<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2000
Commission file number: 1-9344
AIRGAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-0732648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
259 North Radnor-Chester Road, Suite 100
Radnor, PA 19087-5283
(Address of principal executive offices) (ZIP code)
(610) 687-5253
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
Common Stock outstanding at August 1, 2000: 66,270,003 shares
<PAGE> 2
AIRGAS, INC.
FORM 10-Q
June 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings
for the Three Months Ended June 30, 2000 and 1999 (Unaudited)....... 3
Consolidated Balance Sheets
as of June 30, 2000 (Unaudited) and March 31, 2000.................. 4
Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 2000 and 1999 (Unaudited)....... 5
Notes to Consolidated Financial Statements (Unaudited).............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 20
Item 6. Exhibits and Reports on Form 8-K................................ 20
SIGNATURES............................................................... 21
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
<S> <C> <C>
Net sales
Distribution $ 374,739 $ 345,967
Gas Operations 34,259 33,526
Total net sales 408,998 379,493
Costs and expenses
Cost of products sold (excluding
depreciation and amortization)
Distribution 202,749 188,432
Gas Operations 12,447 12,835
Selling, distribution and
administrative expenses 140,015 126,961
Depreciation and amortization 22,744 22,166
Total costs and expenses 377,955 350,394
Operating income
Distribution 26,125 26,260
Gas Operations 4,918 2,839
Total operating income 31,043 29,099
Interest expense, net (15,765) (13,783)
Other income, net 52 222
Equity in earnings of unconsolidated affiliates 1,364 1,000
Earnings before income taxes and the
cumulative effect of an accounting change 16,694 16,538
Income tax expense 6,878 6,863
Earnings before the cumulative effect of an
accounting change 9,816 9,675
Cumulative effect of an accounting
change, net of taxes -- (590)
Net earnings $ 9,816 $ 9,085
Basic earnings per share:
Earnings per share before the cumulative
effect of an accounting change $ .15 $ .14
Cumulative effect per share of an
accounting change -- (.01)
Net earnings per share $ .15 $ .13
Diluted earnings per share:
Earnings per share before the cumulative
effect of an accounting change $ .15 $ .14
Cumulative effect per share of an
accounting change -- (.01)
Net earnings per share $ .15 $ .13
Weighted average shares outstanding:
Basic 65,100 69,800
Diluted 67,300 71,100
Comprehensive income $ 9,672 $ 9,234
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<CAPTION>
(Unaudited)
June 30, March 31,
2000 2000
<S> <C> <C>
ASSETS
Current Assets
Trade receivables, less allowances for
doubtful accounts of $7,061 at
June 30, 2000 and $6,194 at March 31, 2000 $ 217,486 $ 211,989
Inventories, net 167,728 159,438
Deferred income tax asset, net 13,752 13,752
Prepaid expenses and other current assets 24,639 23,611
Total current assets 423,605 408,790
Plant and equipment, at cost 1,085,964 1,074,365
Less accumulated depreciation (335,286) (320,597)
Plant and equipment, net 750,678 753,768
Goodwill, net of accumulated amortization of
$71,939 at June 30, 2000 and $68,471 at
March 31, 2000 442,141 445,498
Other non-current assets 127,792 131,275
Total assets $1,744,216 $1,739,331
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 73,013 $ 78,276
Accrued expenses and other current liabilities 119,803 121,249
Current portion of long-term debt 18,702 20,071
Total current liabilities 211,518 219,596
Long-term debt 867,304 857,422
Deferred income taxes 164,245 160,808
Other non-current liabilities 27,935 28,998
Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, no par, 20,000 shares authorized,
no shares issued or outstanding at June 30, 2000
and March 31, 2000 -- --
Common stock, par value $.01 per share,
200,000 shares authorized, 73,347 and 73,144
shares issued at June 30, 2000 and
March 31, 2000, respectively 733 731
Capital in excess of par value 189,487 193,893
Retained earnings 337,189 327,373
Accumulated other comprehensive loss (740) (596)
Treasury stock, 516 and 1,126 common shares at cost
at June 30, 2000 and March 31, 2000, respectively (3,982) (8,435)
Employee benefits trust, 6,561 and 4,822 common
shares at cost at June 30, 2000 and March 31,
2000, respectively (49,473) (40,459)
Total stockholders' equity 473,214 472,507
Total liabilities and stockholders' equity $1,744,216 $1,739,331
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 9,816 $ 9,085
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 22,744 22,166
Deferred income taxes 3,450 3,375
Equity in earnings of unconsolidated affiliates (1,364) (1,000)
Gains on sale of plant and equipment (47) (59)
Minority interest in earnings -- (65)
Stock issued for employee stock purchase plan 1,442 1,282
Other non-cash charges -- 1,027
Changes in assets and liabilities, excluding
effects of business acquisitions and divestitures:
Trade receivables, net (5,206) (117)
Inventories, net (8,153) (1,137)
Prepaid expenses and other current assets (572) 1,436
Accounts payable, trade (5,482) (13,577)
Accrued expenses and other current liabilities (2,451) 503
Other assets and liabilities, net (1,971) (2,774)
Net cash provided by operating activities 12,206 20,145
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (15,006) (14,421)
Proceeds from sale of plant and equipment 520 458
Proceeds from divestitures 577 --
Business acquisitions, net of cash acquired (1,034) --
Business acquisitions, holdback settlements -- (250)
Investment in unconsolidated affiliates -- (30)
Dividends from unconsolidated affiliates 800 880
Other, net 1,548 88
Net cash used in investing activities (12,595) (13,275)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 16,000 4,947
Repayment of debt (7,487) (1,562)
Purchase of treasury stock (11,214) (8,608)
Proceeds from exercise of stock options 532 665
Cash overdraft 2,558 (2,312)
Net cash provided (used) by financing activities 389 (6,870)
Change in Cash $ -- $ --
Cash - beginning of period -- --
Cash - end of period $ -- $ --
Cash paid during the period for:
Interest $ 13,462 $ 10,847
Income taxes, net of refunds $ 680 $ 633
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 6
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Airgas,
Inc. and its subsidiaries (the "Company"). Unconsolidated affiliates
are accounted for on the equity method and generally consist of 20 -
50% owned operations where control does not exist or is considered
temporary. The excess of the cost of these affiliates over the
Company's share of their net assets at the acquisition date is being
amortized over 20 to 40 years. Intercompany accounts and transactions
are eliminated in consolidation.
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America. These statements do not include all
disclosures required for annual financial statements. These financial
statements should be read in conjunction with the more complete
disclosures contained in the Company's audited consolidated financial
statements for the fiscal year ended March 31, 2000.
The consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to present fairly the Company's
financial position, results of operations and cash flows for the
periods presented. Such adjustments are of a normal, recurring nature
except for the impact of an acquisition, a divestiture and the
accounting change which are discussed in the notes to the accompanying
financial statements. The interim operating results are not
necessarily indicative of the results to be expected for an entire
year.
Certain reclassifications have been made to previously issued
financial statements to conform to the current presentation.
(2) ACCOUNTING CHANGE
In the first quarter of fiscal 2000, the Company adopted Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-
5"), as required, resulting in a charge to net earnings of $590
thousand, or $.01 per diluted share. In accordance with SOP 98-5, the
charge has been reflected on a separate line entitled "Cumulative
effect of an accounting change, net of taxes," on the consolidated
statement of earnings. The charge primarily resulted from the write-
off of start-up costs capitalized in connection with the Company's two
air separation units constructed during fiscal 1998 and 1999.
(3) ACQUISITIONS AND DIVESTITURES
During the three months ended June 30, 2000, the Company acquired one
distributor of industrial gas and related equipment with annual sales
of approximately $2 million.
In May 2000, the Company completed the sale of one of its equity
investments in India, Bhoruka Gases, Ltd. Proceeds from the sale,
including a note receivable, were $1.1 million. The investment was
sold for a loss of approximately $1.7 million, which had been
previously provided for by the Company. During the quarter, the
Company also announced an agreement to sell its remaining equity
investment in India. The sale of Superior Air Products Limited is
expected to close during the second quarter of fiscal 2001. Proceeds
from the sale are expected to be approximately $7 million. The sale of
Superior Air Products Limited will complete the divestitures previously
provided for by the Company.
<PAGE> 7
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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. Outstanding shares consist of issued
shares less treasury stock and common stock held by the Employee
Benefits Trust. 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 months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
(In thousands) 2000 1999
<S> <C> <C>
Weighted average common shares outstanding:
Basic 65,100 69,800
Stock options 400 1,200
Contingently issuable shares 1,800 100
Diluted 67,300 71,100
</TABLE>
Contingently issuable shares represent additional shares of
Company common stock required to be issued in connection with a fiscal
1998 acquisition. Additional shares are required to be issued to the
extent that the average closing market value of the Company's common
stock for the ten business days ended October 1, 2000 is less than
$13.10 per share.
(5) INVENTORIES
<TABLE>
Inventories consist of:
<CAPTION>
(Unaudited)
June 30, March 31,
(In thousands) 2000 2000
<S> <C> <C>
Finished goods $166,447 $158,549
Raw materials 1,281 889
$167,728 $159,438
</TABLE>
Inventories determined by the LIFO inventory method totaled $21.5
million and $22.6 million at June 30, 2000 and March 31, 2000,
respectively. If the FIFO inventory method had been used for these
inventories, they would have been $1.4 million higher at both June 30,
2000 and March 31, 2000.
<PAGE> 8
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) OTHER NON-CURRENT ASSETS
<TABLE>
Other non-current assets include:
<CAPTION>
(Unaudited)
June 30, March 31,
(In thousands) 2000 2000
<S> <C> <C>
Investments in unconsolidated affiliates $ 71,173 $ 72,959
Non-compete agreements and other
intangible assets, at cost, net of
accumulated amortization of $100.3
million at June 30, 2000 and
$97.5 million at March 31, 2000 45,637 48,136
Other assets 10,982 10,180
$127,792 $131,275
</TABLE>
(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
Accrued expenses and other current liabilities include:
<CAPTION>
(Unaudited)
June 30, March 31,
(In thousands) 2000 2000
<S> <C> <C>
Cash overdraft $ 21,518 $ 18,960
Accrued payroll and employee benefits 16,680 24,441
Insurance reserves 12,490 11,475
Accrued interest 11,516 8,969
Other accrued expenses and
current liabilities 57,599 57,404
$119,803 $121,249
The cash overdraft is attributable to the float of the Company's
outstanding checks.
</TABLE>
(8) STOCKHOLDERS' EQUITY
<TABLE>
Changes in stockholders' equity were as follows:
<CAPTION>
Employee
Shares of Common Treasury Benefits
(In thousands of shares) Stock $.01 Par Value Stock Trust
<S> <C> <C> <C>
Balance-April 1, 2000 73,144 1,126 4,822
Common Stock issuance (a) 203 -- --
Purchase of treasury stock -- 1,419 --
Sale of treasury stock to Trust (b) -- (2,029) 2,029
Reissuance of stock held by Trust (c) -- -- (290)
Balance-June 30, 2000 73,347 516 6,561
(a) Issuance of common stock for stock option exercises.
(b) Sale of common stock from treasury to the Employee Benefits Trust.
(c) Reissuance of common stock from the Employee Benefits Trust for
employee benefit programs.
</TABLE>
<PAGE> 9
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Capital in Other Employee Compre-
Common Excess of Retained Comprehensive Treasury Benefits hensive
(In thousands of dollars) Stock Par Value Earnings Loss Stock Trust Income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-April 1, 2000 $731 $193,893 $327,373 $(596) $(8,435) $(40,459) $ --
Net earnings -- -- 9,816 -- -- -- 9,816
Common stock issuance (a) 2 530 -- -- -- -- --
Foreign currency translation
adjustments -- -- -- (144) -- -- (144)
Purchase of treasury stock -- -- -- -- (11,214) -- --
Sale of treasury stock
to Trust (b) -- (4,404) -- -- 15,667 (11,263) --
Reissuance of common stock
from Trust (c) -- (807) -- -- -- 2,249 --
Tax benefit from stock
option exercises -- 275 -- -- -- -- --
Balance-June 30, 2000 $733 $189,487 $337,189 $(740) $(3,982) $(49,473) $9,672
(a) Issuance of common stock for stock option exercises.
(b) Sale of common stock from treasury to the Employee Benefits Trust.
(c) Reissuance of common stock from the Employee Benefits Trust for employee benefit programs.
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
(a) Litigation
In July 1996, Praxair, Inc. ("Praxair") filed suit against the
Company in the Circuit Court of Mobile County, Alabama. The complaint
alleged tortious interference with business or contractual relations
with respect to Praxair's Right of First Refusal contract with the
majority shareholders of National Welders Supply Company, Inc.
("National Welders") 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. A hearing on the
Company's motion for summary judgment took place in May, 2000, and the
court's ruling on the action is expected shortly. The Company is
optimistic that the ruling will be favorable. However, if the court
does not grant the motion in whole, the Company will face a possible
lengthy trial after yet more discovery.
The Company is involved in various legal and regulatory
proceedings that have arisen in the ordinary course of its business and
have not been finally adjudicated. These actions, when ultimately
concluded and determined, will not, in the opinion of management, have
a material adverse effect upon the Company's consolidated financial
condition, results of operations or liquidity.
<PAGE> 10
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(b) Insurance Coverage
The Company has established insurance programs to cover workers'
compensation, business automobile, general and product 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.
(10) SUMMARY BY BUSINESS SEGMENT
<TABLE>
Information related to the Company's operations by business segment
for the three months ended June 30, 2000 and 1999 is as follows:
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
(In thousands) Gas Gas
Distribution Operations Combined Distribution Operations Combined
<S> <C> <C> <C> <C> <C> <C>
Gas and rent $ 158,597 $ 33,494 $ 192,091 $ 142,780 $ 32,526 $ 175,306
Hardgoods 216,142 765 216,907 203,187 1,000 204,187
Total net sales 374,739 34,259 408,998 345,967 33,526 379,493
Intersegment sales -- 8,369 8,369 -- 8,659 8,659
Gross profit 171,990 21,812 193,802 157,535 20,691 178,226
Gross profit margin 45.9% 63.7% 47.4% 45.5% 61.7% 47.0%
Operating income 26,125 4,918 31,043 26,260 2,839 29,099
Earnings before income
taxes and cumulative
effect of an accounting
change 14,357 2,337 16,694 15,680 858 16,538
Assets 1,515,438 228,778 1,744,216 1,443,901 245,125 1,689,026
</TABLE>
<PAGE> 11
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS: THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1999
INCOME STATEMENT COMMENTARY
Net Sales
Net sales increased 7.8% in the quarter ended June 30, 2000 ("current
quarter") compared to the quarter ended June 30, 1999 ("prior year
quarter"). Total same-store sales increased 2.9% in the current
quarter versus the prior year quarter.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) June 30,
Net Sales 2000 1999 Increase
<S> <C> <C> <C> <C>
Distribution $374,739 $345,967 $28,772 8.3%
Gas Operations 34,259 33,526 733 2.2%
$408,998 $379,493 $29,505 7.8%
</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. Distribution sales increased $28.8 million
primarily as a result of net acquisition and divestiture activity and
same-store sales growth. Acquisition and divestiture activity
accounted for a net sales increase of $18.6 million as the acquisition
of seven distributors since July 1, 1999 were partially offset by
divestitures during fiscal 2000. The most significant of the seven
acquisitions was that of Puritan-Bennett Corporation ("Puritan-
Bennett") in the fourth quarter of fiscal 2000, which contributed $15.2
million of sales in the current quarter. Distribution same-store sales
growth of $10.2 million (2.8%) was the result of gas and rent sales
growth of $5.0 million (3.3%) and hardgoods sales growth of $5.2
million (2.5%). The Distribution segment's sales growth resulted from
continued success in sales initiatives such as national accounts and
strategic products. Growth in gas and rent same-store sales was
primarily attributable to higher volumes of strategic products,
including medical, bulk and specialty gases and welder equipment
rental. Although difficult to estimate, the Company believes the
implementation of price increases to customers in the current quarter
also contributed to the increase in net sales of gas and rent.
Hardgoods same-store sales growth was driven by an increase in safety
and tool product sales. The growth in hardgoods sales represented the
first positive same-store sales comparison for the product category
since the quarter ended June 30, 1998.
Gas Operations' sales primarily include dry ice and carbon
dioxide that are used for cooling, food and beverage applications,
chemical products, and oil and gas extraction. In addition, the
segment includes businesses that produce and distribute specialty gases
and nitrous oxide. Sales increased $733 thousand compared to the prior
year quarter as a result of same-store sales growth, partially offset
by net acquisition and divestiture activity. Gas Operations' same-
store sales increased $1.4 million (4.3%) primarily from higher volumes
of dry ice, liquid carbon dioxide, and nitrous oxide. Unseasonably
warm weather helped drive dry ice volumes. The divestiture of foreign
operations in Poland and Thailand during fiscal 2000 was largely offset
by nitrous oxide business acquired with Puritan-Bennett. Net
acquisition and divestiture activity resulted in a sales decline of
$668 thousand.
The Company estimates same-store sales based on a comparison of
current period sales to the 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.
<PAGE> 12
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross Profits
Gross profits increased 8.7% during the current quarter compared to
the prior year quarter.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) June 30,
Gross Profits 2000 1999 Increase
<S> <C> <C> <C> <C>
Distribution $171,990 $157,535 $14,455 9.2%
Gas Operations 21,812 20,691 1,121 5.4%
$193,802 $178,226 $15,576 8.7%
</TABLE>
The increase in Distribution gross profits of $14.5 million resulted
from net acquisition and divestiture activity of $11.7 million and
growth in same-store gross profits of $2.8 million (1.6%).
Acquisitions contributed gross profits of $14.1 million, partially
offset by fiscal 2000 divestitures with gross profits of $2.4 million
in the prior year quarter. The increase in same-store gross profits
resulted primarily from improvements in gas and rent. Competitive
pricing pressures on hardgoods have been partially mitigated by lower
costs from centralized purchasing initiatives and continued growth in
sales of higher margin private label products. Distribution's gross
profit margin of 45.9% in the current quarter increased 40 basis points
from 45.5% in the prior year quarter as a result of the acquisition of
Puritan-Bennett. The acquisition of Puritan-Bennett improved the sales
mix by increasing higher margin gas and rent to 42% of sales in the
current quarter compared to 41% in the prior year quarter. Excluding
the acquisition of Puritan-Bennett, Distribution margins were off 50
basis points.
The increase in Gas Operations' gross profits of $1.1 million
resulted from same-store gross profit growth, partially offset by net
acquisition and divestiture activity. Same-store gross profit growth
of $1.4 million (7.0%) was primarily due to improved gross margins from
higher sales volumes that leveraged fixed manufacturing costs. Gross
profits decreased $300 thousand as a result of net acquisition and
divestiture activity. Gas Operations' gross profit margin of 63.7%
increased 200 basis points from 61.7%.
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 $13.1 million
(10.3%) compared to the prior year quarter primarily from net
acquisition and divestiture activity and higher costs associated with
personnel, insurance and fuel costs. As a percentage of net sales,
operating expenses increased 70 basis points to 34.2% compared to 33.5%
in the prior year quarter.
Depreciation and amortization totaled $22.7 million in the current
quarter compared to $22.2 million in the prior year quarter. The
increase is primarily due to acquisitions and capital expenditures
completed since April 1, 1999, partially offset by divestitures.
<PAGE> 13
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Income
Operating income increased 6.7% during the current quarter
compared to the prior year quarter.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) June 30,
Operating Income 2000 1999 Increase(Decrease)
<S> <C> <C> <C> <C>
Distribution $26,125 $26,260 $ (135) (0.5%)
Gas Operations 4,918 2,839 2,079 73.2%
$31,043 $29,099 $1,944 6.7%
</TABLE>
The Distribution segment's operating income margin decreased 60
basis points to 7.0% in the current quarter compared to 7.6% in the
prior year quarter primarily as a result of higher operating expenses,
partially offset by an increase in gross profits from same-store sales
growth and acquisitions.
Gas Operations' operating income increased $2.1 million compared to
the prior year quarter primarily from the acquisition of Puritan-
Bennett's nitrous oxide business, the divestiture of foreign
operations, and higher sales volumes associated with liquid carbon
dioxide and dry ice. Excluding divestitures in the prior year quarter,
Gas Operations' operating income margin increased to 14.4% in the
current quarter compared to 13.7% in the prior year quarter.
Interest Expense
Interest expense, net, totaled $15.8 million representing an
increase of $2.0 million (14.4%) compared to the prior year quarter.
The increase in interest expense resulted from higher average debt
levels and a 70 basis point increase in weighted-average interest
rates. At June 30, 2000, the Company's ratio of fixed to variable rate
debt was 47% to 53%, respectively. The net increase in debt was
primarily attributable to the fiscal 2000 acquisition of Puritan-
Bennett. As discussed in "Liquidity and Capital Resources" and in Item
3 "Quantitative and Qualitative Disclosures About Market Risk," the
Company manages interest rate exposure of certain borrowing instruments
through participation in interest rate swap agreements.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates of $1.4 million
increased $400 thousand from $1 million in the prior year quarter
primarily due to higher joint venture earnings of National Welders
Supply.
Income Tax Expense
The effective income tax rate was 41.2% of pre-tax earnings in the
current quarter compared to 41.5% in the prior year quarter. The
decrease in the effective income tax rate in the current quarter was
primarily the result of higher earnings of unconsolidated equity
affiliates.
Cumulative Effect of an Accounting Change
In the first quarter of 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.
<PAGE> 14
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Earnings
Net earnings for the quarter ended June 30, 2000 were $9.8
million, or $.15 per diluted share, compared to $9.1 million, or $.13
per diluted share, in the prior year quarter. Net earnings in the
prior year quarter were $9.7 million, or $.14 per diluted share,
excluding the charge for the cumulative effect of an accounting change.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash flows from operating activities totaled $12.2 million for the
three months ended June 30, 2000 compared to $20.1 million in the prior
year quarter. Adjustments to reconcile net income to net cash provided
by operating activities included depreciation and amortization of $22.7
million and deferred income taxes of $3.5 million from temporary
differences. Additionally, working capital components used cash of
$21.9 million primarily for an increase in trade receivables and
inventories and lower accounts payable and accrued expenses. Trade
receivables increased $5.2 million primarily due to higher sales
volumes and a build in receivables related to the Puritan-Bennett
acquisition. Trade receivables days' sales outstanding increased to 50
days from 48 days at March 31, 2000. Inventories used cash of $8.2
million with hardgoods days' supply of inventory increasing to 86 days
from 80 days at March 31, 2000. The higher level of 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. The lower level of accounts payable was
due to the timing of payments to vendors.
After-tax cash flow (net earnings, excluding the charge from the
fiscal 2000 accounting change, plus depreciation, amortization and
deferred income taxes) increased 2.3% to $36.0 million compared to
$35.2 million in the prior year quarter.
Cash used in investing activities totaled $12.6 million during the
current quarter and primarily consisted of capital expenditures.
Capital expenditures during the current quarter totaled $15 million
compared to $14.4 million in the same quarter last year. Capital
expenditures of cylinders, bulk tanks, rental welders and machinery and
equipment totaled approximately $10 million, or 67% of total capital
expenditures, and facilitate strategic product sales growth.
Management continues to focus on improving asset utilization and
controlling capital spending.
Financing activities provided cash of $389 thousand. Debt
financing, net of repayments, and an increase in the cash overdraft
provided cash of $11.1 million, which was largely used for the
repurchase of the Company's common stock. The cash overdraft
represents the float of the Company's outstanding checks.
The Company will continue to look for appropriate acquisitions of
distributors while it focuses on reducing its financial leverage.
Future acquisitions, capital expenditures and costs associated with
eCommerce 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. 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> 15
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Instruments
The Company has unsecured revolving credit facilities totaling
$725 million and $100 million Canadian (US$68 million) under a credit
agreement with a final maturity date of December 5, 2002. The credit
agreement contains covenants that include the maintenance of certain
financial ratios, restrictions on additional borrowings and limitations
on dividends. At June 30, 2000, the Company had borrowings under the
credit agreement of approximately $569 million and $43 million Canadian
(US$29 million). The Company also had commitments under letters of
credit supported by the credit 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 $140 million at June 30, 2000. At June 30, 2000, the
effective interest rate on borrowings under the credit facilities was
6.95% on U.S. borrowings and 6.26% on Canadian borrowings.
At June 30, 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 bearing interest at a fixed
rate of 7.14%; and $100 million of unsecured notes due September 2006
bearing interest at a fixed rate of 7.75%. Additionally, at June 30,
2000, long-term debt of the Company included acquisition notes and
other long-term debt instruments of approximately $63 million with
interest rates ranging from 6% to 10.5%. 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 June 30, 2000, the Company was party to 21 interest rate
swap agreements. The swap agreements are with major financial
institutions and aggregate $539 million in notional principal amount at
June 30, 2000. Sixteen swap agreements with approximately $359 million
in notional principal amount require fixed interest payments based on
an average effective rate of 6.33% for remaining periods ranging
between one and five years. Five swap agreements with $180 million in
notional principal amount require variable interest payments based on
an average rate of 6.22% at June 30, 2000. Under the terms of five
swap agreements, the Company has elected to receive the discounted
value of the counterparties' interest payments up-front. At June 30,
2000, approximately $2.3 million of such payments was included in other
current liabilities and $1.6 million was included in other non-current
liabilities. The Company monitors its positions and the credit ratings
of its counterparties, and does not anticipate non-performance by the
counterparties.
Share Repurchase Program
In March 1999, the Company's Board of Directors authorized the
repurchase of up to seven million shares of the Company's outstanding
common stock. The shares may be repurchased in the open market or in
privately negotiated transactions depending on market conditions and
other factors. The Company has financed its repurchase program with
borrowings and funds provided by operating activities. During the
three month period ended June 30, 2000, the Company repurchased 1.4
million shares at an average cost of $7.90 per share. The effect of
the share repurchases on earnings per share for the quarter ended June
30, 2000 was not material. At June 30, 2000, approximately 500
thousand shares remain under the share repurchase authorization.
Employee Benefits Trust
During the quarter ended June 30, 2000, the Employee Benefits
Trust purchased approximately 2 million shares of common stock from the
Company at fair market value.
<PAGE> 16
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER
New Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 138, "Accounting for
Derivative Instruments and Certain Hedging Activities (an amendment of
FASB Statement No. 133)." Management has evaluated the impact of
Statement 138 as it amends Statement 133, and believes that it will not
have a material impact on the net earnings of the Company.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation- an
Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 is generally
effective for transactions occurring after July 1, 2000 but applies to
option repricings and certain other transactions after December 15,
1998. The Company believes that FIN 44 will not have a material impact
on the net earnings of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). The implementation date of SAB 101 has been
delayed and will be effective for the Company in the fourth quarter of
fiscal 2001. The Company is currently evaluating the impact of SAB 101
on its financial position and results of operations.
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, future acquisitions, future debt repayment, future
sources of financing, asset utilization, the level of fiscal 2001
capital expenditures, price increases, increased sales, 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, 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
certain lawsuits, 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> 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's primary market risk exposure is from changes in
interest rates. The Company's policy is to manage interest rate risk
exposure through the use of a combination of fixed and floating rate
debt and interest rate swap agreements. The Company maintains the
ratio of fixed to variable rate debt within parameters established by
management under policies approved by the Board of Directors. At June
30, 2000, the ratio of fixed versus floating debt was 47% to 53%. In
addition, the Company monitors its positions and the credit ratings of
its counterparties, thereby minimizing the risk of non-performance by
the counterparties. The Company does not enter into derivative
financial instruments for trading purposes.
The table below summarizes the Company's market risks associated
with long-term debt obligations and interest rate swaps as of June 30,
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.
[Continued on following page]
<PAGE> 18
<TABLE>
<CAPTION>
Expected Fiscal Year of Maturity
______________________________________________________________________________
(In millions) Fair
2001 2002 2003 2004 2005 2006 Thereafter Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt:
Medium-term notes $ -- $ 50 $ -- $ 75 $ -- $ -- $100 $225 $191
Interest expense $ 13 $ 15 $ 13 $ 13 $ 8 $ 8 $ 3 $ 73
Average interest rate 7.41% 7.42% 7.49% 7.49% 7.75% 7.75% 7.75%
Acquisition notes $ 11 $ 16 $ 1 $ 22 $ -- $ 2 $ 1 $ 53 $ 47
Interest expense $ 1 $ 1 $ -- $ 2 $ -- $ -- $ -- $ 4
Average interest rate 7.45% 7.45% 7.45% 7.45% 7.45% 7.45% 7.45%
Other notes $ 1 $ 1 $ -- $ -- $ -- $ -- $ -- $ 2 $ 2
Average interest rate 7.55% 7.55%
Variable Rate Debt:
Revolving credit facilities $ -- $ -- $598 $ -- $ -- $ -- $ -- $598 $598
Interest expense $ 31 $ 42 $ 28 $ -- $ -- $ -- $ -- $101
Interest rate (a) 6.95% 6.95% 6.95%
Other notes $ -- $ 7 $ -- $ -- $ 1 $ -- $ -- $ 8 $ 8
Average interest rate 10.50% 10.50% 7.50% 7.50% 7.50%
US denominated Swaps:
14 Swaps Receive
Variable/Pay Fixed $ 59 $177 $ 78 $ -- $ 40 $ -- $ -- $354 $ (2)
Variable Receive rate
(3 month LIBOR)= 6.60%
Weighted average
pay rate = 6.29%
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))
=5.76%
Weighted average
pay rate = 7.11%
Other LIBOR based agreements:
Operating leases with trust $ 1 $ 1 $ 1 $ 43 $ -- $ -- $ -- $ 46 $ 46
Variable rate
(3 month LIBOR plus
130 basis points) = 7.90%
(a) The variable rate of long-term debt obligations is based on the
London Interbank Offered Rate ("LIBOR") as of June 30, 2000. For
future periods, the variable interest rate is assumed to remain at
6.95% with the principal balance of long-term debt obligations held
constant at $598 million. However, the variable rate and borrowing
levels of long-term debt may fluctuate materially from those presented
above.
(b) The variable receive rate for Canadian dollar denominated interest
rate swaps is the rate on Canadian Bankers' acceptances ("CAD BA").
</TABLE>
<PAGE> 19
Limitations of the tabular presentation
As the table incorporates only those interest rate risk exposures
that exist as of June 30, 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.
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.
<PAGE> 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 1996, Praxair, Inc. ("Praxair") filed suit against the Company
in the Circuit Court of Mobile County, Alabama. The complaint alleged
tortious interference with business or contractual relations with
respect to Praxair's Right of First Refusal contract with the majority
shareholders of National Welders Supply Company, Inc. ("National
Welders") 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. A hearing on the Company's motion for
summary judgment took place in May, 2000, and the court's ruling on the
action is expected shortly. The Company is optimistic that the ruling
will be favorable. However, if the court does not grant the motion in
whole, the Company will face a possible lengthy trial after yet more
discovery.
The Company is involved in various legal and regulatory proceedings
that have arisen in the ordinary course of its business and have not
been finally adjudicated. These actions, when ultimately concluded and
determined, will not, in the opinion of management, have a material
adverse effect upon the Company's consolidated financial condition,
results of operations or liquidity.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are being filed as part of this Quarterly
Report on Form 10-Q:
Exhibit No. Description
11 Calculation of earnings per share
27 Financial Data Schedule as of June 30, 2000.
b. Reports on Form 8-K
On April 28, 2000, the Company filed a Form 8-K pursuant to Item 5,
announcing its earnings outlook for the fourth quarter ended March 31,
2000.
On May 12, 2000, the Company filed a Form 8-K pursuant to Item 5,
reporting its earnings for the fourth quarter and fiscal year ended
March 31, 2000.
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Airgas, Inc.
(Registrant)
Date: August 4, 2000 /s/ Roger F. Millay
Roger F. Millay
Senior Vice President - Finance and
Chief Financial Officer
