from
Elkem.
From April 1, 1998 through December 31, 1998, the Company acquired 11
distributors of industrial gas and related equipment (Distribution segment)
with aggregate annual sales of approximately $31 million and four
manufacturers and distributors of dry ice (Manufacturing segment) with
annual sales of approximately $20 million.
<PAGE> 14
AIRGAS, INC.
MANAGMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
In January 1999, the Company announced the signing of a letter of intent
with Linde AG ("Linde"), for the purchase by Linde of the Company's operations
in Poland and Thailand for approximately $50 million. The transactions are
subject to regulatory approvals, completion of due diligence and definitive
documentation.
RESULTS OF OPERATIONS: THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE
THREE MONTHS ENDED DECEMBER 31, 1997
INCOME STATEMENT COMMENTARY
Net sales increased 3% during the current quarter compared to the same
quarter in the prior year.
<TABLE>
(in thousands)
<CAPTION>
Three months Ended
December 31, Increase
Net Sales: 1998 1997 (Decrease)
<S> <C> <C> <C>
Distribution $279,669 $272,958 $ 6,711
Direct Industrial 59,954 61,372 (1,418)
Manufacturing 40,700 33,480 7,220
$380,323 $367,810 $12,513
</TABLE>
Distribution sales include three product groups: gases, hardgoods and
rent. Distribution sales increased $6.7 million as a result of
approximately $12.2 million from the acquisition of 18 distributors since
October 1, 1997. Offsetting the increase in sales due to acquisitions were
a $1.1 million decline in same-store sales and the divestitures of two
businesses in the first quarter of 1999 which had sales of approximately
$4.4 million in the prior period. Distribution same-store sales decreased
approximately .4% as a result of a 4% increase in same-store gas and rent
revenue, offset by a decline of approximately 5% in hardgoods sales. The
increases in gas and rent sales were helped by the Company's continued
focus on strategic products, growth of national accounts, expansion of its
rental welder fleet and small bulk gas sales. Selected price increases
also helped improve gas and rent revenues in the current quarter. Sales
were negatively impacted by a general slowing in several manufacturing and
industrial sectors including: oil and gas exploration and production,
agriculture, steel, pulp and paper products, mining and shipbuilding. The
Company believes that these factors contributed to the decline in its
Distribution same-store sales growth rate from 3% in the prior year
quarter. Additionally, although difficult to quantify, the Company
believes that the indirect effects of the Repositioning have impacted
sales.
The Company estimates same-store sales based on a comparison of
current period sales to the prior period's sales, adjusted for acquisitions
and divestitures. Future same-store sales growth is dependent on the
economy, price increases and the Company's ability to sell additional
products and services to existing customers. The Company continues to
focus on internal sales growth through the addition of new products and
product-line extensions, including certain specialty gases, carbon dioxide,
refrigerant gases in returnable containers, rental welders and tool and
safety hardgoods items.
<PAGE> 15
AIRGAS, INC.
MANAGMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Airgas Direct Industrial ("ADI") sales include safety products and
equipment, metalworking tools and supplies and other Maintenance, Repair
and Operations ("MRO") hardgoods items. ADI's sales decreased $1.4 million
primarily from a same-store sales decline. The same-store sales decrease
compared to the prior year was approximately 5% as a result of a 17%
decline in tool products sales, offset by an increase of approximately 3%
in sales of safety-related products. Sales increases of safety-related
products were helped by growth in national accounts business, however,
sales growth slowed compared to the first and second quarters of fiscal
1999 due to the general slowing in the manufacturing and industrial
sectors. Sales of tool products were more significantly impacted by the
slowing economy, particularly on the West coast. Tool sales also continue
to be impacted by system conversions and warehousing consolidations which
occurred late in fiscal 1998. The Company believes the release of a new
tool catalog will help tool sales during the fourth quarter ending March
31, 1999.
The Manufacturing segment's sales primarily include six product
groups: liquid carbon dioxide, dry ice, specialty gases, nitrous oxide,
carbon products and calcium carbide. Sales increased $7.2 million
primarily from seven liquid carbon dioxide and dry ice acquisitions
completed since October 1, 1997. Liquid carbon dioxide sales declined in
both volume (3.6%) and price (7%) compared to the same quarter a year ago.
Pipeline sales of carbon dioxide increased 23%, partially offsetting the
decline in liquid carbon dioxide sales. Liquid carbon dioxide pricing has
been impacted by market production levels which exceed the growth in
demand. Dry ice sales volumes increased in the quarter as a result of
acquisitions, partially offset by a seasonal slow-down. Sales of nitrous
oxide were down slightly compared to last year due to the general slowing
in the manufacturing and industrial sectors. Sales of carbon products and
calcium carbide decreased 9% compared to the prior year due to a general
decline in metals prices and a downturn in the steel industry.
Gross profits increased 5% during the current quarter compared to the same
quarter in the prior year.
<TABLE>
(in thousands)
<CAPTION>
Three Months Ended
December 31, Increase
Gross Profits: 1998 1997 (Decrease)
<S> <C> <C> <C>
Distribution $139,584 $136,649 $ 2,935
Direct Industrial 16,117 17,577 (1,460)
Manufacturing 24,945 17,633 7,312
$180,646 $171,859 $ 8,787
</TABLE>
<PAGE> 16
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The increase in Distribution gross profits of $2.9 million resulted
from acquisitions which contributed approximately $5.6 million. Offsetting
the increase in gross profits from acquisitions was a same-store gross
profit decline of approximately $.6 million, or .4%, and the divestiture of
two businesses in the first quarter of 1999 which had gross profits of
approximately $2.1 million during the same period in the prior year.
Same-store gross profits for gas and rent increased 3% in the current
quarter as a result of higher gas volumes and increased rental business.
Gas and rent gains were offset by a decrease in hardgoods same-store gross
profits of approximately 9%. The slowing economy impacted pricing in
certain areas, particularly related to hardgoods sales.
The decrease in ADI gross profits of $1.5 million resulted from a
same-store gross profit decline of 8.3%. The same-store gross profit
decline resulted primarily from inventory adjustments recognized in
relation to warehousing consolidations, lower vendor rebates due to lower
purchase volumes and product discounting in certain regions to regain
customers. ADI gross margins were 26.9% for the current quarter and
declined 170 basis points compared to 28.6% in the prior year.
The increase in Manufacturing gross profits of $7.3 million resulted
primarily from higher gross margins of carbon dioxide and dry ice
acquisitions, a favorable product mix and increased volume in pipeline
carbon dioxide sales.
Selling, distribution and administrative expenses consist of
personnel and related costs, distribution and warehousing costs, occupancy
expenses and other selling and general administrative expenses. Selling,
distribution and administrative expenses increased $14 million in the
current quarter compared to the prior year primarily as a result of
acquisitions, higher operating expenses and repositioning expenses.
Repositioning expenses were estimated to total $1.6 million in the current
quarter and resulted from computer conversions, relocation and other
personnel expenses and facility-related costs. Furthermore, the Company
recognized additional operating expenses of $2.1 million during the
quarter, which were directly related to the repositioning (ongoing costs of
operating a national computer center and communication system, regional
distribution centers and additional salary expense related to new product
line sales personnel). The Company believes that these repositioning
expenses will be offset by savings associated with consolidating computer
systems and back-office functions. As a percentage of net sales, selling,
distribution and administrative expenses increased to 35% in the current
quarter compared to 32% in the prior year.
Depreciation, depletion and amortization totaled $22.5 million in the
current quarter and increased $2.3 million compared to the prior year
primarily as a result of acquisitions and capital projects completed during
the previous 12 months. Compared to the prior year, depreciation,
depletion and amortization as a percentage of sales increased 40 basis
points to 5.9%. For the Distribution, ADI and Manufacturing segments,
depreciation, depletion and amortization expense in the current quarter,
relative to net sales, was 6.2%, 3.3% and 7.9%, respectively.
Operating income decreased $7.5 million or 23% in the current quarter
compared to the prior year. The decrease in operating income was primarily
due to higher operating expenses, repositioning expenses and lower gross
profits from reduced hardgoods sales.
<PAGE> 17
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
<TABLE>
(in thousands)
<CAPTION>
Three Months Ended
December 31, Increase
Operating Income: 1998 1997 (Decrease)
<S> <C> <C> <C>
Distribution $20,282 $26,902 $(6,620)
Direct Industrial 352 2,463 (2,111)
Manufacturing 4,539 3,337 1,202
$25,173 $32,702 $(7,529)
</TABLE>
The Distribution segment's operating income margin decreased 260
basis points to 7.3% of sales in the current quarter compared with the
prior year. The lower margin was primarily the result of higher operating
expenses, including expenses associated with the Company's Repositioning
Plan and higher selling expenses related to the expanded distribution of
safety products, specialty gases and welder rentals. In the current
quarter, the Distribution segment incurred approximately $1.5 million of
repositioning expenses which were primarily related to computer conversions
and $1.8 million of ongoing operating expenses related to a national
computer center and communications system and additional salary expense
related to new product line sales personnel.
The operating income margin for ADI decreased to .6% of sales in the
current quarter compared to 4% in the prior year. A decline in same-store
sales and related gross profits coupled with ongoing operating expenses
related to the new regional distribution centers of approximately $800
thousand resulted in operating margin degradation.
The Manufacturing segment's operating margin increased 120 basis
points to 11.2% of sales in the current quarter compared to the prior year
primarily from improved operations of specialty gases and pipeline carbon
dioxide sales.
Interest expense, net, totaled $15.7 million in the current quarter
and increased $2.2 million compared to the prior year. The increase in
interest expense was primarily attributable to an increase in debt
associated with completing 25 acquisitions since October 1, 1997. Interest
costs were also impacted by capital expenditures and an increase in working
capital. As discussed in "Liquidity and Capital Resources" below, the
Company has hedged interest rates under certain borrowings with interest
rate swap agreements.
Equity in earnings of unconsolidated affiliates of $2.9 million
increased $1.9 million compared to the prior year as a result of a non-
recurring insurance gain of $1.8 million and higher joint venture earnings
from National Welders Supply.
Excluding the impact of non-recurring gains in fiscal 1999, the
effective income tax rate increased slightly compared to the prior year.
<PAGE> 18
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Net earnings in the current quarter (excluding non-recurring gains)
were $6.1 million, or $.09 per diluted share, compared to $11.8 million, or
$.17 per diluted share in the prior year. Including the non-recurring
after-tax gain of $14.1 million from the divestiture of the Company's
calcium carbide and carbon products operations and the $1.8 million non-
recurring gain recognized by an equity affiliate, net earnings in the
current quarter were $22.1 million, or $.31 per diluted share.
RESULTS OF OPERATIONS: NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE
NINE MONTHS ENDED DECEMBER 31, 1997
INCOME STATEMENT COMMENTARY
Net sales increased 11% during the nine months ended December 31, 1998
("current period") compared to the same period in the prior year.
<TABLE>
(in thousands)
<CAPTION>
Nine Months Ended
December 31,
Net Sales: 1998 1997 Increase
<S> <C> <C> <C>
Distribution $ 860,628 $ 812,395 $ 48,233
Direct Industrial 193,756 159,433 34,323
Manufacturing 123,304 87,750 35,554
$1,177,688 $1,059,578 $118,110
</TABLE>
Distribution sales increased $48.2 million as a result of
approximately $49.4 million from the acquisition of 30 distributors since
April 1, 1997 and $9.9 million from same-store sales growth. Offsetting
the increase in sales were the divestitures of two businesses in the first
quarter of 1999 which had sales of $11.1 million in the prior period.
Distribution same-store sales increased approximately 1.2% as a result of a
4.4% same-store increase in gas and rent, partially offset by a 1.7%
decline in hardgoods sales. The increases in gas and rent sales were due
to gas sales from the Company's two air separation plants, the expansion
of its rental welder fleet and other sales initiatives. The Company
believes its hardgoods sales were adversely affected by a general slowing
in the manufacturing and industrial sectors which was more significantly
highlighted in the quarter ended December 31, 1998. The slowing in the
economy impacted customers in the following industries: oil and gas
exploration and production, agriculture, steel, pulp and paper products,
mining and shipbuilding. The Company believes that these factors
contributed to the decline in its Distribution same-store sales growth rate
from 4% in the prior year. Additionally, although difficult to quantify,
the Company believes the indirect effects of the Repositioning have
impacted sales.
<PAGE> 19
AIRGAS, INC.
MANAGMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
ADI's sales increased $34.3 million primarily as a result of
approximately $30 million from the acquisition of two distributors since
April 1, 1997 and approximately $4.3 million from same-store sales growth.
The same-store sales growth rate for ADI was 2.3% and resulted from an 8.4%
increase in sales of safety-related products helped by growth in national
account business and by an expanded telemarketing force, largely offset by
an 8.6% decline in tool products. The slowing in the manufacturing and
industrial sectors has impacted ADI's sales growth.
The Manufacturing segment's sales increased $35.6 million primarily
from nine liquid carbon dioxide and dry ice acquisitions completed since
April 1, 1997. Liquid carbon dioxide and dry ice sales volumes increased
during the current period, although volumes declined in the third quarter.
Lower pricing partially offset liquid volume growth. The Company believes
that liquid carbon dioxide prices were impacted by market production which
has exceeded growth in demand.
Gross profits increased approximately 12% in the current period compared to
the same period in the prior year.
<TABLE>
(in thousands)
<CAPTION>
Nine Months Ended
December 31,
Gross Profits: 1998 1997 Increase
<S> <C> <C> <C>
Distribution $429,141 $403,612 $25,529
Direct Industrial 51,181 44,667 6,514
Manufacturing 73,341 46,213 27,128
$553,663 $494,492 $59,171
</TABLE>
The increase in Distribution gross profits of $25.5 million resulted
from acquisitions which contributed approximately $24.6 million and from
same-store gross profit growth of approximately $6.7 million, or 1.6%.
Offsetting the increase in gross profits was the divestiture of two
businesses in the first quarter of 1999 which had contributed gross profits
of $5.8 million in the same period of the prior year. Same-store gross
profits were helped by higher gas volumes and increased rental revenues of
4%, partially offset by a 4% decrease in hardgoods same-store gross profits.
The increase in ADI gross profits of $6.5 million resulted primarily
from acquisitions. Same-store gross profits were essentially flat compared
to the prior year. ADI's gross margin of 26.4% for the current period was
down 160 basis points compared to the prior year as a result of an
acquisition with lower margins not included in the prior period for the
full nine months, certain inventory adjustments, lower vendor rebates and
product discounting in certain regions to regain customers.
The increase in Manufacturing gross profits of $27.1 million resulted
primarily from gross profits of liquid carbon dioxide and dry ice
acquisitions. The Manufacturing gross margin increased to 59.5% in the
current period from 52.7% in the same period last year.
<PAGE> 20
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Selling, distribution, and administrative expenses increased $59.9
million in the current period compared to the prior period primarily as a
result of acquisitions, higher operating expenses and repositioning
expenses. Repositioning expenses were estimated to total $4.7 million in
the current period and resulted from computer conversions, relocation and
other personnel expenses and facility-related costs. Furthermore, the
Company recognized additional operating expenses of $6.9 million during the
current period, which were directly related to the repositioning (ongoing
costs of operating a national computer center and communication system,
regional distribution centers and additional salary expense related to new
product line sales personnel). The Company believes that these
repositioning expenses will be offset by savings associated with
consolidating computer systems and back-office functions. As a percentage
of net sales, selling, distribution and administrative expenses increased
to 34% for the current period compared to 32% in the same period of the
prior year.
Depreciation, depletion and amortization totaled $65.8 million in the
current period and increased approximately $9 million compared to the prior
year primarily as a result of acquisitions and capital projects completed
during previous periods. Compared to the prior year, depreciation,
depletion and amortization as a percentage of sales increased 20 basis
points to 5.6%. For the Distribution, ADI and Manufacturing segments,
depreciation, depletion and amortization relative to net sales was 5.9%,
2.9% and 7.8%, respectively, for the current period.
Operating income decreased $9.8 million or 10% compared to the prior
period, excluding special charges in both periods. The decrease in
operating income was primarily due to higher operating expenses,
repositioning, expenses and lower gross profits on hardgoods.
<TABLE>
(in thousands)
<CAPTION>
Nine Months Ended
Operating Income December 31, Increase
(excluding special charges): 1998 1997 (Decrease)
<S> <C> <C> <C>
Distribution $73,081 $82,778 $ (9,697)
Direct Industrial 2,165 4,911 (2,746)
Manufacturing 14,147 11,513 2,634
$89,393 $99,202 $ (9,809)
</TABLE>
The Distribution segment's operating income margin decreased 170
basis points to 8.5% for the current period compared to the prior year. The
decrease resulted primarily from higher operating expenses related to the
Company's Repositioning Plan, higher selling expenses related to expanded
product offerings and from acquisitions which had lower operating margins.
The Distribution segment incurred $4.2 million of repositioning expenses
during the nine months ended December 31, 1998, primarily related to
computer conversions and personnel-related costs and $4.8 million of
ongoing operating expenses primarily related to a national computer center
and communications system and additional salary expense related to new
product line sales personnel.
<PAGE> 21
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The operating income margin for ADI decreased 200 basis points to 1.1%
in the current period compared to the prior year. Slightly higher
same-store sales and gross profits were offset by repositioning expenses
totaling $560 thousand and ongoing additional operating expenses of
approximately $3 million associated with new regional distribution facilities
in Southern California and Georgia.
The Manufacturing segment's operating margin decreased to 11.5% in the
current period from 13.1% in the prior year primarily as a result of
acquisitions and integration expenses.
Interest expense, net, totaled $46.2 million in the current period and
increased $7 million compared to the prior year. The increase in interest
expense was primarily attributable to an increase in debt associated with
completing 41 acquisitions since April 1, 1997. Interest costs were also
impacted by capital expenditures, an increase in working capital and the
repurchase of the Company's Common Stock. As discussed in "Liquidity and
Capital Resources" below, the Company has hedged interest rates under
certain borrowings with interest rate swap agreements.
Equity in earnings of unconsolidated affiliates of $4.8 million
increased $3.5 million compared to the prior year as a result of a non-
recurring insurance gain of $1.8 million, an increase in earnings from the
Company's liquid carbon dioxide joint venture which was acquired in
connection with the June 1997 acquisition of Carbonic Industries
Corporation and higher joint venture earnings of National Welders Supply.
Earnings have been helped at the Company's liquid carbon dioxide joint
venture because of expanded production capacity which came on-line in
September 1997.
Excluding the impact of special charges and non-recurring gains, the
effective income tax rate of 42.2% declined slightly compared to the prior
year.
Net earnings, excluding special charges and non-recurring gains, in
the current period were $27.3 million, or $.38 per diluted share, compared
to $35.3 million, or $.50 per diluted share, in the prior year. Net
earnings, including an after-tax non-recurring gain of $14.1 million from
the divestiture of a non-core business, a $1.8 million non-recurring gain
recognized by an equity affiliate and the $570 thousand after-tax effect of
the reversal of accruals no longer required related to the divestiture of
two non-core businesses, were $43.8 million, or $.61 per diluted share.
Net earnings in the prior period, including the after-tax gain of $980
thousand related to a divestiture of a non-core business and the after-tax
gain of $9.4 million related to a partial recovery of refrigerant losses,
were $45.7 million, or $.65 per diluted share.
<PAGE> 22
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 and funds
provided by operating activities. The divestiture of certain non-core
businesses has also provided the Company with a source of funds.
Cash flows from operating activities totaled $62.1 million for the
nine months ended December 31, 1998. Depreciation, depletion and
amortization represented $65.8 million of cash flows from operating
activities. Cash flows from working capital components decreased $16.6
million as a result of an increase in accounts receivable; an increase in
inventory levels in order to improve customer order fulfillment rates; a
decrease in accounts payable; and an increase in accrued expenses and other
current liabilities primarily due to taxes payable on the divestiture of a
business. Accounts receivable days' sales outstanding increased from 44 to
48 and hardgoods days' supply of inventory levels also increased from 74 to
90 compared to March 31, 1998 levels.
After-tax cash flow (net earnings plus depreciation, depletion and
amortization and deferred income taxes), increased 2.4% to $101.6 million
in the nine-month period ended December 31, 1998, compared to $99.2 million
in the prior year (before special charges and non-recurring gains in both
periods).
Cash used by investing activities totaled $72.1 million. Activities which
used cash during the period primarily included capital expenditures of
$82.1 million and acquisitions totaling $47.6 million. The divestiture of
three non-core businesses provided cash of $48.8 million.
Capital expenditures associated with the purchase of cylinders, bulk tanks
and machinery and equipment totaled $46.5 million and have helped
facilitate strategic product sales growth. Such purchases account for
approximately 57% of the total capital expenditures during the nine-month
period ended December 31, 1998. Computer capital expenditures related to
the Company's Repositioning Plan totaled approximately $8 million.
Financing activities provided cash of $10 million for the nine months
ended December 31, 1998, with total bank debt increasing by $34.7 million
since March 31, 1998. Cash overdraft, the float of the Company's
outstanding checks, decreased by $10.4 million since March 31, 1998. Funds
provided by financing activities were used primarily for acquisitions,
capital expenditures, working capital needs and the repurchase of the
Company's Common Stock.
The Company has unsecured revolving credit facilities totaling US$725
million and C$100 million (US$65 million) with a final maturity date of
December 5, 2002. The agreement contains covenants which include the
maintenance of certain financial ratios, restrictions on additional
borrowings and limitations on dividends. At December 31, 1998, the Company
had borrowings under the agreement of US$533 million, C$43 million (US$28
million), and commitments under letters of credit supported by the
agreement of US$76 million. Availability under the credit facilities was
$153 million at December 31, 1998. At December 31, 1998, the effective
interest rate on borrowings under the credit line was 5.76% (U.S.
borrowings) and 5.10% (Canadian borrowings).
<PAGE> 23
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
In August 1998, the Company filed an amendment to its shelf
registration pursuant to Rule 462 (b) under the Securities Act of 1933, as
amended, which increased the remaining capacity under the shelf
registration to approximately $175 million. At December 31, 1998, the
Company had the following long-term debt outstanding under medium-term
notes issued under the shelf registration: $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%; and $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. Additionally, at December 31, 1998, long-term debt of the
Company included acquisition notes and other long-term debt instruments.
In managing interest rate exposure, principally under the Company's
floating rate revolving credit facilities, the Company participates in 25
interest rate swap agreements. The swap agreements are with major
financial institutions and aggregate $497 million in notional principal
amount at December 31, 1998. Seventeen swap agreements with approximately
$252 million in notional principal amount require fixed interest payments
based on an average effective rate of 6.55% for remaining periods ranging
between 1 and 8 years. Eight swap agreements require floating rates ($245
million notional amount at 5.71% at December 31, 1998). The Company
continually monitors its positions and the credit ratings of its
counterparties, and does not anticipate non-performance by the
counterparties.
The Company will continue to look for appropriate acquisitions and expects
to fund such acquisitions, future capital expenditure requirements and
costs related to its Repositioning Plan primarily through the use of cash
flow from operations, debt, common stock for certain acquisition
candidates, funds from the divestiture of certain businesses and other
available sources. The Company believes that its sources of financing are
adequate for its anticipated needs and that it could arrange additional
sources of financing for any unanticipated requirement. The cost and terms
of any future financing arrangement will depend on the market conditions
and the Company's financial position at that time.
The Board of Directors has authorized the repurchase of up to 4.6 million
shares of Company Common Stock (the "repurchase plan") from time-to-time to
offset share issuances for stock options, the Company's Employee Stock
Purchase Plan and acquisitions. During the second quarter of fiscal 1999,
the Company purchased 1.1 million shares of Airgas Common Stock at an
average cost of $12.71 per share. No shares were repurchased during the
third quarter of fiscal 1999. The impact of the repurchased shares on
earnings per share was immaterial for both the three and nine month periods
ended December 31, 1998. During fiscal 1999, the Company reissued 358
thousand shares in connection with stock option exercises. From inception
through December 31, 1998, the Company repurchased approximately 4.1
million shares under the repurchase plan at an average cost of $15.15 per
share. The remaining shares authorized for repurchase under the repurchase
program total approximately 500 thousand shares.
The Company does not currently pay dividends.
<PAGE> 24
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
YEAR 2000 READINESS DISCLOSURE
Year 2000 Issues
The Company is aware of the issues associated with the Year 2000
problem. The "Year 2000" matter relates to whether computer hardware and
software and equipment will properly recognize date sensitive information
referring to the Year 2000. Potential computer system and equipment
failures arising from years beginning with "20" rather than "19" are a
known risk. The Company's exposure to Year 2000 issues rests primarily in
three main areas: information systems hardware and application software,
embedded chip technology which may be found in a wide variety of operating
equipment and third party Year 2000 readiness.
Information Systems Hardware and Application Software
With respect to information systems and application software, the
Company's businesses generally do not utilize "home grown" programs or
systems that require programming to become Year 2000 compliant. The
Company typically uses "out of the box" or "shrink wrap" software for its
business needs. Standardized software and computer systems are being
implemented across the Company in connection with the Company's
Repositioning Plan. Although vendors for such software have advised the
Company that their software is Year 2000 compliant, the Company has
undertaken and expects to complete time dimensional testing of critical
systems and software by June 1999. Although execution of the Repositioning
Plan addresses certain significant Year 2000 issues, it was not initiated
primarily as a remediation initiative. The Company believes that
standardized operating platforms will help provide for an effective multi-
channel distribution network. The Company estimates expenditures related
to the system conversion and standardization project will total
approximately $20-$25 million over the duration of the project, of which
approximately $15 million is expected to be capitalized. On a project-to-
date basis, the Company has incurred approximately $13 million in costs and
expenses to standardize systems, of which approximately $8.5 million
represents new capital equipment and software. The Company believes that
it is on target for completion of the project by June 1999. However, if
such standardization is not completed prior to the Year 2000, the Year 2000
matter could have a material impact on the business, results of operations
and financial condition of the Company as well as on customers of the
Company. The Company has not determined the extent to which its business
and customers might be affected in that event.
In conjunction with the Repositioning Plan, the Company has
established a national data center equipped with systems hardware and
software which its vendors have indicated are Year 2000 compliant. Time
dimensional testing of data center hardware and software is expected to be
completed by June 1999. In addition, the Company has substantially
completed testing of its desktop personal computers with very few failures
noted.
<PAGE> 25
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Embedded Chips
The Company's Year 2000 project team includes designated subsidiary-
company managers responsible for directing Year 2000 remediation efforts at
the business unit level. These managers, in cooperation with the
Company's national information services personnel, have completed the
inventories and risk assessments of critical processes and equipment
containing embedded chips. Testing has been substantially completed with
regard to certain critical processes and equipment of the Company's
manufacturing operations. No significant instances of non-compliance were
identified. Additionally, the Company has completed its assessment of its
phone systems and anticipates completing the necessary repairs and
replacements by June 1999. The Year 2000 project team is also in the
process of contacting suppliers to obtain Year 2000 readiness product
information for less significant equipment containing embedded chips. The
Company is in the process of assessing the potential costs for remediation
of non-compliant embedded chip equipment, which costs are not expected to
be material. Although the Company believes it is on target for completing
remediation efforts with regard to embedded chip equipment and processes,
if repair, replacement or contingency plans are not completed before the
Year 2000, the Year 2000 problem could have a material impact on the
business, results of operations and financial condition of the Company.
Third Parties
The Company's Year 2000 issues relate not only to its own business
systems and equipment but also to those of its customers, vendors and
suppliers. To mitigate the risk to the Company arising from third parties,
the Company is contacting significant suppliers, customers and other
critical business partners to determine if they have effective Year 2000
plans in place. The Company anticipates that this evaluation will be
ongoing through calendar 1999. Responses from approximately 55% of key
national suppliers and 30% of other suppliers have been received and
evaluated by the Company, with the majority indicating that they have
active Year 2000 compliance programs. In addition, audits of certain key
suppliers have been initiated to confirm Year 2000 readiness. As a
result of the supplier contact and audit programs, alternative suppliers
will be identified as deemed necessary. However, there can be no assurance
that the Company's customers, vendors, suppliers and other third parties
will successfully resolve their own Year 2000 issues in a timely manner
sufficient to prevent impact to the Company.
Contingency Plans
A contingency plan has not been developed for dealing with the most
reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis
and contingency planning during the latter part of calendar year 1999.
Resources
The Company is funding the computer conversion and standardization
project as well as non-compliant equipment repairs and replacements from
cash flow generated by operations and other available financing sources.
Substantially all of the effort to accomplish the remediation objectives with
regard to the computer conversion and standardization project, embedded chip
equipment, and evaluating third party readiness has been performed by internal
Company personnel.
<PAGE> 26
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
OTHER
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company will adopt
SFAS No. 131 during its fourth quarter ending March 31, 1999, as required.
Adoption of this accounting standard will not impact earnings, financial
condition or liquidity.
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities." This
statement requires that costs of start-up activities, including
organization costs, be expensed as incurred. The statement is effective
for fiscal years beginning after December 15, 1998. The adoption of this
standard will not materially impact earnings, financial condition or
liquidity of the Company.
In June 1998, the FASB unanimously approved for issuance SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 standardizes the accounting for derivative instruments, including
derivative instruments embedded in other contracts, by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. The statement is
effective for fiscal years beginning after June 15, 1999. Management is
currently evaluating the impact that the adoption of this statement may
have on earnings, financial condition or liquidity of the Company.
<PAGE> 27
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Forward-looking Statements
This report contains statements that are forward-looking, as that term is
defined by Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in rules, regulations and releases.
Airgas intends that such forward-looking statements be subject to the safe
harbors created thereby. All forward-looking statements are based on
current expectations regarding important risk factors, and the making of
such statements should not be regarded as a representation by Airgas or any
other person that the results expressed therein will be achieved.
Important factors that could cause actual results to differ materially from
those contained in any forward-looking statement include, but are not
limited to, underlying market conditions, growth in same-store sales,
costs and potential disruptive effects of the Repositioning, the success of
the Repositioning Plan, the Company's ability to reduce costs,
implementation and standardization of information systems projects, any
potential problems relating to Year 2000 matters (including without
limitation, those relating to Airgas' ability to identify and timely
remediate Year 2000 problems, unanticipated remediation costs, timely
resolution of Year 2000 problems by significant vendors, suppliers,
customers and other similar third parties, and Airgas' ability to develop
and implement contingency plans, if necessary), the success and timing of
intended divestitures, the effects of competition from independent
distributors and vertically integrated gas producers on products and
pricing, growth and acceptance of new product lines through the Company's
sales and marketing programs, changes in product prices from gas producers
and name-brand manufacturers and suppliers of hardgoods, uncertainties
regarding accidents or litigation which may arise in the ordinary course of
business and the effects of, and changes in the economy, monetary and
fiscal policies, laws and regulations, inflation and monetary fluctuations
and fluctuations in interest rates, both on a national and international
basis. The Company does not undertake to update any forward-looking
statement made herein or that may be made from time to time by or on behalf
of the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding certain pending litigation, reference is made to
the Company's Form 10-Q for the quarter ended June 30, 1998, which is
incorporated herein by reference.
Item 5. Other Information
Divestiture of Calcium Carbide and Carbon Products Manufacturing Operations
On December 31, 1998, the Company completed its previously announced
divestiture of its calcium carbide and carbon products manufacturing
operations to Elkem Metals Company L.P. ("Elkem"), a subsidiary of Elkem
ASA. In conjunction with the sale, the Company and Elkem terminated the
Elkem-American Carbide Company joint venture which marketed calcium
carbide throughout the United States. The divestiture resulted in a non-
recurring gain of $23.9 million ($14.1 million after-tax, or $.20 per
diluted share) which is recognized in "other income, net." The calcium
carbide and carbon products operations generated annual sales of
approximately $30 million included in the Company's Manufacturing Segment
($7.8 million and $22.1 million in sales for the three and nine months
ended December 31, 1998, respectively). Through a long-term contract, the
Company will continue to purchase its calcium carbide requirements from
Elkem.
<PAGE> 28
Letter of Intent for the Sale of Certain Foreign Operations
In January 1999, the Company announced the signing of a letter of intent
with Linde AG ("Linde"), for the purchase by Linde of the Company's
investments in Poland and Thailand for approximately $50 million. The
transactions are subject to regulatory approvals, completion of due
diligence and definitive documentation.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are being filed as part of this Form 10-Q Report:
Exhibit No. Description
4 First Amendment to the 1997 Rights Agreement
27 Financial Data Schedule as of December 31, 1998
b. Reports on Form 8-K
On October 29, 1998, the Company filed a Form 8-K pursuant to Item 5,
reporting its earnings for the second quarter ended September 30, 1998.
On December 18, 1998, the Company filed a Form 8-K pursuant to Item 5,
reporting its earnings outlook for the third quarter ending December 31, 1998.
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Airgas, Inc.
(Registrant)
Date: February 11, 1999 /s/ Scott M. Melman
Scott M. Melman
Senior Vice President and
Chief Financial Officer
<PAGE> EX-1
FIRST AMENDMENT TO THE 1997 RIGHTS AGREEMENT
This First Amendment (this "Amendment") is made as of
November 12, 1998 between Airgas, Inc., a Delaware corporation (the
"Company"), and The Bank of New York, a New York banking corporation, as
Rights Agent (the "Rights Agent").
The Company and the Rights Agent entered into a Rights Agreement,
dated as of April 1, 1997 (the "Rights Agreement").
Pursuant to Section 26 of the Rights Agreement, the Board of
Directors of the Company has authorized this amendment to the Rights
Agreement.
Accordingly, in consideration of the premises and mutual
agreements herein set forth, and intending to be legally bound hereby, the
parties hereby agree as follows:
Section 1. Amendments to Rights Agreement. The Rights Agreement
shall be amended as follows:
(a) The first sentence of Section 3(a) of the Rights
Agreement is hereby amended
by deleting the words ", provided that if such determination occurs on or
after the date of an Adverse Change in Control, then such date may be
extended only if there are Continuing Directors in office and such
extension is authorized by a majority of such Continuing Directors".
(b) Section 23(a) is hereby deleted in its entirety and
replaced with the following:
"The Board of Directors of the Company may, at its option, at any
time prior to the earlier of (i) any Person becoming an Acquiring
Person or (ii) the Close of Business on the Final Expiration
Date, redeem all, but not less than all, of the then outstanding
Rights at a redemption price of $.001 per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption
price being hereinafter referred to as the "Redemption Price").
Notwithstanding the foregoing, in the event payment of the
Redemption Price to a holder of Rights would result in the
payment of an amount not equal to $.01 or an integral multiple of
$.01, the amount to be paid shall be rounded upward to the next
$.01. The Company may, at its option, pay the Redemption Price
in cash, shares of Common Stock (based on the current market
price per share at the time of redemption) or any other form of
consideration deemed appropriate by the Board of Directors."
(c) The first and second sentences of Section 27 are hereby
deleted in their entirety and replaced with the following:
<PAGE> EX-2
"Prior to the earliest of (i) the Distribution Date or (ii) a
Triggering Event, the Company may and the Rights Agent shall, if
the Company so directs, supplement or amend any provision of this
Agreement (including supplements or amendments that may be deemed
to affect the interests of the holders of Right Certificates
adversely) without the approval of any holders of certificates
representing shares of Common Stock and associated Rights. From
and after the earliest of (i) the Distribution Date or (ii) a
Triggering Event, the Company may and the Rights Agent shall, if
the Company so directs, supplement or amend this Agreement
without the approval of any holders of Right Certificates (i) to
cure any ambiguity or to correct or supplement any provision
contained herein which may be defective or inconsistent with any
other provisions herein or (ii) to make any other changes or
provisions in regard to matters or questions arising hereunder
which the Company may deem necessary or desirable; provided,
however, that no such supplement or amendment shall adversely
affect the interests of the holders of Rights as such (other than
an Acquiring Person or an Affiliate or Associate of any such
Acquiring Person), and no such supplement or amendment may cause
the Rights again to become redeemable at such time as the Rights
are not then redeemable or cause this Agreement again to become
amendable other than in accordance with this sentence."
(d) The third sentence of Section 27 is hereby amended by
deleting the words "or, so long as any Person is an Acquiring Person
hereunder, the Continuing Directors".
(e) Section 29 is hereby amended by (i) deleting in each
instance where they appear the words "(with, where specifically provided
for herein, the concurrence of the Continuing Directors)", and
(ii) deleting from the last sentence thereof the words "or the Continuing
Directors".
Section 2. One Agreement. Except as otherwise expressly provided
in this Amendment, all of the terms, conditions and provisions of the
Rights Agreement shall remain the same, and the Rights Agreement, as
amended hereby, shall continue in full force and effect and this Amendment
and the Rights Agreement shall be read and construed as one instrument.
Section 3. Governing Law. This Amendment shall be governed by
and construed in accordance with the laws of the State of Delaware
applicable to contracts to be made and performed entirely within such
State.
Section 4. Counterparts. This Amendment may be executed in one
or more counterparts, each of which when so executed shall be deemed an
original and all of which when taken together shall constitute one and the
same instrument.
<PAGE> EX-3
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed, all as of the date and year first written above.
AIRGAS, INC.
By: /s/ G.L. Keen Jr.
Name: G.L. Keen Jr.
Title: Sr. V.P. Law & Corp. Dev.
THE BANK OF NEW YORK,
As Rights Agent
By: /s/ Ralph Chianese
Name: Ralph Chianese
Title: Vice President
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