<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
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 August 4, 1999: 70,776,008 shares
<PAGE> 2
AIRGAS, INC.
FORM 10-Q
June 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Earnings
for the Three Months Ended June 30, 1999 and 1998 (Unaudited)...........3
Consolidated Balance Sheets
as of June 30, 1999 (Unaudited) and March 31,1999.......................4
Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 1999 and 1998 (Unaudited)...........5
Notes to Consolidated Financial Statements (Unaudited)..................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................25
Item 6. Exhibits and Reports on Form 8-K...................................26
SIGNATURES .................................................................27
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
Net sales
Distribution $ 345,967 $ 360,553
Gas Operations 33,526 40,220
Total net sales 379,493 400,773
Costs and expenses
Cost of products sold (excluding
depreciation and amortization)
Distribution 188,432 197,351
Gas Operations 12,835 19,752
Selling, distribution and
administrative expenses 126,961 129,644
Depreciation and amortization 22,166 21,597
Special charge -- (1,000)
Total costs and expenses 350,394 367,344
Operating income
Distribution 26,260 28,540
Gas Operations 2,839 3,889
Special charge -- 1,000
Total operating income 29,099 33,429
Interest expense, net (13,783) (14,806)
Other income, net 222 122
Equity in earnings of
unconsolidated affiliates 1,000 754
Earnings before income taxes and the
cumulative effect of an accounting change 16,538 19,499
Income tax expense 6,863 8,224
Earnings before the cumulative effect of
an accounting change 9,675 11,275
Cumulative effect of an accounting
change, net of taxes (590) --
Net earnings $ 9,085 $ 11,275
Basic earnings per share:
Earnings per share before the cumulative
effect of an accounting change $ .14 $ .16
Cumulative effect per share of an
accounting change (.01) --
Net earnings per share $ .13 $ .16
Diluted earnings per share:
Earnings per share before the cumulative
effect of an accounting change $ .14 $ .16
Cumulative effect per share of an
accounting change (.01) --
Net earnings per share $ .13 $ .16
Weighted average shares outstanding:
Basic 69,800 70,300
Diluted 71,100 72,100
Comprehensive income $ 9,234 $ 11,290
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<CAPTION>
(Unaudited)
June 30, March 31,
1999 1999
<S> <C> <C>
ASSETS
Current Assets
Trade receivables, less allowances for doubtful
accounts of $6,514 at June 30, 1999 and $6,092
at March 31, 1999 $ 195,825 $ 195,708
Inventories, net 155,561 154,424
Deferred income tax asset 7,767 7,549
Prepaid expenses and other current assets 19,508 21,161
Total current assets 378,661 378,842
Plant and equipment, at cost 1,006,356 993,496
Less accumulated depreciation (290,080) (275,637)
Plant and equipment, net 716,276 717,859
Goodwill, net of accumulated amortization of
$58,319 at June 30, 1999 and $54,986 at
March 31, 1999 423,959 428,349
Other non-current assets 170,130 173,422
Total assets $ 1,689,026 $ 1,698,472
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 71,909 $ 85,486
Accrued expenses and other current liabilities 104,407 108,295
Current portion of long-term debt 20,602 19,645
Total current liabilities 196,918 213,426
Long-term debt 850,269 847,841
Deferred income taxes 144,571 142,675
Other non-current liabilities 21,921 23,585
Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, no par value, 20,000 shares
authorized, no shares issued or outstanding at
June 30, 1999 and March 31, 1999, respectively -- --
Common stock, par value $.01 per share, 200,000
shares authorized, 72,383 and 72,024 shares issued
at June 30, 1999 and March 31, 1999, respectively 724 720
Capital in excess of par value 193,074 190,175
Retained earnings 298,175 289,090
Accumulated other comprehensive loss (761) (910)
Treasury stock, 136 and 130 common shares at cost
at June 30, 1999 and March 31, 1999, respectively (1,531) (1,129)
Employee benefits trust, 1,451 and 826 common
shares at cost at June 30, 1999 and March 31,
1999, respectively (14,334) (7,001)
Total stockholders' equity 475,347 470,945
Total liabilities and stockholders' equity $ 1,689,026 $ 1,698,472
See accompanying notes to consolidated financial statements.
<PAGE> 5
</TABLE>
<TABLE>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 9,085 $ 11,275
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 22,166 21,597
Deferred income taxes 3,375 2,714
Equity in earnings of unconsolidated affiliates (1,000) (1,078)
Gain on sales of plant and equipment (59) (45)
Minority interest in earnings (65) 66
Stock issued for employee benefit plans 1,282 1,602
Other non-cash charges 1,027 (1,000)
Changes in assets and liabilities, excluding effects
of business acquisitions and divestitures:
Trade receivables, net (117) (9,419)
Inventories, net (1,137) (9,587)
Prepaid expenses and other current assets 1,436 2,773
Accounts payable, trade (13,577) 1,195
Accrued expenses and other current liabilities 503 3,504
Other assets and liabilities, net (2,774) (2,904)
Net cash provided by operating activities 20,145 20,693
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (14,421) (21,648)
Proceeds from sale of plant and equipment 458 427
Proceeds from divestitures -- 10,463
Business acquisitions, net of cash acquired -- (17,644)
Business acquisitions, holdback settlements (250) (86)
Investment in unconsolidated affiliates (30) (59)
Dividends from unconsolidated affiliates 880 1,003
Other, net 88 428
Net cash used by investing activities (13,275) (27,116)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 47,158 90,159
Repayment of debt (43,773) (70,239)
Purchase of treasury stock (8,608) --
Exercise of stock options 665 278
Cash overdraft (2,312) (13,775)
Net cash provided (used) by financing activities (6,870) 6,423
CASH INCREASE (DECREASE) $ -- $ --
Cash - beginning of period -- --
Cash - end of period $ -- $ --
Cash paid during the period for:
Interest $ 10,847 $ 10,224
Income taxes (net of refunds) $ 633 $ --
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 6
AIRGAS, INC. AND SUBSIDIARIES
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 20 to 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 fiscal year ended March 31, 1999.
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, special charges and the accounting change 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.
Certain reclassifications have been made to previously issued financial
statements to conform to the current presentation.
(2) ACCOUNTING CHANGE
The Company adopted Statement of Position 98-5 "Reporting on the Costs of
Start-up Activities" ("SOP 98-5"), as required, in the first quarter of
fiscal year 2000 resulting in a charge to net earnings of $590 thousand, or
$.01 per diluted share. In accordance with SOP 98-5, the charge has been
reflected on a separate line entitled "Cumulative effect of an accounting
change, net of taxes", on the consolidated statement of earnings. The
charge primarily resulted from the write-off of start-up costs capitalized
in connection with the Company's two air separation units constructed
during fiscal 1998 and 1999.
(3) ACQUISITIONS AND DIVESTITURES
Subsequent to June 30, 1999, the Company acquired three distributors
of industrial gas and related equipment with aggregate annual sales of
approximately $24 million.
On August 4, 1999, the Company completed the divestiture of its operations
in Poland and Thailand to Linde AG. After-tax cash proceeds from the sale
were approximately $38 million. The Company expects to record a net gain
on the sale of approximately $7 million, or $.10 per diluted share, in the
second quarter of fiscal 2000. The businesses had combined net sales of
$5.6 million and $5.3 million and operating losses of $521 thousand and
$277 thousand in the quarters ended June 30, 1999 and June 30, 1998,
respectively.
The Company divested two non-core businesses during the quarter ended June
30, 1998. The consideration for the sales of the businesses included the
assumption of certain liabilities and cash proceeds of approximately
<PAGE> 7
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
$10.5 million. The businesses had combined net sales in the quarter ended
June 30, 1998 of $4.6 million. Divestiture reserves, which were
established during the fourth quarter of fiscal 1998, were adjusted by $1
million ($570 thousand after-tax) to reflect differences between original
estimates and the completed divestitures (see "Restructuring reserves" in
the table in Note 7).
(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.
The table below reconciles basic weighted average common shares
outstanding to diluted weighted average common shares outstanding for the
quarters ended June 30, 1999 and 1998:
June 30,
(In thousands) 1999 1998
Weighted average common shares outstanding:
Basic......................................... 69,800 70,300
Stock options................................. 1,200 1,800
Contingently issuable shares.................. 100 --
Diluted....................................... 71,100 72,100
(5) INVENTORIES
Inventories consist of:
<TABLE>
(In thousands)
<CAPTION>
June 30, March 31,
1999 1999
<S> <C> <C>
Finished goods FIFO $ 136,883 $ 135,708
Finished goods LIFO 26,010 25,652
Raw materials 865 853
LIFO reserve (1,521) (1,582)
Obsolescence reserve (6,676) (6,207)
$ 155,561 $ 154,424
</TABLE>
<PAGE> 8
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(6) OTHER NON-CURRENT ASSETS
Other non-current assets include:
<TABLE>
(In thousands)
<CAPTION>
June 30, March 31,
1999 1999
<S> <C> <C>
Investment in unconsolidated affiliates $ 100,596 $ 100,834
Non-compete agreements and other intangible
assets, at cost, net of accumulated
amortization of $88.5 million at June 30,
1999 and $85.5 million at March 31, 1999 52,791 55,894
Other assets 16,743 16,694
$ 170,130 $ 173,422
</TABLE>
(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include:
<TABLE>
(In thousands)
<CAPTION>
June 30, March 31,
1999 1999
<S> <C> <C>
Cash overdraft $ 14,647 $ 16,959
Restructuring reserves 5,048 5,087
Insurance payable and related reserves 10,073 9,584
Customer cylinder deposits 8,278 8,233
Accrued interest 11,618 8,190
Other accrued expenses and
current liabilities 54,743 60,242
$ 104,407 $ 108,295
The cash overdraft is attributable to the float of the Company's outstanding checks.
</TABLE>
<PAGE> 9
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(8) STOCKHOLDERS' EQUITY
Changes in stockholders' equity were as follows:
<TABLE>
<CAPTION>
(In thousands of shares) Employee
Shares of Common Treasury Benefits
Stock $.01 Par Value Stock Trust
<S> <C> <C> <C>
Balance--April 1, 1999 72,024 130 826
Common stock issuance (a) 359 -- --
Purchase of treasury stock -- 679 --
Reissuance of treasury stock (b) -- (48) --
Sale of treasury stock to Trust (c) -- (625) 625
Balance--June 30, 1999 72,383 136 1,451
</TABLE>
<TABLE>
<CAPTION>
(In thousands of dollars) Accumulated
Capital in Other Employee Compre-
Common Excess of Retained Comprehensive Treasury Benefits hensive
Stock Par Value Earnings Loss Stock Trust Income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--April 1, 1999 $720 $190,175 $289,090 $(910) $(1,129) $(7,001) $ --
Net earnings -- -- 9,085 -- -- -- 9,085
Common stock issuance (a) 4 1,808 -- -- -- -- --
Foreign currency
translation adjustments -- -- -- 149 -- -- 149
Purchase of treasury stock -- -- -- -- (7,480) -- --
Reissuance of
treasury stock (b) -- (247) -- -- 424 -- --
Sale of treasury stock
to Trust (c) -- 679 -- -- 6,654 (7,333) --
Tax benefit from stock
option exercises -- 659 -- -- -- -- --
Balance--June 30,1999 $724 $193,074 $298,175 $(761) $(1,531) $(14,334) $9,234
(a) Issuance of common stock for stock option exercises and for the Company's Employee Stock Purchase Plan.
(b) Reissuance of common stock in connection with stock option exercises.
(c) Sale of common stock from treasury to the Employee Benefits Trust.
</TABLE>
<PAGE> 10
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(9) 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 Supply Company, Inc. ("National Welders") by the
Company in connection with the Company's formation of a joint venture with
National Welders. 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 thousand, punitive damages and other
unspecified relief. The Company believes that Praxair's North Carolina
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
alleged 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. On July 1, 1999, after a two-week
trial, a jury found in favor of the defendant. Neither side was awarded
any monetary damages. The Company elected not to appeal the decision.
The Company is involved in various legal and regulatory proceedings
that 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 condition, results of
operations or liquidity.
(b) Insurance Coverage
The Company has established insurance programs to cover workers'
compensation, business automobile, general and product liability. These
programs have self-insured retentions of $500,000 per occurrence. Losses
are accrued based upon the Company's estimates, developed with third party
insurance adjusters, of the aggregate liability for claims incurred, claims
incurred but not reported and on Company experience. The Company has
established insurance reserves that management believes are adequate.
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 that exceed its liability insurance coverage of $100 million, such
suits could have a material adverse effect on the Company's financial
position, results of operations or liquidity.
<PAGE> 11
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(10) SUMMARY BY BUSINESS SEGMENT
Information related to the Company's operations by business segment for
the quarters ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(In thousands) Gas
Distribution Operations Combined
<S> <C> <C> <C>
June 30, 1999
Gas and rent $ 142,780 $ 32,526 $ 175,306
Hardgoods 203,187 1,000 204,187
Total net sales 345,967 33,526 379,493
Intersegment sales -- 8,659 8,659
Gross profit 157,535 20,691 178,226
Gross profit margin 45.5% 61.7% 47.0%
Operating income 26,260 2,839 29,099
Earnings before income taxes and
cumulative effect of an accounting
change 15,680 858 16,538
EBITDA (1) 45,102 6,163 51,265
EBITDA margin 13.0% 18.4% 13.5%
Assets 1,443,901 245,125 1,689,026
</TABLE>
<PAGE> 12
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(10) SUMMARY BY BUSINESS SEGMENT - (Continued)
<TABLE>
<CAPTION>
(In thousands) Gas
Distribution Operations Combined
<S> <C> <C> <C>
June 30, 1998
Gas and rent $ 142,492 $ 32,802 $ 175,294
Hardgoods 218,061 306 218,367
Other -- 7,112 7,112
Total net sales 360,553 40,220 400,773
Intersegment sales -- 5,157 5,157
Gross profit 163,202 20,468 183,670
Gross profit margin 45.3% 50.9% 45.8%
Operating income, excluding
special charges 28,540 3,889 32,429
Earnings before income taxes,
excluding special charges 16,654 1,845 18,499
EBITDA, excluding special charges (1) 47,094 6,932 54,026
EBITDA margin 13.1% 17.2% 13.5%
Assets 1,412,392 251,974 1,664,366
</TABLE>
A reconciliation of the combined operating segments to the applicable line
items on the consolidated financial statements for the quarter ended June
30, 1998 follows:
(In thousands) Quarter Ended June 30, 1998
Segment operating income $ 32,429
Special charge 1,000
Operating income $ 33,429
Segment earnings before income taxes $ 18,499
Special charge 1,000
Earnings before income taxes $ 19,499
(1) EBITDA - Operating income, excluding special charges, plus
depreciation and amortization, is a measure of the Company's ability to
generate cash flow and should be considered in addition to, but not as a
substitute for, other measures of financial performance reported in
accordance with generally accepted accounting principles.
<PAGE> 13
Item 2.
AIRGAS, INC. AND SUBSIDIARIES
MANAGMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1998
INCOME STATEMENT COMMENTARY
Net Sales
Net sales decreased 5% in the quarter ended June 30, 1999 ("current
quarter") compared to the quarter ended June 30, 1998 ("prior year
quarter").
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) June 30,
Net Sales 1999 1998 (Decrease)
<S> <C> <C> <C>
Distribution $345,967 $360,553 $(14,586)
Gas Operations 33,526 40,220 (6,694)
$379,493 $400,773 $(21,280)
</TABLE>
The Distribution segment's principal products and services include:
industrial gases, equipment rental and hardgoods. Industrial gases consist
of packaged and small bulk gases. Rental fees are charged on cylinders,
cryogenic liquid containers, bulk tanks and welding equipment. Hardgoods
consist of welding supplies and equipment, safety products, and industrial
tools and supplies. Distribution sales decreased $14.6 million (-4%)
primarily as a result of a decline in same-store hardgoods sales. Sales of
$6 million from the acquisition of eleven distributors since April 1, 1998
were offset by the divestiture of three businesses during fiscal 1999 which
had sales of $6.3 million in the prior year quarter. The decrease in
Distribution same-store sales of $14.3 million (-4%) resulted from lower
sales of hardgoods of $16.5 million (-7.5%), offset by gas and rent sales
growth of $2.2 million (1.5%). Hardgoods sales were negatively impacted in
the current quarter by the continued slowness in certain manufacturing and
industrial sectors including: metal fabrication, petro-chemical,
agriculture, pulp and paper, mining and shipbuilding. Gas and rent sales
growth were attributable to the Company's focus on national and regional
accounts, expansion of its rental welder fleet, and strategic product
sales, particularly sales related to refrigerants and medical gases.
Gas Operations' sales primarily include dry ice and carbon dioxide
which are primarily used for cooling and beverage applications. The demand
for these products is greatest in the summer months. In addition, the
segment includes the Company's foreign operations and businesses that
produce and distribute specialty gases and nitrous oxide. Until the
divestiture in December 1998, the segment also included sales of calcium
carbide and carbon products ("calcium carbide and carbon operations").
Sales decreased $6.7 million in the current quarter as a result of the
divestiture of the calcium carbide and carbon operations which had
approximately $8 million in sales in the prior year quarter, $2.2 million
of spot sales of specialty gases in the prior year quarter, partially
offset by sales of $3.5 million resulting from four dry ice acquisitions
completed since April 1, 1998.
<PAGE> 14
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company estimates same-store sales based on a comparison of
current period sales to the prior period's sales, adjusted for acquisitions
and divestitures. Future same-store sales growth is dependent on the
economy, competition from other companies, the Company's ability to
implement price increases, and the Company's ability to sell additional
products and services to existing and new customers.
Gross Profits
Gross profits decreased 3% during the current quarter compared to the prior
year quarter.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) June 30, Increase
Gross Profits 1999 1998 (Decrease)
<S> <C> <C> <C>
Distribution $157,535 $163,202 $ (5,667)
Gas Operations 20,691 20,468 223
$178,226 $183,670 $ (5,444)
</TABLE>
The decrease in Distribution gross profits of $5.7 million (-3.5%)
resulted from the divestiture of three businesses during fiscal 1999 which
had gross profits of $3.1 million in the prior year quarter and from a same-
store gross profit decline of $5 million (-3.1%). Offsetting the gross
profit declines were gross profits of $2.4 million from the acquisition of
eleven distributors since April 1, 1998. Declines in same-store gross
profits consisted of decreases in hardgoods of $6.1 million (-10.3%),
partially offset by gas and rent gross profit growth of $1.1 million
(1.1%). The decrease in hardgoods same-store gross profits resulted
primarily from the continued slowness in certain manufacturing and
industrial sectors and from price concessions in certain regions to retain
customers in response to competition. The increase in gas and rental same-
store gross profits resulted primarily from increased rental revenue from
an expanded rental welder fleet and from increases in gas storage
containers. Overall, the gross margin of 45.5% in the current quarter
increased 20 basis points from 45.3% in the prior year quarter as a result
of a shift in sales mix more heavily weighted towards higher margin gas and
rental revenues.
The increase in Gas Operations gross profits of $223 thousand resulted
primarily from four dry ice acquisitions completed since April 1, 1998,
offset by the divestiture of the calcium carbide and carbon operations in
the prior year quarter. Gas Operations' gross margin increased to 62% in
the current quarter compared to 51% in the prior year quarter as a result
of the divestiture of the calcium carbide and carbon operations which had
lower margins and from the acquisition of higher margin dry ice businesses.
Gross margin in the prior year quarter, excluding calcium carbide and
carbon operations, was 56%. In the current quarter, liquid carbon dioxide
volume gains were essentially offset by lower pricing.
<PAGE> 15
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Expenses
Selling, distribution and administrative expenses ("operating
expenses") consist of personnel and related costs, distribution and
warehouse costs, occupancy expenses and other selling and general
administrative expenses. Operating expenses decreased $2.7 million (-2%)
compared to the prior year quarter primarily resulting from the Company's
cost reduction program initiated during the third and fourth quarters of
fiscal 1999. In response to the slowing economy, the Company believes its
cost improvement program has reduced operating expenses by approximately
$12 - $15 million on an annual basis. The cost improvements have impacted
many areas of the Company's expense structure, including headcount
reductions, administrative cost reductions from the consolidation of back
office functions and from the closure of certain branch locations. As a
percentage of net sales, operating expenses increased 110 basis points to
33.5% compared to the prior year quarter.
Depreciation and amortization totaled $22.2 million or 5.8% of net
sales in the current quarter and increased $600 thousand compared to the
prior year quarter primarily as a result of business acquisitions and
capital projects completed since April 1, 1998. For the Distribution and
Gas Operations segments, depreciation and amortization expense relative to
sales was 5.4% and 9.9% for the current quarter, compared to 5.1% and 7.6%
in the prior year quarter, respectively. The increase in the Gas
Operations' percentage relative to sales resulted from the sale of the
calcium carbide and carbon operations in the prior period which had a lower
ratio of depreciation and amortization expense to sales.
Operating Income
Operating income, excluding special charges in the prior year,
decreased 10% compared to the prior year quarter. The decrease in
operating income was primarily due to lower gross profits from the decline
in hardgoods sales, partially offset by a reduction in operating expenses
resulting from cost improvements.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) June 30,
Operating Income 1999 1998 (Decrease)
<S> <C> <C> <C>
Distribution $ 26,260 $ 28,540 $ (2,280)
Gas Operations 2,839 3,889 (1,050)
Special Charges -- 1,000 (1,000)
$ 29,099 $ 33,429 $ (4,330)
</TABLE>
The Distribution segment's operating income margin decreased 30 basis
points to 7.6% in the current quarter compared to 7.9% in the prior year
quarter. Gas Operations' operating income margin decreased to 8.5% in the
current quarter from 9.7% in the prior year as a result of the divestiture
of the calcium carbide and carbon operations. Operating margins for Gas
Operations were essentially unchanged compared to the prior year quarter,
excluding the calcium carbide and carbon operations.
<PAGE> 16
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Interest Expense
Interest expense, net, totaled $13.8 million representing a decrease
of $1 million compared to the prior year quarter. The net decrease in
interest expense was primarily attributable to a decrease in the average
effective interest rate during the current quarter compared to the prior
year, partially offset by interest costs associated with acquisitions and
the repurchase of Common Stock. As discussed in "Liquidity and Capital
Resources" and in Item 3 "Quantitative and Qualitative Disclosures About
Market Risk", the Company manages interest rate exposure of certain
borrowing instruments through participation in interest rate swap
agreements.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates of $1 million
increased $246 thousand compared to the prior year quarter primarily
resulting from higher joint venture earnings of National Welders Supply
("National Welders"). Earnings by National Welders were helped by higher
sales to the construction and metal fabrication markets in the regions that
they serve.
Income Tax Expense
Income tax expense represented 41.5% of pre-tax earnings for the
current quarter compared to 42.2% in the prior year quarter. The decrease
in the effective income tax rate was primarily a result of an increase in
earnings of unconsolidated equity affiliates.
Net Earnings
Net earnings for the quarter ended June 30, 1999 were $9.1 million, or
$.13 per diluted share, compared to $11.3 million, or $.16 per diluted
share, in the same quarter in the prior year. Net earnings, before the
cumulative effect of an accounting change and a special charge, were $9.7
million, or $.14 per diluted share, in the current quarter compared to
$10.7 million, or $.15 per diluted share, in the prior year quarter.
EBITDA
Operating income, excluding special charges, plus depreciation and
amortization ("EBITDA"), was approximately $51 million in the current
quarter compared to $54 million in the prior year quarter. EBITDA as a
percentage of sales was essentially unchanged at 13.5% compared to the
prior year quarter.
<PAGE> 17
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash flows from operating activities in the current quarter totaled
$20.1 million. Depreciation and amortization represented $22.2 million of
cash flows from operating activities. Deferred income taxes of $3.4
million resulted from temporary differences. Cash flows from working
capital components decreased $12.9 million as a result of a decrease in
accounts payable related to the timing of payments to vendors, partially
offset by a decrease in prepaid expenses and other current assets.
Accounts receivable days' sales outstanding increased to 49 days from 47
days and hardgoods days' supply of inventory increased to 83 days from 77
days compared to March 31, 1999 levels. The increase in the level of
accounts receivable resulted from the effects of computer conversions,
changes in administrative personnel and from the slowing economy. The
increase in hardgoods days' supply of inventory was primarily due to a
build of safety products at certain distribution centers in connection with
centralized distribution to the Company's business units. The Company will
continue to focus on initiatives designed to improve working capital
levels.
After-tax cash flow (net earnings, excluding the cumulative effective
of an accounting change and a special charge, plus depreciation,
amortization and deferred income taxes) increased 1% to $35.2 million
compared to $34.9 million in the prior year quarter.
Cash used by investing activities totaled $13.3 million in the quarter
ended June 30, 1999 and primarily related to capital expenditures,
partially offset by dividends received from unconsolidated equity
affiliates.
Capital expenditures totaled $14.4 million and represented a 33%
reduction in capital spending compared to the prior year quarter. Capital
expenditures associated with the purchase of cylinders, bulk tanks, rental
welders and machinery and equipment totaled approximately $8 million or 60%
of total capital spending in the current quarter. Management continues to
focus on improving asset utilization and believes fiscal 2000 capital
spending may total less than $75 million.
Financing activities used cash of $6.9 million primarily to repurchase
the Company's Common Stock. Total debt outstanding increased $3.4 million
since March 31, 1999. Cash overdraft, the float of the Company's
outstanding checks, decreased by $2.3 million since March 31, 1999.
The Company will continue to look for appropriate acquisitions of
distributors. Future acquisitions and capital expenditures are expected to
be funded through 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 unanticipated requirements. 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 Company does not currently pay dividends.
<PAGE> 18
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Financial Instruments
The Company has unsecured revolving credit facilities totaling $725
million and $100 million Canadian (US$68 million) under a credit agreement
with a final maturity date of December 5, 2002. The credit agreement
contains covenants that include the maintenance of certain financial
ratios, restrictions on additional borrowings and limitations on dividends.
At June 30, 1999, the Company had borrowings under the credit agreement of
approximately $531 million and $42 million Canadian (US$28 million). The
Company also had commitments under letters of credit supported by the
credit agreement of approximately $70 million. Availability under the
credit facilities was approximately $162 million at June 30, 1999. At June
30, 1999, the effective interest rate on borrowings under the credit
facilities averaged 5.48% (5.52% on U.S. borrowings and 4.72% on Canadian
borrowings).
At June 30, 1999, the Company had the following long-term debt
outstanding under medium-term notes: $50 million of unsecured notes due
September 2001 bearing interest at a fixed rate of 7.15%; $75 million of
unsecured notes due March 2004 bearing interest at a fixed rate of 7.14%;
and $100 million of unsecured notes due September 2006 bearing interest at
a fixed rate of 7.75%. Additionally, at June 30, 1999, long-term debt of
the Company included acquisition notes and other long-term debt instruments
of approximately $87 million with interest rates ranging from 6.00% to
9.00%. The Company also has a shelf registration statement which is
currently effective under applicable federal securities laws and may be
used to issue debt and other types of securities up to an aggregate of
approximately $175 million.
In managing interest rate exposure, principally under the Company's
floating rate revolving credit facilities, the Company participates in 25
interest rate swap agreements, including two swap agreements entered into
in May 1999. The swap agreements are with major financial institutions and
aggregate $572 million in notional principal amount at June 30, 1999.
Eighteen swap agreements with approximately $335 million in notional
principal amount require fixed interest payments based on an average
effective rate of 6.37% for remaining periods ranging between one and five
years. Seven swap agreements with approximately $237 million in notional
principal amount require variable interest payments based on an average
rate of 5.03% at June 30, 1999. Under the terms of five swap agreements,
the Company has elected to receive the discounted value of the counterparty's
interest payments up-front. At June 30, 1999, approximately $7.6 million of
such payments were included in other non-current liabilities. The Company
monitors its positions and the credit ratings of its counterparties, and does
not anticipate non-performance by the counterparties.
Share Repurchase Program
In March 1999, the Company's Board of Directors authorized the
repurchase of up to seven million shares of the Company's outstanding
Common Stock. The shares may be repurchased in the open market or in
privately negotiated transactions depending on market conditions and other
factors. The Company has financed its repurchase programs with borrowings
and funds provided by operating activities. During the quarter ended June
30, 1999, the Company repurchased 679 thousand shares at an average cost of
$11 per share, including 175 thousand shares to complete a previous
repurchase program. The effect of the share repurchases on earnings per
share for the current quarter was not material. At June 30, 1999, the
remaining shares authorized for repurchase under the repurchase program
totaled 6.5 million shares.
<PAGE> 19
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Subsequent Acquisitions and Divestitures
Subsequent to June 30, 1999, the Company acquired three distributors of
industrial gas and related equipment with aggregate annual sales of
approximately $24 million. In addition, on August 4, 1999, the Company
completed the divestiture of its operations in Poland and Thailand to Linde
AG. After-tax cash proceeds from the sale were approximately $38 million.
The Company expects to record a net gain on the sale of approximately $7
million, or $.10 per diluted share, in the second quarter of fiscal 2000.
YEAR 2000 READINESS DISCLOSURE
Year 2000 Issues
The Company is aware of the issues associated with the Year 2000
matter. 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 hardware 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. Implementation of standardized software and computer
systems has been substantially completed 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 reviewed time dimensional testing performed by a third party on
one critical system and intends to complete internal time dimensional
testing for the other critical system by September 1999. Although
execution of the Repositioning Plan addresses certain significant Year 2000
issues, it was not undertaken 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 $21 million over the duration of the project, of
which approximately $14 million is expected to be capitalized. On a
project-to-date basis, the Company has incurred approximately $17 million
in costs and expenses to standardize systems, of which approximately $12
million represents new capital equipment and software. The standardization
project is substantially complete with one operating company remaining to
be converted to the standard operating platform. This remaining operating
company's current operating system is expected to be Year 2000 compliant by
September 1999. Although it is considered unlikely by management that the
Company's information systems hardware and application software will result
in a Year 2000 problem, 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.
<PAGE> 20
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In conjunction with the Repositioning Plan, the Company has
established a national data center equipped with systems hardware and
software that its vendors have indicated are Year 2000 compliant. Time
dimensional testing of data center hardware has been completed with no
significant compliance exceptions identified. In addition, the Company has
substantially completed testing of its desktop personal computers with very
few failures noted.
Embedded Chips
The Company's Year 2000 project team includes designated operating
company managers responsible for directing Year 2000 remediation efforts.
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 Gas Operations segment. 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 December 1999. Contingency
planning for the effected phone systems will be completed by September
1999. Management believes that sufficient contingency plans can be
implemented such that operations will not be materially impacted if the
effected phone system repairs and replacements are not completed by
December 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
estimates expenditures for Year 2000 remediation, including the replacement
of non-compliant embedded chip equipment, will total approximately $1.1
million. Of this total, the Company expects approximately $1 million will
be for capital upgrades and replacements. The Company believes it will
complete the remediation of embedded chip equipment and processes prior to
the year 2000. However, if repair, replacement or contingency plans are
not completed before the Year 2000, the Year 2000 matter 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 year 1999. A majority of the Company's key
suppliers have indicated that they have active Year 2000 compliance
programs. As a contingency plan, alternative suppliers will be identified
as deemed necessary. In addition, audits of certain key suppliers to
confirm Year 2000 readiness have been completed with no significant issues
identified. 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
The Company believes that its most reasonably likely worst case
scenario changes over time. The Company has developed certain contingency
plans to address currently identified Year 2000 issues. These plans address
<PAGE> 21
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
potential disruptions of the Company's business including administrative
and supply chain functions. Administrative contingency plans provide for
back-up data processing facilities, which have been tested and found to be
Year 2000 compliant, and encompass the national data center, critical
business software and communications networks. Supply chain contingency
plans include identifying alternative suppliers and arranging for back-up
or alternative transportation for shipping the Company's products.
Contingency planning will continue through the remainder of calendar year
1999, as deemed necessary, based upon the Company's ongoing assessment of
potential Year 2000 risks, particularly those related to third parties.
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 evaluation of third party readiness has been
performed by internal Company personnel.
OTHER
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). This statement standardizes the accounting for derivative
instruments 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 was scheduled to be effective for fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 delayed the effective date of
SFAS 133 for one year, to fiscal years beginning after June 15, 2000. The
implementation of SFAS 133 is not expected to have a material impact on the
net earnings of the Company. The recognition of the interest rate swap
agreements and corresponding debt obligations at fair value could reduce
the Company's availability under its revolving credit facility. The
reduction in availability could negatively effect liquidity of the Company
depending on market interest rates at the time of implementation.
<PAGE> 22
AIRGAS, INC. AND SUBSIDIARIES
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 the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in rules, regulations and releases. The
Company 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 the Company
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 success of the Company's cost improvement program,
the Company's ability to reduce costs and capital spending, implementation
and standardization of information systems projects, any potential problems
relating to Year 2000 matters (including without limitation, those relating
to the Company's 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 the Company's ability to develop and implement
contingency plans, if necessary), the success and timing of acquisitions
and 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's primary market risk exposure is from changes in interest
rates. The Company's policy is to manage interest rate risk exposure
through the use of a combination of fixed and floating rate debt and
interest rate swap agreements The Company maintains the ratio of fixed to
variable rate debt within parameters established by management under
policies approved by the Board of Directors. In addition, the Company
monitors its positions and the credit ratings of its counterparties,
thereby minimizing the risk of non-performance by the counterparties. The
Company does not enter into derivative financial instruments for trading
purposes.
The table below summarizes the Company's market risks associated with
long-term debt obligations and interest rate swaps as of June 30, 1999.
For long-term debt obligations, the table presents cash flows related to
payments of principal and interest by expected fiscal year of maturity.
For interest rate swaps, the table presents the notional amounts underlying
the interest rate swaps by year of maturity. The notional amounts are used
to calculate contractual payments to be exchanged and are not actually paid
or received. Fair values were
<PAGE>23
computed using market quotes, if available, or based on discounted cash
flows using market interest rates as of the end of the period.
<TABLE>
<CAPTION>
Expected Fiscal Year of Maturity
(In millions) Fair
Fixed Rate Debt: 2000 2001 2002 2003 2004 2005 Thereafter Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medium-term notes $ -- $ -- $ 50 $ -- $ 75 $ -- $ 100 $ 225 $ 215
Interest expense $ 17 $ 17 $ 15 $ 13 $ 10 $ 8 $ 7 $ 87
Average interest rate 7.41% 7.41% 7.45% 7.49% 7.49% 7.75% 7.75%
Acquisition notes $ 15 $ 13 $ 21 $ 1 $ 20 $ -- $ 2 $ 72 $ 70
Interest expense $ 5 $ 4 $ 3 $ 2 $ 1 $ -- $ -- $ 15
Average interest rate 7.47% 7.47% 7.47% 7.47% 7.47% 7.47% 7.47%
Other notes $ 4 $ 1 $ 1 $ 1 $ -- $ -- $ -- $ 7 $ 7
Average interest rate 6.90% 6.90% 6.90% 6.90%
Variable Rate Debt:
Revolving credit facilities $ -- $ -- $ -- $ 559 $ -- $ -- $ -- $ 559 $ 559
Interest expense $ 31 $ 31 $ 31 $ 31 $ -- $ -- $ -- $ 124
Interest rate (a) 5.48% 5.48% 5.48% 5.48%
Other notes $ -- $ 1 $ 7 $ -- $ -- $ -- $ -- $ 8 $ 8
Average interest rate 8.75% 8.75% 8.75%
</TABLE>
<PAGE> 24
<TABLE>
<CAPTION>
Expected Fiscal Year of Maturity
(In millions) Fair
Interest Rate Swaps: 2000 2001 2002 2003 2004 2005 Thereafter Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
US $ denominated Swaps:
15 Swaps Receive
Variable/Pay Fixed $ 15 $ 55 $ 120 $ 96 $ -- $ 40 $ -- $ 326 $ (11)
Variable Receive rate
(3 month LIBOR) = 5.02%
Weighted average
pay rate = 6.37%
7 Swaps Receive
Fixed/Pay Variable $ 57 $ 50 $ 50 $ -- $ 30 $ -- $ 50 $ 237 $ 5
Weighted average
receive rate = 6.60 %
Variable pay rate
(6 month LIBOR) = 5.03%
Canadian $ denominated Swaps:
3 Swaps Receive
Variable/Pay Fixed $ 3 $ 4 $ 2 $ -- $ -- $ -- $ -- $ 9 $ --
Variable Receive rate
(3 month CAD BA) = 4.76% (b)
Weighted average
pay rate = 6.66%
Other LIBOR based agreements:
Operating leases with trust $ 13 $ -- $ -- $ -- $ -- $ -- $ -- $ 13 $ 13
Variable rate
(3 month LIBOR plus 110
basis points = 6.12%)
(a) The variable rate of long-term debt obligations is based on the London
Interbank Offered Rate ("LIBOR") as of June 30, 1999. For future periods,
the variable interest rate is assumed to remain at 5.48% with the principal
balance of long-term debt obligations held constant at $559 million.
However, the variable rate and borrowing levels of long-term debt may
fluctuate materially from those presented above.
(b) The variable receive rate for Canadian dollar denominated interest
rate swaps is the rate on Canadian Bankers' acceptances ("CAD BA").
</TABLE>
Limitations of the tabular presentation
As the table incorporates only those interest rate risk exposures that
exist as of June 30, 1999, it does not consider those exposures or
positions that could arise after that date. In addition, actual cash flows
of financial instruments in future periods may differ materially from
prospective cash flows presented in the table due to future fluctuations in
variable interest rates and Company debt levels.
<PAGE> 25
Foreign Currency Rate Risk
Certain subsidiaries of the Company are located in foreign countries.
The Company does not hedge its exposure to translation gains and losses
relating to foreign currency net asset exposures. The Company considers
its exposure to foreign currency exchange fluctuations to be immaterial to
its consolidated results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 Supply Company, Inc. ("National Welders") by the
Company in connection with the Company's formation of a joint venture with
National Welders. 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 thousand, punitive damages and other
unspecified relief. The Company believes that Praxair's North Carolina
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
alleged 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. On July 1, 1999, after a two-week
trial, a jury found in favor of the defendant. Neither side was awarded
any monetary damages. The Company elected not to appeal the decision.
The Company is involved in various legal and regulatory proceedings
that 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 condition, results of
operations or liquidity.
<PAGE> 26
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits are being filed as part of this Quarterly
Report on Form 10-Q:
Exhibit No. Description
11 Calculation of earnings per share
27 Financial Data Schedule as of June 30, 1999 and Amended
Financial Data Schedule as of June 30, 1998
b. Reports on Form 8-K
On May 17, 1999, the Company filed a Form 8-K pursuant to Item 5,
reporting its earnings for the fourth quarter and fiscal year ended
March 31, 1999.
<PAGE> 27
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 August 11, 1999 /s/ Scott M. Melman
Scott M. Melman
Senior Vice President and
Chief Financial Officer
<TABLE>
EXHIBIT 11
AIRGAS, INC.
EARNINGS PER SHARE CALCULATIONS
<CAPTION>
Three Months Ended
June 30,
1999 1998
<S> <C> <C>
Weighted Average Shares Outstanding:
Basic shares outstanding 69,800,000 70,300,000
Stock options - incremental shares 1,200,000 1,800,000
Contingently issuable shares 100,000 --
Diluted shares outstanding 71,100,000 72,100,000
Net earnings $9,085,000 $11,275,000
Basic earnings per share $ .13 $ .16
Diluted earnings per share $ .13 $ .16
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 202,339
<ALLOWANCES> 6,514
<INVENTORY> 155,561
<CURRENT-ASSETS> 378,661
<PP&E> 1,006,356
<DEPRECIATION> 290,080
<TOTAL-ASSETS> 1,689,026
<CURRENT-LIABILITIES> 196,918
<BONDS> 850,269
<COMMON> 724
0
0
<OTHER-SE> 474,623
<TOTAL-LIABILITY-AND-EQUITY> 1,689,026
<SALES> 379,493
<TOTAL-REVENUES> 379,493
<CGS> 201,267
<TOTAL-COSTS> 350,394
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,783
<INCOME-PRETAX> 16,538
<INCOME-TAX> 6,863
<INCOME-CONTINUING> 9,675
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (590)
<NET-INCOME> 9,085
<EPS-BASIC> .13
<EPS-DILUTED> .13
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
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0
0
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