<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 1-9344
AIRGAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-0732648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
259 North Radnor-Chester Road, Suite 100
Radnor, Pennsylvania 19087-5283
(Address of principal executive offices) (Zip Code)
(610) 687-5253
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the 62,682,081 shares of voting stock
held by non-affiliates of the Registrant was approximately $337 million
computed by reference to the closing price of such stock on the New York
Stock Exchange on June 2, 2000. For purposes of this calculation, only
executive officers and directors were deemed to be affiliates.
The number of shares of common stock outstanding as of June 2, 2000
was 65,963,656.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for the Annual Meeting of Stockholders
to be held August 3, 2000 is partially incorporated by reference into Part
III. Those portions of the Proxy Statement included in response to Item
402(k) and Item 402(l) of Regulation S-K are not incorporated by reference
into Part III.
<PAGE> 2
AIRGAS, INC.
TABLE OF CONTENTS
PART I
ITEM NO. PAGE
1. Business.................................................... 3
General..................................................... 3
Distribution................................................ 3
Gas Operations.............................................. 4
Airgas Growth Strategies.................................... 5
Regulatory and Environmental Matters........................ 6
Insurance................................................... 6
Employees................................................... 6
Patents, Trademarks and Licenses............................ 6
Executive Officers of the Company........................... 6
2. Properties.................................................. 8
3. Legal Proceedings........................................... 8
4. Submission of Matters to a Vote of Security Holders......... 8
PART II
5. Market for the Company's Common Stock and Related
Stockholder Matters......................................... 9
6. Selected Financial Data..................................... 10
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
7A. Quantitative and Qualitative Disclosures About Market Risk.. 25
8. Financial Statements and Supplementary Data................. 27
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 27
PART III
10. Directors and Executive Officers of the Company............. 27
11. Executive Compensation...................................... 27
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 27
13. Certain Relationships and Related Transactions.............. 27
PART IV
14. Exhibits, Financial Statements Schedules, and
Reports on Form 8-K......................................... 28
Signatures....................................................... 31
<PAGE> 3
PART I
ITEM 1. BUSINESS.
GENERAL
Airgas, Inc. and subsidiaries ("Airgas" or the "Company") is the
largest distributor of industrial, medical and specialty gases (delivered
in "packaged" or cylinder form) and related welding supplies and equipment,
and the third largest distributor of safety products in the United States.
Airgas also produces and distributes dry ice and liquid carbon dioxide in
the United States. Airgas' distribution network consists of approximately
700 locations in 44 states, including branch locations, distribution
centers, catalog operations, inbound call centers and outbound
telemarketing operations. Sales were $1.54 billion, $1.56 billion and
$1.45 billion in fiscal years 2000, 1999 and 1998, respectively.
The Company's operating segments consist of Distribution and Gas
Operations. Financial information by business segment can be found in Item
7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" ("MD&A"), "Financial Statements and Supplementary Data", and
Note 22 to the Company's consolidated financial statements under Item 8.
Descriptions of the operating segments are as follows:
DISTRIBUTION
The Distribution segment accounts for approximately 90% of
consolidated sales and reflects the distribution of industrial, medical and
specialty gases, safety products, and industrial tools and supplies. The
Distribution segment also includes the equity in earnings from a joint
venture with National Welders Supply Company, Inc., which is a producer and
distributor of industrial, medical and specialty gases and related welding
supplies and equipment.
Principal Products and Services
The Distribution segment's principal products and services include
packaged and small bulk gases, gas cylinder and welding equipment rental
and hardgoods. Gas sales include industrial, medical and specialty gases
such as: nitrogen, oxygen, argon, helium, acetylene, carbon dioxide,
nitrous oxide, hydrogen, welding gases, ultra high purity grades and
special application blends. Rent is derived from gas cylinders, cryogenic
liquid containers, bulk storage tanks and through the rental of welding
equipment. Gas and rent represent approximately 42%, 40% and 40% of the
Distribution segment's sales in each of the fiscal years 2000, 1999 and
1998, respectively. Hardgoods consist of welding supplies and equipment,
safety products, and industrial tools and supplies, certain of which are
considered as maintenance, repair and operations ("MRO") products. In each
of the fiscal years 2000, 1999 and 1998, hardgoods sales represent
approximately 58%, 60% and 60% of the Distribution segment's sales,
respectively (see Note 22 of the Company's Consolidated Financial
Statements for additional information regarding segment sales).
Principal Markets and Methods of Distribution
The Company believes the North American market for industrial, medical
and specialty gases to be approximately $9.5 billion annually. The
industry has three principal modes of distribution: on-site supply, bulk or
merchant supply and cylinder ("packaged gas") supply. On-site supply
accounts for approximately 74% of the gas volume delivered in North
America. Bulk or merchant supply accounts for 23% of the volume, and
packaged gas supply accounts for 3% of the volume delivered annually.
However, the packaged gas supply mode accounts for 34% of the value, or
$3.2 billion, of the industrial, medical and specialty gases sold in North
America. The bulk or merchant supply mode accounts for an additional 34%
of the value of annual gas sales. Airgas' market focus has been on the
packaged gas segment of the market and on small bulk customers.
Airgas is the largest distributor of packaged gases in the United
States with approximately a 14% market share. The Company's competitors in
the packaged gases market are approximately 900 independent distributors
that serve approximately 45% of the market through a fragmented
distribution network. Large distributors, including vertically integrated
gas producers such as Praxair, Inc. ("Praxair"), Air Products and
Chemicals, Inc. ("Air Products"), Liquid Air Corporation of America ("Air
Liquide"), and BOC Gases Group ("BOC Gases"), serve the remaining 41% of
the packaged gas market.
<PAGE> 4
The Company estimates the United States market for hardgoods products,
including welding supplies and equipment, safety products, and industrial
tools and supplies, to be approximately $55 billion annually. The market
for hardgoods products is highly fragmented and is serviced through
multiple distribution channels. Airgas offers its lines of hardgoods
products through branch stores, direct sales representatives,
telemarketing, e-commerce and catalogs. The Company believes its share of
the hardgoods market is less than 2%. Competition at the local level
consists primarily of small, branch-based distribution companies. At the
national level, Airgas competes with large, branch-based and direct
marketers, such as W.W. Grainger, Inc., Vallen Corporation and MSC
Industrial Direct, Inc., as well as the large integrated gas producers.
Customer Base
The Company's customer base is broad and includes many major
industries. The Company estimates the following industry segments account
for the indicated percentages of the Company's total sales:
- Manufacturing (56%) - principally producers of fabricated metal
products (16%), industrial and transportation equipment (9%), chemical
products (8%), and primary metal products (6%);
- Service Sector (10%) - principally medical and health services (4%);
- Agriculture and Mining (8%);
- Construction (7%);
- Wholesale Trade (6%); and
- All Other (13%).
Suppliers
The Company purchases industrial, medical and specialty gases pursuant
to requirements contracts from national and regional producers of
industrial gases. The Company also manufactures certain gases, including
acetylene, nitrous oxide, nitrogen, oxygen and argon. The Company believes
that if a contractual arrangement with any supplier of gases or other raw
materials was terminated, it would be able to locate alternative sources of
supply without disruption of service. The Company purchases hardgoods from
major manufacturers and suppliers. For certain products, the Company has
negotiated national purchasing arrangements.
GAS OPERATIONS
The Gas Operations segment produces and distributes certain gas
products, principally dry ice, carbon dioxide, specialty gases and nitrous
oxide. The Company also operates two air separation plants that produce
oxygen, nitrogen and argon which are sold to on-site customers and to the
Distribution segment. A description of the businesses included in the Gas
Operations segment is as follows:
Dry Ice
The Company is a producer and distributor of dry ice in the United
States. Customers include food processors, wholesale trade and
supermarkets. The dry ice business generally experiences a higher level of
sales in the second and third quarters of the fiscal year due to weather-
related demand. The Company's carbon dioxide requirements (dry ice is the
solid form of carbon dioxide) come from internal sources with the balance
purchased from the major producers of carbon dioxide.
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Carbon Dioxide
The Company is a producer and distributor of liquid carbon dioxide.
Carbon dioxide requirements are primarily obtained from carbon dioxide
reserves owned by the Company and through a 50% joint venture. The joint
venture also produces and sells liquid carbon dioxide to other producers of
industrial gases. The Company operates carbon dioxide reserves and a
related pipeline which are located in Mississippi and Louisiana. Carbon
dioxide from the Company's reserves is also sold to competitors, including
Praxair and BOC Gases. The Company believes the United States bulk supply
market for liquid carbon dioxide is approximately $400 million annually.
The largest customer segments include food and beverage producers, chemical
producers and oil and gas extraction. The Company primarily competes with
three major carbon dioxide companies, Praxair, BOC Gases and Air Liquide,
which produce over 80% of the United States merchant carbon dioxide
volumes.
Specialty and Other Gases
The Company operates six "A" labs, full scale testing and blending
facilities, which blend various special application gas mixes, ultra high
purity grade gases, pure hydrocarbon mixtures, EPA protocol gases, and
vehicle emission standard gases. Gas mixtures are used in process control,
final product qualification and emissions monitoring. Specialty gases
produced are primarily sold to the Distribution segment (see Note 22 of the
Company's Consolidated Financial Statements for disclosure related to
segment sales). The third-party customer base for these products consists
primarily of research facilities and biotechnology, pharmaceutical, food
processing and environmental-related businesses. Gas Operations also
provides technical support to 32 "B" labs, limited scale testing and
blending facilities, which are operated by the Distribution segment. The
"A" and "B" labs perform testing and certification services for gas purity.
Nitrous Oxide
The Company is a manufacturer of nitrous oxide gas. Nitrous oxide is
used as an anesthetic in the medical and dental fields, as a propellant in
the packaged food business and is utilized in the manufacturing process of
certain high technology electronics industries. The Company's market focus
includes bulk customers as well as sales to the Distribution segment. The
Company purchases the raw materials utilized in its nitrous oxide
production pursuant to contracts with major manufacturers and suppliers.
The Company believes that if a contractual arrangement with any Gas
Operations segment supplier was terminated, it would not have a material
adverse effect on operations. However, two of the Company's 14 dry ice
production facilities are located on property owned by BOC Gases. If the
current arrangements with BOC Gases were terminated, the Company's dry ice
production capabilities may be reduced.
AIRGAS GROWTH STRATEGIES
The Company's strategy is to focus on internal growth, supplemented by
packaged gas distributor acquisitions. To enhance internal growth, the
Company has selectively added complementary product offerings in order to
leverage its distribution network.
The industrial gas distribution industry continues to undergo a
consolidation, which Airgas believes will present opportunities to acquire
industrial gas distributors. The Company believes that its competitive
advantages in acquiring distributors are its extensive distribution
network, its well-organized acquisition program, its flexibility in
structuring acquisitions to meet sellers' needs and its ability to offer
sellers and their employees a continuing role in the Company. In seeking
to acquire gas distributors, the Company competes with the large vertically
integrated gas producers and other independent distributors.
The Company has financed distributor acquisitions primarily with debt
and internally generated funds. The Company has been able to obtain debt
financing due to its ability to generate cash flow from operating
activities. The cost and terms of any future financing arrangement depend
on the market conditions and the Company's financial position at that time.
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REGULATORY AND ENVIRONMENTAL MATTERS
The Company's subsidiaries are subject to federal and state laws and
regulations adopted for the protection of the environment and the health
and safety of employees and users of the Company's products. The Company
has programs for the operation and design of its facilities to achieve
compliance with applicable environmental regulations. The Company believes
that it is in compliance, in all material respects, with such laws and
regulations. Expenditures for environmental purposes during fiscal 2000
were not material.
INSURANCE
The Company has established insurance programs to cover workers'
compensation, business automobile, general and product liability. These
programs have self-insured retention of $500,000 per occurrence. Estimated
losses are accrued based upon the Company's experience for the aggregate
liability for claims incurred and claims incurred but not reported. The
Company believes its insurance reserves are adequate.
EMPLOYEES
On March 31, 2000, the Company employed approximately 8,000 employees
of whom approximately 5% were covered by collective bargaining agreements.
The Company believes it has good relations with its employees and has not
experienced a significant strike or work stoppage.
PATENTS, TRADEMARKS AND LICENSES
The Company holds trademark registrations for "Airgas," "Carbonic
Reserves," "Red-D-Arc," "RED-D-ARC WELDERENTAL," "Dyna-Switch," "Gold Gas,"
"Stainless Mix," "Steelmix" and "Alummix." The Company holds a patent
registration for "Fluid Bed Air Cooling System," a method and apparatus for
conveying dry ice. The Company believes that its businesses as a whole are
not materially dependent upon any single patent, trademark or license.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
Peter McCausland (1) 50 Chairman of the Board and Chief Executive Officer
William A. Rice, Jr. 53 President and Chief Operating Officer
Roger F. Millay 42 Senior Vice President and Chief Financial Officer
Alfred B. Crichton 52 Division President - West
John Musselman 51 Division President - East
Ted R. Schulte 49 Vice President - Gas Operations
Andrew R. Cichocki 37 Senior Vice President - Business Operations and
Planning
Samuel H. Goldstein 41 Senior Vice President and Chief Information
Officer
Gordon L. Keen, Jr. 55 Senior Vice President - Law and Corporate
Development
Patrick M. Visintainer 36 Senior Vice President - Sales
Michael L. Molinini 49 Vice President - Hardgoods Operations
__________________
(1) Member of the Board of Directors
<PAGE> 7
Mr. McCausland has been the Chairman of the Board and Chief Executive
Officer of the Company since May 1987. Mr. McCausland has also served as
President from June 1986 to August 1988, from April 1993 to November 1995,
and from April 1997 to December 1998. In May 1997, Mr. McCausland was
elected to the board of directors of Hercules Inc., a worldwide
manufacturer of chemical specialty products. He also serves on the Board
of Trustees of the Eisenhower Exchange Fellowships.
Mr. Rice has been President and Chief Operating Officer since January
1999. Prior to 1999, he served as Group President - Airgas Direct
Industrial from April 1997 to December 1998 and Airgas' Division President
- Industrial Distribution and Purchasing from April 1995 to March 1997.
Mr. Millay has been Senior Vice President and Chief Financial Officer
since November 1999. Prior to joining Airgas, Mr. Millay served as Senior
Vice President and Chief Financial Officer of Transport International Pool,
a division of General Electric Capital Corporation, from May 1995 to
October 1999. Prior to that, Mr. Millay served in various positions since
joining General Electric Capital Corporation in July 1987.
Mr. Crichton has been Division President - West since February 1993.
Mr. Musselman has been Division President - East since April 1997.
Prior to that, Mr. Musselman served as President of Northeast Airgas from
January 1989 to March 1997.
Mr. Schulte has been Vice President - Gas Operations since November 1998.
Prior to that, Mr. Schulte served as President of Airgas Carbonic from
November 1997 to October 1998. Before October 1997, Mr. Schulte served as
Senior Vice President of Energetic Solutions, the US subsidiary of ICI
Explosives.
Mr. Cichocki has been Senior Vice President - Business Operations and
Planning since January 1999. Prior to that, Mr. Cichocki served as Vice
President - Corporate Development from April 1997 to December 1998 and as
Assistant Vice President - Corporate Development from August 1992 to March
1997.
Mr. Goldstein has been Senior Vice President and Chief Information
Officer since January 1999. Prior to that, Mr. Goldstein served as Vice
President and Chief Information Officer from September 1996 to December
1998. He joined Airgas from KPMG LLP, where he served as a National
Service Leader for the Consulting Division from June 1991 to September
1996.
Mr. Keen has been Senior Vice President - Law and Corporate
Development since April 1997. Prior to that, Mr. Keen served as Vice
President - Corporate Development from January 1992 to March 1997.
Mr. Visintainer has been Senior Vice President - Sales since January
1999. Prior to that, Mr. Visintainer served as Vice President - Sales and
Marketing from February 1998 to December 1998 and as President of one of
the Company's subsidiaries from April 1996 to January 1998. Until March
1996, he was employed by BOC Gases and served in various field positions
including National Sales Manager - Industrial/Special Gases and National
Accounts Manager.
Mr. Molinini has been Vice President - Hardgoods Operations since
joining the Company in April 1997. Prior to that, Mr. Molinini served as
Vice President of Marketing of National Welders Supply Company since 1991.
<PAGE> 8
ITEM 2. PROPERTIES.
The principal executive offices of the Company are located in leased
space in Radnor, Pennsylvania.
The Company's Distribution segment operates a network of approximately
560 branch stores, 32 "B grade" gas laboratories, 17 acetylene
manufacturing facilities, five regional distribution centers, 100 cylinder
fill plants and various customer call centers. The Distribution segment
conducts business in 44 states. The Company owns approximately 25% of
these facilities. The remaining facilities are primarily leased from third
parties. Facilities leased from employees are on terms consistent with
commercial rental rates prevailing in the surrounding rental market.
The Company's Gas Operations' segment consists of businesses, located
throughout the United States, which operate approximately 60 branch
locations, seven liquid carbon dioxide and 14 dry ice production
facilities, five "A grade" gas laboratories, six nitrous oxide production
facilities and a carbon dioxide pipeline. The Company owns approximately
50% of these facilities. The remaining facilities are leased from third
parties.
During fiscal 2000, the Company's production facilities operated at
approximately 75% of capacity.
The Company believes that its facilities are adequate for its present
needs and that its properties are generally in good condition, well
maintained and suitable for their intended use.
ITEM 3. LEGAL PROCEEDINGS.
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") 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.
The Company is involved in various legal and regulatory proceedings
that have arisen in the ordinary course of its business and have not been
fully 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE> 9
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's common stock (the "common stock") is listed on the New
York Stock Exchange (ticker symbol: ARG). The following table sets forth,
for each quarter during the last two fiscal years, the high and low closing
price per share for the common stock as reported by the New York Stock
Exchange:
High Low
Fiscal 2000
First Quarter $12.31 $ 8.31
Second Quarter 13.75 10.00
Third Quarter 11.50 8.44
Fourth Quarter 9.88 6.06
Fiscal 1999
First Quarter $18.81 $13.94
Second Quarter 14.25 11.50
Third Quarter 12.56 8.50
Fourth Quarter 10.13 8.13
______________________
The closing sale price of the Company's common stock as reported by
the New York Stock Exchange on June 2, 2000, was $5.38 per share. As of
June 2, 2000, there were approximately 12,500 shareholders of record of the
Company's common stock.
The present policy of the Company is to retain earnings to provide
funds for the operation and expansion of its business and not to pay cash
dividends on its common stock. Any payment of future dividends and the
amounts thereof will depend upon the Company's earnings, financial
condition, loan covenants, capital requirements and other factors deemed
relevant by management and the Company's Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA.
Selected financial data for the Company are presented in the table
below and should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item
7 and the Company's consolidated financial statements included in Item 8
herein.
<TABLE>
<CAPTION>
(In thousands, except per share amounts):
Years Ended March 31,
2000 (1) 1999 (2) 1998 (3) 1997 (4) 1996
<S> <C> <C> <C> <C> <C>
Operating Results:
Net sales $1,542,334 $1,561,218 $1,447,990 $1,158,894 $ 838,144
Depreciation & amortization 89,308 87,926 76,670 62,491 45,762
Operating income 106,731 112,996 118,948 82,285 92,985
Interest expense, net 57,560 60,298 53,290 39,752 24,862
Income taxes 31,551 34,437 29,989 21,080 28,522
Net earnings 38,283 51,924 40,540 23,266 39,720
Basic earnings per share $ .55 $ .74 $ .59 $ .35 $ .63
Diluted earnings per share $ .54 $ .72 $ .57 $ .34 $ .60
Balance Sheet Data:
Working capital $ 189,194 $ 165,416 $ 141,276 $ 124,849 $ 81,588
Total assets 1,739,331 1,698,472 1,641,474 1,291,031 883,642
Current portion of long-term debt 20,071 19,645 12,150 25,158 12,179
Long-term debt 857,422 847,841 830,845 629,931 385,832
Other non-current liabilities 28,998 23,585 36,842 29,601 34,490
Stockholders' equity (5) $ 472,507 $ 470,945 $ 426,873 $ 336,657 $ 236,209
____________________________
(1) As discussed in Notes 1, 2 and 3 to the Company's consolidated
financial statements, the results for fiscal 2000 include:
(a) special charge recoveries of $2.8 million ($1.7 million
after-tax) primarily consisting of an insurance settlement related to
a fiscal 1997 loss, (b) non-recurring gains of $14.9 million ($7.8
million after-tax) relating to the divestiture of the Company's
operations in Poland and Thailand and a $2.6 million ($800 thousand
after-tax) gain from the divestiture of a non-core medical equipment
distribution business, (c) other charges, including a litigation
charge of $7.5 million ($4.8 million after-tax) that represents an
estimate of the Company's overall costs associated with the defense
and settlement of certain lawsuits, a $3.8 million ($2.2 million after-
tax) inventory write-down related to certain specialty gases, and a
$590 thousand after-tax charge representing the cumulative effect of
an accounting change.
(2) As discussed in Notes 2 and 3 to the Company's consolidated financial
statements, the results for fiscal 1999 include: (a) special charge
recoveries of $1.0 million ($575 thousand after-tax) for reserve
adjustments related to the divestiture of two non-core businesses, (b)
non-recurring gains of $25.5 million ($15 million after-tax) relating
to the divestiture of the Company's calcium carbide and carbon
products operations, and (c) a $1.8 million after-tax non-recurring
gain relating to insurance proceeds recorded by an equity affiliate.
<PAGE> 11
(3) As discussed in Notes 2 and 3 to the Company's consolidated financial
statements, the results for fiscal 1998 include: (a) fourth quarter
special charges of $22.4 million ($14.3 million after-tax) which
consisted of severance, exit costs for the closure of duplicate
facilities, the impairment write-down of property, equipment
and related goodwill and a write-down related to the divestiture of
several non-core businesses, offset by a one-time net gain related to an
acquisition break-up fee of $3 million ($1.9 million after-tax), (b) a
non-recurring gain of $14.5 million ($9.4 million after-tax) from the
partial recovery of refrigerant losses, and (c) a non-recurring gain on
the sale of a non-core business.
(4) In fiscal 1997, the Company recorded special charges totaling $31.4 million
($20.2 million after-tax) related to the fraudulent breach of contract by a
third-party supplier of refrigerant gas and an after-tax loss on the sale of
a non-core business.
(5) The Company has not paid any dividends on its common stock.
</TABLE>
<PAGE> 12
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7.
RESULTS OF OPERATIONS: 2000 COMPARED TO 1999
OVERVIEW
The Company's net sales for the fiscal year ended March 31, 2000 were
$1.54 billion compared to $1.56 billion in the prior year. Net sales in
fiscal 2000 were impacted by continued slowness in certain manufacturing
and industrial markets served by the Company. The Company believes these
markets hit a cyclical low in the first quarter of fiscal 2000. The
Company has experienced improved same-store sales comparisons in each of
the last three quarters. In the fiscal fourth quarter, year over year same-
store sales improved by 1.8%. Net earnings for fiscal 2000 were $38.3
million, or $.54 per diluted share, compared to $51.9 million, or $.72 per
diluted share, in fiscal 1999. Net earnings for fiscal years 2000 and 1999
were impacted by special charges, non-recurring gains and other charges as
described below.
Fiscal 2000 includes:
- Special charge recoveries of $2.8 million ($1.7 million after-tax)
primarily consisting of an insurance settlement related to a fiscal
1997 loss.
- Non-recurring gains of $14.9 million ($7.8 million after-tax)
relating to the divestiture of the Company's operations in Poland and
Thailand and a $2.6 million ($800 thousand after-tax) gain from the
divestiture of a non-core medical equipment distribution business.
- Other charges, including a litigation charge of $7.5 million ($4.8
million after-tax) that represents an estimate of the Company's
overall costs associated with the defense and settlement of certain
lawsuits, a $3.8 million ($2.2 million after-tax) inventory write-down
related to certain specialty gases, and a $590 thousand after-tax
charge representing the cumulative effect of an accounting change.
Excluding the effect of these items, net earnings were $.52 per diluted
share in fiscal 2000.
Fiscal 1999 includes:
- Special charge recoveries of $1.0 million ($575 thousand after-tax)
for reserve adjustments related to the divestiture of two non-core
businesses.
- Non-recurring gains of $25.5 million ($15 million after-tax) relating
to the divestiture of the Company's calcium carbide and carbon
products operations.
- A $1.8 million after-tax non-recurring gain relating to insurance
proceeds recorded by an equity affiliate.
Excluding the effect of these items, net earnings were $.48 per diluted
share in fiscal 1999.
During fiscal 2000, the Company completed the divestiture of its
operations in Poland and Thailand. Through the date of disposition, the
operations in Poland and Thailand had combined sales and operating losses
in fiscal 2000 of $12.7 million and $550 thousand, respectively. The
operations in Poland and Thailand were reported in the Gas Operations
segment. The Company also expects to complete the divestiture of its
equity investments in India during the first half of fiscal 2001. The
divestiture of the Indian investments will complete the Company's
Repositioning Plan as discussed on page 17.
During fiscal 2000, the Company acquired six distributors of industrial
gas and related equipment with aggregate annual sales of approximately $97
million, including the acquisition of Mallinckrodt Inc.'s Puritan-Bennett
medical gas business. Puritan-Bennett, with historical annual sales of
approximately $70 million, distributes medical gases through a network of
36 locations with 390 employees in the United States and Canada.
<PAGE> 13
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.
During fiscal 2000 and through April 2000, the Company substantially
completed the repurchase of shares under the authorization. At June 2,
2000, approximately 500 thousand shares may be repurchased under the
current share repurchase authorization.
INCOME STATEMENT COMMENTARY
Net Sales
Net sales decreased 1.2% in fiscal 2000 compared to 1999.
<TABLE>
<CAPTION>
(In thousands) 2000 1999 Increase/(Decrease)
<S> <C> <C> <C>
Distribution $1,409,949 $1,406,184 $ 3,765 0.3%
Gas Operations 132,385 155,034 (22,649) (14.6%)
$1,542,334 $1,561,218 $(18,884) (1.2%)
</TABLE>
The Distribution segment's principal products and services include
industrial, medical and specialty gases; equipment rental and hardgoods.
Industrial gases consist of packaged and small bulk gases. Equipment
rental fees are generally 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.
For fiscal 2000, Distribution sales increased $3.8 million as a result of
net acquisition and divestiture activity of $23.1 million, offset by a same-
store sales decline of $19.3 million (-1.7%). Fiscal 2000 sales increased
$37.3 million from seventeen distributor acquisitions since April 1, 1998,
offset primarily by the divestiture of four businesses. The decrease in
same-store sales resulted from a $32.5 million (-4.2%) decline in hardgoods
sales, partially offset by gas and rent same-store sales growth of $13.2
million (1.9%). Lower sales of hardgoods resulted from general slowness in
certain manufacturing and industrial markets served by the Company
including: metal fabrication, oil exploration and extraction, agriculture,
mining and shipbuilding. Gas and rent same-store sales growth was
primarily attributable to the Company's expansion of its rental welder
fleet and improvements in certain gas product sales including bulk,
refrigerant and medical gases. The Distribution segment has experienced
improving same-store sales comparisons in each of the last three quarters
of fiscal 2000. In the fiscal fourth quarter, year over year same-store
sales improved by 1.2%.
Gas Operations' sales primarily include dry ice and carbon dioxide that
are used for cooling, the production of food and beverages, chemical
products, and oil and gas extraction. In addition, the segment includes
businesses that produce and distribute specialty gases and nitrous oxide.
Sales decreased $22.6 million in fiscal 2000 compared to the prior year as
a result of the decrease in sales resulting from the net acquisition and
divestiture activity of $27.6 million, partially offset by same-store sales
growth of $5.0 million (3.5%). Sales decreased $35.7 million primarily due
to the divestiture of the Company's calcium carbide and carbon operations
in December 1998 and the divestiture of operations in Poland and Thailand
in August 1999. The decrease in sales resulting from divestitures was
partially offset by the acquisition of four dry ice companies since April
1, 1998 which contributed sales of $8.1 million in fiscal 2000. Gas
Operations' same-store sales growth resulted from higher liquid carbon
dioxide, dry ice and nitrous oxide volumes. Pricing in fiscal 2000
generally remained stable for these products compared to the prior year.
The Company estimates same-store sales based on a comparison of current
period sales to prior period sales, adjusted for acquisitions and
divestitures. Future same-store sales growth is dependent on the economy,
competition and the Company's ability to implement price increases and sell
additional products and services to existing and new customers.
Gross Profits
<PAGE> 14
Gross profits increased 0.4% in fiscal 2000 compared to 1999.
<TABLE>
<CAPTION>
(In thousands) 2000 1999 Increase/(Decrease)
<S> <C> <C> <C>
Distribution $649,827 $637,616 $12,211 1.9%
Gas Operations 75,910 85,547 (9,637) (11.3%)
$725,737 $723,163 $ 2,574 0.4%
</TABLE>
Distribution gross profits increased $12.2 million resulting from
acquisitions, which contributed gross profits of $20.9 million, partially
offset by divestitures which had gross profits of $7.8 million in the prior
year. Same-store gross profits declined $900 thousand (-0.5%) compared to
the prior year. The decline in same-store gross profits consisted of a
decrease in hardgoods gross profits of $10.6 million (-5.0%), partially
offset by gas and rent gross profit growth of $9.7 million (1.9%). The
decrease in hardgoods same-store gross profits resulted primarily from
lower sales volumes in certain manufacturing and industrial markets. Same-
store gross profits of gas and rent increased as a result of higher gas
volumes and increased rent primarily from an expanded rental welder fleet.
The overall Distribution gross profit margin of 46.1% in fiscal 2000
increased 80 basis points from 45.3% in the prior year primarily as a
result of a shift in sales mix more heavily weighted towards higher margin
gas and rental revenues. Gas and rent comprised 42.0% of distribution
sales in fiscal 2000 compared to 40.5% in fiscal 1999. Although a
competitive hardgoods environment has somewhat increased pricing pressures
to the Company's customers, hardgoods margins have been helped by lower
product costs resulting from centralized hardgoods purchasing initiatives
and sales growth of higher margin private label products.
The decrease in Gas Operations gross profits of $9.6 million resulted
from divestitures and an inventory write-down, partially offset by
acquisitions and same same-store gross profit growth. Gross profits
decreased $13.4 million from divestitures and $3.8 million from an
inventory write-down related to certain specialty gases. The gross profit
decline was partially offset by the acquisition of four dry ice businesses
that contributed $5.0 million to fiscal 2000 gross profits and by same-
store gross profit growth of $2.6 million (2.9%). Gas Operations' gross
profit margin, excluding the impact of divestitures, decreased to 57.5% in
fiscal 2000 compared to 60.2% in fiscal 1999 primarily due to the inventory
write-down and increased sales volume of lower margin liquid carbon
dioxide.
Operating Expenses
Selling, distribution and administrative expenses ("operating expenses")
consist of personnel and related costs, distribution and warehouse costs,
occupancy expenses and other selling, general and administrative expenses.
Operating expenses increased $9.3 million (1.8%) compared to the prior
fiscal year primarily from acquisitions with estimated operating expenses
of $17 million and a fiscal 2000 fourth quarter litigation charge of $7.5
million, partially offset by divestitures with operating expenses of $11
million in the prior year and the impact of cost reductions initiated
during the third and fourth quarters of fiscal 1999. The litigation charge
represents an estimate of the overall costs associated with the defense and
settlement of certain lawsuits related to the Company's hazardous materials
fees. Operating cost reductions related to such areas as headcount and
administrative functions helped control operating costs and expenses during
fiscal 2000. On a same-store basis, operating expenses decreased
approximately $4 million in fiscal 2000 as compared to fiscal 1999.
Although cost control and reductions resulted in lower operating expenses
on a same-store basis in fiscal 2000, the Company experienced higher
operating expenses in the fourth quarter of fiscal 2000 primarily due to
higher salary and wage costs, insurance and fuel costs. The Company
intends to continue to focus on controlling operating costs and expenses.
As a percentage of net sales, operating expenses, excluding the fourth
quarter litigation charge, increased 50 basis points to 34% compared to
fiscal 1999.
Depreciation and amortization totaled $89.3 million in fiscal 2000
representing an increase of $1.4 million (1.6%) compared to fiscal 1999.
Depreciation and amortization expense increased primarily as a result of
net acquisition and divestiture activity and capital projects completed
during the previous 24 months, partially offset by a decrease from a change
in depreciable lives of bulk gas storage tanks. Depreciation and
amortization expense relative to sales was 5.8% for the current period
compared to 5.6% in the prior year.
<PAGE> 15
Operating Income
Operating income, excluding special (charges) recoveries, decreased 7.2% in
fiscal 2000 compared to 1999.
<TABLE>
<CAPTION>
(In thousands) 2000 1999 Increase/(Decrease)
<S> <C> <C> <C>
Distribution $ 94,671 $ 98,447 $(3,776) (3.8%)
Gas Operations 9,231 13,549 (4,318) (31.9%)
Special (Charges) Recoveries 2,829 1,000 1,829 --
$106,731 $112,996 $(6,265) (5.5%)
</TABLE>
The Distribution segment's operating income margin of 6.7% in fiscal 2000
decreased from 7.0% in fiscal 1999 primarily due to the fourth quarter
litigation charge as discussed under "Operating Expenses." Excluding the
litigation charge, the Distribution segment's operating income margin was
7.2% in fiscal 2000. Gas Operations' operating income margin of 7.0% in
fiscal 2000 decreased from 8.7% in fiscal 1999 primarily due to
divestitures with higher operating margins and the inventory write-down of
certain specialty gases.
Special (charges) recoveries in fiscal 2000 consist of recoveries of $2.8
million primarily consisting of an insurance settlement related to a fiscal
1997 loss. Special charges in fiscal 1999 include recoveries of $1 million
from adjustments to reflect differences between the original loss estimates
and the actual losses related to the divestiture of two non-core businesses
during fiscal 1999.
Interest Expense
Interest expense, net, totaled $57.6 million and represents a decrease of
$2.7 million (-4.5%) compared to fiscal 1999. The decrease in interest
expense was primarily attributable to lower average debt levels and lower
average interest rates. The decrease in the average debt level in fiscal
2000 is primarily due to proceeds from divestitures and the sale-leaseback
of certain equipment. In the fourth quarter of fiscal 2000, as a result of
increasing market interest rates, the Company experienced higher interest
costs. At March 31, 2000, the ratio of fixed to variable rate debt was
49% - 51%. As discussed in "Liquidity and Capital Resources" and in Item
7A "Quantitative and Qualitative Disclosures About Market Risk", the
Company manages interest rate exposure of certain borrowings through
participation in interest rate swap agreements.
Other Income, net
Other income, net, totaled $17.8 million in fiscal 2000 compared to $26.7
million in fiscal 1999. Fiscal 2000 includes a $14.9 million gain from the
divestitures of operations in Poland and Thailand. Fiscal 1999 includes a
$25.5 million gain from the divestiture of the Company's calcium carbide
and carbon products operations.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates of $3.4 million decreased
from $7.0 million in fiscal 1999 primarily as a result of a $1.8 million
insurance gain recorded by National Welders Supply in fiscal 1999 and lower
earnings at both National Welders Supply and the Company's liquid carbon
dioxide joint venture.
Income Tax Expense
The effective income tax rate was 44.8% of pre-tax earnings in fiscal
2000 compared to 39.9% in 1999. Excluding the tax effect related to gains
from divestitures and special charges in both periods, the effective income
tax rate was 41.5% of pre-tax earnings in fiscal 2000 compared to 39.5% in
1999. The increase in the effective income tax rate was primarily from a
decrease in earnings of unconsolidated equity affiliates and income tax
from foreign divestitures.
<PAGE> 16
Cumulative Effect of an Accounting Change
In fiscal 2000, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities", resulting in a charge to
net earnings of $590 thousand. 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.
Net Earnings
Net earnings in fiscal 2000 were $38.3 million, or $.54 per diluted
share, compared to $51.9 million, or $.72 per diluted share, in fiscal
1999.
<PAGE> 17
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7.
RESULTS OF OPERATIONS: 1999 COMPARED TO 1998
OVERVIEW
The Company's net sales for the fiscal year ended March 31, 1999
increased 8% to a record $1.56 billion, compared to $1.45 billion in the
prior year. Net earnings for fiscal 1999 were $51.9 million, or $.72 per
diluted share, compared to $40.5 million, or $.57 per diluted share, in
fiscal 1998. Net earnings were $34.5 million, or $.48 per diluted share,
compared to $42.6 million, or $.60 per diluted share, in the prior year,
excluding special charges and non-recurring gains recognized in both
periods. Net earnings in fiscal 1999 were impacted by a general slowing in
the manufacturing and industrial sectors and higher operating expenses,
including expenses associated with the Company's Repositioning initiative.
Non-recurring gains in 1999 consist of a $25.5 million ($15.0 million
after-tax) non-recurring gain related to the divestiture of the Company's
calcium carbide and carbon products operations and non-recurring gains of
$2.8 million ($2.4 million after-tax) related to other special items.
Special charges and non-recurring gains in 1998 consist of special charges
which totaled $22.4 million ($14.3 million after-tax) which included
severance, exit costs for the closure of duplicate facilities, the
impairment write-down of property, equipment and related goodwill and a
write-down related to the divestiture of several non-core businesses,
offset by non-recurring gains related to an acquisition break-up fee of $3
million ($1.9 million after-tax), and a $14.5 million ($9.4 million after-
tax) partial recovery of refrigerant losses.
During the fourth quarter of fiscal 1998, the Company announced its
"Repositioning Airgas for Growth" restructuring plan (the "Repositioning
Plan"). During fiscal year 1999, the Company made substantial progress
towards completing the goals and initiatives established in its
Repositioning Plan. The Repositioning Plan included the consolidation of
subsidiaries into larger regional companies, the standardizing of
information systems, the implementation of a national information,
procurement and logistics infrastructure and communications system, the
consolidation of certain warehouse facilities into regional distribution
centers and the divestiture of several non-core businesses. In addition,
the Repositioning Plan included the sale, closure or downsizing of
approximately 30 distribution locations and a reduction in the Company's
workforce. Fiscal year 1998 special charges totaled $22.4 million ($14.3
million after-tax or $.20 per diluted share) which consisted of an
impairment write-down of property, equipment and goodwill of $11.4 million,
divestiture reserves of $6.9 million, facility exit costs of $2.6 million
and severance of $1.6 million. During fiscal year 1999, progress was made
in the following areas:
- 34 businesses were merged into 15 regional companies;
- computer systems were standardized and resulted in approximately 40
computer conversions;
- the Company completed three of its planned divestitures and, in
January 1999, announced the signing of a letter of intent with Linde AG,
for the sale of the Company's operations in Poland and Thailand. The
transaction closed in the second quarter of fiscal 2000;
- certain branches and distribution centers were closed and/or
consolidated; and
- workforce reductions were made as planned.
In connection with changes in the business, primarily related to a
slowing in the industrial and manufacturing sectors, the Company modified
its plans related to exiting certain facilities and adjusted facility exit
reserves by $763 thousand. In addition, adjustments to divestiture
reserves were made to reflect differences between previous estimates,
amounts related to completed transactions and pending divestitures. The
income statement effect of the adjustments to reserves for facility exit
costs and divestitures was an increase in earnings of $1 million ($575
thousand after-tax) which was recorded in the quarter ended June 30, 1998.
<PAGE> 18
During fiscal 1999, the Company incurred approximately $16.3 million
of expenses associated with the Repositioning Plan, of which approximately
60% are expected to be ongoing in future periods in support of the
established infrastructure. In response to a slowing economy during 1999
and the increase in expenses associated with the Repositioning Plan, the
Company embarked on a cost improvement program to control and reduce
operating expenses. The cost improvements are expected to impact many areas
of the Company's expense structure, including administrative cost
reductions, consolidation of back offices, the closure of certain branch
locations and lower interest costs through working capital improvements and
reduced capital expenditures.
In December 1998, the Company completed the divestiture of its calcium
carbide and carbon products 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 $25.5 million ($15 million
after-tax). The calcium carbide and carbon products operations generated
annual sales of approximately $30 million which are reflected in the
Company's Gas Operations segment.
During fiscal 1999, 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 (Gas Operations segment) with annual sales of approximately $20
million.
INCOME STATEMENT COMMENTARY
Net Sales
Net sales increased 8% in fiscal 1999 compared to 1998.
<TABLE>
<CAPTION>
(In thousands) 1999 1998 Increase
<S> <C> <C> <C>
Distribution $1,406,184 $1,321,958 $ 84,226 6.4%
Gas Operations 155,034 126,032 29,002 23.0%
$1,561,218 $1,447,990 $113,228 7.8%
</TABLE>
For fiscal 1999, Distribution sales increased approximately $88 million
as a result of 33 acquisitions since April 1, 1997 and approximately $11.7
million from same-store sales growth. Offsetting the increase in sales
were the divestitures of three businesses in fiscal 1999. Sales in fiscal
1999 and 1998 for these three businesses were approximately $10.3 million
and $25.8 million, respectively. The increase in Distribution same-store
sales of .8% resulted from growth in gas and rent of $21.4 million (4%) and
safety products of $11.2 million (6.9%), offset by same-store sales
declines of welding supplies and equipment of $12.4 million (-2.1%) and
industrial tools and supplies of $8.5 million (-9.1%). Gas and rent sales
growth was attributable to the Company's focus on national and regional
accounts, expansion of its rental welder fleet, gas sales resulting from
the Company's two air separation plants and higher small bulk and medical
gas sales. Growth in gas sales was primarily attributable to increased
volumes. Sales growth of safety products was driven by growth in national
and regional accounts business, an expanded telemarketing sales force and
selling initiatives that leverage the Distribution segment's customer base.
Sales of welding supplies and equipment and industrial tools and supplies
were negatively impacted during fiscal 1999 by a general slowing in certain
manufacturing and industrial sectors including: metal fabrication, petro-
chemical, agriculture, pulp and paper, and mining.
Gas Operations' sales increased $29 million as a result of $38.6 million
of carbon dioxide and dry ice acquisitions completed during fiscal 1998 and
1999, gas sales volume growth of $1.4 million and a decrease of $11.0
million as a result of the divestiture of the Company's calcium carbide and
carbon products operations. Liquid carbon dioxide sales volumes, including
pipeline volumes, increased during fiscal 1999; however, the increase was
largely offset by lower prices due to increased industry production which
exceeded growth in demand. Nitrous oxide sales declined approximately 4%
in fiscal 1999 compared to the prior year due to the general slowing in the
manufacturing and industrial sectors.
<PAGE> 19
Gross Profits
Gross profits increased 8% in fiscal 1999 compared to 1998.
<TABLE>
<CAPTION>
(In thousands) 1999 1998 Increase
<S> <C> <C> <C>
Distribution $637,616 $605,240 $32,376 5.3%
Gas Operations 85,547 63,212 22,335 35.3%
$723,163 $668,452 $54,711 8.2%
</TABLE>
The increase in Distribution gross profits of approximately $32.4 million
resulted from acquisitions which contributed approximately $35.1 million
and same-store gross profit growth of approximately $5.1 million (.8%),
offset by the divestiture of three businesses which contributed gross
profits of approximately $7.8 million in the prior year. Same-store gross
profit growth consisted of increases in gas and rent of $13.3 million
(3.3%) and safety products of $4.4 million (12.5%), offset by same-store
gross profit declines in welding supplies and equipment of $7.7 million (-
4.6%) and industrial tools and supplies of $4.9 million (-14.5%). Same-
store gross profits of gases and rent increased as a result of higher gas
volumes, helped by the Company's two air separation plants and increased
rent associated with welding equipment, cylinders and bulk tanks. Same-
store gross profits for safety products increased primarily due to sales
volume growth. Same-store gross profit declines in industrial tools and
welding supplies and equipment resulted primarily from a general slowing in
the manufacturing and industrial sectors during fiscal 1999 and from price
reductions in certain regions to retain market share. Overall, gross
margins of 45.3% in fiscal 1999 declined 50 basis points from 45.8% in
fiscal 1998 due primarily to pricing pressures of hardgoods products. Gas
margins were relatively consistent year-over-year. Acquisitions, which
had an average gross margin of approximately 41% partially contributed to
the gross margin decline.
The increase in Gas Operations gross profits of approximately $22.3
million resulted primarily from acquisitions, partially offset by the
divestiture of the Company's calcium carbide and carbon products
operations. Gas Operations' gross margin increased to 55.2% in fiscal 1999
compared to 50.2% in the prior year. The increase was due to the
divestiture of the lower margin calcium carbide and carbon products
operations and the acquisitions of higher margin carbon dioxide and dry ice
companies with an average gross margin of 62%.
Operating Expenses
Operating expenses increased approximately $55 million compared to fiscal
1998 primarily as a result of acquisitions and higher operating expenses
which included direct repositioning expenses. Repositioning expenses were
estimated to total approximately $16 million in fiscal 1999 as a result of
computer conversions, relocation and other personnel expenses and facility-
related costs. Ongoing costs which are included in the repositioning
expense amounts total approximately $10 million and are primarily related
to the costs of operating a national computer center and communications
system, regional distribution centers and additional salary expense related
to new product line sales personnel. As a percentage of net sales,
operating expenses increased 120 basis points to 33.5% in fiscal 1999
compared to the prior year.
Depreciation and amortization totaled $87.9 million in fiscal 1999 and
increased approximately $11.3 million compared to the prior year primarily
due to business acquisitions and capital projects completed during the
previous 24 months. Consolidated depreciation and amortization as a
percentage of sales increased 30 basis points as compared to fiscal 1998.
For the Distribution and Gas Operations segments, depreciation and
amortization relative to sales was 5.3% and 8.4%, respectively.
<PAGE> 20
Operating Income
Operating income, excluding special charges, decreased 10% in fiscal
1999 compared to 1998. The decrease in operating income was primarily due
to higher operating expenses, including repositioning-related expenses and
lower gross profits from a decline in hardgoods sales.
<TABLE>
<CAPTION>
(In thousands) 1999 1998 Increase/(Decrease)
<S> <C> <C> <C>
Distribution $ 98,447 $111,472 $(13,025) (11.7%)
Gas Operations 13,549 12,426 1,123 9.0%
Special (Charges) Recoveries 1,000 (4,950) 5,950 --
$112,996 $118,948 $ (5,952) (5.0%)
</TABLE>
The Distribution segment's operating income margin decreased to 7% in
fiscal 1999 compared to 8.4% in fiscal 1998. The decrease resulted
primarily from higher operating expenses, including expenses associated
with the Company's Repositioning Plan and higher selling expenses related
to expansion of safety products, specialty gases and welder rentals. The
Repositioning expenses primarily impacted the Company's Distribution
segment.
The Gas Operations segment's operating margin decreased to 8.7% in fiscal
1999 compared to 9.9% in the prior year primarily as a result of carbon
dioxide and dry ice acquisitions and related integration expenses.
Special (charges) recoveries in fiscal 1999 include income of $1 million
from adjustments to reflect differences between the original loss estimates
and the actual losses related to the divestiture of two non-core businesses
during fiscal 1999. Special charges in fiscal 1998 of $4.9 million
primarily include charges related to the Repositioning Plan, partially
offset by a recovery related to a fiscal 1997 loss and an acquisition break-
up fee.
Interest Expense
Interest expense, net, totaled $60.3 million and increased $7 million
compared to fiscal 1998. The increase in interest expense was primarily
attributable to increased debt associated with completing 43 acquisitions
since April 1, 1997. Interest expense was also impacted by capital
expenditures, an increase in working capital and the repurchase of common
stock.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates of $7 million
increased $4.1 million compared to fiscal 1998 primarily 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 included in the
Company's results for a full year in fiscal 1999 and higher joint venture
earnings of National Welders Supply. Earnings were helped at the Company's
liquid carbon dioxide joint venture as a result of a plant expansion which
came on-line in September 1997. National Welders Supply reported higher
earnings as a result of increased spot sales of bulk liquid gases.
Income Tax Expense
The effective income tax rate was 39.9% of pre-tax earnings for fiscal
1999, compared to 42.5% in 1998. Excluding the tax effect of special
charges and non-recurring gains, the effective income tax rate was 39.5% of
pre-tax earnings for fiscal 1999, compared to 42.6% in 1998. The decrease
in the effective income tax rate was primarily a result of an increase in
earnings of unconsolidated equity affiliates and from the implementation of
tax planning strategies.
Net Earnings
Net earnings for fiscal 1999 were $51.9 million, or $.72 per diluted
share, compared to $40.5 million, or $.57 per diluted share, in fiscal
1998.
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The Company has primarily financed its operations, capital expenditures,
stock repurchases and acquisitions with borrowings, proceeds from
divestitures, and funds provided by operating activities.
Cash flows from operating activities for fiscal 2000 totaled $100.1
million compared to $102.1 million in fiscal 1999. For fiscal 2000,
adjustments to reconcile net income to net cash provided by operating
activities primarily included depreciation and amortization of $89.3
million and deferred taxes of $13.1 million from temporary differences,
offset by gains from divestitures of $17.7 million. Additionally, working
capital components used $17.6 million of cash primarily from an increase in
trade receivables related to an acquisition and lower accounts payable
related to the timing of payments to vendors. Accounts receivable days'
sales outstanding increased to 48 from 47 days and hardgoods days' supply
of inventory also increased to 80 from 77 days compared to March 31, 1999
levels. The increase in hardgoods days' supply of inventory is primarily
due to an increase in safety and welding product inventories in connection
with centralized purchasing and distribution initiatives. As the number of
the Company's business units purchasing from centralized warehouses
increases, the Company expects inventory levels will decline.
After-tax cash flow (net earnings, excluding special charges and non-
recurring gains, plus depreciation, amortization and deferred income taxes)
increased 2% to $141.7 million in fiscal 2000 compared to $138.3 million in
the prior year.
Cash used by investing activities totaled $65.5 million in fiscal
2000. Capital expenditures of $65.2 million were 36% lower compared to
fiscal 1999 resulting from an improvement in asset utilization and
controlling capital spending. Capital expenditures in fiscal 2000
associated with the purchase of cylinders, bulk tanks, rental welders and
machinery and equipment totaled approximately $44 million or 68% of total
capital spending. The Company paid $99.2 million, net of cash acquired,
for six distribution businesses, which had historical annual sales and
EBITDA of $97 million and $20 million, respectively. Fixed asset sales
provided cash of $37.5 million and primarily included equipment sold in
connection with a sale-leaseback transaction consummated during fiscal
2000. Proceeds from divestitures of certain foreign and other operations
provided cash of $55.6 million.
Financing activities used cash of $34.6 million primarily for the
repurchase of the Company's common stock. Debt financing provided net cash
of $8.9 million during fiscal 2000.
The Company will continue to look for appropriate acquisitions of
distributors. Future acquisitions, capital expenditures and costs
associated with e-commerce are expected to be funded 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 should increase as the Company
focuses on debt repayment in fiscal 2001. The Company also believes that
it could arrange additional sources of financing for unanticipated
requirements. The cost and terms of any future financing arrangement
depend on the market conditions and the Company's financial position at
that time.
The Company does not currently pay dividends.
<PAGE> 22
Financial Instruments
The Company has unsecured revolving credit facilities totaling $725
million and $100 million Canadian (US$67 million) under a credit agreement
with a maturity date of December 5, 2002. The credit agreement contains
covenants which include the maintenance of certain financial ratios,
restrictions on additional borrowings and limitations on dividends. At
March 31, 2000, the Company had borrowings under the agreement of
approximately $555 million and $44 million Canadian (US$29 million). The
Company also had commitments under letters of credit supported by the
agreement of approximately $54 million. Based on restrictions related to
cash flow to funded debt coverage, the Company had additional borrowing
capacity under the credit facilities of approximately $154 million at March
31, 2000. At March 31, 2000, the effective interest rate on borrowings
under the credit facilities was 6.6% on U.S. borrowings and 5.5% on
Canadian borrowings. In fiscal 2001, the Company anticipates that higher
market interest rates will result in higher interest expense.
At March 31, 2000, 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 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 March 31, 2000, long-term debt of the Company
included acquisition notes and other long-term debt instruments of
approximately $69 million with interest rates ranging from 6.0% to 10.0%.
The Company also has a shelf registration with a capacity of approximately
$175 million for the issuance of debt and other types of securities.
The Company manages its exposure to changes in market interest rates.
At March 31, 2000, the Company was party to 21 interest rate swap
agreements. The swap agreements are with major financial institutions and
aggregate to $543 million in notional principal amount at March 31, 2000.
Sixteen swap agreements with approximately $363 million in notional
principal amount require fixed interest payments based on an average
effective rate of 6.3% for remaining periods ranging between one and five
years. Five swap agreements with approximately $180 million in notional
principal amount require variable interest payments based on an average
effective rate of 6.2% at March 31, 2000. Under the terms of three swap
agreements, the Company has elected to receive the discounted value of the
counterparty's interest payments up-front. At March 31, 2000,
approximately $4.5 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. At March 31, 2000, the ratio of fixed to variable rate
debt was 49% to 51%.
Share Repurchase Programs
In March 1999, the Airgas Board of Directors authorized the repurchase
of up to seven million shares of the Company's outstanding common stock.
During fiscal 2000, the Company repurchased approximately 5.3 million
shares at an average cost of $8.71 per share, including 175 thousand shares
to complete a previous repurchase program. Subsequent to March 31, 2000,
the Company substantially completed its stock repurchase program with the
repurchase of approximately 1.4 million shares for total consideration of
$11.2 million through June 2, 2000. At June 2, 2000, approximately 500
thousand shares may be repurchased under the current share repurchase
authorization.
<PAGE> 23
Employee Benefits Trust
In March 1999, the Company established a grantor trust (the
"Trust") to fund certain future obligations of the Company's employee
benefit and compensation plans. The Company, pursuant to a common stock
Purchase Agreement, may sell shares of common stock to the Trust. Such
common stock consists of shares the Company has purchased or will purchase
on the open market or in private transactions. The common stock may also
consist of shares issued directly to the Trust. During fiscal 2000, the
Trust purchased 4.2 million shares of common stock, previously held as
treasury stock, from the Company, for $35.4 million (based on the average
market closing price for the five days preceding each transaction). The
Company holds promissory notes from the Trust in the amount of each
purchase. Shares held by the Trust serve as collateral for the promissory
notes and are available to fund certain employee benefit plan obligations
as the promissory notes are repaid. The shares held by the Trust are not
considered outstanding for earnings per share purposes until they are
released from serving as collateral for the promissory notes.
Approximately 230 thousand shares were issued from the Trust during fiscal
2000 for employee benefit programs. An independent third-party financial
institution serves as the Trustee. The Trustee votes or tenders shares held
by the Trust in accordance with instructions received from the participants
in the employee benefit and compensation plans funded by the Trust.
Subsequent to March 31, 2000, the Trust purchased approximately 2 million
shares of common stock, previously held as treasury stock, from the Company
for approximately $11.3 million through June 2, 2000.
Inflation
While the U.S. inflation rate has been modest for several years, rising
costs continue to affect the Company's business. The Company strives to
minimize the effects of inflation through cost containment and price
increases under highly competitive conditions.
<PAGE> 24
THE YEAR 2000 MATTER
The "Year 2000" matter related to whether computer hardware and
software and equipment would properly recognize date sensitive information
referring to the Year 2000. Prior to December 31, 1999, the Company
undertook various remediation measures to address its state of readiness
with regard to the Year 2000 issue. Such measures included evaluating and
testing computer systems and equipment for Year 2000 compliance, contacting
significant suppliers, customers and other critical business partners to
assess their readiness plans, and developing contingency plans for key
administrative and supply chain functions. To date during calendar year
2000, the Company has not experienced any significant Year 2000 problems
with its information systems hardware, application software, equipment or
operating systems. The Company also has not experienced any significant
Year 2000 complications related to any of its key suppliers, customers or
other business partners. Since latent Year 2000 related problems may arise
in the future, the Company will continue to monitor the Year 2000
compliance of its operating systems and equipment.
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. SFAS 133, as amended by SFAS 137, is effective for
fiscal years beginning after June 15, 2000. Management has evaluated the
impact of SFAS 133 in connection with the Company's use of derivatives in
managing interest rate risk. The Company's exposure to derivatives is
limited to interest rate swap agreements which are highly effective in
managing the Company's interest rate exposure. A high correlation exists
between the terms of the interest rate swaps and the underlying debt
obligations of the Company. As such, fluctuations in the fair value of the
swaps are offset by an equal and opposite fluctuation in the carrying value
of the underlying debt obligations. Consequentially, the implementation of
SFAS 133 is not expected to have a material impact on the net earnings of
the Company.
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.
These statements include, but are not limited to, statements regarding:
same store-sales trends, gross profit trends, operating expense trends,
completion of anticipated divestitures, lower inventory levels, future
acquisitions, future debt repayment, future sources of financing,
performance of counterparties under interest rate swap agreements, the
level of competition and general economic conditions in the industrial
markets served by the Company. 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 and continued improvement in same-store sales,
the Company's ability to reduce costs and control operating expenses, the
potential impact of higher operating expenses in future periods, any
potential problems relating to Year 2000 matters, the ability to manage
interest rate exposure, the success of higher margin private label
products, the success of centralized purchasing and distribution
initiatives in reducing inventory levels and lowering product costs, 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, the
outcome and costs associated with the defense and settlement of lawsuits
related to hazardous material fees, 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.
<PAGE> 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company manages its exposure to changes in market interest rates.
The interest rate exposure arises primarily from the interest payment terms
of the Company's borrowing agreements. Interest rate swap agreements are
used to adjust the interest rate risk exposures that are inherent in its
portfolio of funding sources. The Company has not, and will not establish
any interest risk positions for purposes other than managing the risk
associated with its portfolio of funding sources. The Company maintains
the ratio of fixed to variable rate debt within parameters established by
management under policies approved by the Board of Directors. At March 31,
2000, the ratio of fixed to variable rate debt was 49% to 51%.
Counterparties to interest rate swap agreements are major financial
institutions. The Company has established counterparty credit guidelines
and only enters into transactions with financial institutions with long-
term credit ratings of `A' or better. In addition, the Company monitors
its position and the credit ratings of its counterparties, thereby
minimizing the risk of non-performance by the counterparties.
The table below summarizes the Company's market risks associated with
long-term debt obligations and interest rate swaps as of March 31, 2000.
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 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
2001 2002 2003 2004 2005 Thereafter Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt:
Medium-term notes $ -- $ 50 $ -- $ 75 $ -- $100 $225 $186
Interest expense $ 17 $ 15 $ 13 $ 13 $ 8 $ 11 $ 77
Average interest rate 7.41% 7.42% 7.49% 7.49% 7.75% 7.75%
Acquisition notes $ 19 $ 15 $ 1 $ 20 $ -- $ 3 $ 58 $ 51
Interest expense $ 1 $ 1 $ -- $ 2 $ -- $ -- $ 4
Average interest rate 7.45% 7.45% 7.45% 7.45% $ -- 7.45%
Other notes $ 1 $ 1 $ 1 $ -- $ -- $ -- $ 3 $ 3
Average interest rate 7.55% 7.55% 7.55%
Variable Rate Debt:
Revolving credit facilities $ -- $ -- $584 $ -- $ -- $ -- $584 $584
Interest expense $ 39 $ 39 $ 39 $ -- $ -- $ -- $117
Interest rate (a) 6.56% 6.56% 6.56%
Other notes $ -- $ 7 $ -- $ -- $ 1 $ -- $ 8 $ 8
Average interest rate 10.00% 7.27%
(a) The variable rate of long-term debt obligations is based on the London
Interbank Offered Rate ("LIBOR") as of March 31, 2000. For future periods,
the variable interest rate is assumed to remain at 6.6% with the principal
balance of long-term debt obligations held constant at $584 million.
However, the variable rate and borrowing levels of long-term debt may
fluctuate materially from those presented above.
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
Expected Fiscal Year of Maturity
(In millions)
Fair
2001 2002 2003 2004 2005 Thereafter Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps:
US $ denominated Swaps:
14 Swaps Receive
Variable/Pay Fixed $ 63 $177 $ 78 $ -- $ 40 $ -- $358 $ (3)
Variable Receive rate
(3 month LIBOR) = 6.10%
Weighted average
Pay rate = 6.30%
5 Swaps Receive
Fixed/Pay Variable $ 50 $ 50 $ -- $ 30 $ -- $ 50 $180 $ --
Weighted average
Receive rate = 6.74%
Variable pay rate
(6 month LIBOR) = 6.22%
Canadian $ denominated Swaps:
2 Swaps Receive
Variable/Pay Fixed $ 3 $ 2 $ -- $ -- $ -- $ -- $ 5 $ --
(3 month CAD BA (b)) = 5.11%
Weighted average
Pay rate = 7.11%
Other LIBOR based agreements:
Operating leases with trust $ 2 $ 1 $ 1 $ 43 $ -- $ -- $ 47 $ 47
Variable rate
(3 month LIBOR plus 130
Basis points) = 7.40%
(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 March 31, 2000, 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> 27
Foreign Currency Rate Risk
Canadian subsidiaries of the Company are funded in part with local
currency debt. The Company does not otherwise 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements, supplementary information and
financial statement schedule of the Company are set forth at pages F-1 to
F-40 of the report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The biographical information relating to the Company's directors
appearing in the Proxy Statement relating to the Company's 2000 Annual
Meeting of Stockholders is incorporated herein by reference. Biographical
information relating to the Company's executive officers set forth in Item
1 of Part I of this Form 10-K Report is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under "Board of Directors and Committees," "Executive
Compensation" and "Certain Transactions" appearing in the Proxy Statement
relating to the Company's 2000 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is set forth in the section
headed "Security Ownership" appearing in the Company's Proxy Statement
relating to the Company's 2000 Annual Meeting of Stockholders and such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under "Certain Transactions" appearing in the Proxy
Statement relating to the Company's 2000 Annual Meeting of Stockholders is
incorporated herein by reference.
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2):
The response to this portion of Item 14 is submitted as a separate
section of this report beginning on page F-1. All other schedules have
been omitted as inapplicable, or not required, or because the required
information is included in the Consolidated Financial Statements or notes
thereto.
(a)(3) Exhibits.
The exhibits required to be filed as part of this annual report on
Form 10-K are listed in the attached Index to Exhibits.
(b) Reports on Form 8-K.
On January 28, 2000, the Company filed a current report on Form 8-K
pursuant to Item 5, reporting its earnings for the third quarter and nine
months ended December 31, 1999. The current report on Form 8-K also
included an announcement of the completion of the Company's acquisition of
Mallinckrodt, Inc.'s Puritan-Bennett medical gas business on January 21,
2000.
(c) Index to Exhibits and Exhibits filed as a part of this report.
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of Airgas,
Inc. dated as of August 7, 1995 (Incorporated by reference to
Exhibit 3.1 to the Company's September 30, 1995 Quarterly
Report on Form 10-Q).
3.2 Airgas, Inc. By-Laws Amended and Restated through August 2,
1999. (Incorporated by reference to Exhibit 3 to the Company's
September 30, 1999 Report on Form 10-Q).
4.1 Ninth Amended and Restated Credit Agreement dated as of
December 5, 1997 among Airgas, Inc., Airgas Canada, Inc.,
Red-D-Arc Limited and Airgas Ontario Inc., Nationsbank, N.A. as
U.S. Agent and Canadian Imperial Bank of Commerce as Canadian
Agent. (Incorporated by reference to Exhibit 4.1 to the
Company's December 31, 1997 Quarterly Report on Form 10-Q).
4.2 First Amendment, dated April 13, 1998, to the Ninth Amended and
Restated Credit Agreement dated as of December 5, 1997 among
Airgas, Inc., Airgas Canada, Inc., Red-D-Arc Limited and Airgas
Ontario Inc., Nationsbank, N.A. as U.S. Agent and Canadian
Imperial Bank of Commerce as Canadian Agent. (Incorporated by
reference to Exhibit 4.1 to the Company's June 30, 1998 Quarterly
Report on Form 10-Q).
<PAGE> 29
Exhibit No. Description
4.3 Indenture dated as of August 1, 1996 of Airgas, Inc. to Bank of
New York, Trustee. (Incorporated by reference to Exhibit 4.5 to
the Company's Registration Statement on Form S-4 No. 333-23651
dated March 20, 1997).
4.4 Form of Airgas, Inc. Medium-Term Note (Fixed Rate).
(Incorporated by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-4 No. 333-23651 dated
March 20, 1997).
4.5 Form of Airgas, Inc. Medium-Term Note (Floating Rate).
(Incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-4 No. 333-23651 dated
March 20, 1997).
There are no other instruments with respect to long-term debt
of the Company that involve indebtedness or securities
authorized thereunder exceeding 10 percent of the total assets
of the Company and its subsidiaries on a consolidated basis.
The Company agrees to file a copy of any instrument or
agreement defining the rights of holders of long-term debt of
the Company upon request of the Securities and Exchange
Commission.
4.6 Rights Agreement, dated as of April 1, 1997, between Airgas,
Inc. and The Bank of New York, N.A., as Rights Agent, which
includes as Exhibit B thereto the Form of Right Certificate.
(Incorporated by reference to Exhibit 1.1 to the Company's
Form 8-A filed on April 28, 1997).
4.7 First Amendment, dated November 12, 1998, to the Rights
Agreement dated as of April 1, 1997, between Airgas, Inc. and
The Bank of New York. (Incorporated by reference to Exhibit 4
to the Company's December 31, 1998 Quarterly Report on
Form 10-Q).
* 10.1 Agreement between the Company and Peter McCausland, dated
January 8, 1991, and form of Common Stock Purchase Warrant.
(Incorporated by reference to Exhibit 10.16 to the Company's
March 31, 1992 report on Form 10-K).
* 10.2 Amended and Restated 1984 Stock Option Plan, as amended
effective May 22, 1995. (Incorporated by reference to Exhibit
10.1 to the Company's September 30, 1995 Quarterly Report on
Form 10-Q).
* 10.3 1989 Non-Qualified Stock Option Plan for Directors
(Non-Employees), as amended. (Incorporated by reference to
Exhibit 10.7 to the Company's March 31, 1992 report on
Form 10-K).
* 10.4 Amendment to the 1989 Non-Qualified Stock Option Plan for
Directors (Non-Employees) as amended through August 7, 1995
(Incorporated by reference to Exhibit 10.2 to the Company's
September 30, 1995 Quarterly Report on Form 10-Q).
* 10.5 1994 Employee Stock Purchase Plan. (Incorporated by reference
to Exhibit 10.19 to the Company's March 31, 1993 Report on
Form 10-K).
* 10.6 1998 Employee Stock Purchase Plan. (Incorporated by reference
to Exhibit 4 to the Company's Registration Statement on Form S-8
No. 333-60999 dated August 7, 1998).
<PAGE> 30
Exhibit No. Description
* 10.7 Airgas, Inc. Management Incentive Plan (Incorporated by
reference to Exhibit 10.3 to the Company's September 30,
1995 Quarterly Report on Form 10-Q).
* 10.8 Joint Venture Agreement dated June 28, 1996 between Airgas, Inc.
and National Welders Supply Company, Inc. and J.A. Turner, III,
and Linerieux B. Turner and Molo Limited Partnership, Turner
(1996) Limited partnership, Charitable Remainder Unitrust for
James A. Turner, Jr. and Foundation for the Carolinas
(Incorporated by reference to Exhibit 2.1 to the Company's
June 28, 1996 Report on Form 8-K).
* 10.9 Letter dated July 24, 1992 between Airgas, Inc. (on behalf of
the Nominating and Compensation Committee) and Peter McCausland
regarding the severance agreement between the Company and Peter
McCausland.
* 10.10 1997 Stock Option Plan (Incorporated by reference to Exhibit
10.1 to the Company's September 30, 1997 Quarterly Report on
Form 10-Q).
* 10.11 1997 Directors' Stock Option Plan (Incorporated by reference to
Exhibit 10.2 to the Company's September 30, 1997 Quarterly
Report on Form 10-Q).
* 10.12 Employee Benefits Trust Agreement, dated March 30, 1999, between
Airgas, Inc. and First Union National Bank, as Trustee, which
includes as Exhibit 1 thereto the Common Stock Purchase
Agreement, dated March 30, 1999, between Airgas, Inc. and First
Union National Bank, as Trustee, and Exhibit 2 thereto the
Promissory Note, dated March 31, 1999, between Airgas, Inc. and
First Union National Bank, as Trustee. (Incorporated by
reference to Exhibit 10.12 to the Company's March 31, 1999
Report on Form 10-K).
*10.13 Employee Benefits Trust Amendment Letter, dated March 7, 2000,
between Airgas, Inc. and First Union National Bank, as Trustee.
*10.14 Change of Control Agreement between Airgas, Inc. and William A.
Rice, Jr. dated March 17, 1999. Nine other Executive Officers,
including Peter McCausland, are parties to substantially
identical agreements. (Incorporated by reference to Exhibit
10.13 to the Company's March 31, 1999 Report on Form 10-K).
*10.15 Change of Control Agreement between Airgas, Inc. and Roger F.
Millay dated January 3, 2000.
*10.16 2000 Management Incentive Plan for Corporate Employees dated
April 1, 1999. (Incorporated by reference to Exhibit 10.14 to
the Company's March 31, 1999 Report on Form 10-K).
*10.17 2000 Management Incentive Plan for Business Unit Employees dated
April 1, 1999. (Incorporated by reference to Exhibit 10.15 to
the Company's March 31, 1999 Report on Form 10-K).
*10.18 2001 Management Incentive Plan for Business Unit Employees dated
May 23, 2000.
*10.19 2001 Management Incentive Plan for Corporate Office Employees
dated May 23, 2000.
(11) Statement re: computation of earnings per share.
(21) Subsidiaries of the Company.
(23.1) Consent of KPMG LLP.
(27) Financial data schedule - March 31, 2000
_____________
* A management contract or compensatory plan required to be filed by Item
14(c) of this Report.
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: June 8, 2000
Airgas, Inc.
(Registrant)
By: /s/ Peter McCausland
_________________________
Peter McCausland
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Peter McCausland Director, Chairman of the Board, June 8, 2000
____________________________ and Chief Executive Officer
(Peter McCausland)
/s/ Roger F. Millay Senior Vice President and Chief June 8, 2000
____________________________ Financial Officer
(Roger F. Millay) (Principal Financial Officer)
/s/ Jeffrey P. Cornwell Vice President and Corporate June 8, 2000
____________________________ Controller
(Jeffrey P. Cornwell) (Principal Accounting Officer)
/s/ W. Thacher Brown Director June 8, 2000
____________________________
(W. Thacher Brown)
/s/ Frank B. Foster, III Director June 8, 2000
____________________________
(Frank B. Foster, III)
/s/ James W. Hovey Director June 8, 2000
____________________________
(James W. Hovey)
/s/ John A.H. Shober Director June 8, 2000
____________________________
(John A.H. Shober)
<PAGE> 32
/s/ Paula A. Sneed Director June 8, 2000
____________________________
(Paula A. Sneed)
/s/ David M. Stout Director June 8, 2000
____________________________
(David M. Stout)
/s/ Lee M. Thomas Director June 4, 2000
____________________________
(Lee M. Thomas)
/s/ Robert L. Yohe Director June 8, 2000
____________________________
(Robert L. Yohe)
<PAGE> F-1
AIRGAS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
Reference In
Report On
Form 10-K
Financial Statements:
Independent Auditors' Report.............................. F-2
Statement of Management's Financial Responsibility........ F-3
Consolidated Balance Sheets as of March 31, 2000 and 1999. F-4
Consolidated Statements of Earnings for the Years Ended
March 31, 2000, 1999 and 1998............................ F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 2000, 1999 and 1998................ F-6
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2000, 1999 and 1998............................ F-7
Notes to Consolidated Financial Statements................ F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts........... F-40
All other schedules for which provision is made in the applicable
accounting regulations promulgated by the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
<PAGE> F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Airgas, Inc.:
We have audited the consolidated financial statements of Airgas, Inc.
and subsidiaries listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Airgas, Inc. and subsidiaries as of March 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Philadelphia, Pennsylvania
May 9, 2000
<PAGE> F-3
STATEMENT OF MANAGEMENT'S FINANCIAL RESPONSIBILITY
Management has prepared and is responsible for the integrity and
objectivity of the consolidated financial statements and related financial
information in this Annual Report on Form 10-K. The statements are
prepared in conformity with accounting principles generally accepted in the
United States of America. The financial statements reflect management's
informed judgment and estimation as to the effect of events and
transactions that are accounted for or disclosed.
Management maintains a system of internal control at each business
unit. This system is designed to provide reasonable assurance that assets
are safeguarded and records properly reflect transactions executed in
accordance with management's authorization. The Company also maintains a
staff of internal auditors who review and evaluate the system of internal
control. In determining the extent of the system of internal control,
management recognizes that the cost should not exceed the benefits derived.
The evaluation of these factors requires estimates and judgment by
management.
The Company's financial statements have been audited by KPMG LLP,
independent auditors. Their Independent Auditors' Report, which is based
on an audit made in accordance with auditing standards generally accepted
in the United States of America, is presented on the previous page. In
performing their audit, KPMG LLP considers the Company's internal control
structure to the extent they deem necessary in order to plan their audit,
determine the nature, timing and extent of tests to be performed and issue
their report on the consolidated financial statements.
The Audit Committee of the Board of Directors meets with the
independent auditors, the internal auditors and management to satisfy
itself that they are properly discharging their responsibilities. The
auditors have direct access to the Audit Committee.
Airgas, Inc.
/s/ Roger F. Millay /s/ Peter McCausland
________________________ _______________________
Roger F. Millay Peter McCausland
Senior Vice President and Chairman and
Chief Financial Officer Chief Executive Officer
May 9, 2000
<PAGE> F-4
<TABLE>
<CAPTION>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
(In thousands, except per share amounts) 2000 1999
<S> <C> <C>
ASSETS
Current Assets
Trade receivables, less allowances for doubtful
accounts of $6,194 in 2000 and $6,092 in 1999........ $ 211,989 $ 195,708
Inventories, net (Note 5)............................. 159,438 154,424
Deferred income tax asset, net (Note 15).............. 13,752 7,549
Prepaid expenses and other current assets............. 23,611 21,161
Total current assets................................ 408,790 378,842
Plant and equipment, at cost (Note 6)................. 1,074,365 993,496
Less accumulated depreciation......................... (320,597) (275,637)
Plant and equipment, net............................ 753,768 717,859
Goodwill, net of accumulated amortization of $68,471
in 2000 and $54,986 in 1999.......................... 445,498 428,349
Other non-current assets (Note 7)..................... 131,275 173,422
Total assets $1,739,331 $1,698,472
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade............................... $ 78,276 $ 85,486
Accrued expenses and other current liabilities (Note 8) 121,249 108,295
Current portion of long-term debt (Note 9)............ 20,071 19,645
Total current liabilities........................... 219,596 213,426
Long-term debt, excluding current portion (Note 9).... 857,422 847,841
Deferred income tax liability, net (Note 15).......... 160,808 142,675
Other non-current liabilities......................... 28,998 23,585
Commitments and contingencies (Notes 18 and 19)....... -- --
Stockholders' Equity (Note 11)
Preferred stock, no par value, 20,000 shares
authorized, no shares issued or outstanding in 2000
and 1999............................................. -- --
Common stock, par value $.01 per share, 200,000 shares
authorized, 73,144 and 72,024 shares issued in 2000
and 1999, respectively............................... 731 720
Capital in excess of par value........................ 193,893 190,175
Retained earnings..................................... 327,373 289,090
Accumulated other comprehensive loss.................. (596) (910)
Treasury stock, 1,126 and 130 common shares at cost in
2000 and 1999, respectively........................... (8,435) (1,129)
Employee benefits trust, 4,822 and 826 common shares at
cost in 2000 and 1999, respectively................... (40,459) (7,001)
Total stockholders' equity........................... 472,507 470,945
Total liabilities and stockholders' equity........... $1,739,331 $1,698,472
See accompanying notes to consolidated financial statements.
<PAGE> F-5
</TABLE>
<TABLE>
<CAPTION>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended March 31,
(In thousands, except per share amounts) 2000 1999 1998
<S> <C> <C> <C>
Net Sales
Distribution................................ $1,409,949 $1,406,184 $1,321,958
Gas Operations.............................. 132,385 155,034 126,032
Total net sales........................... 1,542,334 1,561,218 1,447,990
Costs and Expenses
Cost of products sold (excluding
depreciation and amortization)
Distribution............................... 760,122 768,568 716,718
Gas Operations............................. 56,475 69,487 62,820
Selling, distribution and administrative....
expenses................................... 532,527 523,241 467,884
Depreciation and amortization............... 89,308 87,926 76,670
Special charges (recoveries), net (Note 3).. (2,829) (1,000) 4,950
Total costs and expenses.................. 1,435,603 1,448,222 1,329,042
Operating Income
Distribution................................ 94,671 98,447 111,472
Gas Operations.............................. 9,231 13,549 12,426
Special (charges) recoveries, net (Note 3).. 2,829 1,000 (4,950)
Total operating income.................... 106,731 112,996 118,948
Interest expense, net (Note14).............. (57,560) (60,298) (53,290)
Other income, net (Note 2).................. 17,811 26,714 2,813
Equity in earnings of unconsolidated
affiliates (Note 13)....................... 3,391 7,042 2,931
Minority interest (Note 21)................. 51 (93) (873)
Earnings before income taxes and the
cumulative effect of an accounting change 70,424 86,361 70,529
Income taxes (Note 15)...................... 31,551 34,437 29,989
Earnings before the cumulative effect of
an accounting change..................... 38,873 51,924 40,540
Cumulative effect of an accounting change,
net of taxes............................... (590) -- --
Net Earnings................................ $ 38,283 $ 51,924 $ 40,540
Basic earnings per share:
Earnings per share before the cumulative
effect of an accounting change........... $ .56 $ .74 $ .59
Cumulative effect per share of an
accounting change........................ (.01) -- --
Net earnings per share.................... $ .55 $ .74 $ .59
Diluted earnings per share:
Earnings per share before the cumulative
effect of an accounting change........... $ .55 $ .72 $ .57
Cumulative effect per share of an
accounting change........................ (.01) -- --
Net earnings per share.................... $ .54 $ .72 $ .57
Weighted average shares outstanding:
Basic (Note 4)............................ 69,200 70,000 68,700
Diluted (Note 4).......................... 70,600 71,700 70,800
Comprehensive income................... $ 38,597 $ 51,793 $ 40,229
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> F-6
<TABLE>
<CAPTION>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Years Ended March 31, 2000, 1999 and 1998
---------------------------------------------------------------------------------
Shares of Accumulated
Common Capital in Other Employee
Stock $.01 Common Excess of Retained Comprehensive Treasury Benefits
(In thousands) Par Value Stock Par Value Earnings Income (Loss) Stock Trust
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1997............... 68,761.6 $688 $155,543 $196,626 $(468) $(15,732) $ --
Net earnings........................... 40,540
Foreign currency translation
adjustment............................ (311)
Purchase of treasury stock (Note 11)... (33,120)
Reissuance of treasury stock (Note 11) 5,207 46,266
Issuance of stock in connection with
acquisitions (Note 2)................. 1,440.0 14 18,524
Shares issued in connection with stock
options exercised (Note 12)........... 704.5 7 3,329
Tax benefit associated with exercise
of stock options (Note 15)............ 3,807
Shares issued in connection with
Employee Stock Purchase Plan (Note 12) 450.7 5 5,948
Balance - March 31, 1998............... 71,356.8 $714 $192,358 $237,166 $(779) $ (2,586) $ --
Net earnings........................... 51,924
Foreign currency translation adjustment (131)
Purchase of treasury stock (Note 11)... (16,579)
Issuance of stock in connection with
acquisitions.......................... 53.2 (425)
Reissuance of treasury stock for
stock options exercised (Note 11)..... (5,877) 7,798
Tax benefit associated with exercise of
stock options (Note 15)............... 1,648
Shares issued in connection with
Employee Stock Purchase Plan (Note 12) 613.7 6 5,708
Shares of treasury stock sold to
Employee Benefits Trust (Note 11)..... (3,237) 10,238 (7,001)
Balance - March 31, 1999............... 72,023.7 $720 $190,175 $289,090 $(910) $ (1,129) $ (7,001)
Net earnings........................... 38,283
Foreign currency translation adjustment 314
Purchase of treasury stock (Note 11)... (45,996)
Reissuance of treasury stock for stock
options exercised (Note 11)........... (247) 424
Shares issued in connection with stock
options exercised (Note 12)........... 544.4 5 1,429
Tax benefit associated with exercise of
stock options (Note 15)............... 1,638
Shares issued in connection with
Employee Stock Purchase Plan (Note 12) 575.7 6 4,080
Shares issued from Employee Benefits
Trust for Employee Stock Purchase
Plan (Note 11)........................ (348) 1,976
Shares of treasury stock sold to
Employee Benefits Trust (Note 11)..... (2,834) 38,266 (35,434)
Balance - March 31, 2000............... 73,143.8 $731 $193,893 $327,373 $(596) $ (8,435) $(40,459)
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> F-7
<TABLE>
<CAPTION>
AIRGAS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
(In thousands) 2000 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings...................................... $ 38,283 $ 51,924 $ 40,540
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization, including special
charges in 1998................................. 89,308 87,926 88,092
Deferred income taxes............................ 13,123 16,045 10,649
Equity in earnings of unconsolidated affiliates.. (3,391) (7,911) (4,409)
Gains on divestitures............................ (17,712) (25,468) (1,452)
Gain/loss on sale of plant and equipment......... (915) (222) (504)
Minority interest in earnings.................... (51) 93 873
Stock issued for employee stock purchase plan.... 5,715 5,750 5,953
Other non-cash charges........................... 458 (1,000) --
Changes in assets and liabilities, excluding
effects of business acquisitions and divestitures:
Trade receivables, net........................... (14,480) (10,477) (8,108)
Inventories, net................................. 1,392 (3,829) (7,336)
Prepaid expenses and other current assets........ (5,954) (2,236) 637
Accounts payable, trade.......................... (7,966) 1,052 (7,072)
Accrued expenses and other current liabilities... 9,434 5,607 19,761
Other assets and liabilities, net................ (7,152) (15,191) (3,224)
Net cash provided by operating activities......... 100,092 102,063 134,400
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................. (65,211) (101,638) (124,725)
Proceeds from sale of plant and equipment........ 37,454 3,279 3,534
Proceeds from divestitures....................... 55,596 53,682 4,000
Business acquisitions, net of cash acquired...... (99,204) (47,246) (154,395)
Business acquisitions, holdback settlements...... (2,289) (4,839) (6,750)
Investment in unconsolidated affiliates.......... (30) (3,180) (25,220)
Dividends from unconsolidated affiliates......... 3,973 4,533 4,165
Other, net....................................... 4,250 (1,467) 3,957
Net cash used by investing activities............. (65,461) (96,876) (295,434)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings......................... 168,569 449,833 450,051
Repayment of debt................................ (159,638) (426,995) (275,450)
Purchase of treasury stock....................... (47,125) (15,285) (34,433)
Exercise of stock options........................ 1,562 1,943 4,360
Cash overdraft................................... 2,001 (14,662) 16,875
Other financing activities....................... -- (21) (369)
Net cash provided/(used) by financing activities.. (34,631) (5,187) 161,034
CHANGE IN CASH ................................... $ -- $ -- $ --
Cash - Beginning of year.......................... -- -- --
Cash - End of year................................ $ -- $ -- $ --
For supplemental cash flow disclosures see Note 20.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> F-8
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts
of Airgas, Inc. and subsidiaries (the "Company"). Unconsolidated
affiliates are accounted for on the equity method and generally
consist of 20-50% owned operations where control does not exist
or is considered temporary. The excess of the cost of these
affiliates over the Company's share of their net assets at the
acquisition date is being amortized primarily over 40 years.
Intercompany accounts and transactions are eliminated in
consolidation.
The Company has made estimates and assumptions relating to
the reporting of assets and liabilities and disclosure of
contingent assets and liabilities to prepare these statements in
conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out (FIFO) method for
approximately 86% and 85% of the inventories at March 31, 2000
and 1999, respectively. Cost for the remainder of inventories
is determined using the last-in, first-out (LIFO) method.
(c) Plant and Equipment
Plant and equipment are stated at cost. Depreciation is
computed using the straight-line method based on the estimated
useful lives of the related assets.
(d) Goodwill
Goodwill represents costs in excess of net assets of
businesses acquired and is amortized on a straight-line basis
over the expected periods to be benefited, which is principally
40 years. The Company assesses the recoverability of goodwill in
accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of" ("SFAS 121"). The Company assesses the
recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can
be recovered through projected undiscounted future cash flows.
In making such determination with respect to goodwill, the
Company evaluates the performance of underlying businesses which
give rise to such assets. The assets acquired in connection with
these acquisitions continue to generate a significant portion of
the Company's net sales, total operating income and cash flow.
<PAGE> F-9
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(e) Other Intangible Assets
Costs related to the issuance of long-term debt are deferred
and amortized over the term of the related debt. Costs and
payments pursuant to non-competition arrangements entered into in
connection with business acquisitions are amortized over the
terms of the arrangements which are principally over five years.
The Company assesses the recoverability of non-competition
arrangements by determining whether the amortization of the asset
balance can be recovered through projected undiscounted future
cash flows of the related business over its remaining life.
(f) Commitments and Contingencies
The Company's policy is to accrue legal fees associated with
outstanding litigation. Liabilities for loss contingencies
arising from claims, assessments, litigation, and other sources
are recorded when it is probable that a liability has been
incurred and the amount of the claim, assessment or damages can
be reasonably estimated.
(g) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and
liabilities and their respective tax bases and operating loss and
tax credit carry forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation
allowances are recorded to reduce deferred tax assets when it is
more likely than not that a tax benefit will not be realized.
(h) Foreign-Currency Translation
The functional currency of the Company's foreign operations
is the applicable local currency. The translation of foreign
currencies into U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using average
exchange rates during each reporting period. The gains or
losses, net of applicable deferred income taxes, resulting from
such translations are included in stockholders' equity as a
component of "Accumulated other comprehensive income (loss)."
Gains and losses arising from foreign currency transactions are
reflected in the consolidated statements of earnings as incurred.
(i) Concentrations of Credit Risk
Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of trade
receivables. Concentrations of credit risk are limited due to
the Company's large number of customers and their dispersion
across many industries throughout North America. Credit terms
granted to customers are generally net 30 days.
<PAGE> F-10
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(j) Financial Instruments
In managing interest rate risk exposure, the Company enters
into interest rate swap agreements. An interest rate swap is a
contractual exchange of interest payments between two parties. A
standard interest rate swap involves the payment of a fixed rate
times a notional amount by one party in exchange for a floating
rate times the same notional amount from another party. As
interest rates change, the difference
to be paid or received is accrued and recognized as interest
expense over the life of the agreement. These instruments are
not entered into for trading purposes and the Company has the
ability and intent to hold these instruments to maturity. The
fair value of the interest rate swap agreements is not recognized
in the financial statements. Counterparties to the Company's
interest rate swap agreements are major financial institutions.
The carrying amounts for accounts receivable and accounts
payable approximate fair value because of the short-term maturity
of these financial instruments.
(k) Employee Benefits Trust
The Company established a grantor trust (the "Trust") to
fund future obligations of the Company's employee benefit and
compensation plans. Shares are purchased by the Trust from the
Company at fair market value and are reflected as a reduction of
stockholders' equity in the Company's Consolidated Balance Sheets
under the caption "Employee benefits trust." Shares are
transferred from the Trust to fund compensation and employee
benefit obligations based on the original cost of the shares to
the Trust. The satisfaction of compensation and employee benefit
plan obligations is based on the fair value of shares
transferred. Differences between the original cost of the shares
to the Trust and the fair market value of shares transferred is
charged or credited to capital in excess of par value.
(l) Revenue Recognition
Revenue is recognized when product is shipped to customers.
Rental fees on cylinders, bulk gas storage tanks and other
equipment are recognized when earned.
(m) Accounting and Disclosure Changes
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.
<PAGE> F-11
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITIONS & DIVESTITURES
(a) Acquisitions
Acquisitions have been recorded using the purchase method of
accounting, and, accordingly, results of their operations have
been included in the Company's consolidated financial statements
since the effective dates of the respective acquisitions. Also,
as discussed in Note 21, the Company has accounted for the
acquisition of subsidiary minority interests in fiscal 1998 using
the purchase method of accounting.
2000 - During fiscal 2000, the Company purchased six
businesses. The largest of these acquisitions and their
effective dates included Brown Welding Supply, LLC. (July 1,
1999), Oxygen Sales & Service, Inc. (August 1, 1999) and Puritan-
Bennett Corporation (January 21, 2000). The aggregate purchase
price for these acquisitions amounted to approximately $105
million. The purchase price for the remaining 3 businesses
amounted to approximately $4 million.
1999 - During fiscal 1999, the Company purchased 15
businesses. The largest of these acquisitions and their
effective dates included Abel Carbonic Products, Inc. (May 1,
1998), Gas House Welding Supply, Inc. (July 1, 1998), Carbonic
Products, Inc. (September 1, 1998) and Pacific Dry Ice, Inc.
(September 1, 1998). The aggregate purchase price for these
acquisitions amounted to approximately $49 million. The purchase
price for the remaining 11 businesses amounted to approximately
$17 million.
1998 - During fiscal 1998, the Company purchased 28
businesses. The largest of these acquisitions and their
effective dates included Carbonic Industries Corporation (June 5,
1997), Lyons Safety, Inc. (July 1, 1997), Industrial Gas
Products & Supply, Inc. (October 1, 1997), Carbonic Reserves,
Inc. (October 14, 1997), JWS Technologies, Inc. (November 1,
1997) and The Hoprich Company (February 1, 1998). The
aggregate purchase price for these acquisitions amounted to
approximately $224 million. The purchase price for the
remaining 22 businesses amounted to approximately $59 million.
<PAGE> F-12
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITIONS & DIVESTITURES - (Continued)
In connection with the above acquisitions, the total
purchase price, cash paid and liabilities assumed were as
follows:
<TABLE>
<CAPTION>
Years Ended March 31,
(In thousands) 2000 1999 1998
<S> <C> <C> <C>
Cash paid............................. $ 99,204 $47,246 $154,395
Issuance of common stock.............. -- -- 55,608
Notes issued to sellers............... 1,399 2,361 17,781
Notes payable and capital leases
assumed.............................. 561 553 5,947
Other liabilities assumed and accrued
acquisition costs.................... 7,762 15,475 49,407
Total purchase price.................. $108,926 $65,635 $283,138
</TABLE>
Included in the fiscal 1998 aggregate purchase price is the
issuance of approximately 3.4 million shares of the Company's
common stock (including approximately 2 million shares which were
issued out of treasury stock), issued in connection with the
acquisitions of Carbonic Industries Corporation, Kendeco Supply
Company and Industrial Gas Products.
In connection with a previous acquisition, the Company is
required to issue additional shares of common stock if the
average market value of the Company's common stock for the ten
business days ended October 1, 2000 is less than $13.10 per
share. At March 31, 2000, approximately 800 thousand shares were
contingently issuable. Common stock subsequently issued in
connection with such a contingency reduces capital in excess of
par value and increases common stock for the par value of the
additional shares issued.
The purchase price for business acquisitions and minority
interests was allocated to the assets acquired and liabilities
assumed based on their estimated fair values at the date of
acquisition. Such allocations have been based on preliminary
estimates of fair value at the date of acquisition, which may be
revised at a later date. Costs in excess of net assets acquired
(goodwill) for fiscal 2000, 1999 and 1998 amounted to $33
million, $29.3 million and $130.6 million, respectively.
<PAGE> F-13
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITIONS & DIVESTITURES - (Continued)
The following presents unaudited estimated pro forma
operating results as if the fiscal 2000 and 1999 acquisitions had
been consummated on April 1, 1998. These pro forma results have
been prepared for comparative purposes only and do not purport to
be indicative of what would have occurred had the acquisitions
been made as of April 1, 1998 or of results which may occur in
the future.
<TABLE>
<CAPTION>
Years Ended March 31,
(In thousands, except per share amounts) 2000 1999
<S> <C> <C>
Net sales............................... $1,604,838 $1,668,210
Net earnings............................ 42,136 56,398
Diluted earnings per share.............. .60 .79
</TABLE>
(b) Divestitures
During fiscal 2000, the Company completed the sale of its
operations in Poland and Thailand and sold a non-core medical
equipment distribution business. Proceeds from the sales
amounted to $55.6 million and resulted in a gain of $17.7 million
which was recognized in "Other income, net".
During fiscal 1999, the Company sold certain beverage
service operations, its eastern Canadian industrial gas
distribution business and its calcium carbide and carbon products
operations. Proceeds from the sales amounted to $53.7 million.
The beverage service and Canadian operations were sold at a loss
which was provided for in the 1998 Special Charges (Note 3). The
Company's calcium carbide and carbon products operations were
sold for a gain of $25.5 million included in "Other income, net".
The following table sets forth selected financial data related to
the fiscal 2000 and 1999 divested operations:
<TABLE>
<CAPTION>
Years Ended March 31,
(In thousands) 2000 1999 1998
<S> <C> <C> <C>
Sales........................... $17,997 $62,444 $71,414
Gross profits................... 11,906 29,991 28,226
Depreciation and amortization... 1,396 3,944 3,803
Operating income................ 474 5,602 1,468
</TABLE>
In April 2000, the Company agreed to sell its equity
investment in Superior Air Products Limited, a regional
industrial gas producer located in India. The agreement is
subject to the approval of a public offering and certain other
approvals by the Indian government. The transaction is expected
to close in the first half of fiscal 2001. Additionally in May
2000, the Company completed the sale of its equity investment in
Bhoruka Gases Ltd., also located in India.
During fiscal 1998, the Company recorded a gain, included in
"Other income, net," of $1.5 million related to the sale of a non-
core business.
<PAGE> F-14
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) SPECIAL CHARGES
(a) 1998 Special Charges
During the fourth quarter of fiscal 1998, the Company
announced its "Repositioning Airgas for Growth" restructuring
plan (the "Repositioning Plan"). In connection with the
Repositioning Plan, the Company recorded special charges in 1998
totaling $22.4 million ($14.3 million after-tax). The
Repositioning Plan included the consolidation of subsidiaries
into larger regional companies; the consolidation of certain
warehouse facilities into regional distribution centers; the
standardization and integration of information systems; the
building of a national information, procurement and logistics
infrastructure to support expanded product lines and distribution
channels; and the divestiture of several non-core businesses.
The major components of the fiscal 1998 Special Charges were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1998
<S> <C>
Impairment write-down of plant,
equipment and goodwill (1)......... $ 11,423
Divestiture charges (2)............. 6,851
Facility exit costs (3)............. 2,577
Severance costs (3)................. 1,578
Special Charges.................... 22,429
Refrigerant recovery (4)............ (14,500)
Acquisition break-up fee, net (4)... (2,979)
Special Charges, net............... $ 4,950
(1) Certain plant, equipment and related goodwill were written down to
fair value, less the cost to dispose, by $11.4 million. Fair value was
based on the estimated future undiscounted cash flows to be generated from
the sale of such assets.
(2) Estimated reserves of $6.9 million were established in connection
with the planned divestiture of certain non-core businesses. The write-
down was based on an evaluation of the estimated fair value of these assets
which indicated that these assets were impaired. Fair value was based on
the estimated future undiscounted cash flows to be generated from the sale
of these assets.
(3) Reserves were established for facility exit costs of $2.6 million and
severance of $1.6 million. Estimated reserves were related to the closure
of facilities and a workforce reduction of approximately 200 employees.
(4) The fiscal 1998 Special Charges were offset by a non-recurring gain of
$14.5 million ($9.4 million after-tax) from a partial recovery of
refrigerant losses related to the 1997 fraudulent breach of contract by a
third-party supplier and a net gain of $3 million ($1.9 million after-tax)
related to an acquisition break-up fee.
During fiscal 2000, the Company recognized an additional $2.3 million in
refrigerant loss recoveries as "Special charges (recoveries), net" on the
Consolidated Statements of Earnings.
</TABLE>
<PAGE> F-15
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 Special Charges Accrued Liabilities:
(In thousands) Facility exit Severance
Divestitures costs costs Total
<S> <C> <C> <C> <C>
March 31, 1998 liability... $ 6,851 $ 2,292 $ 1,286 $ 10,429
Cash payments............. -- (590) (1,214) (1,804)
Incurred losses........... (2,538) -- -- (2,538)
Change in estimates....... (237) (763) -- (1,000)
March 31, 1999 liability... $ 4,076 $ 939 $ 72 $ 5,087
Cash payments............. (474) (92) (72) (638)
Incurred losses........... (79) -- -- (79)
Change in estimates....... (74) (503) -- (577)
March 31, 2000 liability... $ 3,449 $ 344 $ -- $ 3,793
</TABLE>
Changes in estimates to the divestiture reserve to reflect differences
between the original loss estimate and the actual loss incurred totaled $74
thousand and $237 thousand in fiscal 2000 and 1999, respectively. The
adjustments were reflected as recoveries in "Special charges (recoveries),
net" on the Consolidated Statements of Earnings.
The remaining divestiture reserve at March 31, 2000 primarily relates to
the divestiture of the Company's equity investments in India. As described
in Note 2, the divestiture of these equity investments is expected to close
during the first half of fiscal 2001.
Facility closure plans were modified in response to closure plans
completed. Changes in estimates to the facility exit costs reserves of
$503 thousand and $763 thousand in fiscal 2000 and 1999, respectively, were
reflected as recoveries in "Special charges (recoveries), net" on the
Consolidated Statements of Earnings. The remaining facility exit cost
reserve at March 31, 2000 reflects a non-cancelable lease obligation.
<PAGE> F-16
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 dividing
net earnings by the weighted average common shares outstanding adjusted 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
three years ended March 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Years Ended March 31,
(In thousands) 2000 1999 1998
<S> <C> <C> <C>
Weighted average common shares
outstanding:
Basic........................... 69,200 70,000 68,700
Stock options................. 1,000 1,400 2,100
Contingently issuable shares.. 400 300 --
Diluted......................... 70,600 71,700 70,800
</TABLE>
(5) INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of:
March 31,
(In thousands) 2000 1999
<S> <C> <C>
Finished goods............. $158,549 $153,571
Raw materials.............. 889 853
$159,438 $154,424
</TABLE>
Net inventories determined by the LIFO inventory method totaled $22.6
million and $23.2 million at March 31, 2000 and March 31, 1999,
respectively. If the FIFO inventory method had been used for these
inventories, they would have been $1.4 million higher at March 31, 2000 and
$1.6 million higher at March 31, 1999.
<PAGE> F-17
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
The major classes of plant and equipment, at cost, are as follows:
March 31,
Depreciable
(In thousands) Lives (Yrs) 2000 1999
<S> <C> <C> <C>
Land and land improvements............ -- $ 25,099 $ 23,965
Buildings and leasehold improvements.. 25 101,606 92,943
Cylinders............................. 30 475,144 422,560
Machinery and equipment, including
bulk tanks........................... 7 to 30 337,684 329,619
Computers and furniture and fixtures.. 3 to 10 72,192 64,961
Transportation equipment.............. 3 to 15 55,528 50,923
Construction in progress.............. -- 7,112 8,525
$1,074,365 $993,496
</TABLE>
(7) OTHER NON-CURRENT ASSETS
<TABLE>
<CAPTION>
Other non-current assets include:
March 31,
(In thousands) 2000 1999
<S> <C> <C>
Investments in unconsolidated affiliates (Note 13)... $ 72,959 $100,834
Non-compete agreements and other intangible assets,
at cost, net of accumulated amortization of $97.5
million in 2000 and $85.5 million in 1999........... 48,136 55,894
Other assets......................................... 10,180 16,694
$131,275 $173,422
</TABLE>
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
Accrued expenses and other current liabilities include:
March 31,
(In thousands) 2000 1999
<S> <C> <C>
Cash overdraft........................ $ 18,960 $ 16,959
Restructuring reserves................ 3,793 5,087
Insurance reserves.................... 11,475 9,584
Accrued payroll and employee benefits. 24,441 21,245
Customer cylinder deposits............ 7,998 8,233
Accrued interest...................... 8,969 8,190
Other accrued expenses and current
liabilities.......................... 45,613 38,997
$121,249 $108,295
</TABLE>
The cash overdraft is attributable to the float of the Company's
outstanding checks.
<PAGE> F-18
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INDEBTEDNESS
(a) Long-term Debt
<TABLE>
<CAPTION>
Long-term debt consists of:
March 31,
(In thousands) 2000 1999
<S> <C> <C>
Revolving credit borrowings...................... $583,700 $554,954
Medium-term notes................................ 225,000 225,000
Acquisition notes................................ 57,463 72,577
All other notes, at various rates and maturities. 11,330 14,955
Total long-term debt............................. 877,493 867,486
Less current portion of long-term debt........... (20,071) (19,645)
Long-term debt, excluding current portion........ $857,422 $847,841
</TABLE>
The Company has unsecured revolving credit facilities totaling $725
million and $100 million Canadian (US$67 million). The Company may borrow
under these facilities until the maturity date of December 5, 2002. The
agreement contains covenants which include the maintenance of a minimum
equity level, maintenance of certain financial ratios, restrictions on
additional borrowings and limitations on dividends. At March 31, 2000, the
Company had borrowings under the agreement of $555 million and $44 million
Canadian (US$29 million). The Company also had commitments under letters
of credit supported by the agreement of approximately $54 million. Based
on restrictions related to cash flow to funded debt coverage, the Company
had additional borrowing capacity under the agreement of approximately $154
million. At March 31, 2000, the effective interest rates related to
outstanding borrowings under the lines were approximately 6.6% on U.S.
borrowings and 5.5% on Canadian borrowings.
At March 31, 2000, 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 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%. The Company also has a shelf registration with a capacity of
approximately $175 million for the issuance of debt and other types of
securities.
Acquisition notes represent notes issued to sellers of businesses
acquired and are repayable in periodic installments including interest at
an average effective rate of 7.5%.
<PAGE> F-19
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INDEBTEDNESS - (Continued)
<TABLE>
<CAPTION>
The aggregate maturities of long-term debt are as follows:
(In thousands)
Years Ending March 31, Aggregate Maturity
<S> <C>
2001.................. $ 20,071
2002.................. 73,397
2003.................. 585,079
2004.................. 95,482
2005.................. 506
Thereafter............ 102,958
$877,493
</TABLE>
(b) Swap Agreements
In managing interest rate exposure, the Company participates in 21
interest rate swap agreements with a total notional principal amount of
$543 million at March 31, 2000. Counterparties to the interest rate swap
agreements are major financial institutions. The Company monitors its
positions and the credit ratings of its counterparties, and does not
anticipate nonperformance by the counterparties.
Sixteen swap agreements with approximately $363 million in notional
principal amount require fixed interest payments based on an average
effective rate of 6.3% for remaining periods ranging between one and five
years. Five swap agreements with approximately $180 million in notional
principal amount require variable interest payments based on an average
effective rate of 6.2% at March 31, 2000. Under the terms of three of the
swap agreements, the Company has elected to receive the discounted value of
the counterparty's interest payments up front. At March 31, 2000,
approximately $4.5 million of such payments were included in other non-
current liabilities. The effect of the swap agreements was to increase
interest expense $3.2 million, $1.1 million and $1.0 million in 2000, 1999
and 1998, respectively.
The aggregate maturities of the Company's interest rate swaps by type
of swap for the five years ending March 31, 2005 and thereafter are as
follows:
<TABLE>
<CAPTION>
(In thousands)
Notional Principal Amounts
---------------------------
Years Ending March 31, Pay-Fixed Receive-Fixed
<S> <C> <C>
2001................... $ 65,950 $ 50,000
2002................... 179,225 50,000
2003................... 77,500 --
2004................... -- 30,000
2005................... 40,000 --
Thereafter......... -- 50,000
$362,675 $180,000
</TABLE>
<PAGE> F-20
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
Summarized below are the carrying and fair values of the Company's
financial instruments at March 31, 2000 and 1999.
The fair value of the Company's debt and interest rate swap agreements
is based on estimates using standard pricing models that take into account
the present value of future cash flows as of the balance sheet date. The
computation of fair values of these instruments is generally performed by
the Company. The carrying amounts reported in the balance sheet for trade
receivables and payables, accrued liabilities, accrued income taxes, and
short-term borrowings approximate fair value due to the short-term nature
of these instruments. Accordingly, these items have been excluded from the
table below.
<TABLE>
<CAPTION>
2000 2000 1999 1999
(In thousands) Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial Instruments
Revolving credit borrowings... $583,700 $583,700 $554,954 $554,954
Medium-term notes............. 225,000 185,931 225,000 214,257
Acquisition notes............. 57,463 51,275 72,577 70,063
All other notes............... 11,330 11,330 14,955 14,955
Prepaid interest rate swap
agreements................... 4,519 5,573 8,687 10,121
Interest rate swap agreements. -- (2,322) -- (1,958)
Operating leases with trust... -- 46,956 -- 15,162
</TABLE>
(11) STOCKHOLDERS' EQUITY
(a) Common Stock
The Company is authorized to issue up to 200 million shares of common
stock with a par value of $.01 per share. At March 31, 2000, the number of
shares of common stock outstanding was 67,196,376, excluding 1.1 million
shares of common stock held as treasury stock and 4.8 million shares of
common stock held in a grantor trust as described under Note 11(d).
(b) Preferred Stock and Redeemable Preferred Stock
The Company is authorized to issue up to 20 million shares of
preferred stock. Of the 20 million shares authorized, 200 thousand shares
have been designated as Series A Junior Participating Preferred Stock and
200 thousand shares have been designated as Series B Junior Participating
Preferred Stock (see Note 11(e) for further discussion). At March 31, 2000
and 1999, no shares of the preferred stock were outstanding. The preferred
stock may be issued from time to time by the Board of Directors in one or
more series. The Board of Directors is authorized to fix the dividend
rights and terms, conversion rights, voting rights, rights and terms of
redemption, liquidation preferences, and any other rights, preferences,
privileges and restrictions of any series of preferred stock, and the
number of shares constituting each such series and designation thereof.
Additionally, the Company is authorized to issue 30 thousand shares of
redeemable preferred stock. At March 31, 2000 and 1999, no shares were
outstanding.
<PAGE> F-21
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) Treasury Stock
In March 1999, the Company's Board of Directors authorized the
repurchase of up to seven million shares, or approximately 10%, 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. In accordance with existing and previous
share repurchase authorizations, the Company acquired 5.3 million, 1.4
million, and 2.2 million shares of common stock in fiscal 2000, 1999 and
1998, respectively. In fiscal 2000, the Company reissued 4.2 million
shares of common stock to the Company's Employee Benefits Trust (the
"Trust"), as discussed in Note 11(d), and 48 thousand shares for stock
option exercises. In fiscal 1999, the Company reissued 826 thousand shares
of common stock to the Trust and 598 thousand shares for stock option
exercises. In fiscal 1998, the Company reissued approximately 2 million
shares in connection with its acquisition program, 707 thousand shares
related to the purchase of subsidiary minority interests as described in
Note 21, and 209 thousand shares for stock option exercises. As of March
31, 2000, the total remaining shares authorized for repurchase totaled
approximately 1.9 million shares. When treasury shares are reissued, the
Company uses an average cost method and the excess of the repurchase cost
over the reissuance price is treated as a charge to capital in excess of
par value. Subsequent to March 31, 2000, the Company repurchased
approximately 1.4 million shares of common stock for total consideration of
$11.2 million.
(d) Shares in Employee Benefits Trust
In March 1999, the Company established a grantor trust (the "Trust") to
fund certain future obligations of the Company's employee benefit and
compensation plans. The Company, pursuant to a common stock Purchase
Agreement, may sell shares of common stock to the Trust. Such common stock
consists of shares the Company has purchased or will purchase on the open
market or in private transactions. The common stock may also consist of
shares issued directly to the Trust. The Company holds promissory notes
from the Trust in the amount of each purchase. Shares held by the Trust
serve as collateral for the promissory notes and are available to fund
employee benefit plan obligations as the promissory notes are repaid. The
shares held by the Trust are not considered outstanding for earnings per
share purposes until they are released from serving as collateral for the
promissory notes. An independent third-party financial institution serves
as the Trustee. The Trustee votes or tenders shares held by the Trust in
accordance with instructions received from the participants in the employee
benefit and compensation plans to be funded by the Trust. In fiscal 2000
and 1999, the Trust purchased 4.2 million and 826 thousand shares of common
stock, previously held as treasury stock, from the Company, for
approximately $35 million and $7 million, respectively. During 2000,
approximately 230 thousand shares were issued from the Trust for employee
benefit programs. Subsequent to March 31, 2000, the Trust purchased
approximately 2 million shares of common stock, previously held as treasury
stock, from the Company for approximately $11.3 million.
(e) Stockholder Rights Plan
Effective April 1, 1997, the Company's Board of Directors adopted a
new stockholder rights plan (the "1997 Rights Plan"). Pursuant to the 1997
Rights Plan, the Board of Directors declared a dividend distribution of one
right for each share of common stock. Each right entitles the holder to
purchase from the Company one one-thousandth of a share Series B Junior
Participating Preferred Stock at an initial exercise price of $100 per
share.
Rights become exercisable only following the acquisition by a person
or group of 15 percent (or 20 percent in the case of the Chairman and
certain of his affiliates) or more of the Company's common stock or after
the announcement of a tender offer or exchange offer to acquire 15 percent
(or 20 percent in the case of the Chairman and certain of his affiliates)
or more of the outstanding common stock. If such a person or group
acquires 15 percent or more (or 20 percent or more, as the case may be) of
the common stock, each right (other than such person's or group's rights,
which will become void) will entitle the holder to purchase, at the
exercise price, common stock having a market value equal to twice the
exercise price. In certain circumstances, the rights may be redeemed by
the Company. If not redeemed, they will expire on April 1, 2007.
<PAGE> F-22
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) STOCK-BASED COMPENSATION
The Company has elected to continue to account for its stock-based
compensation plans in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued", as permitted by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation expense has been
recognized for its stock option plans and its stock purchase plan.
However, pro forma information regarding net earnings and earnings per
share is required. Had compensation expense for the Company's stock-based
compensation plans been determined based on the fair value at the grant
date, the Company's pro forma net earnings and earnings per share for 2000,
1999 and 1998 would be as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
(In thousands, except per share amounts) 2000 1999 1998
<S> <C> <C> <C>
Net earnings As reported.. $38,283 $51,924 $40,540
Pro forma.... $32,602 $46,636 $36,240
Diluted earnings per share As reported.. $ .54 $ .72 $ .57
Pro forma.... $ .46 $ .65 $ .51
</TABLE>
The pro forma impact only takes into account options granted since
April 1, 1995 and is likely to increase in future years as additional
options are granted and amortized ratably over the vesting period.
The Company's stock-based compensation plans are described below.
(a) Employee Stock Option Plans
The Company has a stock plan under which officers and key employees
may be granted options. In May 1997, the Company adopted the 1997 Stock
Option Plan (the "1997 Plan"). The 1997 Plan contains essentially the same
terms and conditions as the Company's previous 1984 Stock Option Plan (the
"1984 Plan"). The 1984 Plan was terminated upon approval of the 1997 Plan
by the Company's stockholders. Under the 1984 Plan, 948,855 options were
granted in fiscal 1998 with an exercise price equal to the market price at
the date of grant. Options under the 1984 Plan vest 25% annually and have
a maximum term of ten years.
Under the 1997 Plan, at March 31, 2000, 1999 and 1998, 5,369,499,
6,309,368 and 7,900,850 options, respectively, were available for issuance.
In fiscal 2000, 1999 and 1998, 1,126,845, 1,665,007 and 99,150 options,
respectively, were granted with an exercise price equal to market price at
the date of grant. Options under the 1997 Plan are generally granted in
May of each year, vest 25% annually and have a maximum term of ten years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for fiscal 2000, 1999 and 1998 option grants,
respectively: expected volatility of 44.2%, 42.6% and 39.9%, risk-free
interest rate of 5.56%, 5.54% and 6.48%, and expected life of 4.91, 4.81
and 4.47 years. The weighted average fair value of the options granted
during fiscal 2000, 1999 and 1998 was $5.19, $5.82 and $6.55, respectively.
In connection with the fiscal 1998 acquisition of Carbonic Industries
Corporation ("CIC"), the Company assumed the Carbonic Industries
Corporation 1994 Stock Option Plan (the "CIC Plan"). The CIC Plan provided
grants to certain key officers and employees of CIC. At the date of
acquisition, 196,572 options were exercisable to purchase Company common
stock. The fair value of these options was recorded at the date of
acquisition.
<PAGE> F-23
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
The following table summarizes the activity of the employee stock
option plans during the three years ended March 31, 2000:
Exercise
Number Price Per
of Shares Share
<S> <C> <C>
March 31, 1998
Outstanding, beginning of year..... 6,281,675 $ 1.83 - $23.25
Granted............................ 1,244,577 13.50 - 17.38
Exercised.......................... (897,358) 1.83 - 14.82
Expired............................ (269,787) 10.69 - 22.00
March 31, 1999
Outstanding, beginning of year..... 6,359,107 1.83 - 23.25
Granted............................ 1,665,007 8.13 - 15.94
Exercised.......................... (557,647) 1.83 - 15.63
Expired............................ (256,947) 6.31 - 22.00
March 31, 2000
Outstanding, beginning of year..... 7,209,520 1.83 - 23.25
Granted............................ 1,126,845 6.06 - 12.50
Exercised.......................... (576,772) 1.83 - 11.32
Expired............................ (489,932) 6.31 - 22.00
Outstanding, end of year........... 7,269,661 1.83 - 23.25
</TABLE>
Options for 4,554,991, 4,439,900 and 4,266,095 shares were exercisable
at March 31, 2000, 1999 and 1998, respectively.
(b) Board of Directors Stock Option Plans
The Company also maintains stock option plans covering directors who
are not employees. In May 1997, the Company adopted the 1997 Directors'
Stock Option Plan (the "1997 Directors' Plan"). The 1997 Directors' Plan
reserved 500 thousand shares for issuance. Options under the 1997
Directors' Plan are exercisable in full on the date of grant.
Under the 1997 Directors' Plan, at March 31, 2000, 353,500 options
were available for issuance. During fiscal 2000, 1999 and 1998, 62,500,
48,000 and 36,000 options, respectively, were granted with an exercise price
equal to the market price at the date of grant and have a maximum term of ten
years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for fiscal 2000, 1999 and 1998 option grants,
respectively: expected volatility of 44.8%, 42.2% and 39.5%, risk-free
interest rate of 5.79%, 5.52% and 6.12%, and expected life of 5.44, 5.48
and 5.35 years. The weighted average fair value of the stock options
granted during fiscal 2000, 1999 and 1998 was $6.01, $6.36 and $8.68,
respectively.
<PAGE> F-24
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) STOCK-BASED COMPENSATION - (Continued)
<TABLE>
<CAPTION>
The following table summarizes the activity of the Board of Directors
stock option plans during the three years ended March 31, 2000:
Exercise
Number Price Per
of Shares Share
<S> <C> <C>
March 31, 1998
Outstanding, beginning of year..... 286,000 $2.09 - $19.25
Granted............................ 36,000 $19.00
Exercised.......................... (16,000) 2.09 - 2.14
March 31, 1999
Outstanding, beginning of year..... 306,000 2.09 - 19.25
Granted............................ 48,000 13.50
Exercised.......................... (40,000) 2.09 - 4.16
March 31, 2000
Outstanding, beginning of year..... 314,000 2.09 - 19.25
Granted............................ 62,500 12.25
Exercised.......................... (16,000) 2.20
Outstanding, end of year........... 360,500 2.09 - 19.25
</TABLE>
Options for 360,500, 314,000 and 306,000 shares were exercisable at
March 31, 2000, 1999 and 1998, respectively.
<PAGE> F-25
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) STOCK-BASED COMPENSATION - (Continued)
The following table summarizes information about options outstanding
and exercisable for the employee, CIC and Board of Directors stock option
plans at March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------------
Exercise
Weighted Average Number Price
Remaining Life-Years Outstanding Per Share
<S> <C> <C>
1.60 1,166,553 $ 1.83 - $ 3.30
3.52 772,769 3.48 - 6.31
7.53 820,260 6.32 - 8.50
4.21 424,860 8.56 - 11.44
9.13 1,017,325 11.50 - 11.50
5.13 993,455 12.25 - 14.71
7.19 773,260 14.81 - 15.63
8.12 821,626 15.94 - 15.94
5.96 822,253 16.63 - 22.00
6.43 17,800 22.87 - 23.25
5.79 7,630,161 $ 1.83 $23.25
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
---------------------------------------------
Number of Options Weighted Average
Exercisable Exercise Price Per Share
<S> <C>
1,166,553 $ 2.74
752,769 6.05
348,314 8.10
410,660 11.00
952,455 13.72
375,328 15.61
209,637 15.94
686,424 20.09
13,351 23.24
4,915,491 $10.47
</TABLE>
<PAGE> F-26
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) Employee Stock Purchase Plans
In August 1998, the Company established the Airgas, Inc. 1998 Employee
Stock Purchase Plan (the "1998 Plan") to encourage and assist employees in
acquiring an equity interest in the Company. The 1998 Plan is authorized
to issue up to 3 million shares of common stock. Effective January 1,
1999, eligible employees may elect to have up to 15% of their annual gross
earnings withheld to purchase common stock at 85% of the market value.
Market value under the 1998 Plan is defined as either the closing share
price on the New York Stock Exchange as of the employees' enrollment date
or the closing price on the last business day of a fiscal quarter,
whichever is lower. An employee may lock-in a purchase price for up to 27
months. The 1998 Plan is designed to comply with the requirements of
Sections 421 and 423 of the Internal Revenue Code. The 1998 Plan replaces
the previous 1994 Employee Stock Purchase Plan. During fiscal 2000, the
Company issued 806 thousand shares from the Employee Benefits Trust and
treasury stock for the 1998 Plan at an average purchase price of $7.09 per
share.
The Company established the 1994 Employee Stock Purchase Plan (the
"1994 Plan") to encourage and assist employees in acquiring an equity
interest in the Company. The 1994 Plan was authorized to issue up to 2
million shares of common stock at terms generally consistent with the 1998
Plan. The Company issued 614 thousand shares and 451 thousand shares under
the 1994 Plan at an average purchase price of $9.30 and $13.20 per share
during fiscal 1999 and 1998, respectively. During fiscal 2000, the Company
terminated the 1994 Plan.
Compensation expense under SFAS 123 is estimated for the fair value of
the employees' option to purchase shares of common stock, which was
estimated using the Black-Scholes model with the following assumptions for
fiscal 2000, 1999 and 1998, respectively: expected volatility of 51%, 46%
and 38% risk-free interest rate of 6.0%, 4.8% and 5.8%, and expected term
of 27 months for each period. The weighted average fair value of the
purchase options granted in fiscal 2000, 1999 and 1998 was $3.94, $4.79 and
$6.55, respectively.
(13) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company's investments in unconsolidated affiliates totaled
approximately $73 million at March 31, 2000, and $101 million at March 31,
1999. The Company's investments include a 47% joint venture interest in
the voting capital stock of National Welders Supply Company, Inc.
("National Welders"). National Welders is a distributor of industrial,
medical and specialty gases and related equipment based in Charlotte, North
Carolina. The investment in National Welders totaled approximately $55
million at March 31, 2000 and 1999. The Company's other investments in
unconsolidated affiliates totaled approximately $18 million at March 31,
2000 and $46 million at March 31, 1999. The decrease compared to March 31,
1999 primarily relates to the August 1999 divestiture of the Company's
investments in Poland and Thailand.
The Company's other investments primarily consist of a 25.5% interest in
Bhoruka Gases, Ltd. (India), a 51% interest in Superior Air Products, Ltd.
(India), a 50% joint venture interest in AC Industries (U.S.) and other
investments. As described in Note 2(b), the divestiture of the Indian
investments is expected to be completed in the first half of fiscal 2001.
On December 31, 1998, the Company divested 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
terminated its 55% interest in a joint venture which marketed calcium
carbide throughout the United States.
The Company accounts for investments in unconsolidated affiliates by the
equity method of accounting. The Company's share of earnings from all
unconsolidated affiliates was $3.4 million, $7.9 million and $4.4 million
for the years ended March 31, 2000, 1999 and 1998, respectively. Equity in
earnings from Elkem of $900 thousand and $1.5 million in 1999 and 1998 are
included in Gas Operations net sales. The investments in unconsolidated
affiliates include goodwill of approximately $29 million as of March 31,
2000, which is primarily being amortized to earnings over 40 years.
<PAGE> F-27
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of unaudited financial information for investments in
unconsolidated affiliates for the years ended March 31, 2000 and 1999 were
as follows:
<TABLE>
<CAPTION>
March 31,
(In thousands) 2000 1999
<S> <C> <C>
Current assets................. $ 52,828 $ 47,221
Non-current assets............. 142,461 138,344
Total assets................. $195,289 $185,565
Current liabilities............ $ 31,431 $ 27,557
Non-current liabilities........ 105,945 86,066
Mandatory redeemable preferred
stock......................... 57,577 57,577
Stockholders' equity........... 336 14,365
Total liabilities and
stockholders' equity........ $195,289 $185,565
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31,
(In thousands) 2000 1999 1998
<S> <C> <C> <C>
Net sales...................... $193,335 $200,017 $188,640
Cost of sales.................. 126,249 137,406 113,793
Gross profit................... 67,086 62,611 74,847
Operating income............... 15,182 16,995 20,243
Earnings before taxes.......... 13,571 17,266 14,493
Net earnings................... 9,428 13,463 11,339
Preferred stock dividends and
equity adjustments............ (6,037) (5,553) (6,937)
Equity in earnings of Elkem JV. -- (868) (1,471)
Equity in earnings of
unconsolidated affiliates..... $ 3,391 $ 7,042 $ 2,931
</TABLE>
(14) INTEREST EXPENSE, NET
<TABLE>
<CAPTION>
Interest expense, net, consists of:
Years Ended March 31,
(In thousands) 2000 1999 1998
<S> <C> <C> <C>
Interest expense...................... $58,712 $62,588 $55,403
Interest and finance charge income.... (1,152) (2,290) (2,113)
$57,560 $60,298 $53,290
</TABLE>
<PAGE> F-28
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) INCOME TAXES
<TABLE>
<CAPTION>
Pre-tax earnings (losses) were derived from the following sources:
Years Ended March 31,
(In thousands) 2000 1999 1998
<S> <C> <C> <C>
United States............... $69,028 $83,548 $71,810
Foreign..................... 1,396 2,813 (1,281)
$70,424 $86,361 $70,529
</TABLE>
<TABLE>
<CAPTION>
Income tax expense (benefit) consists of:
Years Ended March 31,
(In thousands) 2000 1999 1998
<S> <C> <C> <C>
Current:
Federal................... $16,554 $15,220 $16,025
Foreign................... 408 599 385
State..................... 1,466 2,573 2,930
18,428 18,392 19,340
Deferred:
Federal................... 10,325 13,870 10,748
Foreign................... 847 446 (260)
State..................... 1,951 1,729 161
13,123 16,045 10,649
$31,551 $34,437 $29,989
</TABLE>
<PAGE> F-29
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) INCOME TAXES - (Continued)
<TABLE>
<CAPTION>
Significant differences between taxes computed at the federal
statutory rate and the provision for income taxes were:
Years Ended March 31,
2000 1999 1998
<S> <C> <C> <C>
Taxes at U.S. federal statutory rate.............. 35.0% 35.0% 35.0%
Increase in income taxes resulting from:
State income taxes, net of federal benefit...... 2.1% 2.3% 3.4%
Amortization of non-deductible goodwill......... 4.7% 4.6% 3.6%
Special charges (Note 3)........................ -- -- 0.7%
Divestitures.................................... 2.6% 0.4% 0.6%
Equity accounting for unconsolidated affiliates. (1.1%) (3.1%) (1.6%)
Other, net...................................... 1.5% 0.7% 0.8%
44.8% 39.9% 42.5%
</TABLE>
<TABLE>
<CAPTION>
The tax effects of cumulative temporary differences that gave rise to
the significant portions of the deferred tax assets and liabilities were as
follows:
March 31,
(In thousands) 2000 1999
<S> <C> <C>
Deferred Tax Assets:
Inventories....................... $ 5,912 $ 4,720
Accounts receivable............... 1,088 414
Deferred rental income............ 385 481
Insurance reserves................ 3,567 3,245
Special charges (Note 3).......... 4,011 3,790
Divestiture of non-core businesses -- 705
Litigation settlement reserve..... 2,385 --
Other reserves.................... 1,963 2,238
Intangible assets................. 649 1,382
Other............................. 7,638 6,760
Valuation allowance............... (1,840) (1,672)
25,758 22,063
Deferred Tax Liabilities:
Plant and equipment............... (156,320) (139,329)
Other............................. (16,494) (17,860)
(172,814) (157,189)
Net deferred tax liability..........$(147,056) $(135,126)
</TABLE>
<PAGE> F-30
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) INCOME TAXES - (Continued)
Current tax assets and current tax liabilities have been netted for
presentation purposes. Non-current tax assets and non-current tax
liabilities have also been netted. Deferred tax assets and liabilities are
reflected in the Company's consolidated balance sheets as follows:
<TABLE>
<CAPTION>
March 31,
(In thousands) 2000 1999
<S> <C> <C>
Current deferred tax assets, net.......... $ 13,752 $ 7,549
Non-current deferred tax liability, net... (160,808) (142,675)
Net deferred tax liability................ $(147,056) $(135,126)
</TABLE>
The Company has recorded tax benefits amounting to $1.6 million, $1.6
million and $3.8 million in fiscal 2000, 1999 and 1998, respectively,
resulting from the exercise of stock options and warrants. This benefit has
been recorded in capital in excess of par value.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the reversal of deferred tax liabilities
and projected future taxable income in making this assessment. Based upon
the level of historical taxable income and projections for future taxable
income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances, at March 31, 2000. Valuation allowances primarily
relate to state tax net operating loss carry forwards.
(16) BENEFIT PLANS
The Company has a defined contribution 401(k) plan (the "plan")
covering substantially all full-time employees. Under the terms of the
plan, the Company makes matching contributions up to two percent of
participants' wages plus additional discretionary profit sharing
contributions based upon the profitability of the Company. Amounts
expensed under the plan for fiscal 2000, 1999 and 1998 were $5.9 million,
$4.7 million and $6.4 million, respectively.
Certain subsidiaries of the Company participate in multi-employer
pension and post-retirement plans which provide defined benefits to union
employees. Contributions are made to the plans in accordance with
negotiated labor contracts. The Company has not taken any action to
terminate or withdraw from these plans. Management believes that the
Company's liability, if any, for multi-employer plan withdrawal liability
will not have a material effect on the Company's financial condition,
results of operations or liquidity. Amounts expensed under the pension
plans for fiscal 2000, 1999 and 1998 were $526 thousand, $611 thousand and
$660 thousand, respectively.
<PAGE> F-31
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) RELATED PARTIES
During the years ended March 31, 2000, 1999 and 1998, National Welders,
an unconsolidated equity affiliate, paid $3.5 million, $1.4 million and
$1.7 million, respectively, to the Company for gas products, hardgoods and
services. In addition, National Welders sold gas products and hardgoods to
the Company in the amounts of $330 thousand, $552 thousand and $390
thousand in fiscal 2000, 1999 and 1998, respectively.
The Company paid $9.1million, $8.4 million and $5.9 million to AC
Industries, an unconsolidated equity affiliate, for the purchase of liquid
carbon dioxide during the years ended March 31, 2000, 1999 and 1998,
respectively. In addition, the Company had a net payable balance to AC
Industries totaling $695 thousand, $1.3 million and $1.2 million, at March
31, 2000, 1999 and 1998, respectively.
(18) LEASES
The Company leases certain distribution facilities and equipment under
long-term operating leases with varying terms. Most leases contain renewal
options and in some instances, purchase options. Rentals under these
long-term leases for the years ended March 31, 2000, 1999 and 1998,
amounted to $38.5 million, $35.4 million and $30.4 million, respectively.
Certain operating facilities are leased at market rates from employees of
the Company who were previous owners of businesses acquired. The Company
also has several capital leases assumed as part of prior acquisitions.
Outstanding lease obligations and the related capital assets are not
material to the consolidated balance sheets at March 31, 2000 and 1999.
In October 1999, the Company renewed a lease of real estate with a trust
established by a commercial bank. The lease was amended to include the
sale-leaseback of certain equipment. The trust holds title to the
properties and equipment included in the leases. The rental payments are
based on LIBOR plus an applicable margin and the cost of the property
acquired by the trust. The appraised value of the real estate and
equipment under the lease totaled approximately $46 million. The lease has
a five-year term and has been accounted for as an operating lease. The
Company has guaranteed a residual value of the real estate and the
equipment at the end of the lease term of approximately $31 million. A
gain of approximately $12 million on the equipment portion of the
transaction has been deferred until the expiration of the Company's
guarantee of the residual value. Cash proceeds received from the
transaction were used to repay debt outstanding under the Company's
revolving credit facility.
<TABLE>
<CAPTION>
At March 31, 2000, future minimum lease payments under noncancelable
operating leases are as follows:
(In thousands)
<S> <C>
2001............ $ 30,729
2002............ 24,584
2003............ 19,714
2004............ 14,987
2005............ 51,069
Thereafter...... 17,077
$158,160
</TABLE>
<PAGE> F-32
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19) COMMITMENTS AND CONTINGENCIES
(a) Legal
In July 1996, Praxair, Inc. ("Praxair") filed suit against the Company
in the Circuit Court of Mobile County, Alabama. The complaint alleged
tortuous 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") 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 tortuous 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.
Airgas is a defendant in related class-action lawsuits in four states
in which the Company has been falsely accused of misleading customers into
believing that its hazardous materials charges were required by
governmental laws or regulations. The Company has denied the allegations
and believes that the hazardous materials charges are lawful and have been
properly disclosed. In one suit, an Oklahoma State court certified a
nationwide class. In another, in California, the Company is in the midst
of a trial. In view of the uncertainties of litigation, the costs to
defend lawsuits in multiple jurisdictions and the Company's desire to focus
on its business, the Company has preliminarily settled all of the lawsuits.
The Company believes that the $7.5 million charge which was recorded in the
fourth quarter of fiscal 2000 represents an estimate of the overall costs
associated with the defense and settlement of these claims.
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 or
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 retention of $500 thousand per occurrence.
Estimated losses are accrued based upon the Company's experience for the
aggregate liability for claims incurred and claims incurred but not
reported. The Company believes its insurance reserves 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> F-33
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(20) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Cash paid for interest expense and income taxes was as follows:
Years Ended March 31,
(In thousands) 2000 1999 1998
<S> <C> <C> <C>
Interest...................... $57,934 $63,316 $51,910
Income taxes (net of refunds). 16,269 10,452 15,099
</TABLE>
<TABLE>
<CAPTION>
Significant non-cash transactions were as follows:
Years Ended March 31,
(In thousands) 2000 1999 1998
<S> <C> <C> <C>
Acquisition related transactions
(also see Note 2):
Debt assumed.................. $ 561 $ 553 $ 5,486
Liabilities assumed........... 7,762 15,475 49,407
Debt issued................... 1,399 2,361 17,781
Common stock issued........... -- -- 55,608
Capital lease additions........ -- -- 461
Capitalized interest........... 191 271 1,200
The Company capitalized interest primarily in connection with the
construction of facilities.
</TABLE>
(21) MINORITY INTEREST IN SUBSIDIARIES
Minority interests in subsidiaries represent the minority
shareholders' proportionate share of the equity and the results of
operations of the domestic and foreign subsidiaries. The Company sold
minority interests in its domestic subsidiaries to employees based on the
estimated fair market value of the subsidiary shares. These sales of
subsidiary shares were accounted for as capital transactions and,
therefore, no gain or loss was recorded.
In December 1997, the Board of Directors approved a Mandatory Exchange
in accordance with the exchange rights agreements between the Company and
the domestic minority shareholders. The number of shares issued from
treasury stock was determined based upon the valuation of the minority
interest and the price of the Company's common stock as of February 28,
1998. The market price on February 28, 1998, was $17.94 per share. The
Mandatory Exchange required that all domestic minority shareholders
exchange their minority interests for an aggregate of 707 thousand shares
of common stock. The acquisition of these minority interests under the
Mandatory Exchange was recorded using the purchase method of accounting.
<PAGE> F-34
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(22) SUMMARY BY BUSINESS SEGMENT
The Company aggregates its operations, based on products and services,
into two reportable segments, Distribution and Gas Operations. The
Distribution segment accounts for approximately 90% of consolidated sales.
The segment's principal products and services are packaged gases, equipment
rental and hardgoods. Gas sales include industrial, medical and specialty
gases such as: nitrogen, oxygen, argon, helium, acetylene, carbon dioxide,
nitrous oxide, hydrogen, welding gases, ultra high purity grades and
special application blends. Rent is derived primarily from compressed gas
cylinders, cryogenic liquid containers and bulk storage tanks rented to
customers and through welding equipment rentals. Hardgoods consist of
welding supplies, equipment, safety products, and industrial tools and
supplies.
The segment entitled Gas Operations consists of certain domestic
operating companies, principally dry ice and carbon dioxide, and, until
their divestiture in August 1999, the Company's operations in Poland and
Thailand. The products and services of this segment consist of the
production of dry ice and liquid carbon dioxide, the operation of specialty
gas laboratories and the manufacture of nitrous oxide. Until the December
1998 divestiture, Gas Operations also manufactured calcium carbide and
carbon products.
The Company's operations are principally in North America. The
Company's customer base is diverse and sales are not dependent on a single
or small group of customers.
The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies (Note 1).
Additionally, Corporate operating results are allocated to each segment pro
rata based on sales dollars; Corporate assets have been allocated to the
Distribution segment; intercompany sales are recorded on the same basis as
sales to third parties; intercompany transactions are eliminated in
consolidation; and special charges are not allocated to the business
segments.
<PAGE> F-35
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(22) SUMMARY BY BUSINESS SEGMENT - (Continued)
<TABLE>
<CAPTION>
(In thousands) Distribution Gas Operations Combined
<S> <C> <C> <C>
Fiscal 2000
Gas and rent................................ $ 592,449 $ 128,703 $ 721,152
Hardgoods................................... 817,500 3,682 821,182
Total net sales........................... 1,409,949 132,385 1,542,334
Intersegment sales.......................... -- 18,253 18,253
Gross profit................................ 649,827 75,910 725,737
Gross profit margin......................... 46.1% 57.3% 47.1%
Depreciation and amortization expense....... 76,483 12,825 89,308
Operating income, excluding special
(charges) recoveries...................... 94,671 9,231 103,902
Interest expense............................ 46,484 12,228 58,712
Interest income and finance charges......... 337 815 1,152
Equity earnings of unconsolidated affiliates 1,658 1,733 3,391
Earnings before income taxes, excluding
special (charges) recoveries and
cumulative effect of an accounting change. 48,882 18,713 67,595
Assets...................................... 1,512,666 226,665 1,739,331
Investment in equity method investees....... 57,339 15,620 72,959
Capital expenditures, excluding acquisitions 56,361 8,850 65,211
Other significant non-cash transactions:
Acquisitions................................ 9,722 -- 9,722
Capitalized interest........................ 114 77 191
</TABLE>
<PAGE> F-36
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(22) SUMMARY BY BUSINESS SEGMENT - (Continued)
<TABLE>
<CAPTION>
(In thousands) Distribution Gas Operations Combined
<S> <C> <C> <C>
Fiscal 1999
Gas and rent................................ $ 569,406 $ 128,740 $ 698,146
Hardgoods................................... 836,778 4,227 841,005
Other....................................... -- 22,067 22,067
Total net sales........................... 1,406,184 155,034 1,561,218
Intersegment sales.......................... -- 14,656 14,656
Gross profit................................ 637,616 85,547 723,163
Gross profit margin......................... 45.3% 55.2% 46.3%
Depreciation and amortization expense....... 74,958 12,968 87,926
Operating income, excluding special
(charges) recoveries...................... 98,447 13,549 111,996
Interest expense............................ 49,995 12,593 62,588
Interest income and finance charges......... 1,339 951 2,290
Equity earnings of unconsolidated affiliates 4,525 2,517 7,042
Earnings before income taxes, excluding
special (charges) recoveries.............. 53,455 31,906 85,361
Assets...................................... 1,451,792 246,680 1,698,472
Investment in equity method investees....... 57,680 43,154 100,834
Capital expenditures, excluding acquisitions 86,114 15,524 101,638
Other significant non-cash transactions:
Acquisitions................................ 6,762 11,627 18,389
Capitalized interest........................ 271 -- 271
</TABLE>
<PAGE> F-37
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(22) SUMMARY BY BUSINESS SEGMENT - (Continued)
<TABLE>
<CAPTION>
(In thousands) Distribution Gas Operations Combined
<S> <C> <C> <C>
Fiscal 1998
Gas and rent................................ $ 531,166 $ 91,315 $ 622,481
Hardgoods................................... 790,792 1,649 792,441
Other....................................... -- 33,068 33,068
Total net sales........................... 1,321,958 126,032 1,447,990
Intersegment sales.......................... -- 9,494 9,494
Gross profit................................ 605,240 63,212 668,452
Gross profit margin......................... 45.8% 50.2% 46.2%
Depreciation and amortization expense....... 67,418 9,252 76,670
Operating income, excluding special
(charges) recoveries...................... 111,472 12,426 123,898
Interest expense............................ 45,081 10,322 55,403
Interest income and finance charges......... 1,460 653 2,113
Equity earnings of unconsolidated affiliates 1,581 1,350 2,931
Earnings before income taxes, excluding
special (charges) recoveries.............. 69,525 5,954 75,479
Assets...................................... 1,396,906 244,568 1,641,474
Investment in equity method investees....... 52,918 45,604 98,522
Capital expenditures, excluding acquisitions 79,741 44,984 124,725
Other significant non-cash transactions:
Acquisitions................................ 78,137 50,606 128,743
Capitalized interest........................ -- 1,200 1,200
</TABLE>
<PAGE> F-38
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(22) SUMMARY BY BUSINESS SEGMENT - (Continued)
A reconciliation of the combined operating segments to the applicable
line items on the consolidated financial statements follows:
<TABLE>
<CAPTION>
Years Ended March 31,
(In thousands) 2000 1999 1998
<S> <C> <C> <C>
Segment operating income.................... $ 103,902 $ 111,996 $ 123,898
Special (charges) recoveries................ 2,829 1,000 (4,950)
Operating income............................ $ 106,731 $ 112,996 $ 118,948
Segment earnings before income taxes and
cumulative effect of an accounting change. $ 67,595 $ 85,361 $ 75,479
Special (charges) recoveries................ 2,829 1,000 (4,950)
Earnings before income taxes................ $ 70,424 $ 86,361 $ 70,529
</TABLE>
(23) SUPPLEMENTARY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
This table summarizes the unaudited results of operations for each
quarter of fiscal 2000 and 1999:
(In thousands, except per share amounts) First Second Third Fourth
<S> <C> <C> <C> <C>
2000
Net sales.................................. $379,493 $387,289 $369,434 $406,118
Operating income........................... 29,099 32,304 29,004 16,324
Net earnings............................... 9,085 18,912 9,760 526
Basic earnings per share (a),(b)........... $ .13 $ .27 $ .14 $ .01
Diluted earnings per share (a),(b)......... $ .13 $ .27 $ .14 $ .01
1999
Net sales.................................. $400,773 $396,592 $380,323 $383,530
Operating income........................... 33,429 31,791 25,173 22,603
Net earnings............................... 11,275 10,480 22,088 8,081
Basic earnings per share (a),(c)........... $ .16 $ .15 $ .32 $ .12
Diluted earnings per share (a),(c)......... $ .16 $ .15 $ .31 $ .11
(a) Earnings per share calculations for each of the quarters are based on
the weighted average number of shares outstanding in each period.
Therefore, the sum of the quarters do not necessarily equal the full year
earnings per share.
(b) As discussed in Notes 1, 2 and 3 to the Company's consolidated
financial statements, the results for fiscal 2000 include: (1) a first
quarter after-tax charge of $590 thousand, or $.01 per diluted share, from
the cumulative effect of an accounting change, (2) a second quarter $7.8
million after-tax, or $.11 per diluted share, net gain from the divestiture
of operations in Poland and Thailand, (3) a third quarter $1.7 million
after-tax, or $.02 per diluted share, special charge recovery primarily
consisting of an insurance settlement related to a fiscal 1997 loss and a
$2.2 million after-tax, or $.03 per diluted share, inventory write-down
related to certain specialty gases, and (4) a fourth quarter $4.8 million
after-tax, or $.07 per diluted share, litigation charge and an $800
thousand after-tax, or $.01 per diluted share, gain from the divestiture of
a non-core medical equipment distribution business.
<PAGE> F-39
(c) As discussed in Notes 2 and 3 to the Company's consolidated financial
statements, the results for fiscal 1999 include: (1) a $575 thousand
after-tax adjustment related to the first quarter divestiture of two non-
core businesses, (2) a $14.1 million after-tax non-recurring gain, or
$.20 per diluted share, related to the third quarter divestiture of its
calcium carbide and carbon products operations, (3) a fourth quarter
$922 thousand after-tax non-recurring gain, or $.01 per diluted share,
from a settlement of certain matters related to the December 1998
divestiture of the Company's calcium carbide and carbon products
operations, and (4) a $1.8 million non-recurring gain, or $.03 per
diluted share, from insurance proceeds recorded by an equity affiliate
in the third quarter.
</TABLE>
<PAGE> F-40
<TABLE>
<CAPTION>
SCHEDULE II
AIRGAS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2000, 1999 and 1998
(In thousands of dollars)
Column A Column B Column C Column D Column E
Additions
----------------------
Charged
Balance at Charged to (Credited) Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
2000
Accounts receivable - allowances
for doubtful accounts............ $ 6,092 $ 6,303 $ 1,078 (1) $ (7,279) $ 6,194
Inventory reserves................ 6,207 885 227 -- 7,319
Insurance reserves................ 9,584 44,492 -- (42,601) (3) 11,475
Restructuring reserves............ 5,087 (577) (4) -- (717) 3,793
Deferred tax asset valuation
allowance........................ 1,672 168 -- -- 1,840
Litigation settlement reserve..... -- 7,500 -- -- 7,500
1999
Accounts receivable - allowances
for doubtful accounts............ $ 5,676 $ 5,850 $ 1,071 (1) $ (6,505) (2) $ 6,092
Inventory reserves................ 8,354 -- 14 (2,161) 6,207
Insurance reserves................ 7,248 36,155 245 (34,064) (3) 9,584
Restructuring reserves............ 10,429 (1,000) -- (4,342) 5,087
Deferred tax asset valuation
allowance........................ 1,329 343 -- -- 1,672
1998
Accounts receivable - allowances
for doubtful accounts............ $ 4,443 $ 5,311 $ 1,418 (1) $ (5,496) (2) $ 5,676
Inventory reserves................ 7,633 (188) 909 -- 8,354
Insurance reserves................ 5,224 33,217 (802) (30,391) (3) 7,248
Restructuring reserves............ -- 11,006 -- (577) 10,429
Deferred tax asset valuation
allowance........................ 491 838 -- -- 1,329
(1) Includes collections on accounts previously written-off and
allowances for doubtful accounts of businesses acquired less the
allowance for doubtful accounts of businesses sold.
(2) Write-off of uncollectible accounts.
(3) Payments of insurance premiums and claims.
(4) Represents a change in estimate.
</TABLE>
