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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............