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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 1-9344
AIRGAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-0732648
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
259 North Radnor-Chester Road, Suite 100
Radnor, Pennsylvania 19087-5283
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(610) 687-5253
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- -------------------------------------- -----------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the 64,026,119 shares of voting stock
held by non-affiliates of the Registrant was approximately $696 million
computed by reference to the closing price of such stock on the New York
Stock Exchange on June 8, 2001. For purposes of this calculation, only
executive officers and directors were deemed to be affiliates.
The number of shares of common stock outstanding as of June 8, 2001
was 68,419,425.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for the Annual Meeting of Stockholders
to be held August 2, 2001 is partially incorporated by reference into Part
III. Those portions of the Proxy Statement included in response to
Item 402(k) and Item 402(l) of Regulation S-K are not incorporated by
reference into Part III.
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AIRGAS, INC.
TABLE OF CONTENTS
PART I
ITEM NO. PAGE
- -------- ----
1. Business.................................................. 3
General................................................ 3
Distribution........................................... 3
Gas Operations......................................... 4
Airgas Growth Strategies............................... 5
Regulatory and Environmental Matters................... 6
Insurance.............................................. 6
Employees.............................................. 6
Patents, Trademarks and Licenses....................... 6
Executive Officers of the Company...................... 7
2. Properties................................................ 8
3. Legal Proceedings......................................... 9
4. Submission of Matters to a Vote of Security Holders....... 9
PART II
5. Market for the Company's Common Stock and Related
Stockholder Matters....................................... 10
6. Selected Financial Data................................... 11
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13
7A. Quantitative and Qualitative Disclosures About Market Risk 28
8. Financial Statements and Supplementary Data............... 31
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 31
PART III
10. Directors and Executive Officers of the Company............ 31
11. Executive Compensation..................................... 31
12. Security Ownership of Certain Beneficial Owners and
Management................................................. 31
13. Certain Relationships and Related Transactions............. 31
PART IV
14. Exhibits, Financial Statements Schedules, and Reports on
Form 8-K................................................... 32
Signatures...................................................... 35
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PART I
ITEM 1. BUSINESS.
GENERAL
Airgas, Inc. and subsidiaries ("Airgas" or the "Company") is the
largest U.S. distributor of industrial, medical and specialty gases
(delivered in "packaged" or cylinder form), and welding, safety and
related products ("hardgoods"). Airgas also produces dry ice, liquid
carbon dioxide, nitrous oxide and specialty gases for distribution
throughout the United States. Airgas' integrated network of
approximately 700 locations includes branches, retail stores,
packaged gas fill plants, specialty gas labs, production facilities
and distribution centers. Airgas also distributes its products and
services to its diversified customer base through eBusiness, catalog
and telemarketing channels. Sales were $1.63 billion, $1.54 billion
and $1.56 billion in fiscal years 2001, 2000 and 1999, respectively.
The Company's two operating segments are Distribution and Gas
Operations. Financial information by business segment can be found
in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" ("MD&A"), and Note 22 to the
Company's Consolidated Financial Statements under Item 8, "Financial
Statements and Supplementary Data." Descriptions of the operating
segments are as follows:
DISTRIBUTION
The Distribution segment accounts for approximately 90% of
consolidated sales and reflects the distribution of industrial,
medical and specialty gases, and hardgoods. The Distribution segment
also includes the equity affiliate earnings related to the Company's
joint venture with National Welders Supply Company, Inc., which is a
producer and distributor of industrial, medical and specialty gases
and hardgoods.
Principal Products and Services
The Distribution segment's principal products and services
include packaged and small bulk gases, gas cylinder and welding
equipment rental and hardgoods. Gas sales include industrial,
medical and specialty gases such as: nitrogen, oxygen, argon, helium,
acetylene, carbon dioxide, nitrous oxide, hydrogen, welding gases,
ultra high purity grades and special application blends. Rent is
derived from gas cylinders, cryogenic liquid containers, bulk storage
tanks and through the rental of welding equipment. Gas and rent
represented approximately 44%, 42%, and 40% of the Distribution
segment's sales in each of the fiscal years 2001, 2000, and 1999,
respectively. Hardgoods consist of welding supplies and equipment,
safety products, and industrial tools and supplies. In each of the
fiscal years 2001, 2000, and 1999, hardgoods sales represented
approximately 56%, 58%, and 60% of the Distribution segment's sales,
respectively (see Note 22 of the Company's Consolidated Financial
Statements for additional information regarding segment sales).
Principal Markets and Methods of Distribution
The Company believes the market for industrial, medical and
specialty gases in the United States is approximately $9.4 billion
annually. The industry has three principal modes of distribution: on-
site supply, bulk or merchant supply and cylinder ("packaged gas")
supply. In the U.S. market, on-site supply accounts for
approximately 25% of sales, bulk or merchant supply accounts for
approximately 35% of sales, and packaged gas supply accounts for the
remaining 40% or $3.8 billion in sales. Airgas' market focus has
been on the packaged gas segment of the market and on small bulk
customers. Generally, packaged gas distributors also distribute
welding products. The Company believes the U.S. market for welding
products to be approximately $3.9 billion annually.
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Airgas is the largest distributor of packaged gases and welding
products in the United States with approximately a 15% market share.
The Company's competitors in this market are approximately 900
independent distributors that serve approximately 50% of the market
through a fragmented distribution network. Large distributors,
including vertically integrated gas producers such as Praxair, Inc.
("Praxair"), Air Products and Chemicals, Inc. ("Air Products"),
Liquid Air Corporation of America ("Air Liquide"), and BOC Gases
Group ("BOC Gases"), serve the remaining 35% of the packaged gas
market. The Company also sells safety equipment. The United States
market for safety equipment is approximately $6 billion, of which
Airgas' share is approximately 4%.
Customer Base
The Company's customer base is broad and includes many major
industries. The Company estimates the following industry segments
account for the indicated percentages of the Company's total sales:
o Manufacturing (49%) - principally producers of fabricated metal
products (15%), industrial and transportation equipment (9%),
chemical products (5%), and primary metal products (5%);
o Service Sector (11%) - principally medical and health services (7%);
o Wholesale Trade (10%),
o Agriculture and Mining (8%);
o Construction (7%); and
o All Other (15%).
Suppliers
The Company purchases industrial, medical and specialty gases
pursuant to requirements contracts from national and regional
producers of industrial gases. The Company also manufactures certain
gases, including acetylene, nitrous oxide, nitrogen, oxygen and
argon. The Company believes, that if a contractual arrangement with
any supplier of gases or other raw materials was terminated, it would
be able to locate alternative sources of supply without disruption of
service. The Company purchases hardgoods from major manufacturers
and suppliers. For certain products, the Company has negotiated
national purchasing arrangements.
GAS OPERATIONS
The Gas Operations segment produces and distributes certain gas
products, principally dry ice, carbon dioxide, nitrous oxide and
specialty gases. The Company also operates two air separation
plants that produce oxygen, nitrogen and argon which are sold to on-
site customers and to the Distribution segment. A description of the
businesses included in the Gas Operations segment are as follows:
Dry Ice
The Company is a producer and distributor of dry ice in the
United States. Customers include food processors, food service,
pharmaceutical and biotech industries, wholesale trade and grocery
and other retail outlets. The dry ice business generally experiences
a higher level of sales in the first and second quarters of the
fiscal year due to weather-related demand. The Company's carbon
dioxide requirements (dry ice is the solid form of carbon dioxide)
are purchased from the vertically integrated producers of carbon
dioxide and from internal production sources.
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Carbon Dioxide
The Company is a producer and distributor of liquid carbon
dioxide. Carbon dioxide requirements are met by eight Company-owned
production facilities and a 50%-owned joint venture as well as
purchased from vertically integrated gas producers of carbon dioxide.
The joint venture also produces and sells liquid carbon dioxide to
other producers of industrial gases. The Company believes the United
States bulk supply market for liquid carbon dioxide is approximately
$400 million annually. The largest customer segments include
chemical producers and oil and gas extraction. The Company primarily
competes with three major carbon dioxide companies, Praxair, BOC
Gases and Air Liquide, which produce over 80% of the merchant carbon
dioxide volumes in the United States.
Specialty and Other Gases
The Company operates six "A" labs, full scale testing and
blending facilities, which blend various special application gas
mixes, ultra high purity grade gases, pure hydrocarbon mixtures, EPA
protocol gases, and vehicle emission standard gases. Gas mixtures
are used in process control, final product qualification and
emissions monitoring. Specialty gases produced are primarily sold to
the Distribution segment (see Note 22 of the Company's Consolidated
Financial Statements for disclosure related to segment sales). The
third-party customer base for these products consists primarily of
environmental-related businesses, manufacturers of electronics,
governmental entities, petroleum refiners, and pharmaceutical and
automotive businesses. Gas Operations also provides technical
support to 27 "B" labs, limited scale testing and blending
facilities, which are operated by the Distribution segment. The "A"
and "B" labs perform testing and certification services for gas
purity.
Nitrous Oxide
The Company is a manufacturer of nitrous oxide gas. Nitrous
oxide is used as an anesthetic in the medical and dental fields, as a
propellant in the packaged food business and is utilized in the
manufacturing process of certain high technology electronics
industries. The Company's market focus includes bulk customers as
well as sales to the Distribution segment. The Company purchases the
raw materials utilized in its nitrous oxide production pursuant to
contracts with major manufacturers and suppliers.
Suppliers
The Company believes that, if a contractual arrangement with any
Gas Operations segment supplier was terminated, it would not have a
material adverse effect on operations. However, two of the Company's
15 dry ice production facilities are located on property owned by BOC
Gases. If the current arrangements with BOC Gases were terminated,
the Company's dry ice production capabilities may be reduced.
AIRGAS GROWTH STRATEGIES
The Company's strategic objectives are to establish itself as
the low-cost supplier in the industry and drive market-leading sales
growth by leveraging its national distribution infrastructure. To
meet these objectives, the Company has established the following
strategic initiatives:
o increasing market penetration by growing the strategic account
business, increasing cross-selling to existing customers,
strengthening sales leadership training and leveraging the market
presence of Puritan Medical Products (a subsidiary of the Company);
o migrating customers to the appropriate distribution channel by
leveraging the Company's safety telesales capabilities, launching the
second generation eBusiness capability and providing sales training
on channel management;
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o improving supply chain efficiencies through optimizing the
routing and scheduling of trucks, more efficient cylinder filling and
management, controlling procurement and enhancing the operations of
the Company's five distribution centers; and
o redesigning key business processes to standardize, centralize and
implement a matrix organization structure.
These strategic objectives are designed to facilitate organic
sales and earnings growth. The Company will also continue to
supplement its internal growth strategies through core business
acquisitions and exiting low-return, non-core businesses.
REGULATORY AND ENVIRONMENTAL MATTERS
The Company's subsidiaries are subject to federal and state laws
and regulations adopted for the protection of the environment and the
health and safety of employees and users of the Company's products.
The Company has programs for the operation and design of its
facilities to achieve compliance with applicable environmental
regulations. The Company believes that it is in compliance, in all
material respects, with such laws and regulations. Expenditures for
environmental purposes during fiscal 2001 were not material.
INSURANCE
The Company has established insurance programs to cover workers'
compensation, business automobile, general and product liability.
These programs have self-insured retention of $500,000 per
occurrence. Estimated losses are accrued based upon the Company's
experience for the aggregate liability for claims incurred and claims
incurred but not reported. The Company believes its insurance
reserves are adequate.
EMPLOYEES
On March 31, 2001, the Company employed approximately 7,600
employees of whom approximately 5% were covered by collective
bargaining agreements. The Company believes it has good relations
with its employees and has not experienced a significant strike or
work stoppage in over ten years.
PATENTS, TRADEMARKS AND LICENSES
The Company holds trademark registrations for "Airgas," "Red-D-
Arc," "RED-D-ARC WELDERENTAL," "Gold Gas," "Stainless Mix,"
"Steelmix," "Alummix," "Powersource," and "VAWELD." The Company has
trademarks pending for "RADNOR," "RADNOR Industrial Products,"
"RADNOR Safety Products," and "RADNOR Welding Products," its private-
label product brands. The Company believes that its businesses as a
whole are not materially dependent upon any single patent, trademark
or license.
7
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
- ---- --- --------------------------------------
Peter McCausland (1) 51 Chairman of the Board and
Chief Executive Officer
Glenn M. Fischer 50 President and Chief Operating Officer
Roger F. Millay 43 Senior Vice President - Finance and
Chief Financial Officer
Andrew R. Cichocki 38 Senior Vice President - Business Operations
and Planning
Robert A. Dougherty 43 Senior Vice President - Information Services
and Chief Information Officer
Christopher E. Giangrasso 40 Senior Vice President - Human Resources
Gordon L. Keen, Jr. 56 Senior Vice President - Law and Corporate
Development
Michael L. Molinini 50 Senior Vice President - Hardgoods Operations
Ted R. Schulte 50 Senior Vice President - Gas Operations
Patrick M. Visintainer 37 Senior Vice President - Sales
Alfred B. Crichton 53 Division President - West
B. Shaun Powers 49 Division President - East
__________________
(1) Member of the Board of Directors
Mr. McCausland has been Chairman of the Board and Chief
Executive Officer of the Company since May 1987. Mr. McCausland has
also served as President from June 1986 to August 1988, from April
1993 to November 1995, and from April 1997 to December 1998. In May
1997, Mr. McCausland was elected to the board of directors of
Hercules Inc., a worldwide manufacturer of chemical specialty
products. He also serves on the Board of Trustees of the Eisenhower
Exchange Fellowships.
Mr. Fischer has been President and Chief Operating Officer since
November 2000. Prior to joining Airgas, Mr. Fischer served as
President of BOC Gases - North America from 1997 to 2000. Prior to
that time, Mr. Fischer served as Executive Vice President of BOC
Gases - Americas from 1995 to 1997.
Mr. Millay has been Senior Vice President - Finance and Chief
Financial Officer since November 1999. Prior to joining Airgas, Mr.
Millay served as Senior Vice President and Chief Financial Officer of
Transport International Pool, a division of General Electric Capital
Corporation, from May 1995 to October 1999.
Mr. Cichocki has been Senior Vice President - Business
Operations and Planning since January 1999. Prior to that time, Mr.
Cichocki served as Vice President - Corporate Development from April
1997 to December 1998 and as Assistant Vice President - Corporate
Development from August 1992 to March 1997.
Mr. Dougherty has been Senior Vice President - Information
Services and Chief Information Officer since joining Airgas in
January 2001. Prior to joining Airgas, Mr. Dougherty served as Vice
President and Chief Information Officer from August 1998 to December
2000 and as Director of Information Systems from November 1993 to
July 1998 of Subaru of America, Inc.
Mr. Giangrasso has been Senior Vice President - Human Resources
since May 2001. Prior to joining Airgas, Mr. Giangrasso served as
Vice President, Human Resources of Aramark Corporation from October
1995 to January 2001.
Mr. Keen has been Senior Vice President - Law and Corporate
Development since April 1997. Prior to that time, Mr. Keen served as
Vice President - Corporate Development from January 1992 to March
1997.
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Mr. Molinini has been Senior Vice President - Hardgoods
Operations since August 2000. Prior to that time, Mr. Molinini
served as Vice President - Hardgoods Operations from August 1999 to
July 2000 and as Vice President - Airgas Direct Industrial from April
1997 to July 1999. Prior to joining Airgas, Mr. Molinini served as
Vice President of Marketing of National Welders Supply Company since
1991.
Mr. Schulte has been Senior Vice President - Gas Operations
since August 2000. Prior to that time, Mr. Schulte served as Vice
President - Gas Operations from November 1998 to July 2000 and as
President of Airgas Carbonic from November 1997 to October 1998.
Prior to joining Airgas, Mr. Schulte served as Senior Vice President
of Energetic Solutions, the US subsidiary of ICI Explosives, from
June 1997 to October 1997 and as Vice President Industrial Gas Sales
of Arcadian Corporation from 1992 through June 1997.
Mr. Visintainer has been Senior Vice President - Sales since
January 1999. Prior to that time, Mr. Visintainer served as Vice
President - Sales and Marketing from February 1998 to December 1998
and as President of one of the Company's subsidiaries from April 1996
to January 1998. Until March 1996, he was employed by BOC Gases and
served in various field positions including National Sales Manager -
Industrial/Special Gases and National Accounts Manager.
Mr. Crichton has been Division President - West since February
1993. Prior to that time, Mr. Crichton served in various leadership
positions since joining the Company in 1988 and has more than 30
years of industry experience.
Mr. Powers has been Division President - East since joining
Airgas in April 2001. Prior to joining Airgas, Mr. Powers served as
Senior Vice President of Industrial Gases at AGA from October 1995 to
March 2001. Mr. Powers' career also includes 17 years with Air
Products and Chemicals, Inc. where he served in various leadership
positions.
ITEM 2. PROPERTIES.
The principal executive offices of the Company are located in
leased space in Radnor, Pennsylvania.
The Company's Distribution segment operates a network of
approximately 560 branch stores, 27 "B" gas laboratories, 15
acetylene manufacturing facilities, five regional distribution
centers, 130 cylinder fill plants and various customer call centers.
The Distribution segment conducts business in 44 states. The Company
owns approximately 25% of these facilities. The remaining facilities
are primarily leased from third parties. Facilities leased from
employees are on terms consistent with commercial rental rates
prevailing in the surrounding rental market.
The Company's Gas Operations' segment consists of businesses,
located throughout the United States, which operate approximately 40
branch locations, eight liquid carbon dioxide and 15 dry ice
production facilities, two air separation plants, six "A" gas
laboratories, and six nitrous oxide production facilities. The
Company owns approximately 20% of these facilities. The remaining
facilities are leased from third parties.
During fiscal 2001, the Company's production facilities operated
at approximately 80% of capacity.
The Company believes that its facilities are adequate for its
present needs and that its properties are generally in good
condition, well maintained and suitable for their intended use.
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ITEM 3. LEGAL PROCEEDINGS.
In July 1996, Praxair, Inc. ("Praxair") filed suit against the
Company in the Circuit Court of Mobile County, Alabama. The
complaint alleged tortious interference with business or contractual
relations with respect to Praxair's Right of First Refusal contract
with the majority shareholders of National Welders Supply Company,
Inc. ("National Welders") in connection with the Company's formation
of a joint venture with National Welders. In June 1998, Praxair
filed a motion to dismiss its own action in Alabama and commenced
another action in the Superior Court of Mecklenburg County, North
Carolina, alleging substantially the same tortious interference by
the Company. The North Carolina action also alleges breach of
contract against National Welders and certain shareholders of
National Welders and unfair trade practices and conspiracy against
all the defendants. In the North Carolina action, Praxair seeks
compensatory damages in excess of $10 thousand, punitive damages and
other unspecified relief. The Company anticipates that additional
discovery and pretrial motions will be completed by the end of the
calendar year, and that a trial on the merits will begin in April
2002. The Company believes that Praxair's North Carolina claims are
without merit and intends to defend vigorously against such claims.
In the fourth quarter of fiscal 2001, the Company recorded a charge
of $6.9 million for the anticipated costs of defending the Praxair
lawsuit.
In 1997, the Company announced it was the victim of a fraudulent
breach of contract by a third party supplier of refrigerant gases and
recorded a special charge related to product losses and costs
associated with the Company's efforts to investigate the fraud and
pursue recoveries. In March 2001, the Company reached a final
settlement with its insurance carriers resulting in additional
insurance recoveries of $4 million. The insurance settlement net of
associated legal expenses was reflected in special charge recoveries
in the Consolidated Statement of Earnings under Item 8. Financial
Statements and Supplementary Data.
In fiscal 2000, the Company recorded a $7.5 million charge
representing an estimate of the overall costs associated with the
defense and settlement of certain class action lawsuits pertaining to
hazardous material charges paid to the Company by customers. In the
fourth quarter of fiscal 2001, a settlement agreement and approving
court orders covering all such class actions against the Company
became final, and the Company reversed $1.1 million of the previously
accrued defense and settlement costs.
The Company is involved in various legal and regulatory
proceedings that have arisen in the ordinary course of its business
and have not been fully adjudicated. These actions, when ultimately
concluded and determined, will not, in the opinion of management,
have a material adverse effect upon the Company's consolidated
financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended March 31, 2001.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's common stock (the "common stock") is listed on the
New York Stock Exchange (ticker symbol: ARG). The following table
sets forth, for each quarter during the last two fiscal years, the
high and low closing price per share for the common stock as reported
by the New York Stock Exchange:
High Low
---- ---
Fiscal 2001
First Quarter $ 8.31 $ 4.63
Second Quarter 6.81 5.13
Third Quarter 8.44 5.88
Fourth Quarter 9.70 6.75
Fiscal 2000
First Quarter $12.31 $ 8.31
Second Quarter 13.75 10.00
Third Quarter 11.50 8.44
Fourth Quarter 9.88 6.06
______________________
The closing sale price of the Company's common stock as reported
by the New York Stock Exchange on June 8, 2001, was $10.87 per share.
As of June 8, 2001, there were approximately 15,900 shareholders of
record of the Company's common stock.
The present policy of the Company is to retain earnings to
provide funds for the operation and expansion of its business and not
to pay cash dividends on its common stock. Any payment of future
dividends and the amounts thereof will depend upon the Company's
earnings, financial condition, loan covenants, capital requirements
and other factors deemed relevant by management and the Company's
Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA.
Selected financial data for the Company are presented in the
table below and should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7 and the Company's consolidated
financial statements included in Item 8 herein.
(In thousands, except per share amounts):
Years Ended March 31,
------------------------------------------------------------
2001 (1) 2000 (2) 1999 (3) 1998 (4) 1997 (5)
OPERATING RESULTS:
Net sales $1,628,901 $1,542,334 $1,561,218 $1,447,990 $1,158,894
Depreciation & amortization 86,754 89,308 87,926 76,670 62,491
Operating income 107,949 106,731 112,996 118,948 82,285
Interest expense, net 60,207 57,560 60,298 53,290 39,752
Income taxes 20,718 31,551 34,437 29,989 21,080
Net earnings 28,223 38,283 51,924 40,540 23,266
Basic earnings per share $ .43 $ .55 $ .74 $ .59 $ .35
Diluted earnings per share $ .42 $ .54 $ .72 $ .57 $ .34
BALANCE SHEET DATA:
Working capital $ 52,255 $ 189,194 $ 165,416 $ 141,276 $ 124,849
Total assets 1,582,725 1,739,331 1,698,472 1,641,474 1,291,031
Current portion of
long-term debt 72,945 20,071 19,645 12,150 25,158
Long-term debt 620,664 857,422 847,841 830,845 629,931
Other non-current liabilities 22,446 28,998 23,585 36,842 29,601
Stockholders' equity (6) $ 496,849 $ 472,507 $ 470,945 $ 426,873 $ 336,657
____________________________
(1) As discussed in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the notes to
the Company's Consolidated Financial Statements, the results for
fiscal 2001 include: (a) net special charges of $3.6 million ($2.3
million after-tax), (b) litigation charges, net, of $5.3 million
($3.4 million after-tax), and (c) asset impairments associated with
two equity affiliates of $700 thousand after-tax. The decrease in
working capital was partially attributable to a trade receivables
securitization program entered into during fiscal 2001 and the
classification of $50 million of medium-term notes maturing September
2001 as a component of "Current Liabilities." Cash proceeds of
approximately $73.2 million from the program were used to reduce long-
term debt.
(2) As discussed in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the notes to
the Company's Consolidated Financial Statements, the results for
fiscal 2000 include: (a) special charge recoveries of $2.8 million
($1.7 million after-tax), (b) divestiture gains of $17.5 million
($8.6 million after-tax), (c) a litigation charge of $7.5 million
($4.8 million after-tax), (d) an inventory write-down of $3.8 million
($2.2 million after-tax), and (e) an after-tax charge of $590
thousand representing a change in accounting principle.
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(3) As discussed in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the notes to
the Company's Consolidated Financial Statements, the results for
fiscal 1999 include: (a) special charge recoveries of $1.0 million
($575 thousand after-tax), (b) divestiture gains of $25.5 million
($15 million after-tax), and (c) a $1.8 million after-tax non-
recurring gain relating to insurance proceeds recorded by an equity
affiliate.
(4) The results for fiscal 1998 include: (a) fourth quarter special
charges of $22.4 million ($14.3 million after-tax) which
consisted of severance, exit costs for the closure of duplicate
facilities, the impairment write-down of property, equipment and
related goodwill and a write-down related to the divestiture of
several non-core businesses, offset by a one-time net gain
related to an acquisition break-up fee of $3 million ($1.9
million after-tax), (b) a non-recurring gain of $14.5 million
($9.4 million after-tax) from the partial recovery of
refrigerant losses, and (c) a non-recurring gain on the sale of
a non-core business.
(5) In fiscal 1997, the Company recorded special charges totaling
$31.4 million ($20.2 million after-tax) related to the
fraudulent breach of contract by a third-party supplier of
refrigerant gas and an after-tax loss on the sale of a non-core
business.
(6) The Company has not paid any dividends on its common stock.
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AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7.
RESULTS OF OPERATIONS: 2001 COMPARED TO 2000
OVERVIEW
The Company's net sales for the fiscal year ended March 31, 2001
were $1.63 billion compared to $1.54 billion in the prior year.
Despite a slowing U.S. economy, the Company experienced positive same-
store sales growth of 3.1%, continuing the same-store sales growth
that began in the prior year fiscal fourth quarter. The Company's
successful strategy of leveraging its distribution network to sign
new strategic accounts, pursue cross-selling opportunities and
promote strategic products had a favorable impact on net sales. In
addition, net sales were positively affected by the prior year
acquisition of Mallinckrodt Inc.'s Puritan-Bennett medical gas
subsidiary ("Puritan Medical Products"). The Company also
implemented price increases during fiscal 2001 that helped to offset
rising costs related to purchased gases, salaries and wages,
insurance, and distribution. Excluding the effect of the items
outlined below, net earnings were $.52 per diluted share in both
fiscal 2001 and 2000. Net earnings, as reported, for fiscal 2001
were $28.2 million, or $.42 per diluted share, compared to $38.3
million, or $.54 per diluted share, in fiscal 2000.
As discussed in the "Income Statement Commentary" below, fiscal
2001 net earnings were affected by the following:
o net special charges of $3.6 million ($2.3 million after-tax),
o litigation charges, net, of $5.3 million ($3.4 million after-tax), and
o asset impairments associated with two equity affiliates of $700
thousand after-tax.
Fiscal 2000 net earnings were affected by the following:
o special charge recoveries of $2.8 million ($1.7 million after-tax),
o divestiture gains of $17.5 million ($8.6 million after-tax),
o a litigation charge of $7.5 million ($4.8 million after-tax),
o an inventory write-down of $3.8 million ($2.2 million after-tax), and
o an after-tax charge of $590 thousand representing a change in
accounting principle.
Additionally in fiscal 2001, the Company reduced total debt by
$183.9 million. The ability to reduce debt is indicative of the
strong cash flow characteristics of the Company's business. Debt
reduction resulted from cash flow from operations, divestitures and a
securitization of trade receivables. Operations provided
approximately $61 million, divestitures provided approximately $50
million, principally the divestiture of the Jackson Dome carbon
dioxide reserves and associated pipeline ("Jackson Dome pipeline"),
and the trade receivables securitization program provided
approximately $73 million.
14
INCOME STATEMENT COMMENTARY
Net Sales
Net sales increased 5.6% in fiscal 2001 compared to 2000, driven
by same-store sales growth of 3.1% and prior year acquisitions
included for a full year in 2001. The Company estimates same-store
sales based on a comparison of current period sales to prior period
sales, adjusted for acquisitions and divestitures.
(In thousands) 2001 2000 Increase
---------- ---------- ---------------
Distribution $1,487,422 $1,409,949 $77,473 5.5%
Gas Operations 141,479 132,385 9,094 6.9%
---------- ---------- -------
$1,628,901 $1,542,334 $86,567 5.6%
========== ========== =======
The Distribution segment's principal products and services
include industrial, medical and specialty gases, equipment rental and
hardgoods. Industrial gases consist of packaged and small bulk
gases. Equipment rental fees are generally charged on cylinders,
cryogenic liquid containers, bulk tanks and welding equipment.
Hardgoods consist of welding supplies and equipment, safety products,
and industrial tools and supplies. Distribution sales increased
$77.5 million as a result of net acquisition and divestiture activity
and same-store sales growth. Fiscal 2001 sales increased $43.8
million from seven distributor acquisitions since April 1, 1999,
partially offset by a divestiture during fiscal 2000. The most
significant of the acquisitions was that of Puritan Medical Products
in the fourth quarter of fiscal 2000. Distribution same-store sales
growth of $33.7 million (2.7%) resulted from gas and rent sales
growth of $28.8 million (5.1%) and hardgoods sales growth of $4.9
million (1.0%). Gas and rent same-store sales growth was primarily
attributable to higher volumes of strategic products and continued
success of certain sales initiatives, such as strategic accounts.
Growth in strategic product sales resulted from expansion of the
rental welder fleet and improvements in certain gas product sales
including medical and specialty gases. Price increases implemented
during fiscal 2001 also contributed to gas and rent sales growth.
Hardgoods same-store sales growth was driven principally by an
increase in safety sales resulting from the successful cross-selling
of safety products through the Company's distribution network.
Although hardgoods same-store sales growth was positive in fiscal
2001, hardgoods sales slowed in the fiscal third quarter with further
contraction in the fourth quarter resulting from the slowing U.S.
industrial economy.
The Gas Operations segment's sales primarily include dry ice and
carbon dioxide that are used for cooling, the production of food and
beverages, chemical products, and oil and gas extraction. In
addition, the segment includes businesses that produce and distribute
specialty gases and nitrous oxide. Sales increased $9.1 million in
fiscal 2001 compared to the prior year primarily from same-store
sales growth (7.2%). Gas Operations' same-store sales growth
resulted from higher volumes of liquid carbon dioxide, dry ice and
nitrous oxide. Sales growth was also driven by price increases that
were implemented during the fourth quarter of fiscal 2001 to help
offset the impact of higher energy and distribution costs. The
reduction in sales from the divestiture of the Jackson Dome pipeline
in fiscal 2001 and the divestiture of operations in Poland and
Thailand in fiscal 2000 were offset by nitrous oxide production
businesses that were acquired with Puritan Medical Products.
15
Gross Profits
Gross profits increased 7.7% in fiscal 2001 compared to 2000.
(In thousands) 2001 2000 Increase
-------- -------- ----------------
Distribution $689,999 $649,827 $40,172 6.2%
Gas Operations 91,702 75,910 15,792 20.8%
-------- -------- -------
$781,701 $725,737 $55,964 7.7%
======== ======== =======
Distribution gross profits increased $40.2 million resulting
from net acquisition and divestiture activity and same-store gross
profits growth. Acquisition and divestiture activity accounted for a
net increase in gross profits of $29.0 million, primarily from the
acquisition of Puritan Medical Products in the fourth quarter of
fiscal 2000. Same-store gross profits increased $11.2 million (2.4%)
compared to the prior year. Same-store gross profit growth consisted
of a $14.4 million (3.7%) increase in gas and rent, partially offset
by a decrease in hardgoods gross profits of $3.2 million. Same-store
gross profits of gas and rent increased resulting from higher sales
volumes and price increases implemented during fiscal 2001. An
expanded rental welder fleet also contributed to the increase in
gross profits. The Distribution segment's gross profit margin of
46.4% in fiscal 2001 increased 30 basis points from 46.1% in the
prior year primarily as a result of a shift in sales mix to higher
margin gases. The shift in sales mix was driven principally by
higher margin medical gases contributed by Puritan Medical Products.
The decline in hardgoods same-store gross profits resulted from
general weakness in certain manufacturing and industrial hardgoods
markets served by the Company. The decline in hardgoods gross
profits was partially mitigated by lower costs from centralized
purchasing initiatives and continued growth of higher margin private
label products. Private label products reached an annual run rate of
$45 million in fiscal 2001 representing a 40% increase over the prior
year.
The Gas Operations segment's gross profits increased $15.8
million primarily from same-store gross profit growth and net
acquisition activity. Same-store gross profit growth of $10.5 million
(13.4%) resulted primarily from higher sales volumes and price
increases of dry ice, liquid carbon dioxide and nitrous oxide. Gross
profits increased $1.5 million from net acquisition activity,
primarily consisting of the prior year acquisition of Puritan Medical
Products's nitrous oxide production businesses. In addition, the
prior year was adversely affected by an inventory write-down of $3.8
million related to certain specialty gas inventories. Gas
Operations' gross profit margin was 64.8% compared to 57.3% in the
prior year. The gross profit margin in the prior year reflects the
impact of the specialty gas inventory write-down.
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 $50.8 million
(9.5%) compared to the prior fiscal year primarily from net
acquisition and divestiture activity and higher costs associated with
personnel, distribution and insurance. On a same-store basis,
operating expenses are estimated to have increased approximately $32
million in fiscal 2001 compared to fiscal 2000. Personnel costs were
affected by rising salaries and wages driven by a competitive labor
market. Higher distribution costs resulted primarily from increases
in the price of fuel and energy. Insurance costs were driven by
rising medical costs related to workers' compensation and health
insurance. The Company implemented a cost reduction plan in the
fourth quarter of fiscal 2001. The cost reduction plan focused on a
reduction in workforce, the closure of 30 branch locations and the
planned disposition of certain non-core businesses. As a percentage
of net sales, operating expenses increased to 35.8% from 34.5% in
fiscal 2000.
16
Fiscal 2001 operating expenses included legal expenses of $7.5
million. Fiscal 2001 legal expenses reflect litigation charges of
$5.3 million, net. The net litigation charges consist primarily of a
fourth quarter charge of $6.9 million related to a lawsuit brought by
a competitor, Praxair, Inc. The charge reflects an estimate of the
future costs associated with the defense of the lawsuit. The charge
was partially offset by the final settlement and reversal of $1.1
million of liabilities established in fiscal 2000 associated with the
defense and settlement of class-action lawsuits related to hazardous
materials charges. Legal expenses for fiscal 2000 of $9.6 million
included a $7.5 million litigation charge representing the Company's
original estimate of the costs to defend against and settle the class-
action lawsuits.
Fiscal 2001 operating expenses also included $2.2 million of
consulting expenses related to a project focused on improving certain
operational and administrative processes. The project was initiated
during the second half of fiscal 2001 and is expected to continue
through fiscal 2003. Project expenses and anticipated benefits
through fiscal 2003 will be dependent on the ultimate scope and
timing of the project. Net of anticipated benefits, the Company
estimates that the project will be dilutive to fiscal 2002 earnings
by approximately $0.05 per diluted share and accretive to earnings in
fiscal 2003.
Depreciation expense of approximately $63 million remained
relatively flat compared to fiscal 2000. Amortization expense of
$23.8 decreased $1.9 million (-7.2%) compared to fiscal 2000
primarily from the expiration of non-compete agreements related to
prior acquisitions.
Special Charges (Recoveries)
Special charges in fiscal 2001 included a charge of $8.5 million
related to a cost reduction plan implemented by the Company to
improve operating results at certain business units as well as to
mitigate rising operating expenses. The fourth quarter 2001 cost
reduction charge included severance costs for a reduction in
workforce of 275 employees, exit costs for the closure of 30 branch
locations and losses associated with the anticipated divestiture of
certain non-core businesses. The non-core businesses to be divested
generated annual sales of approximately $10 million in fiscal 2001
and were included in the Company's Distribution segment. As a result
of the cost reduction plan, the Company estimates cost savings in
fiscal 2002 of approximately $10 million. The charge was partially
offset by $4.9 million of special charge recoveries primarily
consisting of a favorable insurance settlement associated with the
fiscal 1997 special charge. Special charge recoveries in fiscal 2000
consist of $2.8 million primarily from a favorable insurance
settlement related to the fiscal 1997 special charge.
Operating Income
Operating income increased 1.1% in fiscal 2001 compared to 2000.
Excluding special (charges) recoveries, operating income increased 7.4%.
(In thousands) 2001 2000 Increase/(Decrease)
-------- -------- -------------------
Distribution $ 92,186 $ 94,671 $ (2,485) (2.6%)
Gas Operations 19,406 9,231 10,175 110%
Special (Charges) Recoveries (3,643) 2,829 (6,472) --
-------- -------- --------
$107,949 $106,731 $ 1,218 1.1%
======== ======== ========
The Distribution segment's operating income margin of 6.2% in
fiscal 2001 decreased from 6.7% in fiscal 2000 primarily due to
higher operating expenses, partially offset by gross profits from
same-store sales growth and acquisitions.
17
The Gas Operations segment's operating income margin of 13.7% in
fiscal 2001 increased from 7.0% in fiscal 2000. Fiscal 2001 results
benefited from higher gross profits from same-store sales growth and
price increases. The prior year was adversely affected by a $3.8
million inventory write-down of certain specialty gas inventories.
Gas Operations' operating income margin was 9.8% in fiscal 2000,
excluding the impact of the inventory write-down.
Interest Expense
Interest expense, net, totaled $60.2 million and represents an
increase of $2.6 million (4.6%) compared to fiscal 2000. The increase
in interest expense resulted from higher average debt levels,
partially offset by lower weighted-average interest rates. The
increase in the average debt level in fiscal 2001 was primarily due
to the fourth quarter of fiscal 2000 acquisition of Puritan Medical
Products as well as common stock repurchases during fiscal 2001. As
discussed in "Liquidity and Capital Resources" and in Item 7A
"Quantitative and Qualitative Disclosures About Market Risk", the
Company manages interest rate exposure of certain borrowings through
participation in interest rate swap agreements.
Discount on Securitization of Trade Receivables
In December 2000, the Company entered into a trade receivables
securitization agreement with two commercial banks. Net proceeds
received by the Company through March 31, 2001 were $73.2 million and
were used to reduce borrowings under the Company's revolving credit
facilities. The discount on the securitization of trade receivables
of $1.3 million in fiscal 2001 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.
Other Income, net
Other income, net, totaled $242 thousand in fiscal 2001 compared
to $17.9 million in fiscal 2000. Fiscal 2000 includes a $14.9
million gain from the divestitures of operations in Poland and
Thailand.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates of $2.3 million
decreased $1.1 million compared to fiscal 2000. The decrease in
fiscal 2001 was primarily due to fourth quarter after-tax charges of
$700 thousand related to asset impairments associated with two equity
affiliates.
Income Tax Expense
The effective income tax rate was 42.3% of pre-tax earnings in
fiscal 2001 compared to 44.8% in 2000. Excluding the tax effect
related to certain gains and special charges in both periods, the
effective income tax rate was 41.1% of pre-tax earnings in fiscal
2001 compared to 41.5% in 2000.
Cumulative Effect of an Accounting Change
Fiscal 2000 includes a charge to net earnings of $590 thousand
related to the adoption of Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities." The charge primarily resulted
from the write-off of start-up costs capitalized in prior fiscal
years in connection with the Company's two air separation units.
18
Net Earnings
Net earnings in fiscal 2001 were $28.2 million, or $.42 per
diluted share, compared to $38.3 million, or $.54 per diluted share,
in fiscal 2000.
19
AIRGAS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: 2000 COMPARED TO 1999
OVERVIEW
The Company's net sales for the fiscal year ended March 31, 2000
were $1.54 billion compared to $1.56 billion in the prior year. Net
sales in fiscal 2000 were impacted by continued slowness in certain
manufacturing and industrial markets served by the Company. The
Company believes these markets hit a cyclical low in the first
quarter of fiscal 2000. The Company experienced improved same-store
sales comparisons in each of the last three quarters of fiscal 2000.
In the fiscal fourth quarter, year over year same-store sales
improved by 1.8%. Net earnings for fiscal 2000 were $38.3 million,
or $.54 per diluted share, compared to $51.9 million, or $.72 per
diluted share, in fiscal 1999. Net earnings for fiscal years 2000
and 1999 were impacted by special charges, non-recurring divestiture
gains and other charges as described below.
Fiscal 2000 includes:
o special charge recoveries of $2.8 million ($1.7 million after-tax),
o divestiture gains $17.5 million ($8.6 million after-tax),
o a litigation charge of $7.5 million ($4.8 million after-tax),
o an inventory write-down of $3.8 million ($2.2 million after-tax), and
o an after-tax charge of $590 thousand representing a change in
accounting principle.
Fiscal 1999 includes:
o special charge recoveries of $1.0 million ($575 thousand after-tax),
o divestiture gains of $25.5 million ($15 million after-tax), and
o a $1.8 million after-tax non-recurring gain relating to insurance
proceeds recorded by an equity affiliate.
Excluding the effect of these items, net earnings were $.52 per
diluted share in fiscal 2000 and $.48 per diluted share in fiscal
1999.
During fiscal 2000, the Company completed the divestiture of its
operations in Poland and Thailand. Through the date of disposition,
the operations in Poland and Thailand had combined sales and
operating losses in fiscal 2000 of $12.7 million and $550 thousand,
respectively. The operations in Poland and Thailand were reported in
the Gas Operations segment.
During fiscal 2000, the Company acquired six distributors of
industrial gas and related equipment with aggregate annual sales of
approximately $97 million, including the acquisition of Puritan
Medical Products. Puritan Medical Products, with historical annual
sales of approximately $70 million, distributes medical gases through
a network of locations in the United States and Canada.
In March 1999, the Company's Board of Directors authorized the
repurchase of up to seven million shares of the Company's outstanding
common stock. The share repurchase authorization was substantially
completed during the first quarter of fiscal 2001.
20
INCOME STATEMENT COMMENTARY
Net Sales
Net sales decreased 1.2% in fiscal 2000 compared to 1999.
(In thousands) 2000 1999 Increase/(Decrease)
---------- ---------- -------------------
Distribution $1,409,949 $1,406,184 $ 3,765 0.3%
Gas Operations 132,385 155,034 (22,649) (14.6%)
---------- ---------- --------
$1,542,334 $1,561,218 $(18,884) (1.2%)
========== ========== ========
For fiscal 2000, Distribution sales increased $3.8 million as a
result of net acquisition and divestiture activity of $23.1 million,
offset by a same-store sales decline of $19.3 million (-1.7%).
Fiscal 2000 sales increased $37.3 million from seventeen distributor
acquisitions since April 1, 1998, offset primarily by the divestiture
of four businesses. The decrease in same-store sales resulted from a
$32.5 million (-4.2%) decline in hardgoods sales, partially offset by
gas and rent same-store sales growth of $13.2 million (1.9%). Lower
sales of hardgoods resulted from general slowness in certain
manufacturing and industrial markets served by the Company including:
metal fabrication, oil exploration and extraction, agriculture,
mining and shipbuilding. Gas and rent same-store sales growth was
primarily attributable to the Company's expansion of its rental
welder fleet and improvements in certain gas product sales including
bulk, refrigerant and medical gases. The Distribution segment
experienced improving same-store sales comparisons in each of the
last three quarters of fiscal 2000. In the fiscal fourth quarter,
year over year same-store sales improved by 1.2%.
The Gas Operations segment's sales decreased $22.6 million in
fiscal 2000 compared to the prior year as a result of the decrease in
sales resulting from the net acquisition and divestiture activity of
$27.6 million, partially offset by same-store sales growth of $5.0
million (3.5%). Sales decreased $35.7 million primarily due to the
divestiture of the Company's calcium carbide and carbon operations in
December 1998 and the divestiture of operations in Poland and
Thailand in August 1999. The decrease in sales resulting from
divestitures was partially offset by the acquisition of four dry ice
companies since April 1, 1998, which contributed sales of $8.1
million in fiscal 2000. Gas Operations' same-store sales growth
resulted from higher liquid carbon dioxide, dry ice and nitrous oxide
volumes. Pricing in fiscal 2000 generally remained stable for these
products compared to the prior year.
Gross Profits
Gross profits increased 0.4% in fiscal 2000 compared to 1999.
(In thousands) 2000 1999 Increase/(Decrease)
-------- -------- -------------------
Distribution $649,827 $637,616 $12,211 1.9%
Gas Operations 75,910 85,547 (9,637) (11.3%)
-------- -------- -------
$725,737 $723,163 $ 2,574 0.4%
======== ======== =======
Distribution gross profits increased $12.2 million resulting
from acquisitions, which contributed gross profits of $20.9 million,
partially offset by divestitures which had gross profits of $7.8
million in the prior year. Same-store gross profits declined $900
thousand (-0.5%) compared to the prior year. The decline in
same-store gross profits consisted of a decrease in hardgoods gross
profits of $10.6 million (-5.0%), partially offset by gas and rent
gross profit growth of $9.7 million (1.9%). The decrease in
hardgoods same-store gross profits resulted primarily from lower
sales volumes in certain manufacturing and industrial markets. Same-
store gross profits of gas and rent increased as a result of higher
gas volumes and increased rent primarily from an expanded rental
21
welder fleet. The overall Distribution gross profit margin of 46.1%
in fiscal 2000 increased 80 basis points from 45.3% in the prior year
primarily as a result of a shift in sales mix more heavily weighted
towards higher margin gas and rental revenues. Gas and rent
comprised 42.0% of distribution sales in fiscal 2000 compared to
40.5% in fiscal 1999. Although a competitive hardgoods environment
has somewhat increased pricing pressures to the Company's customers,
hardgoods margins have been helped by lower product costs resulting
from centralized hardgoods purchasing initiatives and sales growth of
higher margin private label products.
The decrease in Gas Operations gross profits of $9.6 million
resulted from divestitures and an inventory write-down, partially
offset by acquisitions and same-store gross profit growth. Gross
profits decreased $13.4 million from divestitures and $3.8 million
from an inventory write-down related to certain specialty gases. The
gross profit decline was partially offset by the acquisition of four
dry ice businesses that contributed $5.0 million to fiscal 2000 gross
profits and by same-store gross profit growth of $2.6 million (2.9%).
Gas Operations' gross profit margin, excluding the impact of
divestitures, decreased to 57.5% in fiscal 2000 compared to 60.2% in
fiscal 1999 primarily due to the inventory write-down and increased
sales volume of lower margin liquid carbon dioxide.
Operating Expenses
Operating expenses increased $9.3 million (1.8%) compared to
the prior fiscal year primarily from acquisitions with estimated
operating expenses of $17 million and a fiscal 2000 fourth quarter
litigation charge of $7.5 million, partially offset by divestitures
with operating expenses of $11 million in the prior year and the
impact of cost reductions initiated during the third and fourth
quarters of fiscal 1999. The litigation charge represents an
estimate of the overall costs associated with the defense and
settlement of certain lawsuits related to the Company's hazardous
materials fees. Operating cost reductions related to such areas as
headcount and administrative functions helped control operating costs
and expenses during fiscal 2000. On a same-store basis, operating
expenses decreased approximately $4 million in fiscal 2000 as
compared to fiscal 1999. Although cost control and reductions
resulted in lower operating expenses on a same-store basis in fiscal
2000, the Company experienced higher operating expenses in the fourth
quarter of fiscal 2000 primarily due to higher salary and wage costs,
insurance and fuel costs. As a percentage of net sales, operating
expenses, excluding the fourth quarter litigation charge, increased
50 basis points to 34% compared to fiscal 1999.
Depreciation and amortization totaled $89.3 million in fiscal
2000 representing an increase of $1.4 million (1.6%) compared to
fiscal 1999. Depreciation and amortization expense increased
primarily as a result of net acquisition and divestiture activity and
capital projects completed during the previous 24 months, partially
offset by a decrease from a change in depreciable lives of bulk gas
storage tanks. Depreciation and amortization expense relative to
sales was 5.8% for the current period compared to 5.6% in the prior
year.
Special Charges (Recoveries)
Special charge recoveries in fiscal 2000 primarily consist of
recoveries of $2.8 million from an insurance settlement related to a
fiscal 1997 loss. Special charge recoveries in fiscal 1999 include
$1 million from adjustments to reflect differences between the
original loss estimates and the actual losses related to the
divestiture of two non-core businesses during fiscal 1999.
22
Operating Income
Operating income decreased 5.5% in fiscal 2000 compared to 1999.
Excluding special (charges) recoveries, operating income decreased 7.2%.
(In thousands) 2000 1999 Increase/(Decrease)
-------- -------- --------------------
Distribution $ 94,671 $ 98,447 $(3,776) (3.8%)
Gas Operations 9,231 13,549 (4,318) (31.9%)
Special (Charges) Recoveries 2,829 1,000 1,829 --
-------- -------- -------
$106,731 $112,996 $(6,265) (5.5%)
======== ======== =======
The Distribution segment's operating income margin of 6.7% in
fiscal 2000 decreased from 7.0% in fiscal 1999 primarily due to the
fourth quarter litigation charge as discussed under "Operating
Expenses." Excluding the litigation charge, the Distribution
segment's operating income margin was 7.2% in fiscal 2000. Gas
Operations' operating income margin of 7.0% in fiscal 2000 decreased
from 8.7% in fiscal 1999 primarily due to divestitures with higher
operating margins and the inventory write-down of certain specialty
gases.
Interest Expense
Interest expense, net, totaled $57.6 million and represents a
decrease of $2.7 million (-4.5%) compared to fiscal 1999. The
decrease in interest expense was primarily attributable to lower
average debt levels and lower average interest rates. The decrease in
the average debt level in fiscal 2000 was primarily due to proceeds
from divestitures and the sale-leaseback of certain equipment. In
the fourth quarter of fiscal 2000, as a result of increasing market
interest rates, the Company experienced higher interest costs.
Other Income, net
Other income, net, totaled $17.8 million in fiscal 2000 compared
to $26.7 million in fiscal 1999. Fiscal 2000 included a $14.9
million gain from the divestitures of operations in Poland and
Thailand. Fiscal 1999 included a $25.5 million gain from the
divestiture of the Company's calcium carbide and carbon products
operations.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates of $3.4 million
decreased from $7.0 million in fiscal 1999 primarily as a result of a
$1.8 million insurance gain recorded by National Welders Supply in
fiscal 1999 and lower earnings at both National Welders Supply and
the Company's liquid carbon dioxide joint venture.
Income Tax Expense
The effective income tax rate was 44.8% of pre-tax earnings in
fiscal 2000 compared to 39.9% in 1999. Excluding the tax effect
related to gains from divestitures and special charges in both
periods, the effective income tax rate was 41.5% of pre-tax earnings
in fiscal 2000 compared to 39.5% in 1999. The increase in the
effective income tax rate was primarily from a decrease in earnings
of unconsolidated equity affiliates and income tax from foreign
divestitures.
23
Cumulative Effect of an Accounting Change
In fiscal 2000, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities", resulting in a
charge to net earnings of $590 thousand. The charge primarily
resulted from the write-off of start-up costs capitalized in
connection with the Company's two air separation units.
Net Earnings
Net earnings in fiscal 2000 were $38.3 million, or $.54 per
diluted share, compared to $51.9 million, or $.72 per diluted share,
in fiscal 1999.
24
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash provided by operating activities totaled $199.0 million
in fiscal 2001 compared to $100.1 million in fiscal 2000. Net
earnings, adjusted for non-cash items, were $125 million in both
fiscal 2001 and the prior year. The fiscal 2001 trade receivables
securitization program, described below, provided cash of $73.2
million. Working capital components provided cash of $7 million
compared to a use of cash of $17.6 million in fiscal 2000,
representing a net improvement in cash flow of $24.6 million. 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 $10.9 million during
fiscal 2001. Investing activities primarily included capital
expenditures that used cash of $65.9 million and divestiture proceeds
that provided cash of $49.6 million. Capital expenditures in fiscal
2001 were flat compared to fiscal 2000. Capital expenditures
associated with the purchase of cylinders, bulk tanks, rental welders
and machinery and equipment totaled $47.2 million, or 72% of total
capital expenditures, and helped facilitate strategic product sales
growth. Fiscal 2001 divestitures primarily consisted of the sale of
the Company's Jackson Dome pipeline. The proceeds from divestitures
were used to reduce borrowings under the Company's revolving credit
facilities.
Financing activities used cash of $188.2 million. Activities
that used cash during the period primarily included the net repayment
of debt of $183.9 million and the repurchase of the Company's common
stock for $11.2 million. The Company's stock repurchase program was
completed in the first quarter of fiscal 2001.
Cash on hand at the end of each fiscal year is 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 will continue to look for appropriate acquisitions
of distributors while it focuses on reducing its financial leverage.
Capital expenditures, current debt maturities and any future
acquisitions are expected to be funded through the use of cash flow
from operations, revolving credit facilities, potential sales of non-
core businesses and other financing alternatives, including asset-
based financing and subordinated debt facilities. 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
The Company has unsecured revolving credit facilities totaling
$665 million and $76.5 million Canadian (US $49 million) under
a credit agreement with a final maturity date of December 5, 2002.
The credit agreement contains covenants that include the maintenance
of certain financial ratios, restrictions on additional borrowings
and limitations on dividends. At March 31, 2001, the Company had
borrowings under the credit agreement of approximately $390 million
and $39 million Canadian (US $25 million). The Company also had
commitments under letters of credit supported by the credit agreement
of approximately $52 million. Based on restrictions related to cash
flow to funded debt coverage, the Company had additional borrowing
capacity under the credit facilities of approximately $189 million at
March 31, 2001. At March 31, 2001, the effective interest rate on
borrowings under the credit facilities was 5.79% on U.S. borrowings
and 5.17% on Canadian borrowings. Based on the maturity date related
to the revolving credit facilities, the Company anticipates
refinancing its credit facilities within the next twelve months.
Interest rates of the renegotiated credit facilities will be at
prevailing market rates, which may be higher than rates under the
Company's existing credit facilities.
25
At March 31, 2001, the Company had the following medium-term
notes outstanding: $50 million of unsecured notes due September 2001
bearing interest at a fixed rate of 7.15%; $75 million of unsecured
notes due March 2004 bearing interest at a fixed rate of 7.14%; and
$100 million of unsecured notes due September 2006 bearing interest
at a fixed rate of 7.75%. The medium-term notes due September 2001
are expected to be refinanced with borrowings under the Company's
revolving credit facilities. Additionally, at March 31, 2001, long-
term debt of the Company included acquisition notes and other long-
term debt instruments of approximately $54 million with interest
rates ranging from 6.0% to 9.0%. Acquisition notes of $7 million
will mature in September 2001 and are expected to be refinanced with
borrowings under the Company's revolving credit facilities. The
Company also has a shelf registration with a capacity of
approximately $175 million for the issuance of debt and other types
of securities.
The Company manages its exposure to changes in market interest
rates. At March 31, 2001, the Company was party to 17 interest rate
swap agreements. The swap agreements are with major financial
institutions and aggregate $477 million in notional principal amount
at March 31, 2001. Thirteen swap agreements with approximately $347
million in notional principal amount require fixed interest payments
based on an average effective rate of 6.33% for remaining periods
ranging between one and four years. Four swap agreements with $130
million in notional principal amount require variable interest
payments based on an average rate of 5.51% at March 31, 2001. Under
the terms of one swap agreement, the Company has elected to receive
the discounted value of the counterparties' interest payments
up-front. At March 31, 2001, approximately $1.0 million of such
payments were included in other current liabilities and $400 thousand
of such payments were included in other non-current liabilities. The
Company monitors its positions and the credit ratings of its
counterparties, and does not anticipate non-performance by the
counterparties. After considering the effect of interest rate swap
agreements, the Company's ratio of fixed to variable interest rates
was 60% to 40%.
Trade Receivables Securitization
In December 2000, the Company entered into a $150 million three-
year trade receivables securitization agreement with two commercial
banks. The revolving period securitization helps diversify the
Company's funding sources at an efficient all-in cost of funds.
During fiscal 2001, the Company sold $284.9 million of trade
receivables and remitted to the bank conduits, pursuant to a
servicing agreement, $211.7 million in collections on those
receivables. Net proceeds from the securitization were $73.2
million, which were used to repay borrowings under the Company's
revolving credit facilities. In April 2001, the Company completed
the second and final tranche of the $150 million trade receivables
securitization program. Proceeds from the second tranche of $64.3
million were used to reduce borrowings under the Company's revolving
credit facilities.
The transaction has been accounted for as a sale under the
provisions of Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Under the 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 under Item 8. 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. 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, which approximates fair value.
26
Operating Lease with Trust
In fiscal 2000, the Company renewed a lease of real estate with
a trust established by a commercial bank. The lease was amended to
include the sale-leaseback of certain equipment. The trust holds
title to the properties and equipment included in the leases. The
rental payments are based on LIBOR plus an applicable margin and the
cost of the property acquired by the trust. At March 31, 2001, the
non-cancelable lease obligation of the real estate and equipment
lease was $44 million, a $2 million reduction compared to the prior
year. The lease has a five-year term and has been accounted for as
an operating lease. The Company has guaranteed a residual value of
the real estate and the equipment at the end of the lease term of
approximately $30 million. A gain of approximately $12 million on
the equipment portion of the transaction has been deferred until the
expiration of the Company's guarantee of the residual value.
Employee Benefits Trust
In fiscal 1999, the Company established a grantor trust (the
"Trust") to fund certain future obligations of the Company's employee
benefit and compensation plans. The Company, pursuant to a Common
Stock Purchase Agreement, may sell shares of common stock to the
Trust. Such common stock consists of shares the Company has
purchased or will purchase on the open market or in private
transactions. The common stock may also consist of shares issued
directly to the Trust. During fiscal 2001, the Trust purchased
approximately 2 million shares of common stock, previously held as
treasury stock, from the Company, for $11.3 million (based on the
average market closing price for the five days preceding each
transaction). The Company holds promissory notes from the Trust in
the amount of each purchase. Shares held by the Trust serve as
collateral for the promissory notes and are available to fund certain
employee benefit plan obligations as the promissory notes are repaid.
The shares held by the Trust are not considered outstanding for
earnings per share purposes until they are released from serving as
collateral for the promissory notes. Approximately 1.2 million
shares were issued from the Trust during fiscal 2001 for employee
benefit programs. An independent third-party financial institution
serves as the Trustee. The Trustee votes or tenders shares held by
the Trust in accordance with instructions received from the
participants in the employee benefit and compensation plans funded by
the Trust.
Inflation
While the U.S. inflation rate has been relatively modest for
several years, rising costs continue to affect the Company's
business. The Company strives to minimize the effects of inflation
through cost containment and price increases under highly competitive
conditions.
OTHER
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement standardizes the accounting for derivative
instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and
measure them at fair value. SFAS 133, as amended by SFAS 138, is
effective for fiscal years beginning after June 15, 2000. Management
has evaluated the impact of SFAS 133, as amended, in connection with
the Company's use of derivatives in managing interest rate risk. The
Company's exposure to derivatives is limited to interest rate swap
agreements, which are highly effective in managing the Company's
interest rate exposure. A high correlation exists between the terms
of the interest rate swaps and the underlying debt obligations of the
Company. As such, fluctuations in the fair value of the swaps are
offset by an equal and opposite fluctuation in the carrying value of
the underlying debt obligations. Consequently, the implementation of
SFAS 133, as amended, is not expected to have a material impact on
the net earnings of the Company.
27
Forward-looking Statements
This report contains statements that are forward looking within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements include, but are not limited to, statements
regarding: the Company's strategy of leveraging its distribution
network to sign new strategic accounts, pursue cross-selling
opportunities and promote strategic products; the success of sales
initiatives, including strategic products and accounts, in continuing
sales growth; 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 cost reduction plan to offset
higher operating expenses; the Company's expectation that it will
realize cost savings in fiscal 2002 as a result of the cost reduction
plan; the ability of lower costs from centralized purchasing
initiatives and growth of higher margin private label products to
offset lower gross profits from sales of hardgoods; the estimate of
future legal expenses related to the Praxair, Inc. lawsuit; the
ultimate outcome of the Praxair, Inc. lawsuit; the timing, scope,
success and effect on diluted earnings per share of the project
designed to improve certain operational and administrative processes;
the funding of future acquisitions, capital expenditures and current
debt maturities through the use of cash flow from operations,
revolving credit facilities, potential sales of assets and other
financing alternatives; the identification of acquisitions
candidates; future sources of financing and the refinancing of the
Company's credit facilities and other debt instruments over the next
twelve months; the effect on the Company of higher interest rates;
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
market acceptance and success of private label products; the
inability of the Company to improve margins through sales of
strategic and private label products; the inability of cost reduction
plans to improve operating margins and mitigate rising product costs
and operating expenses; adverse changes in customer buying patterns;
market acceptance of price increases; the inability of price
increases and sales growth to offset any increases in 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 inability of
centralized purchasing and distribution initiatives in lowering
product costs; the inability to generate sufficient cash flow from
operations or other sources to fund future acquisitions, capital
expenditures, and current debt maturities; the inability to identify
and successfully integrate acquisition candidates; the inability to
obtain financing at favorable rates; the ability 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.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company manages its exposure to changes in market interest
rates. The interest rate exposure arises primarily from the interest
payment terms of the Company's borrowing agreements. Interest rate
swap agreements are used to adjust the interest rate risk exposures
that are inherent in its portfolio of funding sources. The Company
has not, and will not establish any interest risk positions for
purposes other than managing the risk associated with its portfolio
of funding sources. The Company maintains the ratio of fixed to
variable rate debt within parameters established by management under
policies approved by the Board of Directors. After the effect of
interest rate swap agreements, the ratio of fixed to variable rate
debt was 60% to 40% at March 31, 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 March 31, 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.
29
Fiscal Year of Maturity
____________________________________________________________________
(In millions) Fair
2002 2003 2004 2005 2006 Thereafter Total Value
____________________________________________________________________
Fixed Rate Debt:
- ---------------
Medium-term notes $ 50 $ -- $ 75 $ -- $ -- $100 $225 $219
Interest expense $ 15 $ 13 $ 13 $ 8 $ 8 $ 4 $ 61
Average interest rate 7.42% 7.49% 7.49% 7.75% 7.75% 7.75%
Acquisition and other notes $ 16 $ 2 $ 22 $ -- $ 5 $ 1 $ 46 $ 45
Interest expense $ 1 $ -- $ 2 $ -- $ -- $ -- $ 3
Average interest rate 7.41% 7.41% 7.41% 7.41% 7.41%
Variable Rate Debt:
- ------------------
Revolving credit facilities $ -- $415 $ -- $ -- $ -- $ -- $415 $415
Interest expense $ 24 $ 24 $ -- $ -- $ -- $ -- $ 48
Interest rate (a) (b) 5.75% 5.75%
Other notes $ 7 $ -- $ -- $ 1 $ -- $ -- $ 8 $ 8
Average interest rate 9.00% 7.27%
Interest Rate Swaps:
- -------------------
US $ denominated Swaps:
12 Swaps Receive Variable/
Pay Fixed $177 $128 $ -- $ 40 $ -- $ -- $345 $ 8
Variable Receive rate
(3 month LIBOR) = 5.32%
Weighted average
pay rate = 6.34%
4 Swaps Receive Fixed/
Pay Variable $ 50 $ -- $ 30 $ -- $ -- $ 50 $130 $ (6)
Weighted average
receive rate = 6.99%
Variable pay rate
(6 month LIBOR) = 5.51%
Canadian $ denominated Swaps:
1 Swap Receive Variable/
Pay Fixed $ 2 $ -- $ -- $ -- $ -- $ -- $ 2 $ --
(3 month CAD BA (b)) =
4.61%
Pay rate = 5.98%
Other Off-Balance Sheet
LIBOR-based agreements:
- -----------------------
Operating leases
with trust (c) $ 1 $ 1 $ 1 $ 41 $ -- $ -- $ 44 $ 44
Lease expense $ 3 $ 3 $ 3 $ 1 $ -- $ -- $ 10
Trade receivable
securitization (d) $ -- $ -- $ 73 $ -- $ -- $ -- $ 73 $ 73
Discount on securitization $ 4 $ 4 $ 3 $ -- $ -- $ -- $ 11
(a) The variable rate of U.S. revolving credit facilities is based
on the London Interbank Offered Rate ("LIBOR") as of March 31, 2001.
For future periods, the variable interest rate is assumed to remain
at 5.75% with the principal balance of long-term debt obligations
held constant at $415 million. However, the variable rate and
borrowing levels of long-term debt may fluctuate materially from
those presented above.
(b) The variable receive rate for Canadian dollar denominated
interest rate swaps is the rate on Canadian Bankers' acceptances
("CAD BA").
(c) The operating lease terminates October 8, 2004, but may be
renewed subject to provisions of the lease agreement.
(d) The three-year agreement expires on December 19, 2003, but the
initial term is subject to renewal provisions of the trade
receivables securitization agreement.
30
Limitations of the tabular presentation
As the table incorporates only those interest rate risk
exposures that exist as of March 31, 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
and Company debt levels.
Foreign Currency Rate Risk
Canadian subsidiaries of the Company are funded in part with
local currency debt. The Company does not otherwise hedge its
exposure to translation gains and losses relating to foreign currency
net asset exposures. The Company considers its exposure to foreign
currency exchange fluctuations to be immaterial to its consolidated
financial position and results of operations.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements, supplementary information
and financial statement schedule of the Company are set forth at
pages F-1 to F-37 of the report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The biographical information relating to the Company's directors
appearing in the Proxy Statement relating to the Company's 2001
Annual Meeting of Stockholders is incorporated herein by reference.
Biographical information relating to the Company's executive officers
set forth in Item 1 of Part I of this Form 10-K Report is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under "Board of Directors and Committees,"
"Executive Compensation" and "Certain Transactions" appearing in the
Proxy Statement relating to the Company's 2001 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item is set forth in the
section headed "Security Ownership" appearing in the Company's Proxy
Statement relating to the Company's 2001 Annual Meeting of
Stockholders and such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under "Certain Transactions" appearing in the
Proxy Statement relating to the Company's 2001 Annual Meeting of
Stockholders is incorporated herein by reference.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2):
The response to this portion of Item 14 is submitted as a
separate section of this report beginning on page F-1. All other
schedules have been omitted as inapplicable, or not required, or
because the required information is included in the Consolidated
Financial Statements or notes thereto.
(a)(3) Exhibits.
The exhibits required to be filed as part of this annual report
on Form 10-K are listed in the attached Index to Exhibits.
(b) Reports on Form 8-K.
On January 9, 2001, the Company filed a current report on Form 8-
K pursuant to Item 5, updating its earnings outlook for its third
quarter ended December 31, 2000.
On January 26, 2001, the Company filed a current report on Form
8-K pursuant to Item 5, reporting its earnings for the third quarter
and nine months ended December 31, 2000.
(c) Index to Exhibits and Exhibits filed as a part of this report.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
Airgas, Inc. dated as of August 7, 1995 (Incorporated by
reference to Exhibit 3.1 to the Company's September 30,
1995 Quarterly Report on Form 10-Q).
3.2 Airgas, Inc. By-Laws Amended and Restated through August 2,
1999. (Incorporated by reference to Exhibit 3 to the Company's
September 30, 1999 Quarterly Report on Form 10-Q).
4.1 Ninth Amended and Restated Credit Agreement dated as of
December 5, 1997 among Airgas, Inc., Airgas Canada, Inc.,
Red-D-Arc Limited and Airgas Ontario Inc., Nationsbank,
N.A. as U.S. Agent and Canadian Imperial Bank of Commerce
as Canadian Agent. (Incorporated by reference to Exhibit
4.1 to the Company's December 31, 1997 Quarterly Report on
Form 10-Q).
4.2 First Amendment, dated April 13, 1998, to the Ninth Amended
and Restated Credit Agreement dated as of December 5, 1997
among Airgas, Inc., Airgas Canada, Inc., Red-D-Arc Limited
and Airgas Ontario Inc., Nationsbank, N.A. as U.S. Agent
and Canadian Imperial Bank of Commerce as Canadian Agent.
(Incorporated by reference to Exhibit 4.1 to the Company's
June 30, 1998 Quarterly Report on Form 10-Q).
4.3 Indenture dated as of August 1, 1996 of Airgas, Inc.
to Bank of New York, Trustee. (Incorporated by reference
to Exhibit 4.5 to the Company's Registration Statement on
Form S-4 No. 333-23651 dated March 20, 1997).
33
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.4 Form of Airgas, Inc. Medium-Term Note (Fixed Rate).
(Incorporated by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-4 No. 333-23651 dated
March 20, 1997).
4.5 Form of Airgas, Inc. Medium-Term Note (Floating Rate).
(Incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-4 No. 333-23651 dated
March 20, 1997).
There are no other instruments with respect to
long-term debt of the Company that involve indebtedness or
securities authorized thereunder exceeding 10 percent of
the total assets of the Company and its subsidiaries on a
consolidated basis. The Company agrees to file a copy of
any instrument or agreement defining the rights of holders
of long-term debt of the Company upon request of the
Securities and Exchange Commission.
4.6 Rights Agreement, dated as of April 1, 1997, between
Airgas, Inc. and The Bank of New York, N.A., as Rights
Agent, which includes as Exhibit B thereto the Form of
Right Certificate. (Incorporated by reference to Exhibit
1.1 to the Company's Form 8-A filed on April 28, 1997).
4.7 First Amendment, dated November 12, 1998, to the
Rights Agreement dated as of April 1, 1997, between Airgas,
Inc. and The Bank of New York. (Incorporated by reference
to Exhibit 4 to the Company's December 31, 1998 Quarterly
Report on Form 10-Q).
* 10.1 Amended and Restated 1984 Stock Option Plan, as
amended effective May 22, 1995. (Incorporated by reference
to Exhibit 10.1 to the Company's September 30, 1995
Quarterly Report on Form 10-Q).
* 10.2 1989 Non-Qualified Stock Option Plan for Directors
(Non-Employees), as amended. (Incorporated by reference to
Exhibit 10.7 to the Company's March 31, 1992 report on Form
10-K).
* 10.3 Amendment to the 1989 Non-Qualified Stock Option Plan
for Directors (Non-Employees) as amended through August 7,
1995 (Incorporated by reference to Exhibit 10.2 to the
Company's September 30, 1995 Quarterly Report on Form 10-Q).
* 10.4 1994 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 10.19 to the Company's March 31, 1993
Report on Form 10-K).
* 10.5 1998 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 4 to the Company's Registration
Statement on Form S-8 No. 333-60999 dated August 7, 1998).
* 10.6 Airgas, Inc. Management Incentive Plan (Incorporated
by reference to Exhibit 10.3 to the Company's September 30,
1995 Quarterly Report on Form 10-Q).
* 10.7 Joint Venture Agreement dated June 28, 1996 between
Airgas, Inc. and National Welders Supply Company, Inc.
and J.A. Turner, III, and Linerieux B. Turner and Molo
Limited Partnership, Turner (1996) Limited partnership,
Charitable Remainder Unitrust for James A. Turner, Jr. and
Foundation for the Carolinas (Incorporated by reference to
Exhibit 2.1 to the Company's June 28, 1996 Report on
Form 8-K).
34
EXHIBIT NO. DESCRIPTION
- ----------- -----------
* 10.8 Letter dated July 24, 1992 between Airgas, Inc. (on
behalf of the Nominating and Compensation Committee) and
Peter McCausland regarding the severance agreement between
the Company and Peter McCausland.
* 10.9 1997 Stock Option Plan (Incorporated by reference to
Exhibit 10.1 to the Company's September 30, 1997 Quarterly
Report on Form 10-Q).
* 10.10 1997 Directors' Stock Option Plan (Incorporated by
reference to Exhibit 10.2 to the Company's September 30,
1997 Quarterly Report on Form 10-Q).
* 10.11 Employee Benefits Trust Agreement, dated March 30,
1999, between Airgas, Inc. and First Union National Bank,
as Trustee, which includes as Exhibit 1 thereto the Common
Stock Purchase Agreement, dated March 30, 1999, between
Airgas, Inc. and First Union National Bank, as Trustee, and
Exhibit 2 thereto the Promissory Note, dated March 31,
1999, between Airgas, Inc. and First Union National Bank,
as Trustee. (Incorporated by reference to Exhibit 10.12 to
the Company's March 31, 1999 Report on Form 10-K).
*10.12 Employee Benefits Trust Amendment Letter, dated March 7,
2000, between Airgas, Inc. and First Union National Bank,
as Trustee.
*10.13 Change of Control Agreement between Airgas, Inc. and
William A. Rice, Jr. dated March 17, 1999. Fourteen other
Executive Officers, including Peter McCausland, are parties
to substantially identical agreements. (Incorporated by
reference to Exhibit 10.13 to the Company's March 31, 1999
Report on Form 10-K).
*10.14 2000 Management Incentive Plan for Corporate Employees
dated April 1, 1999. (Incorporated by reference to Exhibit
10.14 to the Company's March 31, 1999 Report on Form 10-K).
*10.15 2000 Management Incentive Plan for Business Unit Employees
dated April 1, 1999. (Incorporated by reference to
Exhibit 10.15 to the Company's March 31, 1999 Report on
Form 10-K).
*10.16 2001 Management Incentive Plan for Business Unit
Employees dated May 23, 2000. (Incorporated by reference
to Exhibit 10.18 to the Company's March 31, 2000 Report on
Form 10-K).
*10.17 2001 Management Incentive Plan for Corporate Office
Employees dated May 23, 2000. (Incorporated by reference to
Exhibit 10.19 to the Company's March 31, 2000 Report on
Form 10-K).
*10.18 Airgas, Inc. Fiscal Year 2002 Executive Bonus Plan dated
April 1, 2001.
11 Statement re: computation of earnings per share.
21 Subsidiaries of the Company.
23.1 Consent of KPMG LLP.
_____________
* A management contract or compensatory plan required to be filed by
Item 14(c) of this Report.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: June 8, 2001
Airgas, Inc.
(Registrant)
By: /s/ Peter McCausland
_________________________
Peter McCausland
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Peter McCausland Director, Chairman of the Board, June 8, 2001
____________________________ and Chief Executive Officer
(Peter McCausland)
/s/ Roger F. Millay Senior Vice President - Finance June 8, 2001
____________________________ and Chief Financial Officer
(Roger F. Millay) (Principal Financial Officer)
/s/ Jeffrey P. Cornwell Vice President and Corporate June 8, 2001
____________________________ Controller
(Jeffrey P. Cornwell) (Principal Accounting Officer)
/s/ W. Thacher Brown Director June 8, 2001
____________________________
(W. Thacher Brown)
/s/ Frank B. Foster, III Director June 8, 2001
____________________________
(Frank B. Foster, III)
/s/ James W. Hovey Director June 8, 2001
____________________________
(James W. Hovey)
36
/s/ John A.H. Shober Director June 8, 2001
____________________________
(John A.H. Shober)
Director June__, 2001
____________________________
(Paula A. Sneed)
/s/ David M. Stout Director June 8, 2001
____________________________
(David M. Stout)
/s/ Lee M. Thomas Director June 7, 2001
____________________________
(Lee M. Thomas)
/s/ Robert L. Yohe Director June 8, 2001
____________________________
(Robert L. Yohe)
F-1
AIRGAS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
Reference In
Report On
Form 10-K
---------
Financial Statements:
Independent Auditors' Report........................................ F-2
Statement of Management's Financial Responsibility.................. F-3
Consolidated Statements of Earnings for the Years Ended
March 31, 2001, 2000 and 1999...................................... F-4
Consolidated Balance Sheets as of March 31, 2001 and 2000........... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 2001, 2000 and 1999...................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2001, 2000 and 1999...................................... F-7
Notes to Consolidated Financial Statements.......................... F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts..................... F-37
All other schedules for which provision is made in the
applicable accounting regulations promulgated by the Securities and
Exchange Commission are not required under the related instructions
or are inapplicable and therefore have been omitted.
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Airgas, Inc.:
We have audited the consolidated financial statements of Airgas,
Inc. and subsidiaries (the Company) listed in the accompanying index.
In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule
listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Airgas, Inc. and subsidiaries as of March 31, 2001 and
2000, and the results of their operations and their cash flows for
each of the years in the three-year period ended March 31, 2001, in
conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
Philadelphia, Pennsylvania
May 8, 2001
F-3
STATEMENT OF MANAGEMENT'S FINANCIAL RESPONSIBILITY
Management has prepared and is responsible for the integrity and
objectivity of the consolidated financial statements and related
financial information in this Annual Report on Form 10-K. The
statements are prepared in conformity with accounting principles
generally accepted in the United States of America. The financial
statements reflect management's informed judgment and estimation as
to the effect of events and transactions that are accounted for or
disclosed.
Management maintains a system of internal control at each
business unit. This system is designed to provide reasonable
assurance that assets are safeguarded and records properly reflect
transactions executed in accordance with management's authorization.
The Company also maintains a staff of internal auditors who review
and evaluate the system of internal control. In determining the
extent of the system of internal control, management recognizes that
the cost should not exceed the benefits derived. The evaluation of
these factors requires estimates and judgment by management.
The Company's financial statements have been audited by KPMG
LLP, independent auditors. Their Independent Auditors' Report, which
is based on an audit made in accordance with auditing standards
generally accepted in the United States of America, is presented on
the previous page. In performing their audit, KPMG LLP considers the
Company's internal control structure to the extent they deem
necessary in order to plan their audit, determine the nature, timing
and extent of tests to be performed and issue their report on the
consolidated financial statements.
The Audit Committee of the Board of Directors meets with the
independent auditors, the internal auditors and management to satisfy
itself that they are properly discharging their responsibilities.
The auditors have direct access to the Audit Committee.
Airgas, Inc.
/s/ Roger F. Millay /s/ Peter McCausland
________________________ _______________________
Roger F. Millay Peter McCausland
Senior Vice President - Finance and Chairman and
Chief Financial Officer Chief Executive Officer
May 8, 2001
F-4
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended March 31,
------------------------------------
(In thousands, except per share amounts) 2001 2000 1999
---- ---- ----
NET SALES
Distribution................................. $1,487,422 $1,409,949 $1,406,184
Gas Operations............................... 141,479 132,385 155,034
---------- ---------- ----------
Total net sales......................... 1,628,901 1,542,334 1,561,218
COSTS AND EXPENSES
Cost of products sold (excluding depreciation
and amortization)
Distribution............................... 797,423 760,122 768,568
Gas Operations............................. 49,777 56,475 69,487
Selling, distribution and administrative
expenses.................................... 583,355 532,527 523,241
Depreciation................................. 62,938 63,635 61,901
Amortization................................. 23,816 25,673 26,025
Special charges (recoveries), net (Note 3)... 3,643 (2,829) (1,000)
--------- --------- ---------
Total costs and expenses................ 1,520,952 1,435,603 1,448,222
OPERATING INCOME
Distribution................................. 92,186 94,671 98,447
Gas Operations............................... 19,406 9,231 13,549
Special (charges) recoveries, net ........... (3,643) 2,829 1,000
--------- --------- ---------
Total operating income.................. 107,949 106,731 112,996
Interest expense, net (Note 15).............. (60,207) (57,560) (60,298)
Discount on securitization of trade
receivables (Note 11)....................... (1,303) -- --
Other income, net (Note 2)................... 242 17,862 26,621
Equity in earnings of unconsolidated
affiliates (Note 14)........................ 2,260 3,391 7,042
--------- --------- ---------
Earnings before income taxes and the
cumulative effect of an accounting change 48,941 70,424 86,361
Income taxes (Note 16)....................... 20,718 31,551 34,437
--------- --------- ---------
Earnings before the cumulative
effect of an accounting change......... 28,223 38,873 51,924
Cumulative effect of an accounting
change, net of taxes........................ -- (590) --
--------- --------- ---------
NET EARNINGS................................. $ 28,223 $ 38,283 $ 51,924
========= ========= =========
Basic earnings per share:
Earnings per share before the cumulative
effect of an accounting change.......... $ .43 $ .56 $ .74
Cumulative effect per share of an
accounting change....................... -- (.01) --
--------- --------- ---------
Net earnings per share................... $ .43 $ .55 $ .74
========= ========= =========
Diluted earnings per share:
Earnings per share before the cumulative
effect of an accounting change.......... $ .42 $ .55 $ .72
Cumulative effect per share of an
accounting change....................... -- (.01) --
--------- --------- ---------
Net earnings per share................... $ .42 $ .54 $ .72
========= ========= =========
Weighted average shares outstanding:
Basic (Note 4)............................... 66,000 69,200 70,000
========= ========= =========
Diluted (Note 4)............................. 67,200 70,600 71,700
========= ========= =========
Comprehensive income.......................... $ 27,666 $ 38,597 $ 51,793
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
--------------------------
(In thousands, except per share amounts) 2001 2000
---- ----
ASSETS
Current Assets
Trade receivables, less allowances for doubtful accounts
of $7,402 in 2001 and $6,194 in 2000 (Note 11).......... $ 143,129 $ 211,989
Inventories, net (Note 5)................................ 155,024 159,438
Deferred income tax asset, net (Note 16)................. 10,143 13,752
Prepaid expenses and other current assets................ 25,549 23,611
---------- ----------
Total current assets................................ 333,845 408,790
Plant and equipment, at cost (Note 6).................... 1,073,252 1,074,365
Less accumulated depreciation............................ (368,606) (320,597)
---------- ----------
Plant and equipment, net............................ 704,646 753,768
Goodwill, net of accumulated amortization of $82,565 in
2001 and $68,471 in 2000................................ 432,825 445,498
Other non-current assets (Note 7)........................ 111,409 131,275
---------- ----------
Total assets $1,582,725 $1,739,331
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade.................................. $ 76,337 $ 78,276
Accrued expenses and other current liabilities (Note 8).. 132,308 121,249
Current portion of long-term debt (Note 9)............... 72,945 20,071
---------- ----------
Total current liabilities........................... 281,590 219,596
Long-term debt, excluding current portion (Note 9)....... 620,664 857,422
Deferred income tax liability, net (Note 16)............. 161,176 160,808
Other non-current liabilities............................ 22,446 28,998
Commitments and contingencies (Notes 19 and 20).......... -- --
Stockholders' Equity (Note 12)
Preferred stock, no par value, 20,000 shares authorized,
no shares issued or outstanding in 2001 and 2000........ -- --
Common stock, par value $.01 per share, 200,000 shares
authorized, 74,361 and 73,144 shares issued in 2001 and
2000, respectively...................................... 744 731
Capital in excess of par value........................... 188,629 193,893
Retained earnings........................................ 355,596 327,373
Accumulated other comprehensive loss..................... (1,153) (596)
Treasury stock, 516 and 1,126 common shares at cost in
2001 and 2000, respectively............................. (3,982) (8,435)
Employee benefits trust, 5,701 and 4,822 common shares at
cost in 2001 and 2000, respectively..................... (42,985) (40,459)
---------- ----------
Total stockholders' equity.......................... 496,849 472,507
---------- ----------
Total liabilities and stockholders' equity.......... $1,582,725 $1,739,331
========== ==========
See accompanying notes to consolidated financial statements.
F-6
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Years Ended March 31, 2001, 2000 and 1999
----------------------------------------------------------------------------
Shares of Accumulated
Common Capital in Other Employee
Stock $.01 Common Excess of Retained Comprehensive Treasury Benefits
(In thousands) Par Value Stock Par Value Earnings Income (Loss) Stock Trust
---------- ------ ---------- -------- ------------- -------- ---------
Balance - March 31, 1998... 71,356.8 $714 $192,358 $237,166 $ (779) $(2,586) $ --
Net earnings............... 51,924
Foreign currency
translation adjustment.... (131)
Purchase of treasury stock
(Note 12)................. (16,579)
Shares issued in connection
with acquisitions (Note 2) 53.2 (425)
Reissuance of treasury stock
for stock options exercised
(Note 12)................. (5,877) 7,798
Tax benefit associated with
exercise of stock options
(Note 16)................. 1,648
Shares issued in connection
with Employee Stock
Purchase Plan (Note 13)... 613.7 6 5,708
Shares of treasury stock
sold to Employee Benefits
Trust (Note 12)........... (3,237) 10,238 (7,001)
-------- ---- -------- -------- ----- ------- --------
Balance - March 31, 1999... 72,023.7 $720 $190,175 $289,090 $(910) $(1,129) $ (7,001)
Net earnings............... 38,283
Foreign currency translation
adjustment................ 314
Purchase of treasury stock
(Note 12)..... (45,996)
Reissuance of treasury stock
for stock options exercised
(Note 12)................. (247) 424
Shares issued in connection
with stock options
exercised (Note 13)....... 544.4 5 1,429
Tax benefit associated with
exercise of stock options
(Note 16)................. 1,638
Shares issued in connection
with Employee Stock
Purchase Plan (Note 13)... 575.7 6 4,080
Shares issued from Employee
Benefits Trust for
Employee Stock Purchase
Plan (Note 12)............ (348) 1,976
Shares of treasury stock
sold to Employee Benefits
Trust (Note 12)........... (2,834) 38,266 (35,434)
-------- ---- -------- -------- ----- ------- --------
Balance - March 31, 2000... 73,143.8 $731 $193,893 $327,373 $(596) $(8,435) $(40,459)
Net earnings............... 28,223
Foreign currency
translation adjustment.... (557)
Purchase of treasury stock
(Note 12)...... (11,214)
Shares issued in connection
with a prior year
acquisition agreement..... 787.6 8 (8)
Shares issued in connection
with stock options
exercised (Note 13)....... 429.5 5 1,455
Tax benefit associated with
exercise of stock options
(Note 16)................. 800
Shares issued from Employee
Benefits Trust for Employee
Stock Purchase Plan
(Note 12).. (3,107) 8,737
Shares of treasury stock
sold to Employee Benefits
Trust (Note 12)........... (4,404) 15,667 (11,263)
-------- ---- -------- -------- ------- ------- --------
Balance - March 31, 2001... 74,360.9 $744 $188,629 $355,596 $(1,153) $(3,982) $(42,985)
======== ==== ======== ======== ======= ======= ========
See accompanying notes to consolidated financial statements.
F-7
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
-----------------------------------
(In thousands) 2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings....................................... $ 28,223 $ 38,283 $ 51,924
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization................... 86,754 89,308 87,926
Deferred income taxes........................... 5,152 13,123 16,045
Equity in earnings of unconsolidated affiliates. (2,260) (3,391) (7,911)
Gains on divestitures.................... ...... (1,173) (17,712) (25,468)
(Gain)/loss on sale of plant and equipment...... 502 (915) (222)
Stock issued for employee stock purchase plan... 5,630 5,715 5,750
Other non-cash charges.......................... 2,281 458 (1,000)
Changes in assets and liabilities, excluding
effects of business acquisitions and divestitures:
Securitization of trade receivables............. 73,200 -- --
Trade receivables, net.......................... (4,122) (14,480) (10,477)
Inventories, net................................ 4,531 1,392 (3,829)
Prepaid expenses and other current assets....... (1,757) (5,954) (2,236)
Accounts payable, trade......................... (2,005) (7,966) 1,052
Accrued expenses and other current liabilities.. 10,337 9,434 5,607
Other assets and liabilities, net............... (6,288) (7,203) (15,098)
------- ------- -------
Net cash provided by operating activities...... 199,005 100,092 102,063
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................... (65,910) (65,211) (101,638)
Proceeds from sale of plant and equipment.......... 2,854 37,454 3,279
Proceeds from divestitures......................... 49,629 55,596 53,682
Business acquisitions, net of cash acquired........ (1,006) (99,204) (47,246)
Business acquisitions, holdback and
other settlements................................. (4,752) (2,289) (4,839)
Investment in unconsolidated affiliates............ -- (30) (3,180)
Dividends and fees from unconsolidated affiliates.. 3,668 3,973 4,533
Other, net......................................... 4,665 4,250 (1,467)
------- ------- -------
Net cash used in investing activities.......... (10,852) (65,461) (96,876)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings........................... 157,238 168,569 449,833
Repayment of debt.................................. (341,122) (159,638) (426,995)
Purchase of treasury stock......................... (11,214) (47,125) (15,285)
Exercise of stock options.......................... 1,460 1,562 1,943
Cash overdraft..................................... 5,485 2,001 (14,662)
Other financing activities......................... -- -- (21)
------- ------- -------
Net cash used in financing activities.......... (188,153) (34,631) (5,187)
------- ------- -------
CHANGE IN CASH .................................... $ -- $ -- $ --
Cash - Beginning of year........................... -- -- --
------- ------- -------
Cash - End of year................................. $ -- $ -- $ --
======= ======= =======
For supplemental cash flow disclosures see Note 21.
See accompanying notes to consolidated financial statements.
F-8
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of
Airgas, Inc. and subsidiaries (the "Company"). Unconsolidated
affiliates are accounted for on the equity method and generally
consist of 20-50% owned operations where control does not exist or is
considered temporary. The excess of the cost of these affiliates
over the Company's share of their net assets at the acquisition date
is being amortized primarily over 40 years. Intercompany accounts
and transactions are eliminated in consolidation.
The Company has made estimates and assumptions relating to the
reporting of assets and liabilities and disclosure of contingent
assets and liabilities to prepare these statements in conformity with
accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method for
approximately 88% and 86% of the inventories at March 31, 2001 and
2000, respectively. Cost for the remainder of inventories is
determined using the last-in, first-out (LIFO) method.
(c) Plant and Equipment
Plant and equipment are stated at cost. Depreciation is
computed using the straight-line method based on the estimated useful
lives of the related assets.
(d) Goodwill
Goodwill represents costs in excess of net assets of businesses
acquired and is amortized on a straight-line basis over the expected
periods to be benefited, which is principally 40 years. The Company
assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted future cash flows.
In making such determination with respect to goodwill, the
Company evaluates the performance of underlying businesses that give
rise to such assets. The assets acquired in connection with these
acquisitions continue to generate a significant portion of the
Company's net sales, total operating income and cash flow.
(e) Other Intangible Assets
Costs related to the issuance of long-term debt are deferred and
amortized over the term of the related debt. Costs and payments
pursuant to non-competition arrangements entered into in connection
with business acquisitions are amortized over the terms of the
arrangements, which are principally over five years. The Company
assesses the recoverability of non-competition arrangements by
determining whether the amortization of the asset balance can be
recovered through projected undiscounted future cash flows of the
related business over its remaining life.
F-9
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(f) Commitments and Contingencies
The Company's policy is to accrue future legal fees associated
with outstanding litigation. Liabilities for loss contingencies
arising from claims, assessments, litigation and other sources are
recorded when it is probable that a liability has been incurred and
the amount of the claim, assessment or damages can be reasonably
estimated.
(g) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and
their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are recorded to
reduce deferred tax assets when it is more likely than not that a tax
benefit will not be realized.
(h) Foreign Currency Translation
The functional currency of the Company's foreign operations is
the applicable local currency. The translation of foreign currencies
into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for
revenue and expense accounts using average exchange rates during each
reporting period. The gains or losses, net of applicable deferred
income taxes, resulting from such translations are included in
stockholders' equity as a component of "Accumulated other
comprehensive loss." Gains and losses arising from foreign currency
transactions are reflected in the consolidated statements of earnings
as incurred.
(i) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade
receivables. Concentrations of credit risk are limited due to the
Company's large number of customers and their dispersion across many
industries throughout North America. Credit terms granted to
customers are generally net 30 days.
(j) Financial Instruments
In managing interest rate risk exposure, the Company enters into
interest rate swap agreements. An interest rate swap is a
contractual exchange of interest payments between two parties. A
standard interest rate swap involves the payment of a fixed rate
times a notional amount by one party in exchange for a floating rate
times the same notional amount from another party. As interest rates
change, the difference to be paid or received is accrued and
recognized as interest expense over the life of the agreement. These
instruments are not entered into for trading purposes and the Company
has the ability and intent to hold these instruments to maturity. The
fair value of the interest rate swap agreements is not recognized in
the financial statements. Counterparties to the Company's interest
rate swap agreements are major financial institutions.
The carrying amounts for trade receivables and accounts payable
approximate fair value based on the short-term maturity of these
financial instruments.
F-10
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
(k) Employee Benefits Trust
The Company established a grantor trust (the "Trust") to fund
future obligations of the Company's employee benefit and compensation
plans. Shares are purchased by the Trust from the Company at fair
market value and are reflected as a reduction of stockholders' equity
in the Company's Consolidated Balance Sheets under the caption
"Employee benefits trust." Shares are transferred from the Trust to
fund compensation and employee benefit obligations based on the
original cost of the shares to the Trust. The satisfaction of
compensation and employee benefit plan obligations is based on the
fair value of shares transferred. Differences between the original
cost of the shares to the Trust and the fair market value of shares
transferred is charged or credited to capital in excess of par value.
(l) Revenue Recognition
Revenue from sales of gas and hardgoods products is recognized
when products are delivered to customers. Rental fees on cylinders,
bulk gas storage tanks and other equipment are recognized when
earned. Under long-term lease agreements in which rental fees are
collected in advance, revenues are deferred and recognized over the
terms of the lease agreements.
(m) Shipping and Handling Fees and Costs
The Company recognizes delivery and freight charges to customers
as elements of net sales. Costs of third party freight are
recognized as cost of sales while costs of deliveries by company
vehicles and personnel are recognized as elements of selling,
distribution and administrative expenses and depreciation expense.
(n) Accounting and Disclosure Changes
The Company adopted the Securities and Exchange Commission's
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), as required, in the fourth quarter of fiscal
2001. SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The adoption of SAB
101 did not result in a change to the Company's method of revenue
recognition.
The Company adopted Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 140"), as required, in
fiscal 2001. SFAS 140 replaces SFAS 125, revises the standards for
accounting for securitizations and other transfers of financial
assets, and requires certain additional disclosures. The adoption of
SFAS 140 did not have an impact on the results of operations,
financial position and liquidity of the Company.
The Company adopted Statement of Position 98-5 "Reporting on the
Costs of Start-up Activities" ("SOP 98-5"), as required, in the first
quarter of fiscal year 2000 resulting in a charge to net earnings of
$590 thousand. In accordance with SOP 98-5, the charge has been
reflected on a separate line entitled "Cumulative effect of an
accounting change, net of taxes," on the Consolidated Statements of
Earnings. The charge primarily resulted from the write-off of start-
up costs capitalized in connection with the Company's two air
separation units.
F-11
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITIONS & DIVESTITURES
(a) Acquisitions
Acquisitions have been recorded using the purchase method of
accounting, and, accordingly, results of their operations have been
included in the Company's consolidated financial statements since the
effective dates of the respective acquisitions.
2001 - During fiscal 2001, the Company purchased one business
for approximately $2 million.
2000 - During fiscal 2000, the Company purchased six businesses.
The largest of these acquisitions and their effective dates included
Brown Welding Supply, LLC. (July 1, 1999), Oxygen Sales & Service,
Inc. (August 1, 1999) and Puritan-Bennett Corporation (January 21,
2000). The aggregate purchase price for these acquisitions amounted
to approximately $105 million. The purchase price for the remaining
3 businesses amounted to approximately $4 million.
1999 - During fiscal 1999, the Company purchased 15 businesses.
The largest of these acquisitions and their effective dates included
Abel Carbonic Products, Inc. (May 1, 1998), Gas House Welding Supply,
Inc. (July 1, 1998), Carbonic Products, Inc. (September 1, 1998) and
Pacific Dry Ice, Inc. (September 1, 1998). The aggregate purchase
price for these acquisitions amounted to approximately $49 million.
The purchase price for the remaining 11 businesses amounted to
approximately $17 million.
In connection with the above acquisitions, the total purchase
price, cash paid and liabilities assumed were as follows:
Years Ended March 31,
----------------------------
(In thousands) 2001 2000 1999
---- ---- ----
Cash paid................................ $1,006 $ 99,204 $47,246
Issuance of common stock................. -- -- --
Notes issued to sellers.................. -- 1,399 2,361
Notes payable and capital leases assumed. -- 561 553
Other liabilities assumed and accrued
acquisition costs....................... 536 7,762 15,475
------ -------- -------
Total purchase price..................... $1,542 $108,926 $65,635
====== ======== =======
The purchase price for business acquisitions and minority
interests was allocated to the assets acquired and liabilities
assumed based on their estimated fair values at the date of
acquisition. Such allocations have been based on preliminary
estimates of fair value at the date of acquisition, which may be
revised at a later date. Costs in excess of net assets acquired
(goodwill) for fiscal 2001, 2000 and 1999 amounted to $600 thousand,
$33 million and $29.3 million, respectively.
F-12
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITIONS & DIVESTITURES - (Continued)
The following presents unaudited estimated pro forma operating
results as if the fiscal 2001 and 2000 acquisitions had been
consummated on April 1, 1999. These pro forma results have been
prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisitions been made
as of April 1, 1999 or of results which may occur in the future.
Years Ended March 31,
---------------------
(In thousands, except per share amounts) 2001 2000
---- ----
Net sales....................................... $1,629,263 $1,607,011
Net earnings.................................... 28,232 42,192
Pro forma - diluted earnings per share.......... .42 .60
As reported - diluted earnings per share........ .42 .54
(b) Divestitures
In January 2001, the Company divested its Jackson Dome carbon
dioxide reserves and associated pipeline for proceeds of
approximately $42 million resulting in an insignificant gain. The
Jackson Dome Carbon dioxide reserve and associated pipeline was
reflected in the operating results of the Gas Operations segment.
In May 2000, the Company completed the sale of its equity
investment in Bhoruka Gases Ltd., a regional industrial gas
distributor in India. Proceeds from the sale, including a note
receivable, were $1.1 million. The investment was sold for a loss of
$1.7 million, which had been provided for under the Company's 1998
special charges. In August 2000, the Company completed the sale of
Superior Air Products Ltd., also located in India. Proceeds from the
sale were $6.4 million and resulted in an insignificant gain. The
equity investments in India were reflected in the operating results
of the Distribution segment.
During fiscal 2000, the Company completed the sale of its
operations in Poland and Thailand and sold a non-core medical
equipment distribution business. Proceeds from the sales amounted to
$55.6 million and resulted in a gain of $17.5 million, which was
recognized in "Other income, net." The operations in Poland and
Thailand were reflected in the operating results of the Distribution
segment.
During fiscal 1999, the Company sold certain beverage service
operations, its eastern Canadian industrial gas distribution business
and its calcium carbide and carbon products operations. Proceeds
from the sales amounted to $53.7 million. The beverage service and
Canadian operations were sold at a loss, which was provided for in
the 1998 Special Charges (Note 3). The Company's calcium carbide and
carbon products operations were sold for a gain of $25.5 million,
included in "Other income, net." The beverage service operations and
the Canadian industrial gas distribution business were reflected in
the operating results of the Distribution segment, while the calcium
carbide and carbon products operations were reflected in the Gas
Operations segment.
F-13
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITIONS & DIVESTITURES - (Continued)
The following table sets forth selected financial data related
to the fiscal 2001, 2000 and 1999 divested operations:
Years Ended March 31,
---------------------------
(In thousands) 2001 2000 1999
---- ---- ----
Sales............................ $4,270 $23,018 $67,729
Gross profits.................... 4,108 14,809 33,732
Depreciation and amortization.... 1,076 2,729 5,251
Operating income................. 2,816 935 7,008
(3) SPECIAL CHARGES
(a) 2001 Special Charges
During the fourth quarter of fiscal 2001, the Company recorded
net special charges of $3.6 million. The net special charges (the
"2001 Special Charges") include a charge of $8.5 million related to a
cost reduction plan focused on improving results at certain business
units partially offset by special charge recoveries of $4.9 million
principally consisting of a favorable insurance settlement related to
a 1997 Special Charge associated with the fraudulent breach of
contract by a third-party supplier of refrigerant gases. The cost
reduction plan included severance costs from a workforce reduction of
275 employees; facility exit costs, primarily non-cancelable lease
obligations, for the closure of 30 branch locations; and impairment
write-downs associated with the planned divestiture of certain non-
core businesses. The major components of the fiscal 2001 Special
Charges were as follows:
(In thousands) 2001
--------
Severance costs........... $ 3,880
Facility exit costs....... 2,464
Impairment write-down..... 2,188
-------
2001 Special Charges.... 8,532
Special charge recoveries. (4,889)
-------
Special Charges, net.... $ 3,643
=======
Accrued liabilities associated with the cost reduction plan at
March 31, 2001 were as follows:
(In thousands) Severance Facility exit
costs costs Divestitures Total
--------- ------------- ------------ --------
2001 Special Charges..... $ 3,880 $ 2,464 $ 2,188 $ 8,532
Cash payments............ (913) (34) -- (947)
Incurred losses.......... (240) -- (2,188) (2,428)
------- ------- ------- -------
March 31, 2001 liability. $ 2,727 $ 2,430 $ -- $ 5,157
======= ======= ======= =======
F-14
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) SPECIAL CHARGES - (Continued)
(b) 1998 Special Charges
In fiscal 1998, the Company recorded special charges (the "1998
Special Charges") associated with a repositioning plan which included
the consolidation of subsidiaries into larger regional companies; the
consolidation of certain warehouse facilities into regional
distribution centers; the standardization and integration of
information systems; the building of a national information,
procurement and logistics infrastructure to support expanded product
lines and distribution channels; and the divestiture of several non-
core businesses. At March 31, 2000, accrued liabilities related to
the 1998 Special Charges were $3.8 million. During fiscal 2001, the
Company completed the sale of its equity investments in India, which
were the final divestitures contemplated under the 1998 Special
Charges. After completing the activities contemplated by the
repositioning plan, the remaining accrued liabilities were reversed
with the adjustment reflected in income as special charge recoveries.
(4) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net earnings
by the weighted average number of shares of the Company's common
stock outstanding during the period. Outstanding shares consist of
issued shares less treasury stock and common stock held by the
Employee Benefits Trust. Diluted earnings per share is calculated by
dividing net earnings by the weighted average common shares
outstanding adjusted for the dilutive effect of common stock
equivalents related to stock options and contingently issuable
shares.
The table below reconciles basic weighted average common shares
outstanding to diluted weighted average common shares outstanding for
the three years ended March 31, 2001, 2000 and 1999:
Years Ended March 31,
------------------------
(In thousands) 2001 2000 1999
---- ---- ----
Weighted average common shares outstanding:
Basic...................................... 66,000 69,200 70,000
Stock options........................... 600 1,000 1,400
Contingently issuable shares............ 600 400 300
------ ------ ------
Diluted.................................... 67,200 70,600 71,700
====== ====== ======
Contingently issuable shares represent the required issuance of
Company common stock in connection with a prior year acquisition.
During fiscal 2001, the Company issued approximately 800 thousand
shares in connection with the acquisition. The number of issuable
shares was determined based on the spread between the average closing
market value of the Company's common stock for the ten business days
ended October 1, 2000 ($6.09 per share) and $13.10 per share. The
contingent shares included in the diluted weighted average shares
calculation have been weighted based on the number of contingent
shares issuable as of the end of each quarter during the fiscal years
presented. Additional common stock issued in connection with the
prior year acquisition reduced capital in excess of par value and
increased common stock for the par value of the additional shares
issued.
F-15
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) INVENTORIES, NET
Inventories, net, consist of:
March 31,
---------------------
(In thousands) 2001 2000
---- ----
Finished goods................ $154,385 $158,549
Raw materials................. 639 889
-------- --------
$155,024 $159,438
======== ========
Net inventories determined by the LIFO inventory method totaled
$19.1 million and $22.6 million at March 31, 2001 and March 31, 2000,
respectively. If the FIFO inventory method had been used for these
inventories, they would have been $1.5 million and $1.4 million
higher at March 31, 2001 and 2000, respectively.
(6) PLANT AND EQUIPMENT
The major classes of plant and equipment, at cost, are as follows:
March 31,
------------------
Depreciable
(In thousands) Lives (Yrs) 2001 2000
----------- ---- ----
Land and land improvements.............. -- $ 24,739 $ 25,099
Buildings and leasehold improvements.... 25 103,002 101,606
Cylinders............................... 30 486,909 475,144
Machinery and equipment, including
bulk tanks............................. 7 to 30 318,757 337,684
Computers and furniture and fixtures.... 3 to 10 76,679 72,192
Transportation equipment................ 3 to 15 54,950 55,528
Construction in progress................ -- 8,216 7,112
---------- ----------
$1,073,252 $1,074,365
========== ==========
(7) OTHER NON-CURRENT ASSETS
Other non-current assets include:
March 31,
------------------
(In thousands) 2001 2000
---- ----
Investments in unconsolidated affiliates (Note 14) $ 63,262 $ 72,959
Non-compete agreements and other intangible assets,
at cost, net of accumulated amortization of
$107,200 in 2001 and $97,500 in 2000.............. 38,335 48,136
Other assets....................................... 9,812 10,180
-------- --------
$111,409 $131,275
======== ========
F-16
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include:
March 31,
------------------
(In thousands) 2001 2000
---- ----
Cash overdraft.................................... $ 24,445 $ 18,960
Accrued payroll and employee benefits............. 24,989 24,441
Insurance reserves................................ 15,596 11,475
Other accrued expenses and current liabilities.... 67,278 66,373
-------- --------
$132,308 $121,249
======== ========
The cash overdraft is attributable to the float of the Company's
outstanding checks.
(9) INDEBTEDNESS
(a) Long-term Debt
Long-term debt consists of:
March 31,
------------------
(In thousands) 2001 2000
---- ----
Revolving credit borrowings.................. $414,983 $583,700
Medium-term notes............................ 225,000 225,000
Acquisition and other notes.................. 53,626 68,793
-------- --------
Total long-term debt......................... 693,609 877,493
Less current portion of long-term debt....... (72,945) (20,071)
-------- --------
Long-term debt, excluding current portion.... $620,664 $857,422
======== ========
The Company has unsecured revolving credit facilities totaling
$665 million and $76.5 million Canadian (US$49 million). The Company
may borrow under these facilities until the maturity date of December
5, 2002. The agreement contains covenants, which include the
maintenance of a minimum equity level, maintenance of certain
financial ratios, restrictions on additional borrowings and
limitations on dividends. At March 31, 2001, the Company had
borrowings under the agreement of $390 million and $39 million
Canadian (US$25 million). The Company also had commitments under
letters of credit supported by the agreement of approximately $52
million. Based on restrictions related to cash flow to funded debt
coverage, the Company had additional borrowing capacity under the
agreement of approximately $189 million. The variable rates of the
U.S. and Canadian revolving credit facilities are based on LIBOR and
on Canadian Bankers' acceptance rates, respectively. At March 31,
2001, the effective interest rates related to outstanding borrowings
under the lines were 5.79% on U.S. borrowings and 5.17% on Canadian
borrowings.
F-17
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INDEBTEDNESS - (Continued)
At March 31, 2001, the Company had the following medium-term
notes outstanding: $50 million of unsecured notes due September 2001
bearing interest at a fixed rate of 7.15%; $75 million of unsecured
notes due March 2004 at a fixed rate of 7.14%; and, $100 million of
unsecured notes due September 2006 bearing interest at a fixed rate
of 7.75%. The medium term notes due September 2001 are expected to
be refinanced with borrowings under the Company's revolving credit
facilities. The Company also has a shelf registration with a
capacity of approximately $175 million for the issuance of debt and
other types of securities.
Acquisition and other notes principally represent notes issued
to sellers of businesses acquired and are repayable in periodic
installments including interest at an average effective rate of 7.6%.
The aggregate maturities of long-term debt are as follows:
(In thousands)
Years Ending March 31, Aggregate Maturity
- ---------------------- ------------------
2002............... $ 72,945
2003............... 416,860
2004............... 97,158
2005............... 517
2006............... 5,444
Thereafter......... 100,685
--------
$693,609
========
(b) Swap Agreements
In managing interest rate exposure, the Company participates in
17 interest rate swap agreements with a total notional principal
amount of $477 million at March 31, 2001. Counterparties to the
interest rate swap agreements are major financial institutions. The
Company monitors its positions and the credit ratings of its
counterparties, and does not anticipate nonperformance by the
counterparties.
Thirteen swap agreements with approximately $347 million in
notional principal amount require fixed interest payments based on an
average effective rate of 6.3% for remaining periods ranging between
one and three years. Four swap agreements with approximately $130
million in notional principal amount require variable interest
payments based on an average effective rate of 5.5% at March 31,
2001. Under the terms of one of the swap agreements, the Company has
elected to receive the discounted value of the counterparty's
interest payments up front. At March 31, 2001, approximately $1.0
million of such payments were included in other current liabilities
and $400 thousand of such payments were included in other non-current
liabilities. The effect of the swap agreements was to increase
interest expense $1.6 million, $3.2 million and $1.1 million in 2001,
2000 and 1999, respectively.
F-18
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INDEBTEDNESS - (Continued)
The aggregate maturities of the Company's interest rate swaps by
type of swap for the five years ending March 31, 2006 and thereafter
are as follows:
(In thousands) Notional Principal Amounts
--------------------------
Years Ending March 31, Pay-Fixed Receive-Fixed
--------- -------------
2002............... $179,086 $ 50,000
2003............... 127,500 --
2004............... -- 30,000
2005............... 40,000 --
2006............... -- --
Thereafter......... -- 50,000
-------- --------
$346,586 $130,000
======== ========
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
Summarized below are the carrying and fair values of the
Company's financial instruments at March 31, 2001 and 2000.
The fair value of the Company's financial instruments is based
on estimates using standard pricing models that take into account the
present value of future cash flows as of the balance sheet date. The
computation of fair values of these instruments is generally
performed by the Company. The carrying amounts reported in the
balance sheet for trade receivables and payables, accrued
liabilities, accrued income taxes, and short-term borrowings
approximate fair value due to the short-term nature of these
instruments. Accordingly, these items have been excluded from the
table below.
2001 2001 2000 2000
(In thousands) Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
Financial Instruments:
Revolving credit borrowings.... $414,983 $414,983 $583,700 $583,700
Medium-term notes.............. 225,000 218,661 225,000 185,931
Acquisition and other notes.... 53,626 53,013 68,793 62,605
Prepaid interest rate swap
agreements.................... 1,441 3,411 4,519 5,573
Interest rate swap agreements.. -- (273) -- (2,322)
(11) TRADE RECEIVABLES SECURITIZATION
In December 2000, the Company entered into a $150 million three-
year trade receivables securitization agreement with two commercial
banks. The revolving period securitization helps diversify the
Company's funding sources at an efficient all-in cost of funds.
During fiscal 2001, the Company sold $284.9 million of trade
receivables and remitted to the bank conduits, pursuant to a
servicing agreement, $211.7 million in collections on those
receivables. Net proceeds from the securitization were $73.2
million, which were used to repay borrowings under the Company's
revolving credit facilities.
F-19
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) TRADE RECEIVABLES SECURITIZATION - (Continued)
The transaction has been accounted for as a sale under the
provisions of Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Under the 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 $26 million at March 31, 2001 is included
in "Trade receivables" in the accompanying Consolidated Balance
Sheet. 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. The Company also
maintains an allowance for doubtful accounts on trade receivables
that it retains.
In April 2001, the Company completed the second and final
tranche of the $150 million trade receivables securitization program.
Proceeds from the second tranche of $64.3 million were used to reduce
borrowings under the Company's revolving credit facilities. The
three-year trade receivables securitization agreement expires on
December 19, 2003, but the initial term is subject to renewal
provisions.
(12) STOCKHOLDERS' EQUITY
(a) Common Stock
The Company is authorized to issue up to 200 million shares of
common stock with a par value of $.01 per share. At March 31, 2001,
the number of shares of common stock outstanding was 68,144,341,
excluding 516 thousand shares of common stock held as treasury stock
and 5.7 million shares of common stock held in a grantor trust as
described under Note 12(d).
(b) Preferred Stock and Redeemable Preferred Stock
The Company is authorized to issue up to 20 million shares of
preferred stock. Of the 20 million shares authorized, 200 thousand
shares have been designated as Series A Junior Participating
Preferred Stock and 200 thousand shares have been designated as
Series B Junior Participating Preferred Stock (see Note 12(e) for
further discussion). At March 31, 2001 and 2000, no shares of the
preferred stock were issued or outstanding. The preferred stock may
be issued from time to time by the Company's Board of Directors in
one or more series. The Board of Directors is authorized to fix the
dividend rights and terms, conversion rights, voting rights, rights
and terms of redemption, liquidation preferences, and any other
rights, preferences, privileges and restrictions of any series of
preferred stock, and the number of shares constituting each such
series and designation thereof.
Additionally, the Company is authorized to issue 30 thousand
shares of redeemable preferred stock. At March 31, 2001 and 2000, no
shares were issued or outstanding.
F-20
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) STOCKHOLDERS' EQUITY - (Continued)
(c) Treasury Stock
In March 1999, the Company's Board of Directors authorized the
repurchase of up to seven million shares, or approximately 10%, of
the Company's outstanding common stock. The authorization provided
for the repurchase of shares in the open market or in privately
negotiated transactions depending on market conditions and other
factors. In accordance with the March 1999 and previous share
repurchase authorizations, the Company acquired 1.4 million, 5.3
million, and 1.4 million shares of common stock in fiscal 2001, 2000
and 1999, respectively. In fiscal 2001, the Company reissued 2
million shares of common stock to the Company's Employee Benefits
Trust (the "Trust"), as discussed in Note 12(d). In fiscal 2000, the
Company reissued 4.2 million shares of common stock to the Trust and
48 thousand shares for stock option exercises. In fiscal 1999, the
Company reissued 826 thousand shares of common stock to the Trust and
598 thousand for stock option exercises. When treasury shares are
reissued, the Company uses an average cost method with the excess of
the repurchase cost over the reissuance price accounted for as a
charge to capital in excess of par value. During fiscal 2001, the
Company completed the stock repurchase program.
(d) Shares in Employee Benefits Trust
In March 1999, the Company established a grantor trust (the
"Trust") to fund certain future obligations of the Company's employee
benefit and compensation plans. The Company, pursuant to a Common
Stock Purchase Agreement, may sell shares of common stock to the
Trust. Such common stock consists of shares the Company has
purchased or will purchase on the open market or in private
transactions. The common stock may also consist of shares issued
directly to the Trust. The Company holds promissory notes from the
Trust in the amount of each purchase. Shares held by the Trust serve
as collateral for the promissory notes and are available to fund
employee benefit plan obligations as the promissory notes are repaid.
The shares held by the Trust are not considered outstanding for
earnings per share purposes until they are released from serving as
collateral for the promissory notes. An independent third-party
financial institution serves as the Trustee. The Trustee votes or
tenders shares held by the Trust in accordance with instructions
received from the participants in the employee benefit and
compensation plans to be funded by the Trust. In fiscal 2001 and
2000, the Trust purchased 2 million and 4.2 million shares of common
stock, previously held as treasury stock, from the Company, for
approximately $11 million and $35 million, respectively.
Approximately 1.2 million and 230 thousand shares were issued from
the Trust for employee benefit programs during fiscal 2001 and 2000,
respectively.
(e) Stockholder Rights Plan
Effective April 1, 1997, the Company's Board of Directors
adopted a new stockholder rights plan (the "1997 Rights Plan").
Pursuant to the 1997 Rights Plan, the Board of Directors declared a
dividend distribution of one right for each share of common stock.
Each right entitles the holder to purchase from the Company one one-
thousandth of a share Series B Junior Participating Preferred Stock
at an initial exercise price of $100 per share.
Rights become exercisable only following the acquisition by a
person or group of 15 percent (or 20 percent in the case of the
Chairman and certain of his affiliates) or more of the Company's
common stock or after the announcement of a tender offer or exchange
offer to acquire 15 percent (or 20 percent in the case of the
Chairman and certain of his affiliates) or more of the outstanding
common stock. If such a person or group acquires 15 percent or more
(or 20 percent or more, as the case may be) of the common stock, each
right (other than such person's or group's rights, which will become
void) will entitle the holder to purchase, at the exercise price,
common stock having a market value equal to twice the exercise price.
In certain circumstances, the rights may be redeemed by the Company.
If not redeemed, they will expire on April 1, 2007.
F-21
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) STOCK-BASED COMPENSATION
The Company has elected to continue to account for its stock-
based compensation plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", as
permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no
compensation expense has been recognized for its stock option plans
and its stock purchase plan. However, pro forma information
regarding net earnings and earnings per share is required. Had
compensation expense for the Company's stock-based compensation plans
been determined based on the fair value at the grant date, the
Company's pro forma net earnings and earnings per share for fiscal
2001, 2000 and 1999 would be as follows:
Years Ended March 31,
----------------------
(In thousands, except per share amounts) 2001 2000 1999
---- ---- ----
Net earnings As reported........... $28,223 $38,283 $51,924
Pro forma............. $22,142 $32,602 $46,636
Diluted earnings As reported........... $ .42 $ .54 $ .72
per share Pro forma............. $ .33 $ .46 $ .65
The pro forma impact only takes into account options granted
since April 1, 1995 and is likely to have a greater impact in future
years as additional options are granted and amortized ratably over
the vesting period.
The Company's stock-based compensation plans are described below.
(a) Employee Stock Option Plans
The Company has a stock plan under which officers and key
employees may be granted options. In May 1997, the Company adopted
the 1997 Stock Option Plan (the "1997 Plan"). Options under the 1997
Plan vest 25% annually and have a maximum term of ten years. Under
the 1997 Plan, at March 31, 2001, 2000 and 1999, 3.7 million, 5.4
million and 6.3 million options, respectively, were available for
issuance. In fiscal 2001, 2000 and 1999, 1.7 million, 1.1 million
and 1.7 million options, respectively, were granted with an exercise
price equal to market price at the date of grant. Options under the
1997 Plan are generally granted in May of each year.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for fiscal 2001, 2000 and 1999
option grants, respectively: expected volatility of 51.1%, 44.2% and
42.6%, risk-free interest rate of 6.5%, 5.6% and 5.5%, and expected
life of 5.6, 4.9 and 4.8 years. The weighted average fair value of
the options granted during fiscal 2001, 2000 and 1999 was $3.13,
$5.19 and $5.82, respectively.
F-22
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) STOCK-BASED COMPENSATION - (Continued)
The following table summarizes the activity of the employee
stock option plans during the three years ended March 31, 2001:
Exercise
Number Price Per
of Shares Share
--------- --------------
March 31, 1999
- --------------
Outstanding, beginning of year.. 6,359,107 $1.83 - $23.25
Granted......................... 1,665,007 8.13 - 15.94
Exercised....................... (557,647) 1.83 - 15.63
Expired......................... (256,947) 6.31 - 22.00
March 31, 2000
- --------------
Outstanding, beginning of year.. 7,209,520 1.83 - 23.25
Granted......................... 1,126,845 6.06 - 12.50
Exercised....................... (576,772) 1.83 - 11.32
Expired......................... (489,932) 6.31 - 22.00
March 31, 2001
- --------------
Outstanding, beginning of year.. 7,269,661 1.83 - 23.25
Granted......................... 1,734,215 4.63 - 8.25
Exercised....................... (397,494) 1.83 - 8.50
Expired......................... (300,421) 5.21 - 22.00
Outstanding, end of year........ 8,305,961 $1.83 - $23.25
Options for 4.9 million, 4.6 million and 4.4 million shares were
exercisable at March 31, 2001, 2000 and 1999, respectively.
(b) Board of Directors Stock Option Plans
The Company also maintains stock option plans covering directors
who are not employees. In May 1997, the Company adopted the 1997
Directors' Stock Option Plan (the "1997 Directors' Plan"). The 1997
Directors' Plan reserved 500 thousand shares for issuance. Options
under the 1997 Directors' Plan are exercisable in full on the date of
grant.
Under the 1997 Directors' Plan, at March 31, 2001, 253,500
options were available for issuance. During fiscal 2001, 2000 and
1999, 100,000, 62,500 and 48,000 options, respectively, were granted
with an exercise price equal to the market price at the date of grant
and have a maximum term of ten years.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for fiscal 2001, 2000 and 1999
option grants, respectively: expected volatility of 51.1%, 44.8% and
42.2%, risk-free interest rate of 6.1%, 5.8% and 5.5%, and expected
life of 5.6, 5.4 and 5.5 years. The weighted average fair value of
the stock options granted during fiscal 2001, 2000 and 1999 was
$2.85, $6.01 and $6.36, respectively.
F-23
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) STOCK-BASED COMPENSATION - (Continued)
The following table summarizes the activity of the Board of
Directors stock option plans during the three years ended March 31,
2001:
Exercise
Number Price Per
of Shares Share
--------- ---------------
March 31, 1999
- --------------
Outstanding, beginning of year.. 306,000 $2.09 - $19.25
Granted......................... 48,000 13.50
Exercised....................... (40,000) 2.09 - 4.16
March 31, 2000
- --------------
Outstanding, beginning of year.. 314,000 2.09 - 19.25
Granted......................... 62,500 12.25
Exercised....................... (16,000) 2.20
March 31, 2001
- --------------
Outstanding, beginning of year.. 360,500 2.09 - 19.25
Granted......................... 100,000 5.25
Exercised....................... (32,000) 2.09 - 2.14
Outstanding, end of year......... 428,500 $2.09 - $19.25
Options for 428,500, 360,500 and 314,000 shares were exercisable
at March 31, 2001, 2000 and 1999, respectively.
The following table summarizes information about options
outstanding and exercisable for the employee and Board of Directors
stock option plans at March 31, 2001:
Options Outstanding
- ---------------------------------------------------------
Exercise
Weighted Average Number Price
Remaining Life-Years Outstanding Per Share
- -------------------- ----------- ---------------
1.97 1,032,888 $ 1.83 - $ 5.25
9.13 1,466,940 5.44 - 5.50
4.07 1,006,202 5.63 - 7.89
6.08 1,013,810 7.91 - 11.32
8.12 1,002,100 11.44 - 11.50
4.57 875,205 12.25 - 14.71
6.68 1,539,323 14.81 - 15.94
4.97 797,993 16.63 - 23.25
---- --------- ---------------
5.96 8,734,461 $ 1.83 - $23.25
==== ========= ===============
F-24
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) STOCK-BASED COMPENSATION - (Continued)
Options Exercisable
---------------------------------------------
Number of Options Weighted Average
Exercisable Exercise Price Per Share
----------------- ------------------------
1,030,138 $ 3.36
748,402 6.66
686,718 9.92
251,665 11.46
856,830 13.62
943,886 15.75
796,433 20.40
--------- -------
5,314,072 $11.47
========= =======
(c) Employee Stock Purchase Plans
In August 1998, the Company established the Airgas, Inc. 1998
Employee Stock Purchase Plan (the "1998 Plan") to encourage and
assist employees in acquiring an equity interest in the Company. The
1998 Plan replaced the previous 1994 Employee Stock Purchase Plan.
The 1998 Plan is authorized to issue up to 3 million shares of common
stock. Effective January 1, 1999, eligible employees may elect to
have up to 15% of their annual gross earnings withheld to purchase
common stock at 85% of the market value. Market value under the 1998
Plan is defined as either the closing share price on the New York
Stock Exchange as of the employees' enrollment date or the closing
price on the last business day of a fiscal quarter, whichever is
lower. An employee may lock-in a purchase price for up to 27 months.
The 1998 Plan is designed to comply with the requirements of Sections
421 and 423 of the Internal Revenue Code. During fiscal 2001, the
Company issued 1.2 million shares, provided from the Employee
Benefits Trust, to fund purchases made by employees under the 1998
Plan at an average purchase price of $4.86 per share. During fiscal
2000, the Company issued 806 thousand shares from the Employee
Benefits Trust and treasury stock for the 1998 Plan at an average
purchase price of $7.09 per share.
The 1994 Employee Stock Purchase Plan (the "1994 Plan") was
authorized to issue up to 2 million shares of common stock at terms
generally consistent with the 1998 Plan. The Company issued 614
thousand shares under the 1994 Plan at an average purchase price of
$9.30 during fiscal 1999. During fiscal 2000, the Company terminated
the 1994 Plan.
Compensation expense under SFAS 123 is estimated for the fair
value of the employees' option to purchase shares of common stock,
which was estimated using the Black-Scholes model with the following
assumptions for fiscal 2001, 2000 and 1999, respectively: expected
volatility of 63%, 51%, and 46% risk-free interest rate of 5.4%,
6.0%, and 4.8%, and expected term of 27 months for each period. The
weighted average fair value of the purchase options granted in fiscal
2001, 2000 and 1999 was $3.47, $3.94 and $4.79, respectively.
F-25
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company's investments in unconsolidated affiliates totaled
approximately $63 million at March 31, 2001, and $73 million at March
31, 2000. The Company's investments include a 47% joint venture
interest in the voting capital stock of National Welders Supply
Company, Inc. ("National Welders"). National Welders is a
distributor of industrial, medical and specialty gases and related
equipment based in Charlotte, North Carolina. The investment in
National Welders totaled approximately $55 million at March 31, 2001
and 2000. The Company's other investments in unconsolidated
affiliates totaled approximately $8 million at March 31, 2001 and
approximately $18 million at March 31, 2000. The decrease compared
to March 31, 2000 primarily relates to the fiscal 2001 divestiture of
the Company's investments in India, as described in Note 2(b). At
March 31, 2001, the Company's other investments primarily consist of
a 50% joint venture interest in AC Industries.
On December 31, 1998, the Company divested its calcium carbide
and carbon products manufacturing operations to Elkem Metals Company
L.P. ("Elkem"), a subsidiary of Elkem ASA. In conjunction with the
sale, the Company terminated its 55% interest in a joint venture,
which marketed calcium carbide throughout the United States.
The Company accounts for investments in unconsolidated
affiliates by the equity method of accounting. The Company's share
of earnings from all unconsolidated affiliates was $2.3 million, $3.4
million, and $7.9 million for the years ended March 31, 2001, 2000
and 1999, respectively. Equity in earnings from Elkem of $900
thousand in 1999 is included in Gas Operations' net sales. The
investments in unconsolidated affiliates include goodwill of
approximately $28 million and $29 million as of March 31, 2001 and
2000, respectively, which is primarily being amortized to earnings
over 40 years.
A summary of unaudited financial information for investments in
unconsolidated affiliates for the years ended March 31, 2001 and 2000
were as follows:
March 31,
-----------------
(In thousands) 2001 2000
---- ----
Current assets................ $ 44,731 $ 52,828
Non-current assets............ 121,852 142,461
-------- --------
Total assets............. $166,583 $195,289
======== ========
Current liabilities........... $ 29,441 $ 31,431
Non-current liabilities....... 91,798 105,945
Stockholders' equity.......... 45,344 57,913
-------- --------
Total liabilities and
stockholders' equity.... $166,583 $195,289
======== ========
F-26
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) INVESTMENTS IN UNCONSOLIDATED AFFILIATES - (Continued)
Years Ended March 31,
----------------------------
(In thousands) 2001 2000 1999
---- ---- ----
Net sales................. $182,630 $193,335 $200,017
Cost of sales............. 118,244 126,249 137,406
-------- -------- --------
Gross profit.............. 64,386 67,086 62,611
Operating income.......... 11,649 15,182 16,995
Earnings before taxes..... 13,086 13,571 17,266
-------- -------- --------
Net earnings.............. 9,162 9,428 13,463
Preferred stock dividends
and equity adjustments... (6,902) (6,037) (5,553)
Equity in earnings of
Elkem JV................. -- -- (868)
-------- -------- --------
Equity in earnings of
unconsolidated affiliates $ 2,260 $ 3,391 $ 7,042
======== ======== ========
(15) INTEREST EXPENSE, NET
Interest expense, net, consists of:
Years Ended March 31,
--------------------------
(In thousands) 2001 2000 1999
---- ---- ----
Interest expense...................... $61,434 $58,712 $62,588
Interest and finance charge income.... (1,227) (1,152) (2,290)
------- ------- -------
$60,207 $57,560 $60,298
======= ======= =======
(16) INCOME TAXES
Pre-tax earnings were derived from the following sources:
Years Ended March 31,
---------------------------
(In thousands) 2001 2000 1999
---- ---- ----
United States............ $46,021 $69,028 $83,548
Foreign.................. 2,920 1,396 2,813
------- ------- -------
$48,941 $70,424 $86,361
======= ======= =======
F-27
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) INCOME TAXES - (Continued)
Income tax expense (benefit) consists of:
Years Ended March 31,
---------------------------
(In thousands) 2001 2000 1999
---- ---- ----
Current:
Federal.............. $12,286 $16,554 $15,220
Foreign.............. 1,135 408 599
State................ 2,145 1,466 2,573
------- ------- -------
15,566 18,428 18,392
Deferred:
Federal.............. 6,173 10,325 13,870
Foreign.............. 594 847 446
State................ (1,615) 1,951 1,729
------- ------- -------
5,152 13,123 16,045
------- ------- -------
$20,718 $31,551 $34,437
======= ======= =======
Significant differences between taxes computed at the federal
statutory rate and the provision for income taxes were:
Years Ended March 31,
---------------------------
2001 2000 1999
---- ---- ----
Taxes at U.S. federal statutory rate 35.0% 35.0% 35.0%
Increase in income taxes resulting from:
State income taxes,
net of federal benefit................ 1.1% 2.1% 2.3%
Amortization of non-deductible goodwill 4.9% 4.7% 4.6%
Divestitures........................... -- 2.6% 0.4%
Equity accounting for unconsolidated
affiliates............................ (1.1%) (1.1%) (3.1%)
Other, net............................. 2.4% 1.5% 0.7%
----- ----- -----
42.3% 44.8% 39.9%
===== ===== =====
F-28
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) INCOME TAXES - (Continued)
The tax effects of cumulative temporary differences that gave
rise to the significant portions of the deferred tax assets and
liabilities were as follows:
March 31,
--------------------
(In thousands) 2001 2000
---- ----
Deferred Tax Assets:
- --------------------
Inventories...................... $ 5,852 $ 5,912
Accounts receivable.............. 406 1,088
Deferred rental income........... 528 385
Insurance reserves............... 4,391 3,567
Special charges (Note 3)......... 5,396 4,011
Litigation settlement and
other reserves.................. 1,649 4,348
Intangible assets................ (71) 649
Other............................ 11,523 7,638
Valuation allowance.............. (4,263) (1,840)
------- -------
25,411 25,758
------- -------
Deferred Tax Liabilities:
- -------------------------
Plant and equipment.............. (160,000) (156,320)
Other............................ (16,444) (16,494)
-------- --------
(176,444) (172,814)
-------- --------
Net deferred tax liability....... $(151,033) $(147,056)
======== ========
Current tax assets and current tax liabilities have been netted
for presentation purposes. Non-current tax assets and non-current
tax liabilities have also been netted. Deferred tax assets and
liabilities are reflected in the Company's consolidated balance
sheets as follows:
March 31,
--------------------
(In thousands) 2001 2000
---- ----
Current deferred tax assets,net.......... $ 10,143 $ 13,752
Non-current deferred tax liability, net.. (161,176) (160,808)
-------- --------
Net deferred tax liability............... $(151,033) $(147,056)
======== ========
The Company has recorded tax benefits amounting to $800
thousand, $1.6 million, and $1.6 million in fiscal 2001, 2000 and
1999, respectively, resulting from the exercise of stock options.
This benefit has been recorded in capital in excess of par value.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
reversal of deferred tax liabilities and projected future taxable
income in making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the existing
valuation allowances, at March 31, 2001. Valuation allowances
primarily relate to state tax net operating loss carry forwards.
F-29
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) BENEFIT PLANS
The Company has a defined contribution 401(k) plan (the "plan")
covering substantially all full-time employees. Under the terms of
the plan, the Company makes matching contributions up to two percent
of participants' wages plus additional discretionary profit sharing
contributions based upon the profitability of the Company. Amounts
expensed under the plan for fiscal 2001, 2000, and 1999 were $5.8
million, $5.9 million and $4.7 million, respectively.
Certain subsidiaries of the Company participate in
multi-employer pension and post-retirement plans which provide
defined benefits to union employees. Contributions are made to the
plans in accordance with negotiated labor contracts. The Company has
not taken any action to terminate or withdraw from these plans.
Management believes that the Company's liability, if any, for
multi-employer plan withdrawal liability will not have a material
effect on the Company's financial condition, results of operations or
liquidity. Amounts expensed under the pension plans for fiscal 2001,
2000 and 1999 were $543 thousand, $526 thousand and $611 thousand,
respectively.
(18) RELATED PARTIES
During the years ended March 31, 2001, 2000 and 1999, National
Welders, an unconsolidated equity affiliate, paid $3.8 million, $3.5
million, and $1.4 million, respectively, to the Company for gas
products, hardgoods and services. In addition, National Welders sold
gas products and hardgoods to the Company in the amounts of $787
thousand, $330 thousand, and $552 thousand in fiscal 2001, 2000 and
1999, respectively.
The Company paid $7.9 million, $9.1 million, and $8.4 million to
AC Industries, an unconsolidated equity affiliate, for the purchase
of liquid carbon dioxide during the years ended March 31, 2001, 2000
and 1999, respectively. In addition, the Company had a net payable
balance to AC Industries totaling $1.2 million, $695 thousand, and
$1.3 million, at March 31, 2001, 2000 and 1999, respectively.
(19) LEASES
The Company leases certain distribution facilities and equipment
under long-term operating leases with varying terms. Most leases
contain renewal options and in some instances, purchase options.
Rentals under these long-term leases for the years ended March 31,
2001, 2000, and 1999, amounted to $43.7 million, $38.5 million, and
$35.4 million, respectively. Certain operating facilities are leased
at market rates from employees of the Company who were previous
owners of businesses acquired. The Company also has several capital
leases assumed as part of prior acquisitions. Outstanding lease
obligations and the related capital assets are not material to the
consolidated balance sheets at March 31, 2001 and 2000.
In fiscal 2000, the Company renewed a lease of real estate with
a trust established by a commercial bank. The lease was amended to
include the sale-leaseback of certain equipment. The trust holds
title to the properties and equipment included in the leases. The
rental payments are based on LIBOR plus an applicable margin and the
cost of the property acquired by the trust. At March 31, 2001, the
non-cancelable lease obligation of the real estate and equipment
lease totaled approximately $44 million. The lease has a five-year
term and has been accounted for as an operating lease. The Company
has guaranteed a residual value of the real estate and the equipment
at the end of the lease term of approximately $30 million. A gain of
approximately $12 million on the equipment portion of the transaction
has been deferred until the expiration of the Company's guarantee of
the residual value.
F-30
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19) LEASES - (Continued)
At March 31, 2001, future minimum lease payments under
noncancelable operating leases are as follows:
(In thousands)
--------------
2002............ $ 32,010
2003............ 26,752
2004............ 20,736
2005............ 55,619
2006............ 11,467
Thereafter...... 17,960
-------
$164,544
=======
(20) COMMITMENTS AND CONTINGENCIES
(a) Legal
In July 1996, Praxair, Inc. ("Praxair") filed suit against the
Company in the Circuit Court of Mobile County, Alabama. The
complaint alleged 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 the
calendar year, and that a trial on the merits will begin in April
2002. The Company believes that Praxair's North Carolina claims are
without merit and intends to defend vigorously against such claims.
In the fourth quarter of fiscal 2001, the Company recorded a charge
of $6.9 million for the anticipated costs of defending the Praxair
lawsuit.
In 1997, the Company announced it was the victim of a fraudulent
breach of contract by a third party supplier of refrigerant gases and
recorded a special charge related to product losses and costs
associated with the Company's efforts to investigate the fraud and
pursue recoveries. In March 2001, the Company reached a final
settlement with its insurance carriers resulting in additional
insurance recoveries of $4 million. The insurance settlement net of
associated legal expenses was reflected in special charge recoveries
in the Consolidated Statement of Earnings.
In fiscal 2000, the Company recorded a $7.5 million charge
representing an estimate of the overall costs associated with the
defense and settlement of certain class action lawsuits pertaining to
hazardous material charges paid to the Company by customers. In the
fourth quarter of fiscal 2001, a settlement agreement and approving
court orders covering all such class actions against the Company
became final, and the Company reversed $1.1 million of the previously
accrued defense and settlement costs.
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.
F-31
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(20) COMMITMENTS AND CONTINGENCIES - (Continued)
(b) Insurance Coverage
The Company has established insurance programs to cover workers'
compensation, business automobile, general and products liability.
These programs have self-insured retention of $500 thousand per
occurrence. Estimated losses are accrued based upon the Company's
experience for the aggregate liability for claims incurred and claims
incurred but not reported. The Company believes its insurance
reserves are adequate.
The nature of the Company's business may subject it to product
and general liability lawsuits. To the extent that the Company is
subject to claims that exceed its liability insurance coverage of
$100 million, such suits could have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(21) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense and income taxes was as follows:
Years Ended March 31,
------------------------
(In thousands) 2001 2000 1999
---- ---- ----
Interest....................... $65,167 $57,934 $63,316
Income taxes (net of refunds).. 8,109 16,269 10,452
Significant non-cash transactions were as follows:
Years Ended March 31,
--------------------------
(In thousands) 2001 2000 1999
---- ---- ----
Acquisition related transactions
(also see Note 2):
Debt assumed................. $ -- $ 561 $ 553
Liabilities assumed.......... 536 7,762 15,475
Debt issued.................. -- 1,399 2,361
F-32
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(22) SUMMARY BY BUSINESS SEGMENT
The Company aggregates its operations, based on products and
services, into two reportable segments, Distribution and Gas
Operations. The Distribution segment accounts for approximately 90%
of consolidated sales. The segment's principal products and services
are packaged and small bulk gases, gas cylinder and welding equipment
rental and hardgoods. Gas sales include industrial, medical and
specialty gases such as: nitrogen, oxygen, argon, helium, acetylene,
carbon dioxide, nitrous oxide, hydrogen, welding gases, ultra high
purity grades and special application blends. Rent is derived from
gas cylinders, cryogenic liquid containers, bulk storage tanks and
through the rental of welding equipment. Hardgoods consist of welding
supplies and equipment, safety products, and industrial tools and
supplies.
The Gas Operations segment produces and distributes certain gas
products, principally dry ice, carbon dioxide, nitrous oxide and
specialty gases. The Company also operates two air separation
plants that produce oxygen, nitrogen and argon which are sold to on-
site customers and to the Distribution segment. Until their
divestiture in fiscal 2000, the segment also reflected the Company's
operations in Poland and Thailand. Additionally, until its
divestiture in fiscal 1999, the segment reflected the manufacture and
sale of calcium carbide and carbon products.
The Company's operations are principally in the United States.
The Company's customer base is diverse and sales are not dependent on
a single or small group of customers.
The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies (Note 1).
Additionally, Corporate operating results are allocated to each
segment pro rata based on sales dollars; Corporate assets have been
allocated to the Distribution segment; intercompany sales are
recorded on the same basis as sales to third parties; and
intercompany transactions are eliminated in consolidation. Certain
reclassifications have been made to the prior periods segment
disclosures to conform to the current presentation.
F-33
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(22) SUMMARY BY BUSINESS SEGMENT - (Continued)
(In thousands) Distribution Gas Operations Combined
------------ -------------- --------
FISCAL 2001
Gas and rent..................................... $ 647,525 $ 138,383 $ 785,908
Hardgoods........................................ 839,897 3,096 842,993
--------- --------- ---------
Total net sales............................. 1,487,422 141,479 1,628,901
Intersegment sales............................... -- 31,805 31,805
Gross profit..................................... 689,999 91,702 781,701
Gross profit margin.............................. 46.4% 64.8% 48.0%
Depreciation and amortization expense............ 72,552 14,202 86,754
Operating income, excluding special
(charges) recoveries............................ 92,186 19,406 111,592
Special (charges) recoveries, net................ (6,279) 2,636 (3,643)
--------- --------- ---------
Operating income............................ 85,907 22,042 107,949
Interest expense................................. 47,921 13,513 61,434
Interest income and finance charges.............. 307 920 1,227
Discount on securitization of trade receivables.. 941 362 1,303
Equity earnings of unconsolidated affiliates..... 1,386 874 2,260
Earnings before income taxes and the cumulative
effect of an accounting change.................. 37,464 11,477 48,941
Assets........................................... 1,408,363 174,362 1,582,725
Investment in equity method investees............ 56,671 6,591 63,262
Capital expenditures............................. 56,228 9,682 65,910
F-34
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(22) SUMMARY BY BUSINESS SEGMENT - (Continued)
(In thousands) Distribution Gas Operations Combined
------------ -------------- --------
FISCAL 2000
Gas and rent..................................... $ 592,449 $ 128,703 $ 721,152
Hardgoods........................................ 817,500 3,682 821,182
--------- --------- ---------
Total net sales............................. 1,409,949 132,385 1,542,334
Intersegment sales............................... -- 18,253 18,253
Gross profit..................................... 649,827 75,910 725,737
Gross profit margin.............................. 46.1% 57.3% 47.1%
Depreciation and amortization expense............ 76,483 12,825 89,308
Operating income, excluding special
(charges) recoveries............................. 94,671 9,231 103,902
Special (charges) recoveries, net................ 577 2,252 2,829
--------- --------- ---------
Operating income............................ 95,248 11,483 106,731
Interest expense................................. 46,484 12,228 58,712
Interest income and finance charges.............. 337 815 1,152
Equity earnings of unconsolidated affiliates..... 1,658 1,733 3,391
Earnings before income taxes and the cumulative
effect of an accounting change.................. 49,459 20,965 70,424
Assets........................................... 1,512,666 226,665 1,739,331
Investment in equity method investees............ 57,339 15,620 72,959
Capital expenditures............................. 56,361 8,850 65,211
Other significant non-cash transactions:
- ----------------------------------------
Acquisitions..................................... 9,722 -- 9,722
Capitalized interest............................. 114 77 191
F-35
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(22) SUMMARY BY BUSINESS SEGMENT - (Continued)
(In thousands)
Distribution Gas Operations Combined
------------ -------------- --------
FISCAL 1999
Gas and rent..................................... $ 569,406 $ 128,740 $ 698,146
Hardgoods........................................ 836,778 4,227 841,005
Other............................................ -- 22,067 22,067
--------- --------- ---------
Total net sales............................. 1,406,184 155,034 1,561,218
Intersegment sales............................... -- 14,656 14,656
Gross profit..................................... 637,616 85,547 723,163
Gross profit margin.............................. 45.3% 55.2% 46.3%
Depreciation and amortization expense............ 74,958 12,968 87,926
Operating income, excluding special
(charges) recoveries............................. 98,447 13,549 111,996
Special (charges) recoveries, net................ 1,000 -- 1,000
--------- --------- ---------
Operating income............................ 99,447 13,549 112,996
Interest expense................................. 49,995 12,593 62,588
Interest income and finance charges.............. 1,339 951 2,290
Equity earnings of unconsolidated affiliates..... 4,525 2,517 7,042
Earnings before income taxes and cumulative
effect of an accounting change.................. 54,455 31,906 86,361
Assets........................................... 1,451,792 246,680 1,698,472
Investment in equity method investees............ 57,680 43,154 100,834
Capital expenditures............................. 86,114 15,524 101,638
Other significant non-cash transactions:
- ----------------------------------------
Acquisitions..................................... 6,762 11,627 18,389
Capitalized interest............................. 271 -- 271
F-36
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(23) SUPPLEMENTARY INFORMATION (UNAUDITED)
This table summarizes the unaudited results of operations
for each quarter of fiscal 2001 and 2000:
(In thousands, except per share amounts) First Second Third Fourth
----- ------ ----- ------
2001
- ----
Net sales............................... $408,998 $410,097 $394,970 $414,836
Operating income........................ 31,043 33,046 26,242 17,618
Net earnings............................ 9,816 10,403 6,676 1,328
Basic earnings per share (a),(b)........ $ .15 $ .16 $ .10 $ .02
Diluted earnings per share (a),(b)...... $ .15 $ .16 $ .10 $ .02
2000
- ----
Net sales............................... $379,493 $387,289 $369,434 $406,118
Operating income........................ 29,099 32,304 29,004 16,324
Net earnings............................ 9,085 18,912 9,760 526
Basic earnings per share (a),(c)........ $ .13 $ .27 $ .14 $ .01
Diluted earnings per share (a),(c)...... $ .13 $ .27 $ .14 $ .01
(a) Earnings per share calculations for each of the quarters are
based on the weighted average number of shares outstanding in
each period. Therefore, the sum of the quarters does not
necessarily equal the full year earnings per share.
(b) As discussed in the Notes to the Company's consolidated
financial statements, net earnings for fiscal 2001 include: (1)
fourth quarter net special charges of $2.3 million after tax, or
$.03 per diluted share; (2) litigation charges, net of
recoveries, of $3.4 million after tax, ($3.6 million of the net
after tax litigation charges, or $.06 per diluted share, were
recognized in the fourth quarter); and (3) fourth quarter asset
impairments associated with two equity affiliates of $700
thousand after tax, or $.01 per diluted share.
(c) As discussed in the Notes to the Company's consolidated
financial statements, net earnings for fiscal 2000 include: (1)
in the first quarter, a charge of $590 thousand after-tax, or
$.01 per diluted share, representing a change in accounting
principle; (2) in the second quarter, a divestiture gain of $7.8
million after tax, or $.11 per diluted share; (3) in the third
quarter, a special charge recovery of $1.7 million after tax, or
$.02 per diluted share, and an inventory write-down of $2.2
million after-tax, or $.03 per diluted share; and (4) in the
fourth quarter, a litigation charge of $4.8 million after-tax, or
$.07 per diluted share, and a divestiture gain of $800 thousand
after-tax, or $.01 per diluted share.
F-37
SCHEDULE II
AIRGAS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2001, 2000 and 1999
(In thousands of dollars)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
--------------------
Charged
Balance at Charged to (Credited) Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Period
- ----------- ---------- ---------- ---------- ---------- ---------
2001
Accounts receivable - allowances
for doubtful accounts........... $ 6,194 $ 8,730 $ 820 (1) $ (8,342) (2) $ 7,402
Inventory reserves............... 7,319 -- 240 (1,215) 6,344
Insurance reserves............... 11,475 40,991 577 (37,447) (3) 15,596
Restructuring reserves........... 3,793 8,532 (644) (6,524) 5,157
Deferred tax asset valuation
allowance....................... 1,840 2,423 4,263
Litigation reserve............... 7,500 8,288 (8,653) 7,135
2000
Accounts receivable - allowances
for doubtful accounts........... $ 6,092 $ 6,303 $1,078 (1) $ (7,279) (2) $ 6,194
Inventory reserves............... 6,207 885 227 -- 7,319
Insurance reserves............... 9,584 44,492 -- (42,601) (3) $11,475
Restructuring reserves........... 5,087 (577) (4) -- (717) 3,793
Deferred tax asset valuation
allowance....................... 1,672 168 -- -- 1,840
Litigation reserve............... -- 7,500 -- -- 7,500
1999
Accounts receivable - allowances
for doubtful accounts........... $ 5,676 $ 5,850 $1,071 (1) $ (6,505) (2) $ 6,092
Inventory reserves............... 8,354 -- 14 (2,161) 6,207
Insurance reserves............... 7,248 36,155 245 (34,064) (3) 9,584
Restructuring reserves........... 10,429 (1,000) -- (4,342) 5,087
Deferred tax asset valuation
allowance....................... 1,329 343 -- -- 1,672
(1) Includes collections on accounts previously written-off and allowances
for doubtful accounts of businesses acquired less the allowance for
doubtful accounts of businesses sold.
(2) Write-off of uncollectible accounts.
(3) Payments of insurance premiums and claims.
(4) Represents a change in estimate.