<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: December 31, 1999
Commission file number: 1-9344
AIRGAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-0732648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
259 North Radnor-Chester Road, Suite 100
Radnor, PA 19087-5283
(Address of principal executive offices) (ZIP code)
(610) 687-5253
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
Common Stock outstanding at February 4, 2000: 69,568,816 shares
<PAGE> 2
AIRGAS, INC.
FORM 10-Q
December 31, 1999
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings
for the Three and Nine Months Ended December 31, 1999 and 1998 (Unaudited)..3
Consolidated Balance Sheets
as of December 31, 1999 (Unaudited) and March 31, 1999......................4
Consolidated Statements of Cash Flows
for the Nine Months Ended December 31, 1999 and 1998 (Unaudited)............5
Notes to Consolidated Financial Statements (Unaudited)......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................28
Item 6. Exhibits and Reports on Form 8-K...................................28
SIGNATURES..................................................................29
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales
Distribution $339,761 $339,623 $1,032,701 $1,054,384
Gas Operations 29,673 40,700 103,515 123,304
Total net sales 369,434 380,323 1,136,216 1,177,688
Costs and expenses
Cost of products sold (excluding
depreciation and amortization)
Distribution 180,126 183,922 555,205 574,062
Gas Operations 15,471 17,792 44,506 55,299
Selling, distribution and
administrative expenses 125,676 130,932 381,822 393,085
Depreciation and amortization 21,986 22,504 67,105 65,849
Special charges (recoveries) (2,829) - (2,829) (1,000)
Total costs and expenses 340,430 355,150 1,045,809 1,087,295
Operating income
Distribution 26,622 20,634 79,290 75,246
Gas Operations (447) 4,539 8,288 14,147
Special (charges) recoveries 2,829 - 2,829 1,000
Total operating income 29,004 25,173 90,407 90,393
Interest expense, net (13,949) (15,701) (42,167) (46,227)
Other income, net 1,234 24,358 16,639 25,189
Equity in earnings of unconsolidated
affiliates 663 2,862 2,388 4,838
Earnings before income taxes and
the cumulative effect of an
accounting change 16,952 36,692 67,267 74,193
Income tax expense 7,192 14,604 28,920 30,350
Earnings before the cumulative
effect of an accounting change 9,760 22,088 38,347 43,843
Cumulative effect of an accounting
change, net of taxes - - (590) -
Net earnings $ 9,760 $22,088 $37,757 $43,843
Basic earnings per share:
Earnings per share before the
cumulative effect of an
accounting change $ .14 $ .32 $ .55 $ .63
Cumulative effect per share
of an accounting change -- -- (.01) --
Net earnings per share $ .14 $ .32 $ .54 $ .63
Diluted earnings per share:
Earnings per share before the
cumulative effect of an
accounting change $ .14 $ .31 $ .54 $ .61
Cumulative effect per share
of an accounting change -- -- (.01) --
Net earnings per share $ .14 $ .31 $ .53 $ .61
Weighted average shares outstanding:
Basic 69,200 69,700 69,600 70,000
Diluted 70,800 71,600 71,000 71,700
Comprehensive income $ 9,887 $22,038 $38,086 $43,657
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)
December 31, March 31,
1999 1999
<S> <C> <C>
ASSETS
Current Assets
Trade receivables, less allowances for doubtful
accounts of $6,507 at December 31, 1999 and $6,092
at March 31, 1999 $ 193,287 $ 195,708
Inventories, net 158,095 154,424
Deferred income tax asset, net 7,937 7,549
Prepaid expenses and other current assets 23,393 21,161
Total current assets 382,712 378,842
Plant and equipment, at cost 1,020,721 993,496
Less accumulated depreciation (311,277) (275,637)
Plant and equipment, net 709,444 717,859
Goodwill, net of accumulated amortization of
$65,036 at December 31, 1999 and $54,986 at
March 31, 1999 424,700 428,349
Other non-current assets 133,200 173,422
Total assets $1,650,056 $1,698,472
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 69,103 $ 85,486
Accrued expenses and other current liabilities 101,492 108,295
Current portion of long-term debt 2,434 19,645
Total current liabilities 173,029 213,426
Long-term debt 801,022 847,841
Deferred income taxes 152,653 142,675
Other non-current liabilities 31,830 23,585
Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, no par, 20,000 shares authorized,
no shares issued or outstanding at December 31, 1999
and March 31, 1999 -- --
Common stock, par value $.01 per share, 200,000 shares
authorized, 73,084 and 72,024 shares issued at
December 31, 1999 and March 31, 1999, respectively 731 720
Capital in excess of par value 196,563 190,175
Retained earnings 326,847 289,090
Accumulated other comprehensive loss (581) (910)
Treasury stock, 1,118 and 130 common shares at cost at
December 31, 1999 and March 31, 1999, respectively (10,525) (1,129)
Employee benefits trust, 2,098 and 826 common shares
at cost at December 31, 1999 and March 31, 1999,
respectively (21,513) (7,001)
Total stockholders' equity 491,522 470,945
Total liabilities and stockholders' equity $1,650,056 $1,698,472
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>
Nine Months Ended Nine Months Ended
December 31,1999 December 31, 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 37,757 $ 43,843
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 67,105 65,849
Deferred income taxes 11,025 7,478
Equity in earnings of unconsolidated affiliates (2,388) (5,706)
Gain on divestitures (14,850) (23,968)
Gain on sales of plant and equipment (917) (397)
Minority interest in earnings (51) 51
Stock issued for employee benefit plans 4,263 4,269
Other non-cash charges 458 (1,000)
Changes in assets and liabilities, excluding
effects of business acquisitions and divestitures:
Trade receivables, net 4,921 (6,992)
Inventories, net (1,107) (13,279)
Prepaid expenses and other current assets (2,314) (502)
Accounts payable, net (17,074) (9,854)
Accrued expenses and other current liabilities 1,317 15,074
Other assets and liabilities, net (4,293) (12,742)
Net cash provided by operating activities 83,852 62,124
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (47,609) (82,076)
Proceeds from sale of plant and equipment 35,598 1,655
Proceeds from divestitures 46,596 48,816
Business acquisitions, net of cash acquired (24,218) (43,969)
Business acquisitions, holdback settlements (1,862) (3,619)
Investment in unconsolidated affiliates (30) (140)
Dividends from unconsolidated affiliates 2,958 2,788
Other, net (289) 4,409
Net cash provided (used) by investing activities 11,144 (72,136)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 84,187 393,833
Repayment of debt (149,293) (360,789)
Purchase of treasury stock (25,936) (13,982)
Proceeds from exercise of stock options 1,431 1,325
Cash overdraft (5,385) (10,375)
Net cash provided (used) by financing activities (94,996) 10,012
Cash Increase (Decrease) $ -- $ --
Cash - beginning of period -- --
Cash - end of period $ -- $ --
Cash paid during the period for:
Interest $ 38,440 $ 42,704
Income taxes, net of refunds $ 8,089 $ 480
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 6
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Airgas, Inc.
and its subsidiaries (the "Company"). Unconsolidated affiliates are
accounted for on the equity method and generally consist of 20 - 50% owned
operations where control does not exist or is considered temporary. The
excess of the cost of these affiliates over the Company's share of their
net assets at the acquisition date is being amortized over 20 to 40 years.
Intercompany accounts and transactions are eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles. These
statements do not include all disclosures required for annual financial
statements. These financial statements should be read in conjunction with
the more complete disclosures contained in the Company's audited
consolidated financial statements for the fiscal year ended March 31, 1999.
The financial statements reflect, in the opinion of management, all
adjustments necessary to present fairly the Company's financial position,
results of operations and cash flows for the periods presented. Such
adjustments are of a normal, recurring nature except for the impact of
acquisitions, divestitures, special charges and the accounting change which
are discussed in the notes to the accompanying financial statements. The
interim operating results are not necessarily indicative of the results to
be expected for an entire year.
Effective October 1, 1999, the Company changed its estimate of the useful
life of its bulk gas storage tanks from 20 to 30 years. This change was
made to better reflect the estimated periods during which these assets will
remain in service. The impact of the change was not material.
Certain reclassifications have been made to previously issued financial
statements to conform to the current presentation.
(2) ACCOUNTING CHANGE
The Company adopted Statement of Position 98-5 "Reporting on the Costs of
Start-up Activities" ("SOP 98-5"), as required, in the first quarter of
fiscal year 2000 resulting in a charge to net earnings of $590 thousand, or
$.01 per diluted share. In accordance with SOP 98-5, the charge has been
reflected on a separate line entitled "Cumulative effect of an accounting
change, net of taxes", on the consolidated statement of earnings. The
charge primarily resulted from the write-off of start-up costs capitalized
in connection with the Company's two air separation units constructed
during fiscal 1998 and 1999.
(3) ACQUISITIONS AND DIVESTITURES
During the nine months ended December 31, 1999, the Company acquired four
distributors of industrial gas and related equipment with aggregate annual
sales of approximately $27 million.
On January 21, 2000, the Company acquired Mallinckrodt Inc.'s Puritan-
Bennett medical gas business with annual sales of approximately $70
million. Puritan-Bennett distributes medical gases through a network of 36
locations and employs 390 employees in the United States and Canada.
On August 4, 1999, the Company completed the divestiture of its operations
in Poland and Thailand to Linde AG. The divestiture resulted in a gain of
$14.9 million ($7.8 million after-tax, or $.11 per diluted share) which was
recognized in "other income, net." Cash proceeds from the sale were $46.2
million ($38.4 million after taxes and closing costs). Through the date of
disposition, the operations in Poland and Thailand had combined sales and
operating losses in fiscal 2000 of $12.7 million and $550 thousand,
respectively. The operations of the divested companies were previously
reported in the Gas Operations segment.
<PAGE> 7
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On December 31, 1998, the Company completed the divestiture of its calcium
carbide and carbon products operations to Elkem Metals Company L.P., a
subsidiary of Elkem ASA. The divestiture resulted in a gain of
approximately $24 million ($14.1 million after-tax, or $.20 per diluted
share) which was recognized in "other income, net." The calcium carbide
and carbon products operations had annual sales of approximately $30
million and were previously reported in the Gas Operations segment ($8.2
million and $23 million in sales and $1.6 million and $4 million in
operating income for the three and nine months ended December 31, 1998,
respectively).
The Company divested two non-core businesses during the quarter ended June
30, 1998 and received consideration totaling approximately $10.5 million.
The divested businesses had combined sales for the three months ended June
1998 of $4.6 million.
(4) SPECIAL CHARGES AND RECOVERIES
The Company recorded a $2.8 million ($1.7 million after-tax, or $.02 per
diluted share) recovery during the quarter ended December 31, 1999
primarily consisting of an insurance settlement related to a fiscal 1997
loss.
During the quarter ended June 30, 1998, the Company divested two non-core
businesses and adjusted associated divestiture reserves by $1 million ($575
thousand after-tax, or $.01 per diluted share) to reflect differences
between the original loss estimates and the actual losses on those
businesses.
(5) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net earnings by the
weighted average number of shares of the Company's Common Stock outstanding
during the period. Diluted earnings per share is calculated by dividing
net earnings by the weighted average common shares outstanding adjusted for
the dilutive effect of common stock equivalents related to stock options
and contingently issuable shares.
The table below reconciles basic weighted average common shares
outstanding to diluted weighted average common shares outstanding for the
three and nine months ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
(In thousands) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding:
Basic 69,200 69,700 69,600 70,000
Stock options 1,000 1,300 1,100 1,500
Contingently issuable shares 600 600 300 200
Diluted 70,800 71,600 71,000 71,700
</TABLE>
<PAGE> 8
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(6) INVENTORIES
<TABLE>
Inventories consist of:
<CAPTION>
(Unaudited)
December 31, March 31,
(In thousands) 1999 1999
<S> <C> <C>
Finished goods $157,299 $153,571
Raw materials 796 853
$158,095 $154,424
Inventories determined by the LIFO inventory method totaled $25.6 million
and $25.7 million at December 31, 1999 and March 31, 1999, respectively.
If the FIFO inventory method had been used for these inventories, they
would have been $1.5 million higher at December 31, 1999 and $1.6 million
higher at March 31, 1999.
</TABLE>
(7) OTHER NON-CURRENT ASSETS
<TABLE>
Other non-current assets include:
<CAPTION>
(Unaudited)
December 31, March 31,
(In thousands) 1999 1999
<S> <C> <C>
Investments in unconsolidated affiliates $ 73,020 $100,834
Non-compete agreements and other intangible
assets, at cost, net of accumulated
amortization of $94.7 million at
December 31, 1999 and $85.5 million at
March 31, 1999 50,014 55,894
Other assets 10,166 16,694
$133,200 $173,422
The decrease in investments in unconsolidated affiliates is primarily due
to the divestiture of operations in Poland and Thailand.
</TABLE>
<PAGE> 9
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
Accrued expenses and other current liabilities include:
<CAPTION>
(Unaudited)
December 31, March 31,
(In thousands) 1999 1999
<S> <C> <C>
Cash overdraft $ 11,574 $ 16,959
Restructuring reserves 3,944 5,087
Insurance payable and related reserves 9,757 9,584
Customer cylinder deposits 8,100 8,233
Accrued interest 16,557 12,331
Other accrued expenses and current
liabilities 51,560 56,101
$101,492 $108,295
Restructuring reserves primarily relate to pending divestitures. The cash
overdraft is attributable to the float of the Company's outstanding checks.
</TABLE>
(9) LEASE TRANSACTION
In October 1999, the Company renewed a lease of real estate with a trust
established by a commercial bank. The lease was amended to include the
sale-leaseback of certain equipment. The appraised value of the real
estate and equipment under the lease totaled approximately $46 million.
The lease has a five-year term and has been accounted for as an operating
lease. The Company has guaranteed a residual value of the real estate and
the equipment at the end of the lease term of approximately $31 million.
A gain of approximately $12 million on the equipment portion of the
transaction has been deferred until the expiration of the Company's
guarantee of the residual value. Cash proceeds received from the
transaction were used to repay debt outstanding under the Company's
revolving credit facility.
<PAGE> 10
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(10) 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, 1999 72,024 130 826
Common Stock issuance (a) 1,060 -- --
Purchase of treasury stock -- 2,333 --
Reissuance of treasury stock (b) -- (48) --
Sale of treasury stock to Trust (c) -- (1,297) 1,297
Reissuance of stock held by Trust (d) -- -- (25)
Balance-December 31, 1999 73,084 1,118 2,098
</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, 1999 $720 $190,175 $289,090 $(910) $(1,129) $(7,001) $ --
Net earnings -- -- 37,757 -- -- -- 37,757
Common Stock issuance (a) 11 5,299 -- -- -- -- --
Foreign currency
translation adjustments -- -- -- 329 -- -- 329
Purchase of treasury stock -- -- -- -- (24,842) -- --
Reissuance of treasury
stock (b) -- (247) -- -- 424 -- --
Sale of treasury stock
to Trust (c) -- (253) -- -- 15,022 (14,769) --
Reissuance of Common Stock
from Trust (d) -- -- -- -- -- 257 --
Tax benefit from stock
options exercises -- 1,589 -- -- -- -- --
Balance-December 31, 1999 $731 $196,563 $326,847 $(581) $(10,525) $(21,513) $38,086
(a) Issuance of Common Stock for stock option exercises and for the Company's Employee Stock Purchase Plan.
(b) Reissuance of Common Stock in connection with stock option exercises.
(c) Sale of Common Stock from treasury to the Employee Benefits Trust.
(d) Reissuance of Common Stock from the Employee Benefits Trust for employee benefit programs.
</TABLE>
On February 11, 2000, the Employee Benefits Trust purchased approximately
1.4 million shares of Common Stock from the Company at fair market value.
<PAGE> 11
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(11) COMMITMENTS AND CONTINGENCIES
(a) Litigation
In July 1996, Praxair, Inc. ("Praxair") filed suit against the Company in
the Circuit Court of Mobile County, Alabama. The complaint alleged tortious
interference with business or contractual relations with respect to
Praxair's Right of First Refusal contract with the majority shareholders of
National Welders Supply Company, Inc. ("National Welders") by the Company
in connection with the Company's formation of a joint venture with National
Welders. In June 1998, Praxair filed a motion to dismiss its own action in
Alabama and commenced another action in the Superior Court of Mecklenburg
County, North Carolina, alleging substantially the same tortious
interference by the Company. The North Carolina action also alleges breach
of contract against National Welders and certain shareholders of National
Welders and unfair trade practices and conspiracy against all the
defendants. In the North Carolina action Praxair seeks compensatory
damages in excess of $10 thousand, punitive damages and other unspecified
relief. The Company believes that Praxair's North Carolina claims are
without merit and intends to defend vigorously against such claims.
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 maintains insurance programs with self-insured retentions
of $500 thousand per occurrence to cover workers' compensation, business
automobile, general and product liability. Losses are accrued based upon
the Company's estimates, developed with third party insurance adjusters, of
the aggregate liability for claims incurred, claims incurred but not
reported and on Company historical experience.
The nature of the Company's business may subject it to product and
general liability claims. To the extent that the Company is subject to
claims that exceed its liability insurance coverage of $100 million, such
claims could have a material adverse effect on the Company's financial
position, results of operations or liquidity.
<PAGE> 12
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(12) SUMMARY BY BUSINESS SEGMENT
<TABLE>
Information related to the Company's operations by business segment for
the three months ended December 31, 1999 and 1998 is as follows:
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1999 December 31, 1998
(In thousands) Gas Gas
Distribution Operations Combined Distribution Operations Combined
<S> <C> <C> <C> <C> <C> <C>
Gas and rent $ 144,481 $ 28,845 $ 173,326 $ 140,879 $ 32,479 $ 173,358
Hardgoods 195,280 828 196,108 198,744 407 199,151
Other (1) -- -- -- -- 7,814 7,814
Total net sales 339,761 29,673 369,434 339,623 40,700 380,323
Intersegment sales -- 6,112 6,112 -- 6,325 6,325
Gross profit 159,635 14,202 173,837 155,701 22,908 178,609
Gross profit margin 47.0% 47.9% 47.1% 45.8% 56.3% 47.0%
Operating income,
excluding special
charges 26,622 (447) 26,175 20,634 4,539 25,173
Earnings before
income taxes,
excluding special
charges 16,316 (2,193) 14,123 9,909 26,783 36,692
EBITDA (2) 45,471 2,690 48,161 39,926 7,751 47,677
EBITDA margin 13.4% 9.1% 13.0% 11.8% 19.0% 12.5%
Assets 1,433,703 216,353 1,650,056 1,452,915 257,957 1,710,872
</TABLE>
<PAGE> 13
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(12) SUMMARY BY BUSINESS SEGMENT - (Continued)
<TABLE>
Information related to the Company's operations by business segment for
the nine months ended December 31, 1999 and 1998 is as follows:
<CAPTION>
Nine Months Ended Nine Months Ended
December 31, 1999 December 31, 1998
(In thousands) Gas Gas
Distribution Operations Combined Distribution Operations Combined
<S> <C> <C> <C> <C> <C> <C>
Gas and rent $ 432,575 $ 100,740 $ 533,315 $ 426,594 $ 100,040 $ 526,634
Hardgoods 600,126 2,775 602,901 627,790 1,197 628,987
Other (1) -- -- -- -- 22,067 22,067
Total net sales 1,032,701 103,515 1,136,216 1,054,384 123,304 1,177,688
Intersegment sales -- 22,497 22,497 -- 19,848 19,848
Gross profit 477,496 59,009 536,505 480,322 68,005 548,327
Gross profit margin 46.2% 57.0% 47.2% 45.6% 55.2% 46.6%
Operating income,
excluding special
charges 79,290 8,288 87,578 75,246 14,147 89,393
Earnings before
income taxes,
excluding special
charges and cumulative
effect of an accounting
change in 1999 44,371 20,067 64,438 40,511 32,682 73,193
EBITDA (2) 136,387 18,296 154,683 131,509 23,733 155,242
EBITDA margin 13.2% 17.7% 13.6% 12.5% 19.2% 13.2%
Assets 1,433,703 216,353 1,650,056 1,452,915 257,957 1,710,872
</TABLE>
<TABLE>
Reconciliations of the combined operating segments to the applicable
line items on the consolidated financial statements follow:
<CAPTION>
Three Months Ended Nine Months Ended Nine Months Ended
(In thousands) December 31, 1999 December 31, 1999 December 31, 1998
<S> <C> <C> <C>
Segment operating income $ 26,175 $ 87,578 $ 89,393
Special charges 2,829 2,829 1,000
Operating income $ 29,004 $ 90,407 $ 90,393
Segment earnings before income taxes $ 14,123 $ 64,438 $ 73,193
Special charges 2,829 2,829 1,000
Earnings before income taxes $ 16,952 $ 67,267 $ 74,193
(1) Represents sales of calcium carbide and carbon products.
(2) EBITDA - Operating income, excluding special charges, plus depreciation and
amortization, is a measure of the Company's ability to generate cash flow
and should be considered in addition to, but not as a substitute for, other
measures of financial performance reported in accordance with generally
accepted accounting principles.
</TABLE>
<PAGE> 14
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 DECEMBER 31, 1999 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 1998
INCOME STATEMENT COMMENTARY
Net Sales
Net sales decreased 2.9% in the quarter ended December 31, 1999 ("current
quarter") compared to the quarter ended December 31, 1998 ("prior year
quarter"). Total same-store sales were flat in the current quarter versus
the prior year quarter.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) December 31,
Net Sales 1999 1998 Increase(Decrease)
<S> <C> <C> <C> <C>
Distribution $339,761 $339,623 $ 138 --
Gas Operations 29,673 40,700 (11,027) (27.1%)
$369,434 $380,323 $(10,889) (2.9%)
</TABLE>
The Distribution segment's principal products and services include
hardgoods; industrial, medical and specialty gases; and equipment rental.
Hardgoods consist of welding supplies and equipment, safety products, and
industrial tools and supplies. 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.
Distribution sales increased $138 thousand primarily as a result of net
acquisition and divestiture activity, offset by a decline in same-store
hardgoods sales. Acquisition and divestiture activity accounted for a net
increase in sales of $4.5 million as the acquisition of four distributors
since October 1, 1998 were partially offset by a divestiture during fiscal
1999. Distribution same-store sales decreased $4.4 million (-1.3%) as a
result of lower sales of hardgoods of $6.7 million (-3.3%), partially
offset by gas and rent sales growth of $2.3 million (1.6%). Hardgoods
sales were negatively impacted in the current quarter by the continued
slowness in certain manufacturing and industrial markets including: metal
fabrication, oil exploration, agriculture, mining and shipbuilding. Gas
and rent same-store sales growth was attributable to the expansion of the
rental welder fleet and certain gas products including bulk, refrigerant
and medical gases.
Gas Operations' sales primarily include dry ice and carbon dioxide
that are used for cooling and beverage applications. In addition, the
segment includes businesses that produce and distribute specialty gases and
nitrous oxide. Sales decreased $11 million compared to the prior year
quarter as a result of divestitures, partially offset by same-store sales
growth. Sales decreased $15 million primarily due to the divestiture of
the Company's calcium carbide and carbon operations in December 1998 and
operations in Poland and Thailand in August 1999. Gas Operations' same-
store sales increased $4 million (15%) resulting from higher liquid carbon
dioxide, dry ice and nitrous oxide volumes.
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> 15
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross Profits
Gross profits decreased 2.7% during the current quarter compared to the
prior year quarter.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) December 31,
Gross Profits 1999 1998 Increase(Decrease)
<S> <C> <C> <C> <C>
Distribution $159,635 $155,701 $ 3,934 2.5%
Gas Operations 14,202 22,908 (8,706) (38.0%)
$173,837 $178,609 $ (4,772) (2.7%)
</TABLE>
The increase in Distribution gross profits of $3.9 million resulted from
a same-store gross profits increase of $1.9 million (1.2%) and acquisitions
contributing $3.2 million, partially offset by gross profits related to a
divestiture of $1.2 million. Same-store gas and rent gross profits
increased $2.3 million (2.2%), partially offset by a decrease in hardgoods
gross profits of $400 thousand (-.8%). Distribution gross profit margin of
47% in the current quarter increased 120 basis points from 45.8% in the
prior year quarter as a result of higher gas and hardgoods margins and a
shift in sales mix more heavily weighted towards gas and rent. Gas and
hardgoods margins were helped by lower costs resulting from centralized
hardgoods purchasing initiatives, higher-margin private label hardgoods
sales and lower gas costs from recently negotiated supply contracts.
The decrease in Gas Operations' gross profits of $8.7 million resulted
from divestitures in prior periods of $6.1 million, an inventory write-down
of $3.8 million related to certain specialty gas inventories, partially
offset by a same-store gross profit increase of $1.2 million. The
inventory write-down related to certain specialty gases that were purchased
in prior fiscal years and consisted of adjustments to reflect changes in
market prices and book-to-physical inventory differences. The scope of the
Company's operations related to such gases has been reduced and is now more
focused on supplying specialty gases exclusively to the Distribution segment.
Gas Operations' gross profit margin, excluding the divestitures, decreased
from 63% in the prior year quarter to 48% in the current quarter primarily
due to the inventory write-down and from increased sales volume of lower
margin liquid carbon dioxide.
Operating Expenses
Selling, distribution and administrative expenses ("operating
expenses") consist of personnel and related costs, distribution and
warehouse costs, occupancy expenses and other selling, general and
administrative expenses. Operating expenses decreased $5.3 million (-4%)
compared to the prior year quarter primarily as a result of cost reductions
that were initiated during the third and fourth quarters of fiscal 1999,
the net impact of acquisitions and divestitures and a decrease in
repositioning-related expenses that were recognized in the prior year. The
cost reductions have impacted many areas of the Company's expense
structure, including headcount and administrative cost reductions from the
consolidation of back office functions. As a percentage of net sales,
operating expenses decreased 40 basis points to 34.0% compared to the prior
year quarter.
Depreciation and amortization totaled $22 million in the current
quarter, a decrease of $500 thousand (2.3%) compared to the prior year
quarter. The decrease is primarily due to divestitures, the sale of
equipment included in a sale-leaseback transaction that was consummated in
the current quarter, a change in depreciable lives of bulk gas storage
tanks, partially offset by acquisitions and capital expenditures since
October 1, 1998.
<PAGE> 16
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Income
Operating income, excluding special charges, increased 4% compared to
the prior year quarter.
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) December 31,
Operating Income (Loss) 1999 1998 Increase(Decrease)
<S> <C> <C> <C> <C>
Distribution $26,622 $20,634 $ 5,988 29%
Gas Operations (447) 4,539 (4,986) (110%)
Special Charges 2,829 -- 2,829 --
$29,004 $25,173 $ 3,831 15%
</TABLE>
The Distribution segment's operating income margin increased 170 basis
points to 7.8% in the current quarter compared to 6.1% in the prior year
quarter primarily as a result of lower operating expenses and higher gross
profits related to gases and hardgoods.
The decrease in Gas Operations' operating profit of $5 million resulted
primarily from divestitures and a decline in margins related to certain
specialty gases as previously discussed under "Gross Profits". Gas
Operations' operating income margin was -1.5% compared to 11.2% in the
prior year quarter. The operating income margin decrease was mainly due to
a decline in specialty gas gross margins and divestitures.
Special charges of $2.8 million primarily consist of an insurance
settlement related to a fiscal 1997 loss.
Interest Expense
Interest expense, net, totaled $13.9 million and represents a decrease
of $1.8 million (11.2%) compared to the prior year quarter. The decrease
in interest expense resulted from a reduction in debt. The decrease in
debt is primarily due to the proceeds from divestitures and the sale-
leaseback of certain equipment. 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 $1.2 million in the current quarter and $24.4
million in the prior year quarter. The prior year quarter includes a $24
million gain from the divestiture of the Company's calcium carbide and
carbon operations.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates of $663 thousand
decreased $2.2 million compared to the prior year quarter primarily as a
result of a $1.8 million gain from insurance proceeds received by an equity
investee, National Welders Supply, in the prior year.
<PAGE> 17
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Tax Expense
Income tax expense represented 42.4% of pre-tax earnings in the
current quarter compared to 39.8% in the prior year quarter. Excluding
taxes on gains related to divestitures and special charges, income tax
expense represented 41.3% of pre-tax earnings for the current quarter
compared to 43.9% in the prior year quarter.
Net Earnings
Net earnings for the quarter ended December 31, 1999 were $9.8
million, or $.14 per diluted share, compared to $22.1 million, or $.31 per
diluted share, in the prior year quarter. Excluding gains related to a
divestiture and an insurance recovery by an equity affiliate, net earnings
in the prior year quarter were $6.1 million, or $.09 per diluted share.
EBITDA
Operating income, excluding special charges, plus depreciation and
amortization ("EBITDA"), was $48.2 million in the current quarter compared
to $47.7 million in the prior year quarter. EBITDA as a percentage of
sales increased to 13% in the current quarter from 12.5% in the prior year
quarter primarily due to lower operating costs.
<PAGE> 18
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE
NINE MONTHS ENDED DECEMBER 31, 1998
INCOME STATEMENT COMMENTARY
Net Sales
Net sales decreased 3.5% for the nine months ended December 31, 1999
("current period") compared to the nine months ended December 31, 1998
("prior year period"). Total same-store sales declined 2.3% in the current
period compared to the prior year period.
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands) December 31,
Net Sales 1999 1998 Decrease
<S> <C> <C> <C> <C>
Distribution $1,032,701 $1,054,384 $(21,683) (2.1%)
Gas Operations 103,515 123,304 (19,789) (16.0%)
$1,136,216 $1,177,688 $(41,472) (3.5%)
</TABLE>
Distribution sales decreased $21.7 million as a result of a same-store
sales decline of $30 million (-2.8%), offset by acquisition and divestiture
activity. The decrease in same-store sales resulted from a $35.1 million (-
5.5%) decline in hardgoods, partially offset by gas and rent same-store
sales growth of $5.1 million (1.2%). The lower hardgoods sales resulted
from the continued slowness in certain manufacturing and industrial markets
including: metal fabrication, oil exploration, agriculture, mining and
shipbuilding. Gas and rent same-store sales growth was primarily
attributable to the Company's expansion of its rental welder fleet and
improvements in certain gas product sales including bulk, refrigerant and
medical gases. Sales of $19 million from fifteen distributor acquisitions
since April 1, 1998 were partially offset by the divestiture of three
businesses during fiscal 1999 which had sales of $10.7 million in the prior
year period.
Gas Operations sales decreased $19.8 million in the current period as
a result of divestitures which had sales of approximately $29 million in
the prior year period, partially offset by sales of $6 million from four
dry ice acquisitions completed since April 1, 1998 and same-store sales
growth of $3.2 million (3.2%). The divestitures primarily consist of the
Company's calcium carbide and carbon operations (December 1998) and the
operations in Poland and Thailand (August 1999). Same-store sales growth
resulted from higher sales volume of dry ice, liquid carbon dioxide and
nitrous oxide.
Gross Profits
Gross profits decreased 2.2% in the current period compared to the prior
year period.
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands) December 31,
Gross Profits 1999 1998 Decrease
<S> <C> <C> <C> <C>
Distribution $477,496 $480,322 $ (2,826) (0.6%)
Gas Operations 59,009 68,005 (8,996) (13.2%)
$536,505 $548,327 $(11,822) (2.2%)
</TABLE>
<PAGE> 19
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The decrease in Distribution gross profits of $2.8 million resulted
from a same-store gross profit decline of $6.4 million (-1.3%), partially
offset by acquisition and divestiture activity. The decline in same-store
gross profits consisted of a decrease in hardgoods gross profits of $10.5
million (-6.1%), partially offset by gas and rent gross profit growth of
$4.1 million (1.3%). The decrease in hardgoods same-store gross profits
resulted primarily from lower sales volumes. Offsetting the same-store
gross profit declines was a net gross profit increase of $3.6 million from
fifteen distributor acquisitions since April 1, 1998 and three divestitures
during fiscal 1999. The overall Distribution gross profit margin of 46.2%
in the current period increased 60 basis points from 45.6% in the prior
year period primarily as a result of a shift in sales mix more heavily
weighted towards higher margin gas and rental revenues and lower costs
resulting from centralized hardgoods purchasing initiatives.
The decrease in Gas Operations gross profits of $9 million resulted
from divestitures that had gross profits of $9.8 million in the prior year
period and an inventory write-down of $3.8 million related to certain
specialty gas inventories. The inventory write-down related to certain
specialty gases that were purchased in prior fiscal years and consisted of
adjustments to reflect changes in market prices and book-to-physical
inventory differences. The scope of the Company's operations related to
such gases has been reduced and is now more focused on supplying specialty
gases exclusively to the Distribution segment. The gross profit decline
was partially offset by gross profits of $3.7 million related to
acquisitions and by same-store gross profit growth of approximately
$900 thousand (1.5%). Excluding the impact of divestitures, the current
period gross profit margin of 57% decreased from 61% in the prior year
period primarily due to the inventory write-down.
Operating Expenses
Selling, distribution and administrative expenses ("operating
expenses") decreased $11.3 million (-2.9%) compared to the prior year
period primarily resulting from cost reductions that were initiated during
the third and fourth quarters of fiscal 1999 and from the elimination of
certain repositioning expenses that were recognized in the prior year. The
Company estimates that cost reductions, including the elimination of
certain repositioning expenses, are favorably impacting operating expenses
by approximately $12 - $15 million during fiscal 2000. The cost reductions
have impacted many areas of the Company's expense structure, including
headcount reductions and administrative cost reductions from the
consolidation of back office functions. As a percentage of net sales,
operating expenses increased 20 basis points to 33.6% compared to the prior
year period. The increase in the ratio of operating expenses relative to
sales was due to the decrease in sales, which was larger than the Company's
reduction of operating expenses.
Depreciation and amortization totaled $67.1 million in the current period
representing an increase of $1.3 million (1.9%) compared to the prior year
period. Depreciation and amortization expense increased primarily as a
result of net acquisition and divestiture activity and capital expenditures
since April 1, 1998. Depreciation and amortization expense relative to
sales was 5.9% for the current period compared to 5.6% in the prior year
period.
Operating Income
Excluding special charges, operating income decreased 2% compared to
the prior year period. The decrease in operating income was primarily due
to lower gross profits from the decline in hardgoods sales, divestitures
and a specialty gas inventory write-down in the Gas Operations segment,
partially offset by a reduction in operating expenses.
<PAGE> 20
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands) December 31,
Operating Income 1999 1998 Increase(Decrease)
<S> <C> <C> <C> <C>
Distribution $79,290 $75,246 $ 4,044 5.4%
Gas Operations 8,288 14,147 (5,859) (41.4%)
Special Charges 2,829 1,000 1,829 183%
$90,407 $90,393 $ 14 --
</TABLE>
The Distribution segment's operating income margin of 7.7% increased
from 7.1% in the prior year period. Gas Operations' operating income
margin of 8% decreased from 11.5% in the prior year period as a result of
divestitures and lower gross margins in the current period.
Special charges of $2.8 million for the nine months ended December 31,
1999 consist primarily of an insurance settlement related to a fiscal 1997
loss. Special charges of $1 million for the nine months ended December 31,
1998 represent adjustments to reflect differences between the original loss
estimates and the actual losses related to the divestiture of two non-core
businesses sold during the first quarter of fiscal 1999.
Interest Expense
Interest expense, net, totaled $42.2 million and represents a decrease
of $4.1 million (-8.8%) compared to the prior year period. The decrease in
interest expense was primarily attributable to a lower average debt balance
and lower interest rates. 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 $16.6 million in the current period and
$25.2 million in the prior year period. The current period includes a $14.9
million gain from the divestiture of operations in Poland and Thailand.
Other income, net, in the prior year period includes a $24 million gain
from the divestiture of the Company's calcium carbide and carbon
operations.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates of $2.4 million
decreased from $4.8 million in the prior year primarily resulting from a
$1.8 million gain from insurance proceeds received in the prior year period
by an equity investee, National Welders Supply. Lower liquid carbon
dioxide joint venture earnings in the current period also contributed to
the decrease in equity earnings compared to the prior year period.
Income Tax Expense
Income tax expense represented 43% of pre-tax earnings in the current
period and 40.9% in the prior year period. Income tax expense, excluding
the taxes related to gains from divestitures and special charges in both
periods, represented 41.5% of pre-tax earnings for the current period
compared to 42.4% in the prior year period.
<PAGE> 21
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Earnings
Net earnings in the current period were $37.8 million, or $.53 per
diluted share, compared to $43.8 million, or $.61 per diluted share, in the
prior year period. Excluding special charges, gains related to divestitures,
an insurance gain recorded by an equity affiliate and a charge from a change
in accounting, net earnings in the current period were $29.1 million, or
$.41 per diluted share, compared to $27.3 million, or $.38 per diluted
share in the prior period.
EBITDA
Operating income, excluding special charges, plus depreciation and
amortization ("EBITDA"), was $154.7 million in the current period compared
to $155.2 million in the prior year period. EBITDA as a percentage of
sales increased to 13.6% compared to 13.2% in the prior year period
primarily due to cost reductions.
<PAGE> 22
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 $83.9 million for the
nine months ended December 31, 1999. Adjustments to reconcile net income
to net cash provided by operating activities included depreciation and
amortization of $67.1 million and deferred income taxes of $11 million from
temporary differences, offset by a $14.9 million gain on the divestiture of
operations in Poland and Thailand. Additionally, cash flows from working
capital components decreased $14.3 million largely as a result of a
decrease in accounts payable of $17.1 million related to the timing of
payments to vendors. Accounts receivable provided cash of $4.9 million.
Account receivables days' sales outstanding increased to 50 days from 47
days at March 31, 1999. Inventories used cash of $1.1 million with
hardgoods days' supply of inventory increasing to 92 days from 77 days at
March 31, 1999. The increase in hardgoods days' supply of inventory is
primarily due to an increase in safety and welding product inventories in
connection with centralized purchasing and distribution.
After-tax cash flow (net earnings, excluding certain gains and
charges, plus depreciation, amortization and deferred income taxes)
increased 7% to $108.5 million compared to $101.6 million in the prior year
period.
Cash provided by investing activities totaled $11.1 million during the
nine months ended December 31, 1999. Activities that used cash during the
period primarily included capital expenditures of $47.6 million and four
distributor acquisitions totaling $24.2 million. Fixed asset sales
provided cash of $35.6 million and primarily included equipment sold in
connection with a sale-leaseback transaction. The divestitures of certain
foreign operations provided cash of $46.6 million.
Capital expenditures during the current period totaled $47.6 million
and were 42% lower compared to the prior year period. Capital expenditures
associated with the purchase of cylinders, bulk tanks, rental welders and
machinery and equipment totaled approximately $32 million or 67% of the
total capital expenditures during the current period. Management continues
to focus on improving asset utilization and believes that fiscal 2000
capital spending will total less than $70 million.
Financing activities used cash of $95 million primarily for the
repayment of debt and the repurchase of the Company's Common Stock.
Additionally, the cash overdraft, the float of the Company's outstanding
checks, decreased by $5.4 million since March 31, 1999.
The Company will continue to look for appropriate acquisitions of
distributors. Future acquisitions and capital expenditures are expected to
be funded through cash flows from operations, debt, Common Stock for
certain acquisitions, funds from the divestiture of certain businesses and
other available sources. The Company believes that its sources of
financing are adequate for its anticipated needs and that it could arrange
additional sources of financing for unanticipated requirements. The cost
and terms of any future financing arrangement will depend on the market
conditions and the Company's financial position at that time.
The Company does not currently pay dividends.
<PAGE> 23
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$69 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 December 31, 1999, the Company had borrowings under the credit agreement
of approximately $478 million and $45 million Canadian (US$31million). The
Company also had commitments under letters of credit supported by the
credit agreement of approximately $58 million. Availability under the
credit facilities was approximately $228 million at December 31, 1999 (the
availability was reduced by approximately $70 million in connection with
the January 21, 2000 acquisition of Mallinckrodt Inc.'s Puritan-Bennett
medical gas business). At December 31, 1999, the effective interest rate
on borrowings under the credit facilities averaged 6.70% (6.79% on U.S.
borrowings and 5.35% on Canadian borrowings).
At December 31, 1999, the Company had the following long-term debt
outstanding under medium-term notes: $50 million of unsecured notes due
September 2001 bearing interest at a fixed rate of 7.15%; $75 million of
unsecured notes due March 2004 bearing interest at a fixed rate of 7.14%;
and $100 million of unsecured notes due September 2006 bearing interest at
a fixed rate of 7.75%. Additionally, at December 31, 1999, long-term debt
of the Company included acquisition notes and other long-term debt
instruments of approximately $70 million with interest rates ranging from
6% to 9.5%. The Company also has a shelf registration statement which is
currently effective under applicable federal securities laws and may be
used to issue debt and other types of securities up to an aggregate of
approximately $175 million.
In managing interest rate exposure, principally under the Company's
floating rate revolving credit facilities, the Company participates in 25
interest rate swap agreements. The swap agreements are with major
financial institutions and aggregate $608 million in notional principal
amount at December 31, 1999. Eighteen swap agreements with approximately
$371 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. Seven swap agreements with $237 million in
notional principal amount require variable interest payments based on an
average rate of 5.57% at December 31, 1999. Under the terms of five swap
agreements, the Company has elected to receive the discounted value of the
counterparties' interest payments up-front. At December 31, 1999,
approximately $5.6 million of such payments were included in other non-
current liabilities. The Company monitors its positions and the credit
ratings of its counterparties, and does not anticipate non-performance by
the counterparties.
Share Repurchase Program
In March 1999, the Company's Board of Directors authorized the
repurchase of up to seven million shares of the Company's outstanding
Common Stock. The shares may be repurchased in the open market or in
privately negotiated transactions depending on market conditions and other
factors. The Company has financed its repurchase programs with borrowings
and funds provided by operating activities. During the nine months ended
December 31, 1999, the Company repurchased 2.3 million shares at an average
cost of $10.65 per share, including 175 thousand shares to complete a
previous repurchase program. The effect of the share repurchases on
earnings per share for the three and nine month periods ended December 31,
1999 was not material. From January 1, 2000 through February 4, 2000, the
Company repurchased approximately 330 thousand shares at an average cost of
$8.26 per share. As of February 4, 2000, the remaining shares authorized
for repurchase under the repurchase program totaled approximately 4.5
million shares.
Employee Benefits Trust
On February 11, 2000, the Employee Benefits Trust purchased approximately
1.4 million shares of Common Stock from the Company at fair market value.
<PAGE> 24
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE YEAR 2000 MATTER
The "Year 2000" matter related to whether computer hardware and
software and equipment would properly recognize date sensitive information
referring to the Year 2000. Prior to December 31, 1999, the Company
undertook various remediation measures to address its state of readiness
with regard to the Year 2000 issue. Such measures included evaluating and
testing computer systems and equipment for Year 2000 compliance, contacting
significant suppliers, customers and other critical business partners to
assess their readiness plans, and developing contingency plans for key
administrative and supply chain functions. To date during calendar year
2000, the Company has not experienced any significant Year 2000 problems
with its information systems hardware, application software, equipment or
operating systems. The Company also has not experienced any significant
Year 2000 complications related to any of its key suppliers, customers or
other business partners. Since latent Year 2000 related problems may arise
in the future, the Company will continue to monitor the Year 2000
compliance of its operating systems and equipment. Accordingly, there can
be no assurance that the Company and its suppliers, customers or business
partners will not experience significant Year 2000 problems in the future.
Forward-looking Statements
This report contains statements that are forward-looking, as that term
is defined by the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in rules, regulations and releases. The
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. All forward-looking statements are based on
current expectations regarding important risk factors, and the making of
such statements should not be regarded as a representation by the Company
or any other person that the results expressed therein will be achieved.
Important factors that could cause actual results to differ materially from
those contained in any forward-looking statement include, but are not
limited to, underlying market conditions, growth in same-store sales, the
Company's ability to reduce costs and capital spending, the Company's
efforts to improve asset utilization, implementation and standardization of
information systems projects, any potential problems relating to Year 2000
matters (including without limitation, those relating to latent Year 2000
problems that may affect the Company in the future, unanticipated
remediation costs, and the adequate resolution of any Year 2000 problems
experienced by significant vendors, suppliers, customers and other similar
third parties), the success and timing of acquisitions and divestitures,
the effects of competition from independent distributors and vertically
integrated gas producers on products and pricing, growth and acceptance of
new product lines through the Company's sales and marketing programs,
changes in product prices from gas producers and name-brand manufacturers
and suppliers of hardgoods, uncertainties regarding accidents or litigation
which arise in the ordinary course of business and the effects of, and
changes in the economy, monetary and fiscal policies, laws and regulations,
inflation and monetary fluctuations and fluctuations in interest rates,
both on a national and international basis. The Company does not undertake
to update any forward-looking statement made herein or that may be made
from time to time by or on behalf of the Company.
<PAGE> 25
Item 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 December 31, 1999, the
ratio of fixed versus floating debt was 50% -50%. 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 December 31, 1999.
For long-term debt obligations, the table presents cash flows related to
payments of principal and interest by expected fiscal year of maturity.
For interest rate swaps, the table presents the notional amounts underlying
the interest rate swaps by year of maturity. The notional amounts are used
to calculate contractual payments to be exchanged and are not actually paid
or received. Fair values were 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> 26
<TABLE>
<CAPTION>
Expected Fiscal Year of Maturity
__________________________________________________________________________________
(In millions) Fair
Fixed Rate Debt: 2000 2001 2002 2003 2004 2005 Thereafter Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medium-term notes $ -- $ -- $ 50 $ -- $ 75 $ -- $100 $225 $205
Interest expense $ 4 $ 17 $ 15 $ 13 $ 13 $ 8 $ 11 $ 81
Average interest rate 7.41% 7.41% 7.42% 7.49% 7.49% 7.75% 7.75%
Acquisition notes $ 1 $ 13 $ 19 $ 2 $ 20 $ -- $ 3 $ 58 $ 55
Interest expense $ 1 $ 4 $ 3 $ 2 $ 2 $ -- $ -- $ 12
Average interest rate 7.45% 7.45% 7.45% 7.45% 7.45% 7.45% 7.45%
Other notes $ -- $ 1 $ 1 $ 1 $ -- $ -- $ -- $ 3 $ 3
Average interest rate 7.55% 7.55% 7.55% 7.55%
Variable Rate Debt:
Revolving credit facilities $ -- $ -- $ -- $509 $ -- $ -- $ -- $509 $509
Interest expense $ 34 $ 34 $ 34 $ 34 $ -- $ -- $ -- $136
Interest rate (a) 6.70% 6.70% 6.70% 6.70%
Other notes $ -- $ -- $ 7 $ -- $ -- $ 1 $ -- $ 8 $ 8
Average interest rate 9.22% 9.22% 9.00% 7.27% 7.27% 7.27%
US denominated Swaps:
15 Swaps Receive
Variable/Pay Fixed $ 5 $ 55 $170 $ 93 $ -- $ 40 $ -- $363 $ (5)
Variable Receive rate
(3 month LIBOR)= 6.12%
Weighted average
pay rate = 6.32%
7 Swaps Receive
Fixed/Pay Variable $ 57 $ 50 $ 50 $ -- $ 30 $ -- $ 50 $237 $ --
Weighted average
receive rate = 6.60%
Variable pay rate
(6 month LIBOR)=5.57%
Canadian $ denominated Swaps:
3 Swaps Receive
Variable/Pay Fixed $ 3 $ 3 $ 2 $ -- $ -- $ -- $ -- $ 8 $ --
Variable Receive rate
(3 month CAD BA) = 4.91% (b)
Weighted average
pay rate = 6.66%
Other LIBOR based agreements:
Operating leases with trust $ -- $ 1 $ 1 $ 1 $ 44 $ -- $ -- $ 47 $ 47
Variable rate
(3 month LIBOR plus
130 basis points = 7.42%
<PAGE> 27
(a) The variable rate of long-term debt obligations is based on the London
Interbank Offered Rate ("LIBOR") as of December 31, 1999. For future
periods, the variable interest rate is assumed to remain at 6.70% with the
principal balance of long-term debt obligations held constant at $509
million. However, the variable rate and borrowing levels of long-term debt
may fluctuate materially from those presented above.
(b) The variable receive rate for Canadian dollar denominated interest
rate swaps is the rate on Canadian Bankers' acceptances ("CAD BA").
</TABLE>
Limitations of the tabular presentation
As the table incorporates only those interest rate risk exposures that
exist as of December 31, 1999, it does not consider those exposures or
positions that could arise after that date. In addition, actual cash flows
of financial instruments in future periods may differ materially from
prospective cash flows presented in the table due to future fluctuations in
variable interest rates and Company debt levels.
Foreign Currency Rate Risk
Certain subsidiaries of the Company are located in foreign countries.
The Company does not hedge its exposure to translation gains and losses
relating to foreign currency net asset exposures. The Company considers
its exposure to foreign currency exchange fluctuations to be immaterial to
its consolidated results of operations.
<PAGE> 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding certain litigation, reference is made to the
Company's Form 10-Q for the quarter ended June 30, 1999, which is incorporated
herein by reference.
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 Schedules as of December 31, 1999 and 1998
b. Reports on Form 8-K
On November 1, 1999, the Company filed a Form 8-K pursuant to Item 5,
reporting its earnings for the second quarter and six months ended
September 30, 1999.
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Airgas, Inc.
(Registrant)
Date: February 11, 2000 /s/ Roger F. Millay
Roger F. Millay
Senior Vice President and
Chief Financial Officer
<TABLE>
EXHIBIT 11
AIRGAS, INC.
EARNINGS PER SHARE CALCULATIONS
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
(In thousands, except per share amounts) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding:
Basic shares outstanding 69,200 69,700 69,600 70,000
Stock options - incremental shares 1,000 1,300 1,100 1,500
Contingently issuable shares 600 600 300 200
Diluted shares outstanding 70,800 71,600 71,000 71,700
Net earnings $ 9,760 $22,088 $37,757 $43,843
Basic earnings per share $ .14 $ .32 $ .54 $ .63
Diluted earnings per share $ .14 $ .31 $ .53 $ .61
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 199,794
<ALLOWANCES> 6,507
<INVENTORY> 158,095
<CURRENT-ASSETS> 382,712
<PP&E> 1,020,721
<DEPRECIATION> 311,277
<TOTAL-ASSETS> 1,650,056
<CURRENT-LIABILITIES> 173,029
<BONDS> 801,022
<COMMON> 731
0
0
<OTHER-SE> 490,791
<TOTAL-LIABILITY-AND-EQUITY> 1,650,056
<SALES> 1,136,216
<TOTAL-REVENUES> 1,136,216
<CGS> 599,711
<TOTAL-COSTS> 1,045,809
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,167
<INCOME-PRETAX> 67,267
<INCOME-TAX> 28,920
<INCOME-CONTINUING> 38,347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (590)
<NET-INCOME> 37,757
<EPS-BASIC> .54
<EPS-DILUTED> .53
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 198,084
<ALLOWANCES> 5,955
<INVENTORY> 164,471
<CURRENT-ASSETS> 387,785
<PP&E> 981,993
<DEPRECIATION> 265,431
<TOTAL-ASSETS> 1,710,872
<CURRENT-LIABILITIES> 224,141
<BONDS> 861,554
<COMMON> 718
0
0
<OTHER-SE> 462,367
<TOTAL-LIABILITY-AND-EQUITY> 1,710,872
<SALES> 1,177,688
<TOTAL-REVENUES> 1,177,688
<CGS> 629,361
<TOTAL-COSTS> 1,087,295
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,227
<INCOME-PRETAX> 74,193
<INCOME-TAX> 30,350
<INCOME-CONTINUING> 43,843
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,843
<EPS-BASIC> .63
<EPS-DILUTED> .61
</TABLE>
