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, 2001
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 8, 2001: 69,241,743 shares
1
AIRGAS, INC.
FORM 10-Q
September 30, 2001
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings for the
Three and Six Months Ended September 30, 2001 and 2000 (Unaudited).... 3
Consolidated Balance Sheets as of
September 30, 2001 (Unaudited) and March 31, 2001..................... 4
Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 2001 and 2000 (Unaudited).............. 5
Notes to Consolidated Financial Statements (Unaudited)................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 38
Item 2. Changes in Securities and Use of Proceeds......................... 38
Item 4. Submission of Matters to a Vote of Security Holders............... 39
Item 6. Exhibits and Reports on Form 8-K.................................. 40
SIGNATURES................................................................. 41
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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,
2001 2000 2001 2000
------------------ -------------------
NET SALES
Distribution $372,345 $371,059 $750,659 $745,798
Gas Operations 39,637 39,038 76,998 73,297
------- ------- ------- -------
Total net sales 411,982 410,097 827,657 819,095
------- ------- ------- -------
COSTS AND EXPENSES
Cost of products sold (excluding
depreciation)
Distribution 193,850 198,650 392,753 401,399
Gas Operations 14,210 14,437 27,530 26,884
Selling, distribution and
administrative expenses 151,235 141,653 303,954 281,668
Depreciation 15,774 15,990 31,446 32,314
Amortization 2,074 6,321 4,351 12,741
------- ------- ------- -------
Total costs and expenses 377,143 377,051 760,034 755,006
------- ------- ------- -------
OPERATING INCOME
Distribution 27,787 26,598 54,358 52,723
Gas Operations 7,052 6,448 13,265 11,366
------- ------- ------- -------
Total operating income 34,839 33,046 67,623 64,089
Interest expense, net (11,850) (16,306) (22,763) (32,071)
Discount on securitization of
trade receivables (1,492) -- (2,984) --
Other income (expense), net 15 405 (178) 457
Equity in earnings of unconsolidated
affiliates 1,317 487 2,230 1,851
------- ------- ------- -------
Earnings before income taxes and
the cumulative effect of a change
in accounting principle 22,829 17,632 43,928 34,326
Income taxes 8,276 7,229 15,924 14,107
------- ------- ------- -------
Earnings before the cumulative
effect of a change in accounting
principle 14,553 10,403 28,004 20,219
Cumulative effect of a change in
accounting principle -- -- (59,000) --
------- ------- ------- -------
NET EARNINGS (LOSS) $ 14,553 $ 10,403 $(30,996) $ 20,219
======= ======= ======= =======
Basic earnings per share:
Earnings per share before the
cumulative effect of a change in
accounting principle $ .21 $ .16 $ .41 $ .31
Cumulative effect per share of a
change in accounting principle -- -- (.87) --
------- ------- ------- -------
Net earnings (loss) per share $ .21 $ .16 $ (.46) $ .31
======= ======= ======= =======
Diluted earnings per share:
Earnings per share before the
cumulative effect of a change in
accounting principle $ .21 $ .16 $ .41 $ .30
Cumulative effect per share of a
change in accounting principle -- -- (.87) --
------- ------- ------- -------
Net earnings (loss) per share $ .21 $ .16 $ (.46) $ .30
======= ======= ======= =======
Weighted average shares outstanding:
Basic 67,900 65,400 67,600 65,200
======= ======= ======= =======
Diluted 69,500 66,600 68,900 66,900
======= ======= ======= =======
Comprehensive income $ 13,035 $ 10,360 $(36,233) $ 20,032
======= ======= ======= =======
See accompanying notes to consolidated financial statements, including Note 2 containing
pro forma amounts assuming the retroactive application of the change in accounting principle.
3
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
September 30, March 31,
2001 2001
------------- ---------
ASSETS
Current Assets
Trade receivables, less allowances for doubtful
accounts of $8,857 at September 30, 2001 and
$7,402 at March 31, 2001 $ 82,949 $ 143,129
Inventories, net 148,766 155,024
Deferred income tax asset, net 10,394 10,143
Prepaid expenses and other current assets 18,933 25,549
--------- ---------
Total current assets 261,042 333,845
--------- ---------
Plant and equipment, at cost 1,098,830 1,073,252
Less accumulated depreciation (396,547) (368,606)
--------- ---------
Plant and equipment, net 702,283 704,646
Goodwill 387,767 440,057
Other intangible assets, net 25,725 29,668
Investments in unconsolidated affiliates 64,067 63,262
Other non-current assets 29,729 9,812
--------- ---------
Total assets $1,470,613 $1,581,290
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 70,441 $ 76,337
Accrued expenses and other current liabilities 114,058 130,873
Current portion of long-term debt 8,023 72,945
--------- ---------
Total current liabilities 192,522 280,155
--------- ---------
Long-term debt 603,111 620,664
Deferred income taxes, net 164,422 161,176
Other non-current liabilities 42,754 22,446
Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, no par value, 20,000 shares
authorized, no shares issued or outstanding
at September 30, 2001 and March 31, 2001 -- --
Common stock, par value $.01 per share, 200,000 shares
authorized, 74,785 and 74,361 shares issued at
September 30, 2001 and March 31, 2001, respectively 748 744
Capital in excess of par value 190,873 188,629
Retained earnings 324,600 355,596
Accumulated other comprehensive loss (6,390) (1,153)
Treasury stock, 547 and 516 common shares at cost at
September 30, 2001 and March 31, 2001, respectively (4,289) (3,982)
Employee benefits trust, 5,005 and 5,701 common shares
at cost at September 30, 2001 and
March 31, 2001, respectively (37,738) (42,985)
--------- ---------
Total stockholders' equity 467,804 496,849
--------- ---------
Total liabilities and stockholders' equity $1,470,613 $1,581,290
========= =========
See accompanying notes to consolidated financial statements.
4
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended Six Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (30,996) $ 20,219
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 35,797 45,055
Deferred income taxes 5,400 6,900
Equity in earnings of unconsolidated affiliates (2,230) (1,851)
Gain on divestitures -- (526)
Gains on sales of plant and equipment (120) (58)
Stock issued for employee stock purchase plan 3,465 2,800
Cumulative effect of a change in accounting
principle 59,000 --
Other non-cash charges 963 --
Changes in assets and liabilities, excluding
effects of business acquisitions and divestitures:
Securitization of trade receivables 66,000 --
Trade receivables, net (5,820) (8,372)
Inventories, net 7,473 (1,944)
Prepaid expenses and other current assets 6,127 1,740
Accounts payable, trade (5,896) (10,651)
Accrued expenses and other current liabilities (3,399) 1,200
Other assets and liabilities, net (288) (3,859)
------- -------
Net cash provided by operating activities 135,476 50,653
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (28,324) (30,959)
Proceeds from sales of plant and equipment 2,170 1,346
Proceeds from divestitures -- 7,000
Business acquisitions, net of cash acquired -- (1,839)
Business acquisitions, holdback settlements -- (1,878)
Dividends and fees from unconsolidated affiliates 1,528 1,487
Other, net 537 2,302
------- -------
Net cash used in investing activities (24,089) (22,541)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 368,628 62,000
Repayment of debt (460,920) (75,232)
Purchase of treasury stock -- (11,214)
Financing costs (8,753) --
Proceeds from exercise of stock options 1,739 837
Cash overdraft (12,081) (4,503)
------- -------
Net cash used in financing activities (111,387) (28,112)
------- -------
Change in Cash $ -- $ --
Cash - beginning of period -- --
------- -------
Cash - end of period $ -- $ --
======= =======
Cash paid during the period for:
Interest $ 24,768 $ 32,985
Income taxes, net of refunds $ 16,904 $ 1,315
See accompanying notes to consolidated financial statements.
5
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. Prior to the adoption of Statement of Financial Accounting
Standards No. 142 as of April 1, 2001 (see Note 2), the excess of the
cost of these affiliates over the Company's share of their net assets
at the acquisition date was being amortized over 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, 2001.
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 accounting changes, 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 CHANGES
------------------
SFAS 133
On April 1, 2001, the Company adopted the Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Certain
Hedging Activities, as amended by SFAS No. 137 and 138. SFAS 133
requires all derivatives to be recorded on the balance sheet at fair
value. In accordance with the transition provisions of SFAS 133, on
April 1, 2001, the Company recorded the cumulative effect of this
accounting change as a liability and a deferred loss of $6.7 million in
the accumulated other comprehensive income (loss) component of
stockholder's equity to recognize, at fair value, interest rate swap
agreements that are designated as cash-flow hedging instruments.
Additionally, the Company recorded an asset and adjusted the carrying
value of the hedged portion of its fixed rate debt by $6 million to
recognize, at fair value, interest rate swap agreements that are
designated as fair value hedging instruments.
SFAS 141
Effective July 1, 2001, the Company adopted SFAS No. 141, Business
Combinations. SFAS 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001.
The adoption of SFAS 141 did not have an impact on the results of
operations, financial position and liquidity of the Company.
6
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) ACCOUNTING CHANGES - (Continued)
------------------
SFAS 142
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. As allowed under the Standard, the Company has
adopted SFAS 142 retroactively to April 1, 2001. SFAS 142 requires
goodwill and intangible assets with indefinite useful lives to no
longer be amortized, but instead be tested for impairment at least
annually.
With the adoption of SFAS 142, the Company reassessed the useful
lives and residual values of all acquired intangible assets to make any
necessary amortization period adjustments. Based on that assessment,
no adjustments were made to the amortization period or residual values
of other intangible assets. Additionally, certain reclassifications
were made to previously issued financial statements to conform to the
presentation required by SFAS 142 (see Note 10).
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
SFAS 142 provides a six-month transitional period from the
effective date of adoption for the Company to perform an assessment of
whether there is an indication that goodwill is impaired. To the
extent that an indication of impairment exists, the Company must
perform a second test to measure the amount of the impairment. The
Company determined the fair value of each of its reporting units using
a discounted cash flow analysis and compared such values to the
respective reporting units' carrying amounts. This evaluation
indicated that goodwill recorded in the Distribution segment associated
with its industrial tool distribution company, Rutland Tool, was
impaired as of April 1, 2001. Conditions that contributed to the
goodwill impairment at Rutland included the deterioration of the
industrial and machine tool markets since its acquisition and
difficulty in achieving expected cross-selling synergies. The
resulting business performance made it difficult to justify further
investment to achieve the growth originally forecast for the business.
Accordingly, the Company recognized a $59 million non-cash charge,
recorded as of April 1, 2001, as the cumulative effect of a change in
accounting principle for the write-down of goodwill to its fair value.
The impaired goodwill was not deductible for taxes, and as a result, no
tax benefit was recorded in relation to the charge.
Below represents the pro forma amounts, excluding the cumulative
effect of a change in accounting principle of $59 million, or $.87 per
share, assuming that the application of the change in accounting
principle was applied retroactively (Note 10):
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
------------------ -----------------
Net earnings $14,553 $13,947 $28,004 $27,323
====== ====== ====== ======
Basic earnings per share $ .21 $ .21 $ .41 $ .42
====== ====== ====== ======
Diluted earnings per $ .21 $ .21 $ .41 $ .41
====== ====== ====== ======
7
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) ACQUISITIONS AND DIVESTITURES
-----------------------------
On September 29, 2001, the Company acquired six retail distributor
locations from Air Liquide America Corporation ("Air Liquide"). The
purchase price of $11 million was paid to Air Liquide on October 1,
2001 and resulted in goodwill of approximately $7 million. The
operations have annual sales of approximately $10 million and
distribute packaged gases and welding hardgoods in the southwestern
portion of the United States. Pro forma results are not considered
material.
In October 2001, in a separate transaction, the Company sold two
of its nitrous oxide production facilities to Air Liquide. After-tax
proceeds from the sale of approximately $10 million will be used to
reduce borrowings under the Company's revolving credit facilities. The
Company expects to recognize a gain on the transaction in its fiscal
2002 third quarter. The nitrous oxide facilities generated
approximately $7 million in annual sales. The Company has retained its
remaining four nitrous oxide production facilities to meet its
requirements as a major producer and distributor of nitrous oxide.
(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, warrants 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, 2001 and 2000:
Three Months Ended Six Months Ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
------------------ ----------------
Weighted average common shares
outstanding:
Basic 67,900 65,400 67,600 65,200
Stock options and warrants 1,600 400 1,300 400
Contingently issuable shares -- 800 -- 1,300
------ ------ ------ ------
Diluted 69,500 66,600 68,900 66,900
====== ====== ====== ======
Contingently issuable shares represented the issuance of Company
common stock in connection with a prior year acquisition.
8
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) TRADE RECEIVABLES SECURITIZATION
--------------------------------
In December 2000, the Company entered into a three-year
securitization agreement with two commercial banks to sell up to $150
million of certain qualifying trade receivables. As collections reduce
the previously sold interests, new receivables may be sold up to $150
million. During the six months ended September 30, 2001, the Company
sold, net of its retained interest, $894 million of trade receivables
and remitted to the bank conduits, pursuant to a servicing agreement,
$754.8 million in collections on those receivables. The net proceeds
were used to reduce borrowings under the Company's revolving credit
facilities. The amount of outstanding receivables under the agreement
was $139.2 million at September 30, 2001 and $73.2 million at March 31,
2001.
The transaction has been accounted for as a sale under the
provisions of SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. Under the
securitization agreement, eligible trade receivables are sold to bank
conduits through a bankruptcy-remote special purpose entity, which is
consolidated for financial reporting purposes. The difference between
the proceeds from the sale and the carrying value of the receivables is
recognized as "Discount on securitization of trade receivables" in the
accompanying Consolidated Statements of Earnings and varies on a
monthly basis depending on the amount of receivables sold and market
rates. The Company retains a subordinated interest in the receivables
sold, which is recorded at the receivables' previous carrying value. A
subordinated retained interest of approximately $45 million and $26
million is included in "Trade receivables" in the accompanying
Consolidated Balance Sheets at September 30, 2001 and March 31, 2001,
respectively. In accordance with a servicing agreement, the Company
will continue to service, administer and collect the trade receivables
on behalf of the bank conduits. The servicing fees charged to the bank
conduits approximate the costs of collections.
(6) INVENTORIES
-----------
Inventories consist of:
(Unaudited)
September 30, March 31,
(In thousands) 2001 2001
------------- ---------
Finished goods $148,226 $154,385
Raw materials 540 639
------- -------
$148,766 $155,024
======= =======
Net inventories determined by the LIFO inventory method totaled
$14.9 million and $19.1 million at September 30, 2001 and March 31,
2001, respectively. If the FIFO inventory method had been used for
these inventories, they would have been $1.4 million and $1.5 million
higher at September 30, 2001 and March 31, 2001, respectively.
9
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
----------------------------------------------
Accrued expenses and other current liabilities include:
(Unaudited)
September 30, March 31,
(In thousands) 2001 2001
------------- ---------
Cash overdraft $ 12,364 $ 24,445
Accrued payroll and employee benefits 23,754 24,989
Insurance reserves 19,330 15,596
Restructuring reserves 4,198 5,157
Other accrued expenses and current
liabilities 54,412 60,686
------- -------
$114,058 $130,873
======= =======
The cash overdraft is attributable to the float of the Company's
outstanding checks. The restructuring reserves were established in
conjunction with the cost reduction plan initiated in the fourth
quarter of fiscal 2001. The decrease in the restructuring reserves is
due to cash payments related to severance paid to employees and the
exiting of facilities.
(8) DEBT REFINANCING AND NOTE ISSUANCE
----------------------------------
On July 30, 2001, the Company refinanced its existing revolving
credit facilities due December 5, 2002 with new bank credit facilities
(the "new credit facilities") under a credit agreement with a syndicate
of lenders. The new credit facilities consist of revolving credit
facilities totaling $367.5 million and $50 million Canadian (US $32
million), including letters of credit. The new credit facilities will
mature on July 30, 2006. At September 30, 2001, the Company had
borrowings under the new credit facilities of approximately $137
million and $42 million Canadian (US $26 million). The Company also
had commitments under letters of credit supported by the new credit
facilities of approximately $44 million. Based on restrictions related
to certain leverage ratios, the Company had additional borrowing
capacity under the new credit facilities of approximately $120 million
at September 30, 2001. The variable interest rates of the U.S. and
Canadian revolving credit facilities are based on LIBOR and Canadian
Bankers' acceptance rates, respectively. At September 30, 2001, the
effective interest rates on borrowings under the new credit facilities
were 4.98% on U.S. borrowings and 4.07% on Canadian borrowings.
Borrowings under the new credit facilities are guaranteed by certain of
the Company's domestic subsidiaries and Canadian borrowings are also
guaranteed by Canadian subsidiaries. Should the Company's long-term
senior unsecured debt ratings be reduced by one level, the Company will
be required to pledge 100% of the stock of the domestic guarantors and
65% of the stock of the Canadian guarantors for the benefit of the
syndicate of lenders. If the Company's long-term senior unsecured debt
ratings are reduced by two or more levels, the Company will be required
to grant a security interest in substantially all of the tangible and
intangible assets of the Company for the benefit of the syndicate of
lenders. The new credit facilities also contain covenants, which
include the maintenance of certain leverage ratios, a fixed charge
ratio, and restrictions on certain additional borrowings, the payment
of dividends and the repurchase of common stock.
10
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) DEBT REFINANCING AND NOTE ISSUANCE - (Continued)
----------------------------------
On July 30, 2001, concurrent with the refinancing of its revolving
credit facilities, the Company issued $225 million of senior
subordinated notes (the "Notes") with a maturity date of October 1,
2011. The Notes bear interest at a fixed annual rate of 9.125%,
payable semi-annually on April 1 and October 1 of each year. The Notes
were sold in accordance with the provisions of Rule 144A of the
Securities Act of 1933 (the "Securities Act"). Subsequent to September
30, 2001, the Company exchanged the Notes for substantially similar
notes that are registered with the Securities and Exchange Commission
in accordance with the Securities Act. The notes contain covenants
that restrict the payment of dividends, the issuance of preferred
stock, and the incurrence of additional indebtedness and liens. The
notes are guaranteed on a subordinated basis by each of the domestic
guarantors under the new credit facilities (see Note 14).
(9) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
---------------------------------------------
The Company's involvement with derivative instruments is limited
to highly effective fixed and floating interest rate swap agreements
used to manage well-defined interest rate risk exposures. Interest
rate swap agreements are not entered into for trading purposes.
At September 30, 2001, the Company had a notional amount of $230
million in fixed interest rate swap agreements that effectively convert
a corresponding amount of variable interest rate borrowings under the
revolving credit facilities and operating leases to fixed interest rate
instruments. The scheduled maturities of these cash flow hedging
instruments are fiscal 2002, $62 million; fiscal 2003, $128 million;
and fiscal 2005, $40 million. Through September 30, 2001, the Company
has recorded the change in fair value of the fixed interest rate swap
agreements of $1.3 million to accumulated other comprehensive income
(loss). The net additional interest payments made under these swap
agreements during the quarter were recognized in interest expense.
Over the next 12 months, the Company expects to reclassify
approximately $6.1 million of the deferred loss from accumulated other
comprehensive income (loss) to interest expense as payments under the
swap agreements mature.
In connection with the issuance of the senior subordinated notes,
the Company entered into two variable interest rate swap agreements
with a total notional amount of $75 million. At September 30, 2001,
the Company also had a notional amount of $155 million in variable
interest rate swap agreements that effectively converts a corresponding
amount of fixed rate Medium Term Notes to variable rate debt. The fair
value of these variable interest rate swap agreements and the adjusted
carrying value of the hedged portion of the Medium Term Notes at
September 30, 2001 was $9.8 million. There is no ineffectiveness
associated with the Company's variable interest rate swap agreements,
and therefore, changes in the fair value of the swap agreements are
completely offset by changes in the fair value of the hedged portion of
the Medium Term Notes.
11
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) GOODWILL AND OTHER INTANGIBLE ASSETS
------------------------------------
As described in Note 2, the Company adopted SFAS 142 as of April 1,
2001. The following table reconciles the prior year's reported
operating income, equity in earnings of unconsolidated affiliates,
earnings before the cumulative effect of a change in accounting
principle and net income to their respective pro forma balances
adjusted to exclude goodwill amortization expense which is no longer
amortized under the provisions of SFAS 142. Current period results,
adjusted for a cumulative effect of a change in accounting principle,
are presented for comparative purposes.
Three Months Ended Six Months Ended
September 30, September 30,
(In thousands, except per share amounts) 2001 2000 2001 2000
------------------ -----------------
OPERATING INCOME:
Distribution segment $27,787 $26,598 $54,358 $52,723
Gas Operations segment 7,052 6,448 13,265 11,366
------ ------ ------ ------
Total reported operating income 34,839 33,046 67,623 64,089
------ ------ ------ ------
Add back: Distribution goodwill amortization -- 3,032 -- 6,117
Add back: Gas Operations goodwill amortization -- 534 -- 1,067
------ ------ ------ ------
Add back: Total goodwill amortization -- 3,566 -- 7,184
------ ------ ------ ------
Adjusted Distribution operating income 27,787 29,630 54,358 58,840
Adjusted Gas Operations operating income 7,052 6,982 13,265 12,433
------ ------ ------ ------
Adjusted total operating income $34,839 $36,612 $67,623 $71,273
====== ====== ====== ======
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES:
Reported equity in earnings of unconsolidated affiliates $ 1,317 $ 487 $ 2,230 $ 1,851
Add back: equity method goodwill amortization -- 426 -- 852
------ ------ ------ ------
Adjusted equity in earnings of unconsolidated affiliates $ 1,317 $ 913 $ 2,230 $ 2,703
====== ====== ====== ======
EARNINGS BEFORE THE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE:
Reported earnings before the cumulative effect of a
change in accounting principle $14,553 $10,403 $28,004 $20,219
Add back: goodwill amortization after-tax -- 3,544 -- 7,104
------ ------ ------ ------
Reported earnings before the cumulative effect of a
change in accounting principle $14,553 $13,947 $28,004 $27,323
====== ====== ====== ======
NET INCOME:
Reported net income (loss) $14,553 $10,403 $(30,996) $20,219
Add back: goodwill amortization after-tax -- 3,544 -- 7,104
Cumulative effect of a change in accounting principle -- -- 59,000 --
------ ------ ------ ------
Adjusted net income $14,553 $13,947 $ 28,004 $27,323
====== ====== ====== ======
BASIC EARNINGS PER SHARE:
Reported net income (loss) $ .21 $ .16 $ (.46) $ .31
Goodwill amortization after-tax -- .05 -- .11
Cumulative effect of a change in accounting principle -- -- .87 --
------ ------ ------ ------
Adjusted net income $ .21 $ .21 $ .41 $ .42
====== ====== ====== ======
DILUTED EARNINGS PER SHARE:
Reported net income (loss) $ .21 $ .16 $ (.46) $ .30
Goodwill amortization after-tax -- .05 -- .11
Cumulative effect of a change in accounting principle -- -- .87 --
------ ------ ------ ------
Adjusted net income $ .21 $ .21 $ .41 $ .41
====== ====== ====== ======
12
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) GOODWILL AND OTHER INTANGIBLE ASSETS - (Continued)
------------------------------------
Changes in the carrying amount of goodwill for the six months
ended September 30, 2001, were as follows:
Distribution Gas Operations
(In thousands) Segment Segment Total
------------ -------------- -----
Balance at March 31, 2001 $364,943 $75,114 $440,057
Acquisitions 6,789 -- 6,789
Cumulative effect of a change
in accounting principle (59,000) -- (59,000)
Foreign currency translation
and other adjustments (76) (3) (79)
------- ------ -------
Balance at September 30, 2001 $312,656 $75,111 $387,767
======= ====== =======
Other intangible assets amounted to $25.7 million (net of
accumulated amortization of $77.6 million) and $29.7 million (net of
accumulated amortization of $73.1 million) at September 30, 2001 and
March 31, 2001, respectively. These intangible assets primarily
consist of non-compete agreements entered into in connection with
business combinations and are amortized over the term of the
agreements, principally five years. There are no expected residual
values related to these intangible assets. Estimated fiscal year
amortization expense is as follows ($ in millions): 2002 - $8.8; 2003
- $5.6; 2004 - $4.8; 2005 - $3.3; and 2006 - $2.2.
(11) STOCKHOLDERS' EQUITY
--------------------
Changes in stockholders' equity were as follows:
Employee
Shares of Common Treasury Benefits
(In thousands of shares) Stock $.01 Par Value Stock Trust
-------------------- -------- --------
Balance-March 31, 2001 74,361 516 5,701
Common stock issuance (a) 424 -- --
Purchase of treasury stock -- 31 --
Reissuance of stock from Trust (c) -- -- (696)
------ ----- -----
Balance-September 30, 2001 74,785 547 5,005
====== ===== =====
(a) Issuance of common stock for stock option exercises.
(c) Reissuance of common stock from the Employee Benefits Trust for
employee benefit programs.
13
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(11) STOCKHOLDERS' EQUITY - (Continued)
--------------------
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
------ ---------- -------- ------------- -------- -------- -------
Balance-March 31, 2001 $ 744 $188,629 $355,596 $(1,153) $(3,982) $(42,985) $ --
Net earnings (loss) -- -- (30,996) -- -- -- (30,996)
Common stock issuance (a) 4 1,735 -- -- -- -- --
Foreign currency
translation adjustments -- -- -- (49) -- -- (49)
Purchase of treasury stock -- -- -- -- (307) -- --
Cumulative effect of a change
in accounting principle (b) -- -- -- (6,664) -- -- (6,664)
Net change in fair value of
interest rate swap agreements -- -- -- (1,304) -- -- (1,304)
Reissuance of common stock
from Trust (c) -- (1,782) -- -- -- 5,247 --
Issuance of warrants (d) -- 963 -- -- -- -- --
Net tax benefit of
comprehensive income items -- -- -- 2,780 -- -- 2,780
Tax benefit from stock
option exercises -- 1,328 -- -- -- -- --
---- ------- ------- ------ ------ ------- -------
Balance-September 30, 2001 $ 748 $190,873 $324,600 $(6,390) $(4,289) $(37,738) $(36,233)
==== ======= ======= ====== ====== ======= =======
(a) Issuance of common stock for stock option exercises.
(b) Recognition of the cumulative effect of a change in accounting principle related to the adoption
of SFAS 133 in the period (see Notes 2 and 9).
(c) Reissuance of common stock from the Employee Benefits Trust for employee benefit programs.
(d) The Company granted warrants to purchase 300,000 shares of the Company's common stock to
an outside consulting firm for services rendered during the six months ended September 30, 2001.
The warrants have a term of three years from the date of grant and have exercise prices in excess
of market value on the date of grant ranging from $11.98 to $16.59 per share. The aggregate value
of the warrants on the dates of grant, as determined by the Black-Scholes pricing model, was $963
thousand, which the Company expensed during the six months ended September 30, 2001.
2001 EMPLOYEE STOCK PURCHASE PLAN
On August 2, 2001, the Company's stockholders approved the 2001
Employee Stock Purchase Plan (the "2001 Plan"). The 2001 Plan is
authorized to issue up to 1.5 million shares of Company common stock
and contains essentially the same terms and conditions as the Company's
previous 1998 Employee Stock Purchase Plan.
14
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(12) COMMITMENTS AND CONTINGENCIES
-----------------------------
Litigation
In July 1996, Praxair, Inc. ("Praxair") filed suit against the
Company in the Circuit Court of Mobile County, Alabama. The complaint
alleged tortious interference with business or contractual relations
with respect to Praxair's Right of First Refusal contract with the
majority shareholders of National Welders Supply Company, Inc.
("National Welders") in connection with the Company's formation of a
joint venture with National Welders. In June 1998, Praxair filed a
motion to dismiss its own action in Alabama and commenced another
action in the Superior Court of Mecklenburg County, North Carolina,
alleging substantially the same tortious interference by the Company.
The North Carolina action also alleges breach of contract against
National Welders and certain shareholders of National Welders and
unfair trade practices and conspiracy against all the defendants. In
the North Carolina action, Praxair seeks compensatory damages in excess
of $10 thousand, punitive damages and other unspecified relief. The
Company anticipates that additional discovery and pretrial motions will
be completed by the end of May 2002, and that a trial on the merits
will begin in July 2002. The Company believes that Praxair's North
Carolina claims are without merit and intends to defend vigorously
against such claims.
The Company is involved in various legal and regulatory
proceedings that have arisen in the ordinary course of its business and
have not been fully adjudicated. These actions, when ultimately
concluded and determined, will not, in the opinion of management, have
a material adverse effect upon the Company's consolidated financial
condition, results of operations or liquidity.
(13) SUMMARY BY BUSINESS SEGMENT
---------------------------
Information related to the Company's operations by business segment
for the three months ended September 30, 2001 and 2000 follows:
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
Gas Gas
(In thousands) Distribution Operations Combined Distribution Operations Combined
------------ ---------- -------- ------------ ---------- --------
Gas and rent $ 171,817 $ 38,976 $ 210,793 $ 160,307 $ 38,220 $ 198,527
Hardgoods 200,528 661 201,189 210,752 818 211,570
--------- --------- --------- --------- --------- ---------
Total net sales 372,345 39,637 411,982 371,059 39,038 410,097
Intersegment sales -- 8,413 8,413 -- 7,944 7,944
Gross profit 178,495 25,427 203,922 172,409 24,601 197,010
Gross profit margin 47.9% 64.1% 49.5% 46.5% 63.0% 48.0%
Operating income 27,787 7,052 34,839 26,598 6,448 33,046
Earnings before income
taxes 18,711 4,118 22,829 13,527 4,105 17,632
Assets 1,269,746 200,867 1,470,613 1,500,827 223,560 1,724,387
15
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(13) SUMMARY BY BUSINESS SEGMENT - (Continued)
---------------------------
Information related to the Company's operations by business segment
for the six months ended September 30, 2001 and 2000 follows:
Six Months Ended Six Months Ended
September 30, 2001 September 30, 2000
(In thousands) Gas Gas
Distribution Operations Combined Distribution Operations Combined
------------ ---------- -------- ------------ ---------- --------
Gas and rent $ 345,292 $ 75,782 $ 421,074 $ 318,904 $ 71,714 $ 390,618
Hardgoods 405,367 1,216 406,583 426,894 1,583 428,477
--------- ---------- --------- --------- --------- ---------
Total net sales 750,659 76,998 827,657 745,798 73,297 819,095
Intersegment sales -- 17,251 17,251 -- 16,313 16,313
Gross profit 357,906 49,468 407,374 344,399 46,413 390,812
Gross profit margin 47.7% 64.2% 49.2% 46.2% 63.3% 47.7%
Operating income 54,358 13,265 67,623 52,723 11,366 64,089
Earnings before income
taxes and cumulative
effect of an accounting
change 36,353 7,575 43,928 27,892 6,434 34,326
Assets 1,269,746 200,867 1,470,613 1,500,827 223,560 1,724,387
(a) Financial results for the three and six month periods ended September 30, 2001 do not include goodwill
amortization expense as a result of adopting SFAS 142 as of April 1, 2001 (see Note 2). See Note 10
for a reconciliation of prior period financial results as reported to financial results adjusted to
exclude goodwill amortization expense.
(14) CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF SUBSIDIARY GUARANTORS
----------------------------------------------------------------------
As described in Note 8, on July 30, 2001, the Company refinanced its
revolving credit facilities and issued $225 million of Notes. The obligations
of the Company under the Notes are guaranteed by the Company's domestic
subsidiaries that guarantee the Company's new credit facilities (the
"Guarantors"). The Company's joint venture operations, foreign holdings and
bankruptcy remote special purpose entity (the "Non-guarantors") are not
guarantors of the Notes. The guarantees are made on a joint and several
basis. The claims of creditors of Non-guarantor subsidiaries have priority
over the rights of the Company to receive dividends or distributions from such
subsidiaries. Presented below is condensed consolidating financial
information for the Company, the Guarantors and the Non-guarantors as of
September 30, 2001 and March 31, 2001 and for the six-months ended
September 30, 2001 and 2000. On August 31, 2001, two Non-guarantor entities
were merged into the parent. These entities were holding companies through
which the Company managed its operations in Poland and Thailand. The
operations in Poland and Thailand were divested in fiscal 2000. The two
Non-guarantor entities' net assets of $42,692 were transferred to the parent.
16
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet
September 30, 2001
Non- Elimination
(In thousands) Parent Guarantors Guarantors Entries Consolidated
------ ---------- ---------- ----------- ------------
ASSETS
Current Assets
Trade receivables, net $ -- $ 4,458 $ 78,491 $ -- $ 82,949
Intercompany receivable/(payable) 170 (24,946) 24,776 -- --
Inventories, net -- 145,091 3,675 -- 148,766
Deferred income tax asset, net 6,298 4,096 -- -- 10,394
Prepaid expenses and other
current assets 1,012 17,305 616 -- 18,933
--------- --------- --------- ---------- ---------
Total current assets 7,480 146,004 107,558 -- 261,042
Plant and equipment, net 10,295 671,533 20,455 -- 702,283
Goodwill -- 377,671 10,096 -- 387,767
Other intangible assets, net 896 24,811 18 -- 25,725
Investments in unconsolidated
affiliates 57,637 6,430 -- -- 64,067
Investments in subsidiaries 1,115,105 -- -- (1,115,105) --
Intercompany receivable/(payable) (125,078) 194,269 (69,191) -- --
Other non-current assets 24,536 5,001 192 -- 29,729
--------- --------- --------- ---------- ---------
Total assets $1,090,871 $1,425,719 $ 69,128 $(1,115,105) $1,470,613
========= ========= ========= ========== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 937 $ 67,736 $ 1,768 $ -- $ 70,441
Accrued expenses and other
current liabilities 47,409 66,504 145 -- 114,058
Current portion of long-term debt -- 7,941 82 -- 8,023
--------- --------- --------- ---------- ---------
Total current liabilities 48,346 142,181 1,995 -- 192,522
Long-term debt, excluding
current portion 566,978 9,408 26,725 -- 603,111
Deferred income tax liability, net 195 156,430 7,797 -- 164,422
Other non-current liabilities 7,548 36,071 (865) -- 42,754
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Preferred stock, no par value -- -- -- -- --
Common stock, par value $.01
per share 748 -- -- -- 748
Capital in excess of par value 190,873 733,731 8,224 (741,955) 190,873
Retained earnings 324,600 348,224 26,127 (374,351) 324,600
Accumulated other comprehensive
loss (6,390) (326) (875) 1,201 (6,390)
Treasury stock (4,289) -- -- -- (4,289)
Employee benefits trust (37,738) -- -- -- (37,738)
--------- --------- --------- ---------- ---------
Total stockholders' equity 467,804 1,081,629 33,476 (1,115,105) 467,804
Total liabilities and
stockholders' equity $1,090,871 $1,425,719 $ 69,128 $(1,115,105) $1,470,613
========= ========= ========= ========== =========
17
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet
March 31, 2001
Non- Elimination
(In thousands) Parent Guarantors Guarantors Entries Consolidated
------ ---------- ---------- ----------- ------------
ASSETS
Current Assets
Trade receivables, net $ -- $ 111,081 $ 32,048 $ -- $ 143,129
Intercompany receivable/(payable) 170 (14,183) 14,013 -- --
Inventories, net -- 151,402 3,622 -- 155,024
Deferred income tax asset, net 6,297 3,846 -- -- 10,143
Prepaid expenses and other
current assets 10,167 13,901 1,481 -- 25,549
--------- --------- --------- ---------- ---------
Total current assets 16,634 266,047 51,164 -- 333,845
Plant and equipment, net 6,851 677,480 20,315 -- 704,646
Goodwill -- 429,942 10,115 -- 440,057
Other intangible assets, net 1,120 28,345 203 -- 29,668
Investments in unconsolidated
affiliates 56,656 6,591 15 -- 63,262
Investments in subsidiaries 1,197,952 -- -- (1,197,952) --
Intercompany receivable/(payable) (107,248) 99,842 7,406 -- --
Other non-current assets 5,294 4,311 207 -- 9,812
--------- --------- --------- ---------- ---------
Total assets $1,177,259 $1,512,558 $ 89,425 $(1,197,952) $1,581,290
========= ========= ========= ========== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 3,339 $ 71,045 $ 1,953 $ -- $ 76,337
Accrued expenses and other
current liabilities 41,291 88,253 1,329 -- 130,873
Current portion of long-term debt 50,000 22,863 82 -- 72,945
--------- --------- --------- ---------- ---------
Total current liabilities 94,630 182,161 3,364 -- 280,155
Long-term debt, excluding
current portion 585,465 10,354 24,845 -- 620,664
Deferred income tax liability, net 194 157,906 3,076 -- 161,176
Other non-current liabilities 121 22,935 (610) -- 22,446
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Preferred stock, no par value -- -- -- -- --
Common stock, par value $.01
per share 744 7 -- (7) 744
Capital in excess of par value 188,629 754,926 31,783 (786,709) 188,629
Retained earnings 355,596 384,631 27,818 (412,449) 355,596
Accumulated other comprehensive
loss (1,153) (302) (851) 1,153 (1,153)
Treasury stock (3,982) (60) -- 60 (3,982)
Employee benefits trust (42,985) -- -- -- (42,985)
--------- --------- --------- ---------- ---------
Total stockholders' equity $ 496,849 $1,139,202 $ 58,750 $(1,197,952) $ 496,849
Total liabilities and
stockholders' equity $1,177,259 $1,512,558 $ 89,425 $(1,197,952) $1,581,290
========= ========= ========= ========== =========
18
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Earnings
Six Months Ended
September 30, 2001
Non- Elimination
(In thousands) Parent Guarantors Guarantors Entries Consolidated
------ ---------- ---------- ----------- ------------
Net sales $ -- $ 817,404 $ 10,253 $ -- $ 827,657
Costs and Expenses
Costs of products sold
(excluding depreciation) -- 417,797 2,486 -- 420,283
Selling, distribution and
administrative expenses 26,723 267,691 9,540 -- 303,954
Depreciation 1,508 28,856 1,082 -- 31,446
Amortization 129 4,222 -- -- 4,351
------- -------- -------- ------- --------
Operating Income (Loss) (28,360) 98,838 (2,855) -- 67,623
Interest (expense) income, net (25,934) 2,461 710 -- (22,763)
(Discount) gain on securitization
of trade receivables -- (32,563) 29,579 -- (2,984)
Other income (expense), net 34,358 (34,423) (113) -- (178)
Equity in earnings of
unconsolidated affiliates 1,465 765 -- -- 2,230
------- -------- -------- ------- --------
Earnings (loss) before income
taxes and a cumulative effect of
a change in accounting principle (18,471) 35,078 27,321 -- 43,928
Income tax benefit (expense) 6,465 (12,486) (9,903) -- (15,924)
Equity in earnings of subsidiaries (18,990) -- -- 18,990 --
Cumulative effect of a change in
accounting principle -- (59,000) -- -- (59,000)
------- -------- -------- ------- --------
Net Earnings (Loss) $(30,996) $ (36,408) $ 17,418 $ 18,990 $ (30,996)
======= ======== ======== ======= ========
19
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Earnings
Six Months Ended
September 30, 2000
Non- Elimination
(In thousands) Parent Guarantors Guarantors Entries Consolidated
------ ---------- ---------- ----------- ------------
Net sales $ -- $ 807,542 $ 11,553 $ -- $ 819,095
Costs and Expenses
Costs of products sold
(excluding depreciation) -- 425,371 2,912 -- 428,283
Selling, distribution and
administrative expenses 14,868 262,447 4,353 -- 281,668
Depreciation 1,315 29,650 1,349 -- 32,314
Amortization 113 12,429 199 -- 12,741
------- -------- -------- ------- --------
Operating Income (Loss) (16,296) 77,645 2,740 -- 64,089
Interest (expense) income, net (33,106) 551 484 -- (32,071)
Other income (expense), net 34,450 (33,975) (18) -- 457
Equity in earnings of
unconsolidated affiliates 714 1,287 (150) -- 1,851
------- -------- -------- ------- --------
Earnings before taxes (14,238) 45,508 3,056 -- 34,326
Income tax benefit (expense) 4,983 (17,714) (1,376) -- (14,107)
Equity in earnings of subsidiaries 29,474 -- -- (29,474) --
------- -------- -------- ------- --------
Net Earnings $ 20,219 $ 27,794 $ 1,680 $(29,474) $ 20,219
======= ======== ======== ======= ========
20
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows
Six Months Ended
September 30, 2001
Non- Elimination
(In thousands) Parent Guarantors Guarantors Entries Consolidated
------ ---------- ---------- ----------- ------------
Net cash provided by (used in)
operating activities $ (10,779) $ 185,562 $(39,307) $ -- $ 135,476
-------- -------- ------- ------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures -- (27,254) (1,070) -- (28,324)
Proceeds from sale of plant
and equipment -- 2,160 10 -- 2,170
Dividends and fees from
unconsolidated affiliates 1,465 63 -- -- 1,528
Other, net 3,126 (5,150) 2,561 -- 537
-------- -------- ------- ------- --------
Net cash provided by (used in)
investing activities 4,591 (30,181) 1,501 -- (24,089)
-------- -------- ------- ------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from borrowings 366,089 -- 2,539 -- 368,628
Repayment of debt (434,575) (25,686) (659) -- (460,920)
Financing costs (8,753) -- -- -- (8,753)
Exercise of stock options 1,739 -- -- -- 1,739
Cash overdraft -- (12,081) -- -- (12,081)
Inter-company 81,688 (117,614) 35,926 -- --
-------- -------- ------- ------- --------
Net cash provided by (used in)
financing activities 6,188 (155,381) 37,806 -- (111,387)
-------- -------- ------- ------- --------
CHANGE IN CASH $ -- $ -- $ -- $ -- $ --
Cash - Beginning of year -- -- -- -- --
-------- -------- ------- ------- --------
Cash - End of year $ -- $ -- $ -- $ -- $ --
======== ======== ======= ======= ========
21
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows
Six Months Ended
September 30, 2000
Non- Elimination
(In thousands) Parent Guarantors Guarantors Entries Consolidated
------ ---------- ---------- ----------- ------------
Net cash provided by (used in)
operating activities $ (3,125) $ 50,500 $ 3,278 $ -- $ 50,653
-------- -------- ------- ------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures -- (28,916) (2,043) -- (30,959)
Proceeds from sale of plant
and equipment 258 376 712 -- 1,346
Proceeds from divestitures -- -- 7,000 -- 7,000
Business acquisitions, net of
cash acquired -- (1,839) -- -- (1,839)
Business acquisitions,
holdback settlement -- (1,878) -- -- (1,878)
Dividends and fees from
unconsolidated affiliates 714 773 -- -- 1,487
Other, net 5,012 (7,090) 4,380 -- 2,302
-------- -------- ------- ------- --------
Net cash provided by (used in)
investing activities 5,984 (38,574) 10,049 -- (22,541)
-------- -------- ------- ------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from borrowings 62,000 -- -- -- 62,000
Repayment of debt (63,000) (10,387) (1,845) -- (75,232)
Purchase of treasury stock (11,214) -- -- -- (11,214)
Exercise of stock options 837 -- -- -- 837
Cash overdraft -- (4,503) -- -- (4,503)
Inter-company 8,518 2,964 (11,482) -- --
-------- -------- ------- ------- --------
Net cash used in financing
activities (2,859) (11,926) (13,327) -- (28,112)
-------- -------- ------- ------- --------
CHANGE IN CASH $ -- $ -- $ -- $ -- $ --
Cash - Beginning of year -- -- -- -- --
-------- -------- ------- ------- --------
Cash - End of year $ -- $ -- $ -- $ -- $ --
======== ======== ======= ======= ========
22
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, 2001 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2000
INCOME STATEMENT COMMENTARY
Net Sales
---------
Net sales increased 0.5% in the quarter ended September 30, 2001
("current quarter") compared to the quarter ended September 30, 2000
("prior year quarter"). Total Company same-store sales increased 0.9%
in the current quarter versus the prior year quarter. The Company
estimates same-store sales based on a comparison of current period
sales to prior period sales, adjusted for acquisitions and
divestitures.
Three Months Ended
(In thousands) September 30,
Net Sales 2001 2000 Increase
------------------- -------------
Distribution $372,345 $371,059 $1,286 0.3%
Gas Operations 39,637 39,038 599 1.5%
------- ------- -----
$411,982 $410,097 $1,885 0.5%
======= ======= =====
The Distribution segment's principal products and services include
industrial, medical and specialty gases; equipment rental; and
hardgoods. 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 $1.3 million (0.3%)
resulting from gas and rent same-store sales growth of $11.5 million
(7.2%), offset by a decline in hardgoods sales of $10.2 million (-4.9%).
Price increases implemented during the current fiscal year as
well as during fiscal 2001 were the primary drivers of gas and rent
same-store sales growth. The Company will continue to focus on price
increases as contract terms and market conditions permit to maintain
acceptable margins and help offset rising costs. Continued success in
sales initiatives such as strategic accounts and strategic product
sales also contributed to same-store sales growth. Strategic account
sales (sales to large customers with multiple locations) were $40
million in the current quarter, representing an 8% increase over the
prior year quarter. The Company is on track with its fiscal 2002
forecast of strategic account sales of at least $160 million.
Strategic products sales growth was driven by higher volumes of
medical, bulk and specialty gases. The decline in hardgoods same-store
sales was driven by lower volumes of tools and welding products
reflecting the continued weak industrial environment, particularly with
regard to the metal fabrication and machine tool markets. Partially
offsetting the decline in tools and welding hardgoods, safety product
sales grew 8% to $67 million reflecting continued success of cross-
selling initiatives as well as growth through the Company's
telemarketing sales channel.
Gas Operations' sales primarily include dry ice and carbon
dioxide that are used for cooling and the production of food and
beverages, and chemical products. In addition, the segment includes
businesses that produce and distribute specialty gases and nitrous
oxide. Sales increased $599 thousand compared to the prior year
quarter as a result of same-store sales growth, partially offset by a
divestiture. Gas Operations' same-store sales increased $2.2 million
(6.0%) primarily from price increases and higher volumes of dry ice and
liquid carbon dioxide. The divestiture of the Jackson Dome carbon
dioxide reserves and associated pipeline (the "Jackson Dome pipeline")
in the fourth quarter of fiscal 2001 offset the sales increase by $1.6
million.
23
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross Profits
-------------
Gross profits, excluding depreciation expense, increased 3.5% and
the gross profit margin increased 150 basis points to 49.5% during the
current quarter compared to the prior year quarter.
Three Months Ended
(In thousands) September 30,
Gross Profits 2001 2000 Increase
------------------- ------------
Distribution $178,495 $172,409 $6,086 3.5%
Gas Operations 25,427 24,601 826 3.4%
------- ------- -----
$203,922 $197,010 $6,912 3.5%
======= ======= =====
The increase in Distribution gross profits of $6.1 million
primarily resulted from same-store gross profit growth of gas and rent
of $8.7 million (7.5%), partially offset by a decline in hardgoods
gross profits of $2.6 million (-4.2%). The Distribution segment's gross
profit margin of 47.9% in the current quarter increased 140 basis points
from 46.5% in the prior year quarter as a result of a shift in sales mix
towards higher margin gas and rent sales and price increases.
The increase in Gas Operations' gross profits of $826 thousand
resulted from same-store gross profit growth, partially offset by a
reduction in gross profits associated with the divestiture of the
Jackson Dome pipeline. Same-store gross profits grew 13.5% primarily
from improved gross margins from price increases implemented during the
current and prior fiscal years and higher volumes of dry ice and liquid
carbon dioxide. Gas Operations' gross profit margin of 64.1% increased
110 basis points from 63.0% in the prior year quarter.
Operating Expenses
------------------
Selling, distribution and administrative expenses ("operating
expenses") consist of personnel and related costs, distribution and
warehouse costs, occupancy expenses and other selling, general and
administrative expenses. Operating expenses increased $9.6 million
(6.8%) compared to the prior year quarter primarily from higher costs
associated with the Company's "Project One" initiative, personnel
costs, and health and workers' compensation insurance. The Company's
"Project One" initiative is focused on improving certain operational
and administrative processes, and added incremental costs of
approximately $4 million during the current quarter. As a percentage
of net sales, operating expenses increased 220 basis points to 36.7%
compared to 34.5% in the prior year quarter. Project One costs
contributed 90 basis points to the rise in operating expenses as a
percentage of net sales. The operating expense percentage of net sales
of 36.7% in the current quarter was consistent with the quarter ended
June 30, 2001.
Amortization expense was $2.1 million in the current quarter
compared to $6.3 million in the prior year quarter. On April 1, 2001,
the Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill
and Other Intangible Assets. The decrease in amortization expense was
due to the adoption of SFAS 142, which resulted in the Company no
longer amortizing goodwill.
24
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Income
----------------
Operating income decreased 4.8% during the current quarter
compared to the prior year quarter, adjusted to exclude the
amortization of goodwill.
Three Months Ended
(In thousands) September 30,
Adjusted As reported
Operating Income 2001 2000 (a) Increase(Decrease) 2000
------------------- ------------------ -----------
Distribution $27,787 $29,630 $(1,843) (6.2%) $26,598
Gas Operations 7,052 6,982 70 1.0% 6,448
------ ------ ------ ------
$34,839 $36,612 $(1,773) (4.8%) $33,046
====== ====== ====== ======
(a) Operating income for the quarter ended September 30, 2000 has been
adjusted for comparative purposes to exclude the amortization of
goodwill (see Note 10 to the Financial Statements).
The Distribution segment's operating income margin decreased 50
basis points to 7.5% in the current quarter compared to 8.0% in the
prior year quarter, as adjusted. This decrease in the Distribution
segment's operating income margin was primarily attributable to Project
One costs, the majority of which were allocated to the Distribution
segment. Increases in other operating expenses were largely offset by
increases in gross profits as discussed above. The Distribution
segment's operating income margin in the current quarter of 7.5%
improved on a sequential basis compared to 7.0% in the first quarter
ended June 30, 2001.
Gas Operations' operating income margin was relatively flat at 17.8%
in the current quarter compared to 17.9% in the prior year quarter. On
a sequential basis, Gas Operations' operating income margin of 17.8% in
the current quarter improved compared to 16.6% in the quarter ended
June 30, 2001, reflecting higher selling prices and volume gains
leveraging fixed manufacturing costs.
Interest Expense and Discount on Securitization of Trade Receivables
--------------------------------------------------------------------
Interest expense, net, and the discount on securitization of trade
receivables totaled $13.3 million representing a decrease of $3 million
(-18.2%) compared to the prior year quarter. The decrease resulted
from lower average debt levels and lower weighted-average interest
rates. The decrease in average debt levels was attributable to cash
flow provided from operations and proceeds from the divestiture of the
Jackson Dome pipeline in the fourth quarter of fiscal 2001. Lower
weighted-average interest rates resulted from lower prevailing market
rates related to the Company's variable rate debt.
In December 2000, the Company entered into a trade receivables
securitization agreement with two commercial banks to sell up to $150
million of certain qualifying trade receivables. The amount of
outstanding receivables under the agreement was $139.2 million at
September 30, 2001. Net proceeds were used to reduce borrowings under
the Company's revolving credit facilities. The discount on the
securitization of trade receivables represents the difference between
the carrying value of the receivables and the proceeds from their sale.
The amount of the discount varies on a monthly basis depending on the
amount of receivables sold and market rates.
As discussed in "Liquidity and Capital Resources" and in Note 8 to
the Financial Statements, on July 30, 2001, the Company refinanced its
variable rate revolving credit facilities and concurrently issued fixed
rate senior subordinated notes. The Company's refinancing strategy
also included the securitization of trade receivables, which helped
diversify its funding sources. The Company refinanced its debt
facilities prior to their maturity in December 2002 to take advantage
of current favorable market conditions. Interest expense, net, and the
discount on securitization of trade receivables in the current quarter
of $13.3 million increased $900 thousand compared to $12.4 million in
the quarter ended June 30, 2001. The sequential quarter over quarter
increase in interest expense was primarily due to higher borrowing
costs resulting from the debt refinancing and note issuance.
25
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Equity in Earnings of Unconsolidated Affiliates
-----------------------------------------------
Equity in earnings of unconsolidated affiliates of $1.3 million
increased $830 thousand compared to $487 thousand in the prior year
quarter primarily due to higher joint venture earnings related to
National Welders Supply ("National Welders") and the absence of
goodwill amortization in the current year period. Adjusting for the
impact of SFAS 142, equity earnings in the prior year quarter were $913
thousand.
Income Tax Expense
------------------
The effective income tax rate was 36.3% of pre-tax earnings in the
current quarter compared to 41.0% in the prior year quarter. The
decrease in the effective income tax rate was primarily due to the
adoption of SFAS 142 and the elimination of non-deductible goodwill
amortization expense in the current quarter. Adjusting the prior year
for the pro forma impact of SFAS 142, the effective income tax rate was
35.5%.
Net Earnings
------------
Net earnings for the quarter ended September 30, 2001 were $14.6
million, or $.21 per diluted share, compared to $10.4 million, or $.16
per diluted share, in the prior year quarter. Adjusting for the pro
forma impact of SFAS 142, net earnings were $.21 per diluted share in
the prior year quarter.
26
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: SIX MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO
THE SIX MONTHS ENDED SEPTEMBER 30, 2000
INCOME STATEMENT COMMENTARY
Net Sales
---------
Net sales increased 1.0% in the six months ended September 30,
2001 ("current period") compared to the six months ended September 30,
2000 ("prior year period"). Total Company same-store sales increased
1.3% in the current period versus the prior year period.
Six Months Ended
(In thousands) September 30,
Net Sales 2001 2000 Increase
------------------ --------------
Distribution $750,659 $745,798 $4,861 0.7%
Gas Operations 76,998 73,297 3,701 5.0%
------- ------- -----
$827,657 $819,095 $8,562 1.0%
======= ======= =====
Distribution sales increased $4.9 million primarily resulting from
same-store sales growth. Distribution same-store sales increased $4.6
million (0.6%) resulting from gas and rent sales growth of $26.3
million (8.2%), offset by a decline in hardgoods sales of $21.7 million
(-5.1%). Gas and rent same-store sales growth was primarily driven by
price increases implemented during the current period as well as during
the latter half of fiscal 2001. The price increases were levied in
response to rising costs. Sales initiatives such as strategic accounts
(sales to large customers with multiple locations) also contributed to
same-store sales growth. Strategic account sales reached approximately
$80 million, an increase of 11% over the prior year period, which is in
line with the Company's fiscal 2002 forecast of $160 million. Gas and
rent sales were driven by higher volumes of medical, bulk and specialty
gases, and welder equipment rentals. The decline in hardgoods sales
was driven by lower sales volumes of tools and welding products
reflecting the continued weak industrial environment. Partially
offsetting the decline in tool and welding hardgoods sales, safety
product sales grew 7% to approximately $134 million reflecting
continued success of cross-selling initiatives through the Company's
distribution network.
Gas Operations' sales increased $3.7 million compared to the prior
year period resulting from same-store sales growth, partially offset by
a divestiture. Gas Operations' same-store sales increased $6.4 million
(9.1%) primarily from price increases and higher volumes of dry ice and
liquid carbon dioxide. The divestiture of the Jackson Dome pipeline in
the fourth quarter of fiscal 2001 offset the sales increase by $2.7
million. The Company anticipates that sales of the Gas Operations
segment will decline in the latter half of fiscal 2002 compared to the
first half of fiscal 2002 resulting from the seasonal impact of cooler
temperatures, which reduces the demand for dry ice and liquid carbon
dioxide.
27
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross Profits
-------------
Gross profits, excluding depreciation expense, increased 4.2% and
the gross profit margin increased 150 basis points to 49.2% in the
current period compared to the prior year period.
Six Months Ended
(In thousands) September 30,
Gross Profits 2001 2000 Increase
---------------- --------------
Distribution $357,906 $344,399 $13,507 3.9%
Gas Operations 49,468 46,413 3,055 6.6%
------- ------- ------
$407,374 $390,812 $16,562 4.2%
======= ======= ======
The increase in Distribution gross profits of $13.5 million
primarily resulted from same-store gross profit growth from gas and
rent of $18.9 million (8.2%), partially offset by a decline in
hardgoods gross profits of $5.4 million (-4.4%). The Distribution
segment's gross profit margin of 47.7% in the current period increased
150 basis points from 46.2% in the prior year period primarily due to
price increases and a shift in sales mix towards higher margin gas and
rent sales.
The increase in Gas Operations' gross profits of $3.1 million
resulted from same-store gross profit growth, partially offset by the
divestiture of the Jackson Dome pipeline. Same-store gross profit
growth of 15.1% was primarily due to improved gross margins from price
increases implemented during the current and prior fiscal years and
higher volumes of dry ice and liquid carbon dioxide. Gas Operations'
gross profit margin of 64.2% increased 90 basis points from 63.3% in
the prior year period.
Operating Expenses
------------------
Operating expenses increased $22.3 million (7.9%) compared to the
prior year period primarily from higher costs associated with the
Company's "Project One" initiative, personnel costs, and health and
workers' compensation insurance. The Company's "Project One"
initiative added incremental costs of approximately $8 million during
the current period. As a percentage of net sales, operating expenses
increased 230 basis points to 36.7% compared to 34.4% in the prior year
period. Project One costs contributed 95 basis points to the rise in
operating expenses as a percentage of net sales.
Amortization expense was $4.4 million in the current period
compared to $12.7 million in the prior year period. The decrease in
amortization expense was due to the adoption of SFAS 142, which
resulted in the Company discontinuing the amortization of goodwill.
28
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Income
----------------
Operating income decreased 5.1% in the current period compared to
the prior year period, adjusted to exclude the amortization of
goodwill.
Six Months Ended
(In thousands) September 30,
Adjusted As reported
Operating Income 2001 2000 (a) Increase(Decrease) 2000
------------------- ------------------ -----------
Distribution $54,358 $58,840 $(4,482) (7.6%) $52,723
Gas Operations 13,265 12,433 832 6.7% 11,366
------ ------ ------ ------
$67,623 $71,273 $(3,650) (5.1%) $64,089
====== ====== ====== ======
(a) Operating income for the six months ended September 30, 2000 has
been adjusted for comparative purposes to exclude the amortization of
goodwill (see Note 10 to the Financial Statements).
The Distribution segment's operating income margin decreased 70
basis points to 7.2% in the current period compared to 7.9% in the
prior year period, as adjusted. The operating income margin decrease
was primarily attributable to Project One costs and increases in other
operating expenses, as discussed above, partially offset by higher
gross profits.
Gas Operations' operating income margin increased 20 basis points to
17.2% in the current period compared to 17.0% in the prior year period,
as adjusted, primarily from higher gross profits from price and volume
increases related to dry ice and liquid carbon dioxide.
Interest Expense and Discount on Securitization of Trade Receivables
--------------------------------------------------------------------
Interest expense, net, and the discount on securitization of trade
receivables totaled $25.7 million representing a decrease of $6.3
million (-19.7%) compared to the prior year period. The decrease
resulted from lower average debt levels and lower weighted-average
interest rates. The decrease in average debt levels was attributable
to cash flow provided from operations and proceeds from the divestiture
of the Jackson Dome pipeline in the fourth quarter of fiscal 2001.
Lower weighted-average interest rates resulted from lower prevailing
market rates related to the Company's variable rate debt.
In December 2000, the Company entered into a trade receivables
securitization agreement with two commercial banks to sell up to $150
million of certain qualifying trade receivables. The amount of
outstanding receivables under the agreement was $139.2 million at
September 30, 2001. Net proceeds from the sale of trade receivables
were used to reduce borrowings under the Company's revolving credit
facilities. The discount on the securitization of trade receivables
represents the difference between the carrying value of the receivables
and the proceeds from their sale. The amount of the discount varies on
a monthly basis depending on the amount of receivables sold and market
rates.
Equity in Earnings of Unconsolidated Affiliates
-----------------------------------------------
Equity in earnings of unconsolidated affiliates of $2.2 million
increased approximately $300 thousand compared to $1.9 million in the
prior year period primarily due to the absence of goodwill amortization
in the current period related to the adoption of SFAS 142. Adjusting
for the impact of SFAS 142, equity earnings in the prior year period
were $2.7 million.
29
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Tax Expense
------------------
The effective income tax rate was 36.3% of pre-tax earnings in the
current period compared to 41.1% in the prior year period. The
decrease in the effective income tax rate was primarily due to the
adoption of SFAS 142 and the elimination of non-deductible goodwill
amortization expense in the current year period. Adjusting the prior
year for the pro forma impact of SFAS 142, the effective income tax
rate was 35.5%.
Cumulative Effect of a Change in Accounting Principle
-----------------------------------------------------
In connection with the adoption of SFAS 142, the Company performed
an evaluation of goodwill as of April 1, 2001. The results of the
evaluation indicated that goodwill of one reporting unit, Rutland Tool,
was impaired. The Company measured the amount of impairment based on a
comparison of the fair value of the reporting unit to its carrying
value. Accordingly, the Company recognized a $59 million non-cash
charge, recorded as of April 1, 2001, as a cumulative effect of a
change in accounting principle for the write-down of goodwill to its
fair value. The impaired goodwill was not deductible for taxes, and as
a result, no tax benefit was recorded in relation to the charge.
Net Earnings (Loss)
-------------------
The net loss for the six month period ended September 30, 2001 was
$31 million, or $.46 per diluted share, compared to net earnings of
$20.2 million, or $.30 per diluted share, in the prior year period.
Net earnings for the six month period ended September 30, 2001,
excluding the cumulative effect of a change in accounting principle,
were flat at $.41 per diluted share as compared to the prior year
period, adjusted for the pro forma impact of SFAS 142.
30
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
----------
Net cash provided by operating activities totaled $135.5 million
for the six months ended September 30, 2001 compared to $50.7 million
in the prior year period. The increase in cash provided by operating
activities was primarily driven by the sale of trade receivables. Net
earnings, adjusted for non-cash items, including the cumulative effect
of a change in accounting priniciple, were $71.3 million in the current
period compared to $72.5 million in the prior year period. The sale of
trade receivables under the trade receivables securitization program,
described below, provided cash of $66 million in the current period.
Working capital and other assets and liabilities, net, used cash of
$1.8 million in the current period compared to a use of cash of $21.8
million in the prior year period. Cash flow provided by operating
activities was primarily used to reduce borrowings under the Company's
revolving credit facilities and to fund capital expenditures.
Cash used in investing activities totaled $24.1 million during the
current period and primarily consisted of capital expenditures. The
Company anticipates capital spending within a range of $65 to $70
million during fiscal 2002, including costs associated with the Project
One initiative. As discussed below, financing activities used cash of
$111.4 million primarily for the net repayment of $92.3 million of
debt. The reduction in debt was principally the result of the sale of
receivables under the Company's securitization program and cash from
operations.
Cash on hand at the end of each period presented was zero. On a
daily basis depository accounts are swept of all available funds. The
funds are deposited into a concentration account through which all cash
on hand is used to repay debt under the Company's revolving credit
facilities.
The Company expects to continue to look for appropriate
acquisitions of distributors while it focuses on reducing its financial
leverage. Capital expenditures and any future acquisitions are
expected to be funded by cash from operations, revolving credit
facilities and other financing alternatives. 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.
Financial Instruments
---------------------
On July 30, 2001, the Company refinanced its revolving credit
facilities due December 5, 2002 with new bank credit facilities under a
credit agreement with a syndicate of lenders. The new credit
facilities consist of unsecured revolving credit facilities totaling
$367.5 million and $50 million Canadian (US $32 million) under a credit
agreement with a maturity date of July 30, 2006. At September 30,
2001, the Company had borrowings under the credit agreement of
approximately $137 million and $42 million Canadian (US $26 million).
The Company also had commitments under letters of credit supported by
the credit agreement of approximately $44 million at September 30,
2001. The credit agreement contains covenants that include the
maintenance of certain leverage ratios, a fixed charge ratio, and
restrictions on certain additional borrowing, the payment of dividends
and the repurchase of common stock. Based on restrictions related to
certain leverage ratios, the Company had additional borrowing capacity
under the new credit facilities of approximately $120 million at
September 30, 2001. The variable interest rates of the U.S. and
Canadian revolving credit facilities are based on LIBOR and Canadian
Bankers' acceptance rates, respectively. At September 30, 2001, the
effective interest rates on borrowings under the new credit facilities
were 4.98% on U.S. borrowings and 4.07% on Canadian borrowings.
31
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Borrowings under the new revolving credit facilities are
guaranteed by certain of the Company's domestic subsidiaries and
Canadian borrowings are guaranteed by Canadian subsidiaries. Should
the Company's long-term senior unsecured debt ratings be reduced by one
level, the Company will be required to pledge 100% of the stock of the
domestic guarantors and 65% of the stock of the Canadian guarantors for
the benefit of the syndicate of lenders. If the Company's long-term
senior unsecured debt ratings are reduced by two or more levels, the
Company will be required to grant a security interest in substantially
all of the tangible and intangible assets of the Company for the
benefit of the syndicate of lenders.
On July 30, 2001, concurrent with the refinancing of the new
revolving credit facilities, the Company issued $225 million of senior
subordinated notes (the "Notes") with a maturity date of October 1,
2011. The Notes bear interest at a fixed annual rate of 9.125%,
payable semi-annually on April 1 and October 1 of each year. The Notes
were sold in accordance with the provisions of Rule 144A of the
Securities Act of 1933 (the "Securities Act"). Subsequent to September
30, 2001, the Company exchanged the Notes for substantially similar
notes that are registered with the Securities and Exchange Commission
in accordance with the Securities Act. The notes contain covenants
that restrict the payment of dividends, the issuance of preferred
stock, and the incurrence of additional indebtedness and liens. The
notes are guaranteed on a subordinated basis by each of the domestic
guarantors under the new credit facilities.
In addition to the senior subordinated notes, the Company had the
following medium-term notes outstanding at September 30, 2001: $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%. At September 30, 2001, the
Company's long-term debt also included acquisition notes and other long-
term debt instruments of approximately $38 million with interest rates
ranging from 6.0% to 9.0%. During the quarter ended September 30,
2001, the Company refinanced $50 million of medium-term notes and $7
million of acquisition notes due September 2001 with borrowings under
the Company's new credit facilities.
The Company manages its exposure to changes in market interest
rates. In connection with the issuance of the senior subordinated
notes, the Company entered into two variable interest rate swap
agreements in August 2001 with a total notional amount of $75 million.
At September 30, 2001, the Company was party to a total of 15 interest
rate swap agreements. The swap agreements are with major financial
institutions and aggregate $385 million in notional principal amount at
September 30, 2001. Ten swap agreements with approximately $230
million in notional principal amount require fixed interest payments
based on an average effective rate of 6.63% and mature over periods
ranging between one and four years. Five swap agreements with $155
million in notional principal amount require variable interest payments
based on an average rate of 5.29% at September 30, 2001 and mature over
periods ranging between two and ten years. The Company monitors its
positions and the credit ratings of its counterparties, and does not
anticipate non-performance by the counterparties. After considering
the effect of interest rate swap agreements, the Company's ratio of
fixed to variable interest rates was 66% to 34% at September 30, 2001.
Trade Receivables Securitization
--------------------------------
In December 2000, the Company entered into a three-year
securitization agreement with two commercial banks to sell up to $150
million of certain qualifying trade receivables. As collections reduce
the previously sold interests, new receivables may be sold up to $150
million. During the six months ended September 30, 2001, the Company
sold, net of its retained interest, $894 million of trade receivables
and remitted to the bank conduits, pursuant to a servicing agreement,
$754.8 million in collections on those receivables. The net proceeds
were used to reduce borrowings under the Company's revolving credit
facilities. The amount of outstanding receivables under the agreement
was $139.2 million at September 30, 2001 and $73.2 million at March 31,
2001.
32
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER
New Accounting Pronouncements
-----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 143,
Accounting for Asset Retirement Obligations. SFAS 143 requires the
recognition of a liability for an asset retirement obligation in the
period in which it is incurred. A retirement obligation is defined as
one in which a legal obligation exists in the future resulting from
existing laws, statutes or contracts. SFAS 143 is effective for fiscal
years beginning after June 15, 2002. The Company is evaluating the
impact of SFAS 143 on its results of operations, financial position and
liquidity.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 establishes one
accounting model to be used for long-lived assets to be disposed of by
sale and broadens the presentation of discontinued operations to
include more disposal transactions. The Statement supersedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for the
disposal of a business segment. SFAS 144 also amends ARB No. 51,
Consolidated Financial Statements, to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The Company is evaluating the impact of SFAS 144 on
its results of operations, financial position and liquidity.
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
success of the Company's sales initiatives, including strategic
products and accounts, in continuing sales growth; the achievement of
strategic product sales of $160 million in fiscal 2002; the effect of
price increases on sales growth; the Company's expectation that
continued sales growth and the impact of price increases will help to
offset increases in product costs and operating expenses; the ability
of the Company to continue raising prices to maintain acceptable
margins and offset rising costs; the seasonal impact of cooler
temperatures on Gas Operations' sales in the second half of fiscal
2002; the ultimate outcome of the Praxair, Inc. lawsuit; the timing,
scope and success of the Company's "Project One" initiative designed to
improve certain operational and administrative processes; the Company's
expectation that capital spending will be in the range of $65 to $70
million in fiscal 2002; the funding of future acquisitions and capital
expenditures through the use of cash flow from operations, revolving
credit facilities, and other financing alternatives; the identification
of acquisition candidates; future sources of financing for
unanticipated requirements; the effect on the Company of higher
interest rates and/or changes in the Company's credit rating; 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 and accounts; the Company's inability to control
operating expenses and the potential impact of higher operating
expenses in future periods; the inability of the Company's "Project
One" initiative to improve operational and administrative processes;
higher than estimated expenses related to Project One; adverse changes
in customer buying patterns; market acceptance of price increases; the
inability of price increases and sales growth to offset any increases
in product costs and operating expenses; the impact of higher than
anticipated consulting expenses on future results; an economic downturn
(including adverse changes in the specific markets for the Company's
products); the impact of weather and cooler temperatures on the sales
of the Gas Operations segment;
33
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the inability to generate sufficient cash flow from operations or other
sources to fund future acquisitions and capital expenditures; higher interest
rates in future periods and/or downgrades of the Company's credit rating; the
inability to identify acquisition candidates; a higher or lower than expected
level of capital spending in fiscal 2002; the inability to manage interest
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; higher than estimated legal
fees related to the Praxair, Inc. lawsuit; an unfavorable outcome of
the Praxair, Inc. lawsuit; 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.
34
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
------------------
The Company manages its exposure to changes in market interest rates.
The interest rate exposure arises primarily from the interest payment
terms of the Company's borrowing agreements. Interest rate swap
agreements are used to adjust the interest rate risk exposures that are
inherent in its portfolio of funding sources. The Company has not, and
will not establish any interest rate risk positions for purposes other
than managing the risk associated with its portfolio of funding sources.
The Company maintains the ratio of fixed to variable rate debt within
parameters established by management under policies approved by the Board
of Directors. After the effect of interest rate swap agreements, the
ratio of fixed to variable rate debt was 66% to 34% at September 30, 2001.
Counterparties to interest rate swap agreements are major financial
institutions. The Company has established counterparty credit guidelines
and only enters into transactions with financial institutions with long-
term credit ratings of `A' or better. In addition, the Company monitors
its position and the credit ratings of its counterparties, thereby
minimizing the risk of non-performance by the counterparties.
The table below summarizes the Company's market risks associated with
long-term debt obligations, interest rate swaps and LIBOR-based agreements
as of September 30, 2001. For long-term debt obligations, the table
presents cash flows related to payments of principal and interest by
fiscal year of maturity. For interest rate swaps and LIBOR-based
agreements, the table presents the notional amounts underlying the
agreements 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.
Fiscal Year of Maturity
------------------------------------------------------------------------
(In millions) Fair
2002(a) 2003 2004 2005 2006 2007 Thereafter Total Value
------------------------------------------------------------------------
Fixed Rate Debt:
----------------
Medium-term notes $ -- $ -- $ 75 $ -- $ -- $100 $ -- $175 $171
Interest expense $ 7 $ 13 $ 13 $ 8 $ 8 $ 4 $ -- $ 53
Average interest rate 7.49% 7.49% 7.49% 7.75% 7.75% 7.75%
Acquisition and other notes $ 6 $ 1 $ 22 $ 1 $ 6 $ 1 $ -- $ 37 $ 38
Interest expense $ 1 $ 2 $ 2 $ 1 $ 1 $ -- $ -- $ 7
Average interest rate 7.55% 7.55% 7.58% 7.75% 7.96% 8.50%
Senior subordinated notes $ -- $ -- $ -- $ -- $ -- $ -- $225 $225 $228
Interest expense $ 10 $ 21 $ 21 $ 21 $ 21 $ 21 $ 92 $207
Interest rate 9.125% 9.125% 9.125% 9.125% 9.125% 9.125% 9.125%
Variable Rate Debt:
-------------------
Revolving credit facilities $ -- $ -- $ -- $ -- $ -- $163 $ -- $163 $163
Interest expense $ 4 $ 8 $ 8 $ 8 $ 8 $ 5 $ -- $ 41
Interest rate (b) 4.83% 4.83% 4.83% 4.83% 4.83% 4.83%
Other notes $ -- $ -- $ -- $ 1 $ -- $ -- $ -- $ 1 $ 1
Average interest rate 6.50%
35
Fiscal Year of Maturity
------------------------------------------------------------------------
(In millions) Fair
2002(a) 2003 2004 2005 2006 2007 Thereafter Total Value
------------------------------------------------------------------------
Interest Rate Swaps:
--------------------
US $ denominated Swaps:
9 Swaps Receive Variable/Pay Fixed
Notional amounts $ 60 $128 $ -- $ 40 $ -- $ -- $ -- $228 $ 9
Swap payments/(receipts) $ 4 $ 5 $ 1 $ 1 $ -- $ -- $ -- $ 11
Variable receive rate = 3.49%
(3 month LIBOR)
Weighted average pay rate = 6.63%
5 Swaps Receive Fixed/Pay Variable
Notional amounts $ -- $ -- $ 30 $ -- $ -- $ 50 $ 75 $155 $(10)
Swap payments/(receipts) $ (2) $ (4) $ (4) $ (3) $ (3) $ (3) $ (8) $(27)
Weighted average receive rate = 8.05%
Variable pay rate = 5.29%
(6 month LIBOR)
Canadian $ denominated Swaps:
1 Swap Receive Variable/Pay Fixed
Notional amounts $ 2 $ -- $ -- $ -- $ -- $ -- $ -- $ 2 $ --
Variable receive rate = 4.39%
(3 month CAD BA (c))
Weighted average pay rate = 5.98%
Other Off-Balance Sheet
LIBOR-based agreements:
-----------------------
Operating leases with trust (d) $ -- $ 1 $ 1 $ 41 $ -- $ -- $ -- $ 43 $ 43
Lease expense $ 1 $ 2 $ 2 $ 2 $ -- $ -- $ -- $ 7
Trade receivables securitization (e) $ -- $ -- $139 $ -- $ -- $ -- $ -- $139 $139
Discount on securitization $ 3 $ 6 $ 4 $ -- $ -- $ -- $ -- $ 13
(a) Fiscal 2002 financial instrument maturities and interest expense
relate to the period October 1, 2001 through March 31, 2002.
(b) The variable rate of U.S. revolving credit facilities is based on the
London Interbank Offered Rate ("LIBOR") as of September 30, 2001. The
variable rate of the Canadian dollar portion of the revolving credit
facilities is the rate on Canadian Bankers' acceptances as of September
30, 2001.
(c) The variable receive rate for Canadian dollar denominated interest
rate swaps is the rate on Canadian Bankers' acceptances ("CAD BA").
(d) The operating lease terminates October 8, 2004, but may be renewed
subject to provisions of the lease agreement.
(e) The three-year agreement expires on December 19, 2003, but the
initial term is subject to renewal provisions of the trade receivables
securitization agreement.
36
Limitations of the tabular presentation
As the table incorporates only those interest rate risk exposures
that exist as of September 30, 2001, 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, debt levels and the Company's
credit rating.
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 financial position and
results of operations.
37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 1996, Praxair, Inc. ("Praxair") filed suit against the Company
in the Circuit Court of Mobile County, Alabama. The complaint alleged
tortious interference with business or contractual relations with respect
to Praxair's Right of First Refusal contract with the majority shareholders
of National Welders Supply Company, Inc. ("National Welders") in connection
with the Company's formation of a joint venture with National Welders. In
June 1998, Praxair filed a motion to dismiss its own action in Alabama and
commenced another action in the Superior Court of Mecklenburg County, North
Carolina, alleging substantially the same tortious interference by the
Company. The North Carolina action also alleges breach of contract against
National Welders and certain shareholders of National Welders and unfair
trade practices and conspiracy against all the defendants. In the North
Carolina action, Praxair seeks compensatory damages in excess of $10
thousand, punitive damages and other unspecified relief. The Company
anticipates that additional discovery and pretrial motions will be
completed by the end of May 2002, and that a trial on the merits will begin
in July 2002. The Company believes that Praxair's North Carolina claims are
without merit and intends to defend vigorously against such claims.
The Company is involved in various legal and regulatory proceedings
that have arisen in the ordinary course of its business and have not been
fully adjudicated. These actions, when ultimately concluded and
determined, will not, in the opinion of management, have a material adverse
effect upon the Company's consolidated financial condition, results of
operations or liquidity.
Item 2. Changes in Securities and Use of Proceeds
During the six months ended September 30, 2001, in connection with
services rendered by an outside consulting firm, the Company granted
warrants to the consulting firm to purchase 300,000 shares of the Company's
common stock at exercise prices ranging from $11.98 to $16.59 per share.
The warrants have a term of three years from the date of grant. No
underwriter was involved in the foregoing grant of warrants. The grants
were made by the Company in reliance upon an exemption from the
registration provisions of the Securities Act of 1933 set forth in Section
4 (2) thereof as a transaction by an issuer not involving a public
offering. The warrants were acquired for investment and not for
distribution by an accredited investor which had access to information
respecting the Company and its business.
On July 30, 2001, the Company issued $225 million of senior
subordinated notes (the "Notes") with a maturity date of October 1, 2011.
The Notes bear interest at a fixed annual rate of 9.125%, payable semi-
annually on April 1 and October 1 of each year. The Notes were sold in
accordance with the provisions of Rule 144A of the Securities Act of 1933
(the "Securities Act"). The principal underwriters were Goldman, Sachs &
Co.; Banc of America Securities LLC; Fleet Securities, Inc.; BNY Capital
Markets, Inc.; and CIBC World Markets Corp. Net of underwriting discounts
and commissions, the Company received proceeds from the Notes issuance of
approximately $219 million, which were used to reduce borrowings under its
then existing revolving credit facilities. Subsequent to September 30,
2001, the Company exchanged all of the Notes for substantially similar
notes that are registered with the Securities and Exchange Commission in
accordance with the Securities Act under a Form S-4 registration statement
(No. 333-68722) with an effective date of September 17, 2001.
38
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on
August 2, 2001, where the following actions were taken:
(a) The stockholders voted to elect W. Thacher Brown, Frank B. Foster,
III, and Peter McCausland to the Board of Directors. The votes cast
for each Director were as follows:
No. of Shares
------------------------------
For Withheld/Against
--- ----------------
W. Thacher Brown 67,990,298 1,586,438
Frank B. Foster, III 67,988,908 1,587,828
Peter McCausland 67,851,928 1,724,808
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: James W. Hovey, John A. H. Shober, Paula A.
Sneed, David M. Stout, 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
--- ---------------- -------
68,799,445 629,768 147,523
(c) The stockholders voted to approve the 2001 Employee Stock Purchase
Plan. The votes cast in regard to the action were as follows:
No. of Shares
-----------------------------------------
For Withheld/Against Abstain
--- ---------------- -------
67,474,931 1,920,880 180,925
(d) The stockholders voted against a proposal submitted by a stockholder
that requested the Company's Board of Directors to identify and develop
strategic alternatives to maximize stockholder value, including a
potential sale of the Company or similar corporate transaction with a
strategic partner. The votes cast in regard to the proposal were as
follows:
No. of Shares
-----------------------------------------------------------
For Withheld/Against Abstain Broker Non-Votes
--- ---------------- ------- ----------------
5,550,745 54,451,745 377,187 9,197,059
39
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
--------
The following exhibit is being filed as part of this Quarterly Report
on Form 10-Q:
Exhibit No. Description
----------- -----------
11 Calculation of earnings per share
b. Reports on Form 8-K
-------------------
On July 13, 2001, the Company filed a Form 8-K pursuant to Item 5,
announcing its intent to sell senior subordinated notes due 2011.
Concurrent with the notes offering, the Company also announced its intent
to obtain a new revolving credit facility for which the Company had
received commitments of $400 million. Net proceeds from the notes
offering, together with initial borrowings under the new revolving credit
facility, would then be used to refinance the loans outstanding under the
Company's then existing credit facilities. Pursuant to Item 9, the Company
also disclosed certain information to be utilized in connection with the
notes offering.
On July 17, 2001, the Company filed a Form 8-K pursuant to Item 5,
announcing preliminary results for its first quarter ended June 30, 2001.
On July 25, 2001, the Company filed a Form 8-K pursuant to Item 5,
reporting its earnings for its first quarter ended June 30, 2001.
40
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant and Co-Registrants have duly caused this report to
be signed on its behalf by the undersigned hereunto duly authorized.
AIRGAS, INC. AIRGAS EAST, INC.
(Registrant) AIRGAS GREAT LAKES, INC.
AIRGAS MID AMERICA, INC.
AIRGAS NORTH CENTRAL, INC.
BY: /s/ Robert M. McLaughlin AIRGAS SOUTH, INC.
Robert M. McLaughlin AIRGAS GULF STATES, INC.
Vice President & Controller AIRGAS MID SOUTH, INC.
(Principal Accounting Officer) AIRGAS INTERMOUNTAIN, INC.
AIRGAS NORPAC, INC.
AIRGAS NORTHERN CALIFORNIA & NEVADA, INC.
AIRGAS SOUTHWEST, INC.
AIRGAS WEST, INC.
AIRGAS SAFETY, INC.
RUTLAND TOOL & SUPPLY CO., INC.
AIRGAS CARBONIC, INC.
AIRGAS SPECIALTY GASES, INC.
NITROUS OXIDE CORP.
PURITAN MEDICAL PRODUCTS, INC.
RED-D-ARC, INC.
AIRGAS REALTY, INC.
CYLINDER LEASING CORP.
ATNL, INC.
AIRGAS DATA, LLC
________________________________________
(Co-Registrants)
BY: /s/ Robert M. McLaughlin
Robert M. McLaughlin
Vice President
(Principal Accounting Officer)
AIRGAS DIRECT INDUSTRIAL VESSEL, LLC
________________________________________
(Co-Registrant)
BY: /s/ Robert M. McLaughlin
Robert M. McLaughlin
President and Member
(Principal Accounting Officer)
DATED: November 13, 2001
41