<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: September 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 November 3, 2000: 66,635,111 shares
<PAGE> 2
AIRGAS, INC.
FORM 10-Q
September 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings for the Three and
Six Months Ended September 30, 2000 and 1999 (Unaudited)............ 3
Consolidated Balance Sheets
as of September 30, 2000 (Unaudited) and March 31, 2000............. 4
Consolidated Statements of Cash Flows
for the Six Months Ended September 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....................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 26
Item 4. Submission of Matters to a Vote of Security Holders............. 26
Item 6. Exhibits and Reports on Form 8-K................................ 27
SIGNATURES............................................................... 28
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net sales
Distribution $371,059 $346,973 $745,798 $692,940
Gas Operations 39,038 40,316 73,297 73,842
Total net sales 410,097 387,289 819,095 766,782
Costs and expenses
Cost of products sold (excluding
depreciation and amortization)
Distribution 198,650 186,647 401,399 375,079
Gas Operations 14,437 16,200 26,884 29,035
Selling, distribution and
administrative expenses 141,653 129,185 281,668 256,146
Depreciation 15,990 16,525 32,314 32,304
Amortization 6,321 6,428 12,741 12,815
Total costs and expenses 377,051 354,985 755,006 705,379
Operating income
Distribution 26,598 26,408 52,723 52,668
Gas Operations 6,448 5,896 11,366 8,735
Total operating income 33,046 32,304 64,089 61,403
Interest expense, net (16,306) (14,435) (32,071) (28,218)
Other income, net 405 15,183 457 15,405
Equity in earnings of unconsolidated
affiliates 487 725 1,851 1,725
Earnings before income taxes and
the cumulative effect of an
accounting change 17,632 33,777 34,326 50,315
Income tax expense 7,229 14,865 14,107 21,728
Earnings before the cumulative
effect of an accounting change 10,403 18,912 20,219 28,587
Cumulative effect of an accounting
change, net of taxes -- -- -- (590)
Net earnings $ 10,403 $ 18,912 $ 20,219 $ 27,997
Basic earnings per share:
Earnings per share before the
cumulative effect of an
accounting change $ .16 $ .27 $ .31 $ .41
Cumulative effect per share of an
accounting change -- -- -- (.01)
Net earnings per share $ .16 $ .27 $ .31 $ .40
Diluted earnings per share:
Earnings per share before the
cumulative effect of an
accounting change $ .16 $ .27 $ .30 $ .40
Cumulative effect per share of an
accounting change -- -- -- (.01)
Net earnings per share $ .16 $ .27 $ .30 $ .39
Weighted average shares outstanding:
Basic 65,400 69,700 65,200 69,800
Diluted 66,600 71,200 66,900 71,200
Comprehensive income $ 10,360 $ 18,965 $ 20,032 $ 28,199
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
September 30, March 31,
2000 2000
<S> <C> <C>
ASSETS
Current Assets
Trade receivables, less allowances for
doubtful accounts of $7,417 at September 30,
2000 and $6,194 at March 31, 2000 $ 220,603 $ 211,989
Inventories, net 161,507 159,438
Deferred income tax asset, net 13,463 13,752
Prepaid expenses and other current assets 22,622 23,611
Total current assets 418,195 408,790
Plant and equipment, at cost 1,097,513 1,074,365
Less accumulated depreciation (349,129) (320,597)
Plant and equipment, net 748,384 753,768
Goodwill, net of accumulated amortization of
$75,487 at September 30, 2000 and $68,471 at
March 31, 2000 439,025 445,498
Other non-current assets 118,783 131,275
Total assets $1,724,387 $1,739,331
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 67,691 $ 78,276
Accrued expenses and other current liabilities 113,504 121,249
Current portion of long-term debt 68,662 20,071
Total current liabilities 249,857 219,596
Long-term debt 795,599 857,422
Deferred income taxes 167,494 160,808
Other non-current liabilities 26,055 28,998
Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, no par, 20,000 shares
authorized, no shares issued or outstanding at
September 30, 2000 and March 31, 2000 -- --
Common stock, par value $.01 per share,
200,000 shares authorized, 73,431 and
73,144 shares issued at September 30, 2000 and
March 31, 2000, respectively 734 731
Capital in excess of par value 189,176 193,893
Retained earnings 347,592 327,373
Accumulated other comprehensive loss (783) (596)
Treasury stock, 516 and 1,126 common shares
at cost at September 30, 2000 and March 31,
2000, respectively (3,982) (8,435)
Employee benefits trust, 6,280 and 4,822
common shares at cost at September 30, 2000 and
March 31, 2000, respectively (47,355) (40,459)
Total stockholders' equity 485,382 472,507
Total liabilities and stockholders' equity $1,724,387 $1,739,331
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended Six Months Ended
September 30, 2000 September 30, 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 20,219 $ 27,997
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 45,055 45,119
Deferred income taxes 6,900 6,750
Equity in earnings of unconsolidated affiliates (1,851) (1,725)
Gain on divestitures (526) (14,369)
(Gain) loss on sales of plant and equipment (58) 7
Minority interest in earnings -- (51)
Stock issued for employee stock purchase plan 2,800 2,707
Other non-cash charges -- 1,027
Changes in assets and liabilities, excluding
effects of business acquisitions and divestitures:
Trade receivables, net (8,372) (1,618)
Inventories, net (1,944) (697)
Prepaid expenses and other current assets 1,740 (139)
Accounts payable, trade (10,651) (14,274)
Accrued expenses and other current liabilities 1,200 3,792
Other assets and liabilities, net (3,859) (3,302)
Net cash provided by operating activities 50,653 51,224
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (30,959) (30,841)
Proceeds from sales of plant and equipment 1,346 955
Proceeds from divestitures 7,000 46,596
Business acquisitions, net of cash acquired (1,839) (23,377)
Business acquisitions, holdback settlements (1,878) (830)
Investment in unconsolidated affiliates -- (30)
Dividends from unconsolidated affiliates 1,487 1,897
Other, net 2,302 (358)
Net cash used in investing activities (22,541) (5,988)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 62,000 77,985
Repayment of debt (75,232) (102,461)
Purchase of treasury stock (11,214) (15,345)
Proceeds from exercise of stock options 837 904
Cash overdraft (4,503) (6,319)
Net cash used in financing activities (28,112) (45,236)
Change in Cash $ -- $ --
Cash - beginning of period -- --
Cash - end of period $ -- $ --
Cash paid during the period for:
Interest $ 32,985 $ 29,067
Income taxes, net of refunds $ 1,315 $ 5,427
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 acquisitions, divestitures, an accounting
change and special charges, which are discussed in the notes to the
accompanying financial statements. The interim operating results are
not necessarily indicative of the results to be expected for an entire
year.
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) DIVESTITURES
In May 2000, the Company completed the sale of its equity investment
in 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 provided for under the
Company's 1998 special charges. In August 2000, the Company completed
the sale of Superior Air Products Limited ("SAPL"). Proceeds from
the sale were $6.4 million. The investment was sold for a gain of
approximately $500 thousand, which was recorded in "Other income, net."
The Company's combined equity in the earnings of these unconsolidated
affiliates was insignificant for both of the six-month periods ended
September 30, 2000 and 1999. With the completion of the SAPL sale in
the quarter ended September 30, 2000, the Company reversed its
remaining accrued liability of $1.3 million that was originally
established in the 1998 special charges. The special charge reversal
of the remaining accrued divestiture liability reflects the difference
between the Company's original loss estimates and actual results.
<PAGE> 7
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) DIVESTITURES - (Continued)
In August 1999, the Company completed the divestiture of its
operations in Poland and Thailand. The divestiture resulted in a non-
recurring gain of $14.4 million ($7.6 million after-tax, or $.11 per
diluted share) which was recognized in "Other income, net." Cash
proceeds from the sale were $46.2 million. The operations in Poland
and Thailand had combined sales and operating losses in fiscal 2000 of
$7.1 million and $29 thousand, respectively.
(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 and six months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
(In thousands) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding:
Basic 65,400 69,700 65,200 69,800
Stock options 400 1,300 400 1,200
Contingently issuable shares 800 200 1,300 200
Diluted 66,600 71,200 66,900 71,200
</TABLE>
Contingently issuable shares represent additional shares of Company
common stock required to be issued in connection with a fiscal 1998
acquisition. In the fiscal 2001 third quarter, the Company will issue
approximately 800 thousand shares in connection with the acquisition.
The number of issuable shares is based on the spread between the
average closing market value of the Company's common stock for the ten
business days ended October 1, 2000 ($6.09 per share) and $13.10 per
share.
(5) INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of:
(Unaudited)
September 30, March 31,
(In thousands) 2000 2000
<S> <C> <C>
Finished goods $160,443 $158,549
Raw materials 1,064 889
$161,507 $159,438
</TABLE>
Inventories determined by the LIFO inventory method totaled $19.8
million and $22.6 million at September 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 September 30,
2000 and March 31, 2000.
<PAGE> 8
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) OTHER NON-CURRENT ASSETS
<TABLE>
<CAPTION>
Other non-current assets include:
(Unaudited)
September 30, March 31,
(In thousands) 2000 2000
<S> <C> <C>
Investments in unconsolidated affiliates $ 65,029 $ 72,959
Non-compete agreements and other
intangible assets, at cost, net of
accumulated amortization of $103.2 million
at September 30, 2000 and $97.5 million at
March 31, 2000 42,762 48,136
Other assets 10,992 10,180
$118,783 $131,275
</TABLE>
(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
Accrued expenses and other current liabilities include:
(Unaudited)
September 30, March 31,
(In thousands) 2000 2000
<S> <C> <C>
Cash overdraft $ 14,457 $ 18,960
Accrued payroll and employee benefits 21,612 24,441
Insurance reserves 12,805 11,475
Other accrued expenses and current liabilities 64,630 66,373
$113,504 $121,249
</TABLE>
The cash overdraft is attributable to the float of the Company's
outstanding checks.
<PAGE> 9
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Changes in stockholders' equity were as follows:
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 <F1> 287 -- --
Purchase of treasury stock -- 1,419 --
Sale of treasury stock to Trust <F2> -- (2,029) 2,029
Reissuance of stock held by Trust <F3> -- -- (571)
Balance-September 30, 2000 73,431 516 6,280
<FN>
<F1> Issuance of common stock for stock option exercises.
<F2> Sale of common stock from treasury to the Employee Benefits Trust.
<F3> Reissuance of common stock from the Employee Benefits Trust for
employee benefit programs.
</FN>
</TABLE>
<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 -- -- 20,219 -- -- -- 20,219
Common stock issuance <F1> 3 834 -- -- -- -- --
Foreign currency translation
adjustments -- -- -- (187) -- -- (187)
Purchase of treasury stock -- -- -- -- (11,214) -- --
Sale of treasury stock
to Trust <F2> -- (4,404) -- -- 15,667 (11,263) --
Reissuance of common stock
from Trust <F3> -- (1,567) -- -- -- 4,367 --
Tax benefit from stock
option exercises -- 420 -- -- -- -- --
Balance-September 30, 2000 $734 $189,176 $347,592 $(783) $(3,982) $(47,355) $20,032
<FN>
<F1> Issuance of common stock for stock option exercises.
<F2> Sale of common stock from treasury to the Employee Benefits Trust.
<F3> Reissuance of common stock from the Employee Benefits Trust for
employee benefit programs.
</TABLE>
<PAGE> 10
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) COMMITMENTS AND CONTINGENCIES
(a) Litigation
In July 1996, Praxair, Inc. ("Praxair") filed suit against the
Company in the Circuit Court of Mobile County, Alabama. The complaint
alleged tortious interference with business or contractual relations
with respect to Praxair's Right of First Refusal contract with the
majority shareholders of National Welders Supply Company, Inc.
("National Welders") 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. In
August, 2000, the Company's motion for summary judgment was denied, and
the Company anticipates that additional discovery and pretrial motions
will take nine to twelve more months and may result in additional
costs. The Company believes that Praxair's North Carolina claims are
without merit and intends to defend vigorously against such claims.
In 1997, the Company announced it was the victim of a fraudulent
breach of contract by a third party supplier of refrigerant gases and
recorded a non-recurring special charge related to product losses and
costs associated with the Company's efforts to investigate the fraud
and pursue recoveries. During the quarter ended September 30, 2000,
the Company recorded a non-recurring special charge of $1.3 million
related to the estimated legal fees and costs of pursuing additional
recoveries from its insurance carriers. All steps preparatory for
trial have been concluded, and the Company expects that a trial date
will be set imminently.
The Company is involved in various legal and regulatory
proceedings that have arisen in the ordinary course of its business and
have not been finally adjudicated. These actions, when ultimately
concluded and determined, will not, in the opinion of management, have
a material adverse effect upon the Company's consolidated financial
condition, results of operations or liquidity.
(b) Insurance Coverage
The Company has established insurance programs to cover workers'
compensation, business automobile, general and product liability.
These programs have self-insured 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> 11
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) SUMMARY BY BUSINESS SEGMENT
Information related to the Company's operations by business segment
for the three months ended September 30, 2000 and 1999 follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
(In thousands) Gas Gas
Distribution Operations Combined Distribution Operations Combined
<S> <C> <C> <C> <C> <C> <C>
Gas and rent $ 160,307 $ 38,220 $ 198,527 $ 145,314 $ 39,369 $ 184,683
Hardgoods 210,752 818 211,570 201,659 947 202,606
Total net sales 371,059 39,038 410,097 346,973 40,316 387,289
Intersegment sales -- 7,944 7,944 -- 7,726 7,726
Gross profit 172,409 24,601 197,010 160,326 24,116 184,442
Gross profit margin 46.5% 63.0% 48.0% 46.2% 59.8% 47.6%
Operating income 26,598 6,448 33,046 26,408 5,896 32,304
Earnings before
income taxes 13,527 4,105 17,632 15,267 18,510 33,777
Assets 1,500,827 223,560 1,724,387 1,458,402 221,887 1,680,289
</TABLE>
<PAGE> 12
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) SUMMARY BY BUSINESS SEGMENT - (Continued)
Information related to the Company's operations by business segment
for the six months ended September 30, 2000 and 1999 follows:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
September 30, 2000 September 30, 1999
(In thousands) Gas Gas
Distribution Operations Combined Distribution Operations Combined
<S> <C> <C> <C> <C> <C> <C>
Gas and rent $ 318,904 $ 71,714 $ 390,618 $ 288,095 $ 71,895 $ 359,990
Hardgoods 426,894 1,583 428,477 404,845 1,947 406,792
Total net sales 745,798 73,297 819,095 692,940 73,842 766,782
Intersegment sales -- 16,313 16,313 -- 16,385 16,385
Gross profit 344,399 46,413 390,812 317,861 44,807 362,668
Gross profit margin 46.2% 63.3% 47.7% 45.9% 60.7% 47.3%
Operating income 52,723 11,366 64,089 52,668 8,735 61,403
Earnings before income
taxes and cumulative
effect of an
accounting change 27,892 6,434 34,326 30,931 19,384 50,315
Assets 1,500,827 223,560 1,724,387 1,458,402 221,887 1,680,289
</TABLE>
<PAGE> 13
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 SEPTEMBER 30, 2000 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999
INCOME STATEMENT COMMENTARY
Net Sales
Net sales increased 5.9% in the quarter ended September 30, 2000
("current quarter") compared to the quarter ended September 30, 1999
("prior year quarter"). Total Company same-store sales increased 4.4%
in the current quarter versus the prior year quarter. The Company
estimates same-store sales based on a comparison of current period
sales to the prior period sales, adjusted for acquisitions and
divestitures.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) September 30,
Net Sales 2000 1999 Increase(Decrease)
<S> <C> <C> <C> <C>
Distribution $371,059 $346,973 $24,086 6.9%
Gas Operations 39,038 40,316 (1,278) (3.2%)
$410,097 $387,289 $22,808 5.9%
</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 $24.1 million
primarily from net acquisition and divestiture activity and same-store
sales growth. Acquisition and divestiture activity accounted for a net
sales increase of $12.8 million as the acquisition of five distributors
since July 1, 1999 were partially offset by a divestiture during fiscal
2000. The most significant of the five acquisitions was that of
Mallinckrodt Inc.'s Puritan-Bennett ("Puritan-Bennett") medical gas
business in the fourth quarter of fiscal 2000. Distribution same-store
sales growth of $11.3 million (4.0%) resulted from gas and rent sales
growth of $7.2 million (5.5%) and hardgoods sales growth of $4.1
million (2.8%). 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 and specialty gases and welder equipment rental. The
Company also believes price increases during the first and second
fiscal quarters contributed to gas and rent sales growth. Hardgoods
same-store sales growth was driven by an increase in sales of safety
and tool products. The growth in hardgoods sales represented a second
consecutive positive same-store sales comparison for the product
category. The strength in certain strategic product categories, such
as safety, medical and specialty gases, and tools are helping sales
growth even though several of the Company's core welding and metal
fabrication customer segments are still relatively weak. The Company
believes that the Distribution segment's positive sales momentum will
continue into the fiscal third quarter driven by higher volumes of
strategic products and price increases implemented during the current
fiscal year.
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 decreased $1.3 million compared to the prior year
quarter primarily from net divestiture activity, partially offset by
same-store sales growth. Lower sales resulting from the divestiture of
operations in Poland and Thailand in the prior year were partially
offset by the nitrous oxide production business that was acquired with
Puritan-Bennett. Gas Operations' same-store sales increased $2.8
million (8.7%) driven by selected price increases and higher volumes of
dry ice, liquid carbon dioxide, and specialty gases. The Company
anticipates that sales of the Gas Operations segment will decline in
<PAGE> 14
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the third and fourth quarters of fiscal 2001 compared to the first and
second quarters of fiscal 2001 as a result of the seasonal impact of
cooler temperatures, which reduce the demand for dry ice and liquid
carbon dioxide.
Gross Profits
Gross profits increased 6.8% and gross profit margins increased 40
basis points to 48.0% during the current quarter compared to the prior
year quarter.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) September 30,
Gross Profits 2000 1999 Increase
<S> <C> <C> <C> <C>
Distribution $172,409 $160,326 $12,083 7.5%
Gas Operations 24,601 24,116 485 2.0%
$197,010 $184,442 $12,568 6.8%
</TABLE>
The increase in Distribution gross profits of $12.1 million resulted
from net acquisition and divestiture activity of $8.6 million and
growth in same-store gross profits of $3.5 million (2.9%). The
increase in same-store gross profits resulted primarily from higher
sales volumes of gas and rent and price increases implemented during
the first and second fiscal quarters. Hardgoods gross profits have
also been helped by lower product costs resulting from centralized
purchasing initiatives and increased sales of higher margin private
label products. Distribution's gross profit margin of 46.5% in the
current quarter increased 30 basis points from 46.2% in the prior year
quarter primarily as a result of the acquisition of Puritan-Bennett.
The increase in Gas Operations gross profits of $485 thousand
resulted from same-store gross profit growth, partially offset by net
divestiture activity. Same-store gross profits grew $1.8 million
(8.6%) primarily due to higher sales volumes of dry ice and price
increases during the first and second fiscal quarters. Gross profits
decreased $1.3 million as a result of net divestiture activity. Gas
Operations' gross profit margin of 63.0% increased 320 basis points
from 59.8% in the prior year quarter primarily due to the divestiture
of lower margin foreign operations.
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 $12.5 million
(9.7%) compared to the prior year quarter primarily from net
acquisition and divestiture activity and higher costs associated with
personnel, insurance and fuel. As a percentage of net sales, operating
expenses increased 110 basis points to 34.5% compared to 33.4% in the
prior year quarter.
Depreciation and amortization amounted to $22.3 million in the
current quarter compared to $23.0 million in the prior year quarter.
During the current quarter, with the sale of a business in India,
the Company completed the divestiture of businesses originally provided
for under the fiscal 1998 special charge associated with the Company's
"Repositioning Airgas for Growth" restructuring plan. The Company
reversed the remaining divestiture accrual of $1.3 million that
represented the difference between the Company's original loss
estimates and actual results. The special charge reversal was offset
by a charge recorded in September 2000 to establish a liability for
legal fees and costs related to litigation that resulted from a 1997
refrigerant loss.
<PAGE> 15
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Income
Operating income increased 2.3% and operating margins declined 20
basis points to 8.1% during the current quarter compared to the prior
year quarter.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) September 30,
Operating Income 2000 1999 Increase
<S> <C> <C> <C> <C>
Distribution $26,598 $26,408 $ 190 0.7%
Gas Operations 6,448 5,896 552 9.4%
$33,046 $32,304 $ 742 2.3%
</TABLE>
The Distribution segment's operating income margin decreased 40
basis points to 7.2% 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. The Company believes that continued sales
growth and the impact of price increases will help to offset increases
in operating expenses during the third and fourth quarters of fiscal
2001.
The Gas Operations segment's operating income margin increased 190
basis points to 16.5% compared to 14.6% in the prior year quarter
primarily from net divestiture activity.
Interest Expense, net
Interest expense, net, totaled $16.3 million representing an
increase of $1.9 million (13.0%) compared to the prior year quarter.
The increase in interest expense resulted from higher average debt
levels and a 75 basis point increase in weighted-average interest
rates. The net increase in debt was primarily attributable to the
fourth quarter fiscal 2000 acquisition of Puritan-Bennett as well as
common stock repurchases. At September 30, 2000, the Company's ratio
of fixed to variable rate debt was 61% to 39%, respectively. 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.
Other Income, net
Other income, net, totaled $405 thousand in the current quarter
compared to $15.2 million in the prior year quarter. The prior year
quarter included a $14.4 million gain from the divestiture of
operations in Poland and Thailand.
Income Tax Expense
The effective income tax rate was 41.0% of pre-tax earnings in the
current quarter compared to 44.0% in the prior year quarter. The
effective income tax rate in the prior year quarter was impacted by
higher foreign tax rates on the gain from the divestiture of operations
in Poland and Thailand.
Net Earnings
Net earnings for the quarter ended September 30, 2000 were $10.4
million, or $.16 per diluted share, compared to $18.9 million, or $.27
per diluted share, in the prior year quarter. Excluding the gain on
the divestiture of operations in Poland and Thailand, net earnings in
the prior year quarter were $11.4 million, or $.16 per diluted share.
<PAGE> 16
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
THE SIX MONTHS ENDED SEPTEMBER 30, 1999
INCOME STATEMENT COMMENTARY
Net Sales
Net sales increased 6.8% for the six months ended September 30, 2000
("current period") compared to the six months ended September 30, 1999
("prior year period"). Total Company same-store sales increased 3.7%
in the current period versus the prior year period.
<TABLE>
<CAPTION>
Six Months Ended
(In thousands) September 30,
Net Sales 2000 1999 Increase(Decrease)
<S> <C> <C> <C> <C>
Distribution $745,798 $692,940 $52,858 7.6%
Gas Operations 73,297 73,842 (545) (0.7%)
$819,095 $766,782 $52,313 6.8%
</TABLE>
Distribution sales increased $52.9 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 $30.9 million, primarily resulting from the fourth quarter
fiscal 2000 acquisition of Puritan-Bennett. Same-store sales growth of
$22.0 million (3.4%) was the result of gas and rent sales growth of
$12.4 million (4.4%) and hardgoods sales growth of $9.6 million (2.7%).
Gas and rent same-store sales growth was attributable to sales
initiatives such as national accounts and higher volumes of strategic
products, particularly medical and specialty gases and welder equipment
rental. Gas and rent sales growth was also helped by price increases
implemented during the current period. Hardgoods same-store sales
growth resulted from an increase in safety and tool product sales from
cross-selling initiatives.
Gas Operations sales decreased $545 thousand in the current period
as a result of net divestiture activity largely offset by same-store
sales growth. Sales in the current period were $4.7 million lower
primarily due to the divestiture of operations in Poland and Thailand
in the prior year period. Gas Operations same-store sales increased
$4.2 million (6.5%) primarily from higher volumes of dry ice and liquid
carbon dioxide. Unseasonably warm weather in certain regions helped
increase dry ice volumes during the current period.
Gross Profits
Gross profits increased 7.8% and gross profit margins increased 40
basis points to 47.7% in the current period compared to the prior year
period.
<TABLE>
<CAPTION>
Six Months Ended
(In thousands) September 30,
Gross Profits 2000 1999 Increase
<S> <C> <C> <C> <C>
Distribution $344,399 $317,861 $26,538 8.3%
Gas Operations 46,413 44,807 1,606 3.6%
$390,812 $362,668 $28,144 7.8%
</TABLE>
The increase in Distribution gross profits of $26.5 million resulted
from net acquisition and divestiture activity of $20.1 million and
growth in same-store gross profits of $6.4 million (2.3%). The
increase in same-store gross profits was driven by higher sales volumes
of gas and rent and price increases implemented during the current
period. Hardgoods gross profits have been helped by lower costs from
centralized purchasing initiatives and continued sales growth of higher
margin private label products. The Distribution segment's gross profit
<PAGE> 17
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
margin of 46.2% in the current period increased 30 basis points from
45.9% in the prior year period primarily from the acquisition of
Puritan-Bennett.
The increase in Gas Operations gross profits of $1.6 million resulted
from same-store gross profit growth, partially offset by net
divestiture activity. Same-store gross profit growth of $3.2 million
(7.8%) resulted primarily from higher sales volumes of dry ice and
liquid carbon dioxide and price increases implemented during the
current period. Net divestiture activity partially offset the same-
store gross profit growth by $1.6 million. Gas Operations gross profit
margin of 63.3% increased 260 basis points from 60.7% in the prior year
period driven by the divestiture of lower margin foreign operations and
the addition of higher margin nitrous oxide business acquired with
Puritan-Bennett.
Operating Expenses
Operating expenses increased $25.5 million (10.0%) compared to the
prior year period primarily from net acquisition and divestiture
activity and higher costs associated with personnel, insurance and
fuel. As a percentage of net sales, operating expenses increased 100
basis points to 34.4% compared to 33.4% in the prior year quarter.
Depreciation and amortization was flat at $45.1 million in both
the current and prior year periods.
Operating Income
Operating income increased 4.4% and operating margins declined 20
basis points to 7.8% in the current period compared to the prior year
period.
<TABLE>
<CAPTION>
Six Months Ended
(In thousands) September 30,
Operating Income 2000 1999 Increase
<S> <C> <C> <C> <C>
Distribution $52,723 $52,668 $ 55 0.1%
Gas Operations 11,366 8,735 2,631 30.1%
$64,089 $61,403 $2,686 4.4%
</TABLE>
The Distribution segment's operating income margin decreased 50
basis points to 7.1% in the current period compared to 7.6% in the
prior year period primarily as a result of higher operating expenses,
partially offset by gross profits from same-store sales growth and
acquisitions.
The Gas Operations segment's operating income margin increased 370
basis points to 15.5% primarily from the divestiture of lower margin
foreign operations.
Interest Expense, net
Interest expense, net, totaled $32.1 million representing an
increase of $3.9 million (13.7%) compared to the prior year period.
The increase in interest expense resulted from higher average debt
levels and a 70 basis point increase in weighted-average interest
rates. The net increase in debt was primarily attributable to the
fourth quarter fiscal 2000 acquisition of Puritan-Bennett as well as
common stock repurchases. 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.
<PAGE> 18
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Income, net
Other income, net, totaled $457 thousand in the current period
compared to $15.4 million in the prior year period. The prior year
period included a $14.4 million gain from the divestiture of operations
in Poland and Thailand.
Income Tax Expense
The effective income tax rate was 41.1% of pre-tax earnings in the
current period compared to 43.2% in the prior year period. The
effective income tax rate in the prior year period was affected by
higher foreign tax rates on the gain from the divestiture of operations
in Poland and Thailand.
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.
Net Earnings
Net earnings for the six month period ended September 30, 2000
were $20.2 million, or $.30 per diluted share, compared to $28 million,
or $.39 per diluted share, in the prior year period. Excluding the
charge for the cumulative effect of an accounting change and a gain on
the divestiture of the Company's operations in Poland and Thailand, net
earnings in the prior year period were $21 million, or $.30 per diluted
share,
<PAGE> 19
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash flows from operating activities totaled $50.7 million for the
six months ended September 30, 2000 compared to $51.2 million in the
prior year period. Adjustments to reconcile net income to net cash
provided by operating activities included depreciation and amortization
of $45.1 million and deferred income taxes of $6.9 million from
temporary differences. Additionally, working capital components used
cash of $18 million primarily for an increase in trade receivables and
inventories and lower accounts payable. Trade receivables increased
$8.4 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 51 days from 48 days
at March 31, 2000. Inventories used cash of $1.9 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 associated with payment terms.
Cash used in investing activities totaled $22.5 million during the
current period. Investing activities primarily included capital
expenditures that used cash of $31 million and divestiture proceeds
that provided cash of $7 million. Capital expenditures in the current
period were flat compared to the same period last year. Capital
expenditures associated with the purchase of cylinders, bulk tanks,
rental welders and machinery and equipment totaled approximately $23
million, or approximately 75% of total capital expenditures, and
facilitate strategic product sales growth. Management continues to
focus on improving asset utilization and controlling capital spending.
Capital expenditures for fiscal 2001 are expected to amount to less
than the fiscal 2000 total of $65 million.
Financing activities used cash of $28.1 million. Activities that
used cash during the period primarily included net repayment of debt of
$13.2 million, repurchase of the Company's common stock in the amount
of $11.2 million and the decrease in the cash overdraft of $4.5
million. 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.
Capital expenditures, current debt maturities and any future
acquisitions are expected to be funded through the use of cash flow
from operations, revolving credit facilities, potential sales of non-
core businesses and other financing alternatives, including asset-based
financing. The Company believes that the sales of non-core businesses
have the potential to generate $70 to $85 million in after-tax cash
proceeds over the next 12 months. The Company believes that its
sources of financing are adequate for its anticipated needs and that it
could arrange additional sources of financing for unanticipated
requirements. The cost and terms of any future financing arrangement
depend on the market conditions and the Company's financial position at
that time.
The Company does not currently pay dividends.
<PAGE> 20
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 $66 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 September 30, 2000, the Company had
borrowings under the credit agreement of approximately $554 million and
$41 million Canadian (US $27 million). The Company also had
commitments under letters of credit supported by the credit agreement
of approximately $51 million. Based on restrictions related to cash
flow to funded debt coverage, the Company had additional borrowing
capacity under the credit facilities of approximately $83 million at
September 30, 2000. At September 30, 2000, the effective interest rate
on borrowings under the credit facilities was 7.20% on U.S. borrowings
and 6.03% on Canadian borrowings.
At September 30, 2000, the Company had the following medium-term
notes outstanding: $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 September 30, 2000, long-term
debt of the Company included acquisition notes and other long-term debt
instruments of approximately $58 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 September 30, 2000, the Company was party to 21 interest
rate swap agreements. The swap agreements are with major financial
institutions and aggregate $535 million in notional principal amount at
September 30, 2000. Seventeen swap agreements with approximately $405
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 six years. Four swap agreements with $130
million in notional principal amount require variable interest payments
based on an average rate of 6.91% at September 30, 2000. Under the
terms of three swap agreements, the Company has elected to receive the
discounted value of the counterparties' interest payments up-front. At
September 30, 2000, approximately $2.1 million of such payments was
included in other current liabilities and $900 thousand 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. At September 30, 2000, the Company's
ratio of fixed to variable rate debt was 61% to 39%.
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. In April 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 three and six-month periods ended September 30, 2000 was not
material. At September 30, 2000, approximately 500 thousand shares
remain under the share repurchase authorization.
<PAGE> 21
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER
New Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Statement 140 replaces FASB Statement
125, revises the standards for accounting for securitizations and other
transfers of financial assets and requires certain additional
disclosures. Statement 140 is effective for applicable transactions
occurring after March 31, 2001. Statement 140 disclosures are required
for fiscal years ending after December 15, 2000. The Company will
evaluate the impact of Statement 140 upon the consideration of
potential financing alternatives.
In June 2000, the 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 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 within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements include, but are not limited to, statements regarding: the
Company's expectations regarding the continuation of the Distribution
segment's positive same-store sales momentum into the fiscal third
quarter; the impact of higher volumes of strategic products and price
increases and their effect on sales growth; the seasonal impact on
sales of the Gas Operations segment in the fiscal third and fourth
quarters of fiscal 2001; the Company's belief that continued sales
growth and the impact of price increases will help to offset increases
in operating expenses in the third and fourth quarters of fiscal 2001;
operating expense trends; the funding of future acquisitions, capital
expenditures and current debt maturities through the use of cash flow
from operations, revolving credit facilities, potential sales of assets
and other financing alternatives; the identification of acquisitions
candidates; future debt repayment; future sources of financing; the
Company's belief that the sales of non-core businesses have the
potential to generate $70 to $85 million in after-tax proceeds over the
next 12 months; the level of fiscal 2001 capital expenditures; and
performance of counterparties under interest rate swap agreements.
These forward-looking statements involve risks and uncertainties.
Factors that could cause actual results to differ materially from those
predicted in any forward-looking statement include, but are not limited
to: underlying market conditions; growth and continued improvement in
same-store sales; the success of marketing initiatives on sales of
strategic products; the Company's ability to control operating expenses
and the potential impact of higher operating expenses in future
periods; the impact of seasonality on sales of the Gas Operations
segment; the market acceptance and success of private label products;
the ability of the Company to improve margins through sales of
strategic and private label products; adverse changes in customer
buying patterns; the market acceptance of price increases; the ability
of price increases and sales growth to offset any increases in
operating expenses; the success of centralized purchasing and
distribution initiatives in lowering product costs; the ability to
generate sufficient cash flow from operations or other sources to repay
debt, fund future acquisitions or capital expenditure requirements; the
ability to identify economically attractive or willing acquisition
candidates; the ability to identify alternate sources of financing; the
ability to consummate sales of businesses; the ability to negotiate
sales prices of businesses on terms economically favorable to the
Company; the ability to identify means to improve asset utilization;
the ability to control capital spending; the ability to manage interest
<PAGE> 22
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
rate exposure; the effects of competition from independent distributors
and vertically integrated gas producers on products, pricing and sales
growth; 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> 23
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
September 30, 2000, the ratio of fixed versus floating debt was 61% to
39%. 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 September
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> 24
<TABLE>
<CAPTION>
Expected Fiscal Year of Maturity
___________________________________________________________________________
(In millions) Fair
2001<F1> 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 $207
Interest expense $ 7 $ 15 $ 13 $ 13 $ 8 $ 8 $ 3 $ 67
Average interest rate 7.41% 7.42% 7.49% 7.49% 7.75% 7.75% 7.75%
Acquisition notes $ 7 $ 16 $ 1 $ 22 $ -- $ 2 $ -- $ 48 $ 46
Interest expense $ -- $ 1 $ -- $ 2 $ -- $ -- $ -- $ 3
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 $ -- $ -- $581 $ -- $ -- $ -- $ -- $581 $581
Interest expense $ 21 $ 42 $ 28 $ -- $ -- $ -- $ -- $ 91
Interest rate <F2> 7.14% 7.14% 7.14%
Other notes $ -- $ 7 $ -- $ -- $ 1 $ -- $ -- $ 8 $ 8
Average interest rate 10.50% 10.50% 7.50% 7.50% 7.50%
US denominated Swaps:
15 Swaps Receive
Variable/Pay Fixed $ 55 $177 $128 $ -- $ 40 $ -- $ -- $400 $ (3)
Variable Receive rate
(3 month LIBOR)= 6.69%
Weighted average
pay rate = 6.32%
4 Swaps Receive
Fixed/Pay Variable $ -- $ 50 $ -- $ 30 $ -- $ -- $ 50 $130 $ 1
Weighted average
receive rate = 6.99%
Variable pay rate
(6 month LIBOR)= 6.91%
Canadian $ denominated
Swaps:
2 Swaps Receive
Variable/Pay Fixed $ 3 $ 2 $ -- $ -- $ -- $ -- $ -- $ 5 $ --
(3 month
CAD BA <F3>) = 5.88%
Weighted average
pay rate = 7.11%
Other LIBOR based
agreements:
Operating leases
with trust $ -- $ 1 $ 1 $ 43 $ -- $ -- $ -- $ 45 $ 45
Variable rate
(3 month LIBOR plus
130 basis points)=7.99%
<FN>
<F1> Fiscal 2001 financial instrument maturities and related interest
expense relate to the period October 1, 2000 through March 31, 2001.
<F2> The variable rate of long-term debt obligations is based on the
London Interbank Offered Rate ("LIBOR") as of September 30, 2000.
For future periods, the variable interest rate is assumed to remain at
7.14% with the principal balance of long-term debt obligations held
constant at $581 million. However, the variable rate and borrowing
levels of long-term debt may fluctuate materially from those presented
above.
<F3> The variable receive rate for Canadian dollar denominated interest
rate swaps is the rate on Canadian Bankers' acceptances ("CAD BA").
</FN>
</TABLE>
<PAGE> 25
Limitations of the tabular presentation
As the table incorporates only those interest rate risk exposures
that exist as of September 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 and financial position.
<PAGE> 26
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. In
August, 2000, the Company's motion for summary judgment was denied, and
the Company anticipates that additional discovery and pretrial motions
will take nine to twelve more months and may result in additional
costs. The Company believes that Praxair's North Carolina claims are
without merit and intends to defend vigorously against such claims.
In 1997, the Company announced it was the victim of a fraudulent
breach of contract by a third party supplier of refrigerant gases and
recorded a non-recurring special charge related to product losses and
costs associated with the Company's efforts to investigate the fraud
and pursue recoveries. During the quarter ended September 30, 2000,
the Company recorded a non-recurring special charge of $1.3 million
related to the estimated legal fees and costs of pursuing additional
recoveries from its insurance carriers. All steps preparatory for
trial have been concluded, and the Company expects that a trial date
will be set imminently.
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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on
August 3, 2000, where the following actions were taken:
(a) The stockholders voted to elect James W. Hovey, Paula A. Sneed,
and David M. Stout to the Board of Directors. The votes cast for each
Director were as follows:
No. of Shares
For Withheld/Against
James W. Hovey 64,504,997 2,940,272
Paula A. Sneed 64,505,052 2,940,217
David M. Stout 64,511,314 2,933,955
In addition to the Board members elected at the annual meeting,
the following are directors whose terms in office as directors
continued after the meeting: W. Thacher Brown, Frank B. Foster,
III, Peter McCausland, John A. H. Shober, Lee M. Thomas, and
Robert L. Yohe.
(b) The stockholders voted to ratify the selection of KPMG LLP as the
Company's independent auditors. The votes cast in regard to the action
were as follows:
No. of Shares
For Withheld/Against Abstain
65,732,665 919,630 792,974
<PAGE> 27
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 September 30, 2000.
b. Reports on Form 8-K
On July 28, 2000, the Company filed a Form 8-K pursuant to Item 5,
reporting its earnings for the first quarter ended June 30, 2000.
On September 19, 2000, the Company filed a Form 8-K pursuant to
Item 5, announcing that Glenn Fischer, formerly president of BOC Gases
- North America, would be named president and chief operating officer
effective November 1, 2000.
<PAGE> 28
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: November 9, 2000 /s/ Roger F. Millay
Roger F. Millay
Senior Vice President - Finance and
Chief Financial Officer
