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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, 1997
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 Radnor-Chester Road, Suite 100
Radnor, Pennsylvania 19087-5240
(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 57,075,279 shares of voting stock held
by non-affiliates of the registrant on May 30, 1997 was approximately $970
million. 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 May 30, 1997 was
66,818,522.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for the Annual Meeting of Stockholders to be
held August 4, 1997 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.
2
AIRGAS, INC.
TABLE OF CONTENTS
PART I
ITEM PAGE NO.
_____ ________
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . .13
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . .13
PART II
5. Market for the Company's Common Stock and Related Stockholder Matters . 14
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 15
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . 27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . 27
PART III
10. Directors and Executive Officers of the Company . . . . . . . . . . . . 27
11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 27
12. Security Ownership of Certain Beneficial Owners and Management. . . . . 27
13. Certain Relationships and Related Transactions. . . . . . . . . . . . . 27
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K . . . . 27
3 PART I
ITEM 1. BUSINESS.
GENERAL
Airgas, Inc. ("Airgas" or the "Company") classifies its operations into
three business segments: Distribution, Direct Industrial and Manufacturing.
Sales for Airgas were $1.16 billion in fiscal 1997, and $838 and $688 million
in fiscal 1996, and 1995, respectively. Distribution sales represented 88% of
total sales and 85% of Airgas' operating income in fiscal 1997. Financial
information by business segment can be found in 1) Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Financial Statements and Supplementary Data", and 2) Note 22 to the Company's
consolidated financial statements for the three years ended March 31, 1997
under Item 8.
The Distribution business is conducted through approximately 600 locations
in 41 states, Canada and Mexico. Principal products distributed include:
industrial, medical and specialty gases and a wide selection of name-brand
welding equipment, accessories and industrial protective equipment
("hardgoods"), including electrode holders, welding wire, cable lugs and
connectors, hard hats, welding helmets, hearing protectors, goggles, face
shields, safety glasses, welding machines and electrodes. In connection with
the distribution of gases, Airgas rents industrial gas cylinders and bulk
storage tanks to its customers. Additionally, acetylene gas is manufactured
and sold as part of the Company's Distribution business. Since its formation,
the Company's strategy has been to expand through the acquisition of
independent distributors. The Company believes that it is the largest
distributor of industrial, medical and specialty gases and related equipment in
North America.
During fiscal 1997, the Company acquired IPCO Safety Products Company
(IPCO) and Rutland Tool & Supply Co., Inc. (Rutland), which had historical
combined annual sales of approximately $120 million. IPCO and Rutland formed
the basis for the Company's Direct Industrial segment, Airgas Direct Industrial
("ADI"). ADI sells an expansive line of welding, metalworking, safety and
other MRO (Maintenance, Repair and Operations) products directly to end-users.
The Company believes ADI will help enable it to be a low cost supplier and
increase sales of other products and services by leveraging the Company's
strong local presence and the relationships with its existing customer base and
distribution network. Many of Airgas' customers use the same types of safety
products sold by IPCO. Rutland targets the same metal fabrication market which
also accounts for a large part of Airgas' current Distribution gas and
hardgoods sales.
Manufacturing operations include the production of carbon products,
calcium carbide, nitrous oxide and carbon dioxide. In connection with its
carbon dioxide business, Airgas has implemented a strategy to expand the
distribution of carbon dioxide. During 1997, the Company acquired Shell Land &
Energy Company's (Shell) interest in unitized leases producing carbon dioxide,
including Shell's 183 mile pipeline. In June 1997, the Company closed the
acquisition of Carbonic Industries Corporation ("CIC"), the fourth largest
producer of carbon dioxide in the United States.
4
THE DISTRIBUTION BUSINESS
Industry Background
The industrial gas distribution market is broad and includes customers
from most major industries. Airgas sells nitrogen, oxygen, argon, helium,
acetylene, carbon dioxide, nitrous oxide, hydrogen and welding gases and a
variety of medical and specialty gases to a diverse customer base. Gases are
distributed and stored in industrial gas cylinders and bulk storage tanks.
Hardgoods sold through its distribution network include: protective equipment,
such as hard hats, welding helmets, goggles, face shields and protective
glasses; welding machines and welding consumables; and accessories, such as
electrodes, electrode holders and cable connectors.
The United States market for industrial gases is approximately $7 billion
annually. Sales to major users of industrial gases that have the capacity to
accept large bulk shipments or pipeline deliveries are generally serviced
directly by industrial gas producers and account for approximately $3.5 billion
of such market. The remaining $3.5 billion of annual industrial gas sales are
made to small bulk users and cylinder gas customers. These small bulk users and
cylinder gas customers are also believed to purchase approximately $3.5 billion
of hardgoods annually. Small bulk users and cylinder gas customers are
primarily served by a fragmented distribution system of approximately 1,000
distributors, the majority of which are independently owned. The Company
concentrates on the small bulk, cylinder gas, welding and
protective equipment segment of the market. This segment is less capital
intensive, in part, because of the long useful lives of the fixed assets,
principally cylinders.
Acquisition Strategy
Since May 1986, the Company has acquired over 225 distributors of
industrial gases and related equipment. These distributors are organized into
three divisions with approximately 600 locations in 41 states, Canada and
Mexico which provide a national distribution network.
Based on the terms of a joint venture agreement, the Company acquired 47%
of the voting capital stock of National Welders Supply Company ("National
Welders"), the largest independent distributor of industrial, medical and
specialty gases and related equipment in the United States based in Charlotte,
North Carolina. The purpose of the joint venture is to carry on the business
of National Welders, enhanced by its association with the Company and its
financial, purchasing and national marketing strengths, and to pursue
acquisition opportunities in the area currently served by National Welders.
Inasmuch as National Welders is a joint venture, it represents a departure from
Airgas' usual method of expansion which is acquisitions.
The Company's principal business strategy is to continue to expand its
distribution network through a program of acquiring independent distributors.
The industrial gas distribution industry continues to undergo a consolidation
process which Airgas believes will continue to present it with opportunities to
acquire industrial gas distributors.
The Company believes that its principal competitive advantages in
acquiring distributors are its extensive distribution network, its well-
organized acquisition program, flexibility in structuring acquisitions to meet
sellers' needs and the ability to offer sellers and their employees a
continuing management role in a decentralized entrepreneurial environment. In
seeking to acquire distributors, the Company competes with industrial gas
producers and other independent distributors.
5
The Company has made investments in industrial gas operations in Poland,
India and Thailand. At March 31, 1997, the total investment in these foreign
operations was approximately 1% of total assets. The Company will continue to
evaluate foreign industrial gas opportunities, although its principal focus
remains on North American expansion.
The Company has financed distributor acquisitions primarily with
internally generated funds and debt. The Company has been able to obtain debt
financing due, in part, to its ability to generate cash flow from operating
activities and the long useful lives and relatively stable market values of the
fixed assets, principally cylinders.
Operating Policies
The Company believes that its operations are best managed at the local
level by entrepreneurial, incentive-driven executives with backgrounds
principally in the industrial gas industry. The president of each distribution
subsidiary is typically a former owner or key employee of the acquired business
or an experienced executive recruited by management. The continuity afforded
by retaining the key employees of an acquired business combined with local
management is essential because the Company's distribution business is local in
nature and is dependent upon satisfied repeat customers.
Customer Base
The majority of the Company's gases are generally stored in bulk tanks at
the Company's cylinder fill plants and are pumped into cylinders for distribu-
tion to customers or, in the case of bulk customers, in tanker trucks or tube
trailers for delivery into bulk tanks at the customer's business location. The
Company emphasizes sales to cylinder and small bulk gas customers.
The distribution of industrial gases historically has been to customers
engaged in the business of welding and metal fabrication. In order to better
serve these customers, industrial gas distributors have traditionally sold
hardgood items through their distribution branch locations. As certain sectors
of the economy have grown, such as the electronics and chemicals industries,
and as new applications for gases have developed, the customer base of the gas
distribution business has broadened significantly to include businesses in
almost every major industry, from medical and high technology to consumer and
basic industries. For example, the food and beverage industry uses carbon
dioxide and nitrogen; the electronics industry uses oxygen, nitrogen, argon,
and hydrogen; the healthcare industry uses oxygen, nitrogen, and nitrous oxide;
and the chemical and fiber industries use nitrogen.
Specialty gases, which are used in numerous industries and in electronic
and laboratory applications, include rare gases, high-purity gases, and blended
multi-component gas mixtures. In fiscal 1997, the Company formed a new
subsidiary, Airgas Specialty Gases ("ASG"). ASG is a national organization
within Airgas that assists in the management of the Company's network of 24
specialty gas laboratories in the U.S., sourcing specialty gas through the
Company's hubs and branches. ASG operates four "A" laboratories, which produce
complicated gas mixtures, and oversees the Company's twenty (20) "B" Labs,
which produce simple, pure gases and certain common mixtures. ASG also assists
the hubs in growing their specialty gas business and improving the
responsiveness and quality of the hubs' specialty gas operations. The
principal drivers for market growth include: (1) environmental regulations,
such as the Clean Air Act, water testing and pollution remediation and testing
and monitoring; (2) quality control services using in-line chromatography and
spectrography to analyze samples; and (3) the growth of environmental, research
and clinical laboratories.
6
The Company continues to concentrate its efforts in the small bulk gas
market. The primary gases that Airgas sells in bulk are liquid oxygen,
nitrogen, argon, and carbon dioxide, and gaseous hydrogen, helium and nitrogen.
The Company charges customers rent for the use of bulk tanks and tube trailers
which are placed on the customer's property. The Company believes there are
growth opportunities in marketing to these small bulk customers, which it can
serve more effectively than industrial gas producers.
The Company has undertaken selected initiatives to develop further its
industrial gas customer base to include customers which require large-volume
supplies of gases, such as nitrogen. The Company has entered into long-term
supply agreements with two customers which require the construction of two air
separation plants which will begin production late in calendar 1997. These two
plants will also produce liquid oxygen and argon which will be sold to Airgas'
Distribution customers. The Company views these investments as opportunities
and not as its principal investment strategy.
The Company's same-store sales, a comparison of current period sales to
the prior period's sales, adjusted for acquisitions, has historically followed
the real gross domestic product annual growth rate as published by the Commerce
Department. Management believes the Company's broad customer base and geo-
graphic diversity help to reduce the adverse effects of an economic downturn on
the Company. Also, management believes that the gas portion of its distri-
bution business is somewhat resistant to economic downturns due to the follow-
ing factors: 1) gases frequently represent a fixed cost of operations that do
not necessarily decline with production levels; 2) gases are required for main-
tenance and renovation activities which tend to increase during an economic
downturn; 3) industries less subject to the effects of an economic downturn,
such as the medical field, are major purchasers of gases; and 4) gas purchases
often represent a small portion of a typical user's overall cost of operation
and, therefore, do not typically represent a large cost-cutting item. Manage-
ment further believes that sales of certain lower margin nonconsumable hard-
goods equipment, such as welding machines, are more adversely impacted during a
downturn in the economy and are typically the fastest to rebound during an
economic recovery.
Products
Gases distributed by Airgas include oxygen, nitrogen, hydrogen, argon,
helium, acetylene, carbon dioxide, nitrous oxide and specialty gases. In addi-
tion to gases, the Company distributes a wide selection of name-brand hard-
goods, including electrode holders, welding wire, cable lugs and connectors,
hard hats, welding helmets, hearing protectors, goggles, face shields, safety
glasses, welding machines and electrodes. Of Airgas' fiscal 1997 sales from
the Distribution segment, approximately 50% represent sales of gases and
rentals of cylinders and bulk tanks, and 50% represent hardgood sales.
The Company intends to strategically broaden its product line in order to
increase sales in existing locations and to take advantage of its distribution
network. Recent product line additions have included returnable containers,
specialty gases and additional hardgoods (such as industrial safety products
and coatings). The Company believes the selective addition of complementary
product offerings through its distribution network and ADI will enable it to
better serve its diverse, expanding customer base.
7
Suppliers
The Company purchases industrial, medical and specialty gases pursuant to
requirements contracts from all four of the major producers of industrial gases
in the United States and three regional producers. The Company believes that
if a contractual arrangement with any supplier of gases were terminated, it
would be able to locate alternative sources of supply without significant cost
increases and with no disruption of service.
The Company purchases hardgoods from name-brand manufacturers and
suppliers. For certain products, the Company has negotiated favorable pricing
based on national purchasing arrangements and is reducing its investment in
hardgood inventories by consolidating vendors.
DIRECT INDUSTRIAL BUSINESS
During fiscal 1997, the Company acquired IPCO and Rutland. IPCO and
Rutland provided an industrial distribution infrastructure, additional product
lines and management talent to form the basis for ADI. IPCO is a distributor
of safety, industrial and environmental supplies, and utilizes a system of
regional warehouses and telemarketing centers to market its products. Rutland
is a distributor of industrial tools, MRO supplies and welding and safety
equipment, and markets its products through direct mail, catalogs and monthly
fliers. ADI's principal thrust is to sell directly to customers, through
outbound telemarketing and catalogs, and to build on Airgas' existing base of
approximately 650,000 Airgas customers and strong customer relationships. To
serve its customers, ADI has distribution centers located in key industrial
distribution markets. ADI targets the same metal fabrication market that
accounts for a large part of Airgas' current Distribution gas and hardgoods
equipment sales. The safety and metalworking tools market represents
approximately $55 billion in annual revenues.
The Company's acquisition strategy with respect to ADI is to acquire
additional industrial distribution companies which comprise this highly
fragmented industry. Such acquisitions may provide for enhanced warehouse
logistics, information systems, new product lines, geographic expansion and
unique marketing concepts.
MANUFACTURING AND RELATED BUSINESS
Nitrous Oxide
The Company produces nitrous oxide which is used in various medical and
commercial applications. 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 electronic
industries. The Company's nitrous oxide manufacturing facilities are located
in Yazoo City, Mississippi and Donora, Pennsylvania.
8
Carbon Products
The Company manufactures carbon electrode paste, carbon ramming paste and
electrically calcined anthracite ("ECA") at its manufacturing facility located
in Keokuk, Iowa. The Company is the nation's primary manufacturer of carbon
electrode paste which is used as a consumable electrode in the production of
special alloy steel, nickel and other metals. ECA is used as an ingredient in
carbon mixes used in the aluminum industry and as an additive in the production
of certain metals.
Calcium Carbide
The Company is a partner with Elkem Metals Company ("Elkem") in a joint
venture (Elkem-American Carbide Company) which primarily sells calcium carbide
which is used in the production of acetylene gas. The Company and Elkem
receive certain fees, based on net sales, for acting as agents for the joint
venture. Additionally, as general manager of the joint venture, Elkem receives
a management fee based on net sales. The Company operates a manufacturing
facility in Pryor, Oklahoma which sells calcium carbide to the joint venture.
Carbon Dioxide
The Company is implementing a strategy to expand its carbon dioxide
business. In December 1996, the Company acquired Shell's interest in unitized
leases producing carbon dioxide, including Shell's 183 mile pipeline stretching
from the Northeast Jackson Dome area of Mississippi to White Castle, Louisiana
(the "Jackson Dome" properties). The pipeline services three major liquid
carbon dioxide producers (including CIC) and a major methanol producer, each
pursuant to a long-term supply contract, as well as a group of enhanced oil
recovery fields. Carbon dioxide is used in refrigeration, food processing,
beverage carbonation, chemical processing, crude oil recovery, metal
fabrication and agricultural fumigation.
As part of its carbon dioxide strategy, the Company also made related
acquisitions of liquid carbon dioxide distributors and carbon dioxide beverage
companies during 1997. In June 1997, the Company closed the acquisition of
CIC, merged into a newly-formed subsidiary of the Company in exchange for a
combination of the Company's common stock and cash.
COMPETITION
Each of the major business areas in which the Company participates is
highly competitive. Some competitors are larger than the Company and have
greater resources.
The Company's industrial gas distribution operations compete with
independent distributors and vertically integrated gas producers such as Air
Products and Chemicals, Inc. ("Air Products"), Praxair, Inc. ("Praxair"),
Liquid Air Corporation of America ("Air Liquide"), BOC Gases Group ("BOC
Gases") and others, all of which have distribution operations. The Company
also purchases industrial gases pursuant to requirements contracts from all
four of the above major producers of industrial gases.
Competition in the distribution market is based on customer service,
prompt delivery, price, consistent product quality, attention to safety
procedures, and employee and customer training in the uses of gases and
hardgoods. The Company believes its decentralized system allows competitive
decisions to be made on the local level which results in reduced costs and/or
improved service. In addition, the Company's distribution network allows it to
realize economies of scale in purchasing, training, marketing and information
systems.
9
Regarding the Company's carbon dioxide business strategy, the carbon
dioxide market includes suppliers of crude CO2 and three major carbon dioxide
companies: Praxair, BOC Gases and Air Liquide. These three companies produce
over 80% of the United States merchant carbon dioxide, develop most of the new
applications, and handle much of the distribution.
The ADI segment competes with small branch-based industrial distribution
companies at the local level. In addition, ADI also competes nationally with
large, branch-based and direct marketers, which include W.W. Grainger, Inc. and
MSC Industrial Direct, Inc. which sell through catalogs and stores, and Vallen
Corporation, a safety equipment distributor.
REGULATORY AND ENVIRONMENTAL MATTERS
The businesses of 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 rules and regulations. The Company
believes that it is in compliance in all material respects with such laws and
regulations. Expenditures for environmental purposes during the fiscal year
ended March 31, 1997 were not material.
INSURANCE
The Company's policy is to obtain liability and property insurance
coverage that is currently available at what management determines to be a fair
and reasonable price. As of March 31, 1997, the Company had a liability
insurance limit of $100 million. The liability insurance is subject to per-
occurrence deductible amounts of $1 million for product liability, general
liability and workers' compensation claims, and $500 thousand for motor vehicle
liability.
The nature of the Company's business may subject it to product and general
liability lawsuits. To the extent that the Company is subject to claims which
exceed its liability insurance coverage, such suits could have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
EMPLOYEES
On March 31, 1997, the Company employed approximately 6,400 people of whom
approximately 6% were covered by collective bargaining agreements. The Company
believes it has good relations with its employees and has not experienced a
strike or work stoppage in the past 10 years.
PATENTS, TRADEMARKS AND LICENSES
The Company holds trademark registrations for "Airgas", "Dyna-Switch" and
"Va-Weld", and a patent registration for the purification of acetonitrile. The
Company believes that its businesses as a whole are not materially dependent
upon any single patent, trademark or license.
10
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
Peter McCausland (1) 47 Chairman of the Board, President and Chief
Executive Officer
Hermann Knieling 59 Executive Vice President and Group President -
Manufacturing, Business Engineering and
International Group
E. Pat Baker 57 Group President - Distribution
William A. Rice, Jr. 50 Group President - Airgas Direct Industrial
Alfred B. Crichton 49 Division President - West
Ronald B. Rush 53 Division President - South
John Musselman 48 Division President - East
Thomas C. Deas, Jr. 47 Vice President-Finance & Chief Financial Officer
Gordon L. Keen, Jr. 52 Senior Vice President - Law and Corporate
Development
William E. Sanford 36 Executive Vice President of Airgas Direct
Industrial
Thomas Mason 63 Senior Vice President
Scott M. Melman 40 Vice President - Administration
Rudi G. Endres 53 Vice President - International
Samuel H. Goldstein 38 Vice President - Information Systems
Andrew R. Cichocki 34 Vice President - Corporate Development
__________________
(1) Member of the Board of Directors
Mr. McCausland has been a Director of the Company since June 1986, the
Chairman of the Board and Chief Executive Officer of the Company since May
1987, President from June 1986 to August 1988, from April 1, 1993 to November
30, 1995, and since April 1, 1997. Mr. McCausland has been Chairman and Chief
Executive Officer of US Airgas since its organization in February 1982. From
January 1982 until June 1990, Mr. McCausland was a partner in the law firm of
McCausland, Keen & Buckman, Radnor, Pennsylvania, which provides legal services
to the Company. In May 1997, Mr. McCausland was elected to the board of
directors of Hercules Inc., a worldwide manufacturer of chemical specialty
products.
Mr. Knieling has been Executive Vice President of the Company and Group
President - Manufacturing, Business Engineering and International since April
1, 1997. Prior to that, Mr. Knieling served as the President and Chief
Operating Officer of Airgas from December 1, 1995 to March 1997. Mr. Knieling
served as Division President - Southern Division from April 1, 1995 to November
30, 1995 and as Division President - Eastern Division from February 3, 1993 to
March 1995. Mr. Knieling served as a Regional Vice President from June 1990 to
February 1993 and as President of Gulf States Airgas from June 1989 to February
1993. Mr. Knieling owned and operated an industrial gas distributor which was
sold to the Company in 1989. Also, Mr. Knieling served in various capacities
for Hoechst AG during a period of 18 years, and, prior to his leaving Hoechst
in 1982 was President and Chief Executive Officer of its subsidiary, MG Burdett
Gas Products Company.
Mr. Baker has been Group President - Distribution since April 1, 1997.
Prior to that, Mr. Baker served as the Company's Division President - Eastern
Division from April 1, 1995 to March 1997. Mr. Baker served as a Regional Vice
President from May 1991 to February 1993 and President of Southwest Airgas
since the acquisition of Southwest Airgas (formerly West Texas Welders Supply),
in October 1988, to March 1995. Prior to joining the Company, Mr. Baker was
President and owner of West Texas Welders Supply from August 1981 to October
1988.
11
Mr. Rice has been Group President - Airgas Direct Industrial since April
1, 1997. Prior to that he served as Airgas' Division President - Industrial
Distribution and Purchasing from April 1, 1995 to March 1997 and served as Vice
President - Purchasing from August 1, 1993 to March 1995. Until August 1993,
Mr. Rice was President of Virginia Welding Supply, which was acquired by
the Company in July 1992. Mr. Rice has over 20 years of industry experience
and serves on the boards of various companies.
Mr. Crichton has been the Company's Division President - West since
February 3, 1993. Mr. Crichton served as a Regional Vice President from May
1991 to February 1993 and as President of Sierra Airgas since the acquisition
of Sierra Airgas (formerly Moore Bros.) in January 1987. Mr. Crichton was
employed by Union Carbide Industrial Gases (UCIG) from 1969 through 1986, and
prior to joining Moore Bros., was President of a subsidiary of UCIG.
Mr. Rush has been the Company's Division President - South since December
1, 1995. Mr. Rush served as President of Sooner Airgas from June 1, 1991 to
November 30, 1995 and as Vice President of Sales for Southwest Airgas from
September 1990 to May 31, 1991.
Mr. Musselman has been Division President - East since April 1, 1997.
Prior to that, Mr. Musselman served as President of Northeast Airgas from
January 1989 to March 1997.
Mr. Deas has been the Vice President-Finance & Chief Financial Officer
since February 17, 1997. From March 1996 to February 1997, Mr. Deas served as
Chief Financial Officer of Maritrans, Inc., a New York Stock Exchange listed
shipping company headquartered in Philadelphia. Prior to that, Mr. Deas served
for 18 years in various positions at Scott Paper Company, a manufacturer of
tissue products, including Vice President, Treasury and Assistant Treasurer
from October 1988 to February 1996.
Mr. Keen has been Senior Vice President - Law and Corporate Development
since April 1, 1997. Prior to that, Mr. Keen served as Vice President -
Corporate Development from January 1, 1992 to March 1997. From January 1982
until December 1991, Mr. Keen was a partner in the law firm of McCausland, Keen
& Buckman, Radnor, Pennsylvania, which provides legal services to the Company.
Mr. Sanford has been Executive Vice President of Airgas Direct Industrial
since April 1, 1997. Prior to that, he served as the Company's Executive Vice
President from December 1, 1995 to March 1997 and Vice President - Sales and
Marketing since February 3, 1993. Mr. Sanford served as President of Cascade
Airgas from March 1989 to February 1993. From May 1984 to February 1989 Mr.
Sanford served as Vice President -- Sales and Marketing for Midwest Carbide.
Mr. Mason has been Senior Vice President since December 1, 1995. Mr.
Mason served as Assistant to the Chairman from January 1993 to November 1995.
Prior to that, Mr. Mason served as Executive Vice President of the Company from
March 1990 until January 1993 and served as President from August 1988 until
February 1990.
Mr. Melman has been Vice President - Administration since April 1, 1995.
Mr. Melman served as Vice President - Corporate Controller from August 1994 to
March 1995 and Corporate Controller from August 1986 to July 1994. Prior to
joining the Company, Mr. Melman was the Controller for Integrated Circuit
Systems, Inc. from November 1983 to July 1986, and prior to joining Integrated
Circuit Systems, Inc., was a Tax Manager for KPMG Peat Marwick LLP.
12
Mr. Endres has been Vice President - International since January 1993.
Mr. Endres served as Vice President - Marketing from July 1991 until December
1992. From February 1987, Mr. Endres served as General Manager and Vice
President for the western region of Airgas. Prior to joining Airgas, Mr.
Endres served for 18 years in various positions nationally and internationally
for Messer Griesheim, a major producer of industrial gases headquartered in
Germany. His last position was Vice President for Specialty Gases and
Chemicals at MG Industries in Valley Forge, PA.
Mr. Goldstein has been the Vice President-Information Systems of Airgas
since September 9, 1996. He joined Airgas from KPMG Peat Marwick LLP (KPMG)
where he served as a National Service Leader for their Consulting Division
since June 1991. Prior to 1991, he was a Senior Manager at KPMG. Mr.
Goldstein held a variety of consulting positions at Coopers & Lybrand LLP from
June 1986 to July 1989.
Mr. Cichocki has been Vice President - Corporate Development of Airgas
since April 1, 1997. Mr. Cichocki served as Assistant Vice President -
Corporate Development from August 1992 to March 1997. Prior to that, he served
in various corporate development and finance positions from April 1988 to July
1992.
ITEM 2. PROPERTIES.
The Company has offices, manufacturing and distribution facilities in 41
states, Canada and Mexico. The principal executive offices of the Company are
located in leased space in Radnor, Pennsylvania.
The Company's Manufacturing segment produces carbon products at its
Keokuk, Iowa, facility; calcium carbide at its Pryor, Oklahoma, facility;
nitrous oxide at its Donora, Pennsylvania and Yazoo City, Mississippi
facilities; and carbon dioxide at the Jackson Dome production facility located
in Jackson, Mississippi. Manufacturing facility utilization, based on market
demand, has ranged from 65% to 100%.
The Keokuk and Pryor facilities are owned by the Company. The Donora
plant is located on property leased through the year 2006. The Yazoo City
property is owned by the Company; however, it will revert to the local
municipality if the plant terminates operations. The Keokuk, Pryor and Donora
facilities are pledged as collateral under industrial development board revenue
bonds.
The Company's Distribution segment conducts business from approximately
600 locations in 41 states, Canada and Mexico. These locations are either
owned or are leased from third parties or from employees of the Company who
were previous owners of businesses acquired on terms consistent with commercial
rental rates prevailing in the surrounding rental market. Fifteen (15)
distribution locations in eleven (11) states have acetylene manufacturing
plants. The Company's acetylene plants operate at an average production
capacity of approximately 65%.
The Company's Direct Industrial segment conducts its business from
locations strategically located throughout the United States. IPCO's principal
offices are located in leased space in Langhorne, Pennsylvania, with additional
warehouse locations in Pennsylvania, Texas, and California. Rutland's principal
offices are located in leased space in the City of Industry, California, and
also include warehouse locations in California, Arizona, Texas, Illinois, Ohio
and South Carolina.
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.
13
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are parties to pending legal proceedings
arising out of their business operations. The proceedings involve claims for
personal injuries, breach of contract, product warranty and product design,
and claims involving employee relations and certain administrative
proceedings. Management does not believe that the eventual outcome of any
litigation to which the Company or its subsidiaries are parties would have a
material adverse effect on the consolidated financial position, results of
operations or liquidity.
On July 26, 1996, Praxair, Inc. ("Praxair") filed suit against the Company
in the Circuit Court of Mobile County, Alabama. The complaint alleges tortious
interference with business or contractual relations with respect to Praxair's
Right of First Refusal contract with the majority shareholders of National
Welders by the Company in connection with the Company's formation of a joint
venture with National Welders. Praxair is seeking compensatory damages in
excess of $100 million and punitive damages. On February 24, 1997, the court
entered an order denying the Company's motion to dismiss for forum non
conveniens. The Company has filed a petition for writ of mandamus with the
Alabama Supreme Court requesting that the lower court's order be vacated or set
aside. The Company believes that Praxair's claims are without merit and
intends to defend vigorously against such claims.
On September 9, 1996, the Company filed suit against Praxair in the Court
of Common Pleas of Philadelphia County, Pennsylvania. The complaint alleges
breach of contract, fraud, conversion and misappropriation of trade secrets
with respect to an agreement between Praxair and the Company, pursuant to which
Praxair induced the Company to provide Praxair valuable information and
conclusions developed by the Company concerning CBI Industries, Inc. ("CBI") in
exchange for Praxair's promise not to acquire CBI without the Company's
participation. The Company has alleged that it became entitled, pursuant to
such agreement, to acquire certain of CBI's assets having a value in excess of
$800 million. The Company is seeking compensatory and punitive damages. On
January 2, 1997, the court entered an order overruling Praxair's preliminary
objections to the Company's complaint and ordering Praxair to file an answer to
the complaint. Praxair has since filed an answer and asserted various
defenses.
The fraudulent breach of contract by a third-party supplier of refrigerant
gas was reported by the Company on December 23, 1996. On February 12, 1997,
the Company filed a lawsuit in the United States District Court for the
Southern District of Georgia against Discount Auto Parts, Inc. ("Discount"), an
employee of Discount and certain other business and individual defendants,
alleging that Discount and the other defendants engaged in racketeering
activity involving the fraudulent sale of smuggled and counterfeit R-12
refrigerant gas. The Company's complaint alleges that the racketeering
activity of the defendants caused damages to the Company in an amount not less
than $20 million. The complaint seeks treble damages under the Federal RICO
and Georgia RICO statutes, as well as monetary damages under other counts
alleging fraud, conspiracy and related wrongful conduct. The Company believes
there will be future recoveries, including cash in bank accounts frozen under
restraining orders, net assets of the refrigerant supplier which breached the
contract and insurance proceeds under Airgas' and the refrigerant supplier's
policies. The Company will continue to pursue vigorously all possible sources
of recovery.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's 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 sales prices as reported by the
New York Stock Exchange.
High Low
---- ---
1997 Fiscal (1)
First Quarter $22.38 $18.75
Second Quarter 25.50 17.38
Third Quarter 27.13 21.13
Fourth Quarter 24.50 16.50
1996 Fiscal (1)
First Quarter $13.88 $12.50
Second Quarter 15.00 13.31
Third Quarter 16.63 15.69
Fourth Quarter 20.06 19.81
________________
(1) Adjusted to reflect a two-for-one stock split effective on April 15, 1996
(See Note 10 to the Company's consolidated financial statements under Item
8). On May 30, 1997, there were approximately 13,000 holders 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 the Board of
Directors (See Note 9 to the Company's consolidated financial statements).
15
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company is 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.
(amounts in thousands except per share amounts):
Years Ended March 31, (5)
___________________________________________
1997 1996 1995 1994 1993
(6)
____ ____ ____ ____ ____
Operating Results:
Net sales $1,158,894 $838,144 $687,983 $519,349 $410,771
Depreciation, depletion &
amortization(2) 62,491 45,762 36,868 30,571 28,045
Operating income 82,285 92,985 72,600 48,667 34,367
Interest expense, net 39,752 24,862 17,625 12,486 11,403
Income taxes(1) 21,080 28,522 23,894 16,027 10,811
Net earnings 23,266 39,720 31,479 20,290 12,469
Earnings Per Share(3) $ .34 $ .60 $ .48 $ .31 $ .19
Balance Sheet Data:
Working capital $ 124,849 $ 81,588 $ 54,084 $ 47,071 $ 40,253
Total assets 1,291,031 883,642 645,637 514,897 399,477
Current portion of long-term
debt 25,158 12,179 11,780 10,304 9,923
Long-term debt 629,931 385,832 259,970 205,311 158,629
Other non-current liabilities 29,565 34,490 11,116 6,635 762
Stockholders' equity(4) $ 336,657 $236,209 $189,652 $156,867 $127,571
_______________
(1) The Company retroactively adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" as of April 1, 1992.
(2) Effective April 1, 1993, the Company changed its estimate of the useful
lives of its acetylene and high pressure cylinders from 20 to 30 years.
This change was made to better reflect the estimated periods during which
these assets will remain in service. The change had the effect of
reducing depreciation expense in 1994 by approximately $3.1 million and
increasing net earnings by $1.9 million or $.03 per share.
(3) See Notes 4 and 10 to the Company's consolidated financial statements for
information regarding earnings per share calculations and adjustment for
the stock split effective April 15, 1996.
(4) The Company has not paid any dividends on its common stock.
(5) During the fiscal years 1993 through 1997, the Company acquired 127
distributors.
(6) As discussed in Note 3 to the Company's consolidated financial statements,
during the fourth quarter of fiscal 1997, the Company recorded special
charges totaling $31.4 million ($20.2 million after tax) and incurred a
net loss of $780 thousand related to the sale of a medical home-care
business. Excluding the effects of the special charges and the loss,
operating income, net earnings and earnings per share were $113.7 million,
$44.3 million, and $.65 per share, respectively.
16
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7.
OVERVIEW
The Company's sales for the year ended March 31, 1997 increased 38% to a
record $1.16 billion, compared to $838.1 million in the prior year. Net
earnings for the year, before fourth-quarter special charges and a loss
related to the sale of a medical business, increased by 11% to $44.3 million,
or $.65 per share, compared to $39.7 million or $.60 per share in the prior
year. Net earnings were $23.3 million or $.34 per share, after including the
special charges and loss. Cash flow, excluding the special charges and the
loss, also increased to record levels. After-tax cash flow (net earnings plus
depreciation, amortization and deferred income taxes) for the year, before
special charges and the loss, increased 22% to $117.3 million compared to $96.4
million in the prior year. These increases were attributable to the continued
success of the Company's acquisition growth strategies combined with internal
sales growth and continuous improvement in other areas. Offsetting this growth
was lower-than-expected performances at certain Distribution subsidiaries
caused by difficult consolidations, costs associated with an accelerated rate
of new branch start-ups and planned expenses related to the expansion of Airgas
Direct Industrial ("ADI"). Since April 1, 1995, the Company has completed 65
acquisitions with a combined annual revenue base of approximately $420 million.
During 1997, the Company completed 24 acquisitions with annual sales of $230
million.
The Company has successfully acquired, integrated and consolidated more
than 250 businesses over the past 15 years, creating a national network of hubs
and branches that form the largest distributor of industrial, medical and
specialty gases and welding-related equipment and supplies in North America.
With over 600 locations in 41 states, Canada and Mexico, the Company has
established a strong local presence and has developed high value-added
relationships with its 650,000 customers. The Company continues to remain
focused on improved profitability and cash flow fueled by operational
efficiencies, improved pricing and business development opportunities,
including acquisitions.
Growth in the Company's industrial gas distribution business during 1997
was helped by the acquisition of 21 businesses with annual sales of $102
million. Internal development and expansion of existing product
lines resulted in same-store sales growth of 3.4% and same-store gross profit
growth of 3.9%.
Among the Company's other initiatives which are helping to build its
industrial gas business include the acquisition of Shell Land & Energy
Company's Jackson Dome carbon dioxide reserves and 183-mile pipeline in the
Southeastern United States. Additionally, in June 1997, the Company closed the
Carbonic Industries Corporation acquisition, the fourth largest producer of
carbon dioxide in the United States. These two key acquisitions, combined with
related acquisitions of liquid carbon dioxide distributors and carbon dioxide
beverage companies, complement the Company's existing industrial gas business
and provide opportunities for future growth.
In addition, the Company entered into a 47% joint venture with
National Welders Supply Company, a premier independent distributor with annual
sales of $125 million.
17
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
During 1997, the Company entered a new business segment and formed its ADI
Group with the acquisitions of IPCO Safety Products ("IPCO", effective April
1, 1996) and Rutland Tool & Supply Co., Inc. ("Rutland", effective September 1,
1996). These two ADI companies offer a multi-channel, direct mail, national
distribution infrastructure which broadens the line of hardgoods and positions
the Company for entry into the $55 billion safety and metalworking industrial
segment of the Maintenance, Repair and Operations ("MRO") market. The MRO
market encompasses the same metal fabrication market that also accounts for
approximately 28% of Airgas' current gas and hardgoods equipment sales. The
Company believes that ADI's direct channel of delivery will lower the costs to
customers by leveraging the Company's purchasing power, taking advantage of
economies of scale and reducing the number of times an order is handled before
products reach the customer.
ADI's focus is to build on the Company's existing base of 650,000 local
customers and strong customer relationships by selling more products to
existing customers. The Company believes ADI will also provide improved
customer services, such as next-day delivery, and will enhance the Company's
branch-based network's ability to obtain and service national accounts.
During the fourth quarter of fiscal 1997, the Company recorded special
charges totaling $31.4 million and a net loss of $780 thousand related to the
sale of a medical home-care business. The special charges consist of a non-
recurring charge of $26.4 million ($17 million after tax) for product losses
and costs associated with the Company's investigation into the fraudulent
breach of contract by a third-party supplier of refrigerant gas and a $5
million ($3.2 million after tax)non-cash charge related to the impairment
write-down of certain machinery and equipment, goodwill and other intangible
assets of two non-core product-line businesses.
The fraudulent breach of contract by a third-party supplier of refrigerant
gas was reported by the Company on December 23, 1996. On February 12, 1997, the
Company disclosed it had filed a lawsuit in the United States District Court
against Discount Auto Parts, Inc. ("Discount"), an employee of Discount, and
certain other business and individual defendants, alleging that Discount and
the other defendants engaged in racketeering activity involving the fraudulent
sale of smuggled and counterfeit R-12 refrigerant gas. Airgas' complaint
alleges that the racketeering activity of the defendants caused damages to
Airgas in an amount not less than $20 million. The complaint seeks treble
damages under the Federal RICO and Georgia RICO statutes, as well as monetary
damages under other counts alleging fraud, conspiracy and related wrongful
conduct. The Company believes there will be future recoveries, including cash
in bank accounts frozen under restraining orders, net assets of the refrigerant
supplier which breached the contract and insurance proceeds under Airgas' and
the refrigerant supplier's policies. The Company will continue to pursue
vigorously all possible sources of recovery. See Item 3, "Legal Proceedings,"
and Notes 3 and 19 to the Company's Consolidated Financial Statements under
Item 8.
18
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS: 1997 COMPARED TO 1996
____________________________________________
Net sales increased 38% in 1997, compared to 1996:
(in thousands)
1997 1996 Increase
____ ____ __________
Distribution $1,018,704 $801,552 $217,152
Direct Industrial 99,216 -- 99,216
Manufacturing 40,974 36,592 4,382
_______ _______ _______
$1,158,894 $838,144 $320,750
======= ======= =======
For the year ended March 31, 1997, Distribution sales increased
approximately $181 million resulting from the acquisition of 62 distributors
since April 1, 1995 and approximately $36 million from same-store sales growth.
The Company estimates that had all acquisitions during the year ended March 31,
1997 been consummated on April 1, 1996, sales for 1997 would have been
approximately $1.050 billion. The increase in same-store Distribution sales
of 3.4% was a result of growth in all three product groups: gases, hardgoods
and rent. The internal growth was attributable to higher sales volume and from
improved pricing. The Company continues to focus on internal sales growth
through the development of new gas products and product-line extensions,
including specialty gases, small bulk gases, carbon dioxide, replacement
refrigerants in returnable containers, expansion of rental welder fleets and
increased hardgoods business through ADI. The Company believes its same-store
sales growth is slightly understated since it does not reflect the Company's
decision to cease unprofitable sales to certain customers and other sales lost
during acquisition consolidation and integration activity. Airgas subsidiaries
without significant acquisition activity averaged approximately 5% same-store
sales growth. The Company estimates same-store sales based on a comparison of
current period sales to the prior period's sales, adjusted for acquisitions.
Future same-store sales growth is dependent on the economy and the Company's
ability to expand markets for new and existing products and to increase prices.
ADI's sales include welding, metalworking, safety and other MRO hardgoods.
The internal sales growth rate for ADI was approximately 12% during fiscal
1997. Pro forma unaudited sales for ADI, assuming that the Rutland acquisition
had been completed on April 1, 1996, would have been approximately $120
million. Sales to the Distribution segment totaled approximately $1 million.
The Manufacturing segment's sales increased 12% during fiscal 1997
primarily as a result of the December 1, 1996 acquisition of the Jackson Dome
carbon dioxide business. Sales related to carbide, carbon products and nitrous
oxide were essentially flat. Sales to the Distribution segment totaled
approximately $1.5 million.
The increase in Distribution gross profits of approximately $100 million
compared to the prior year resulted from acquisitions which contributed
approximately $81 million and from same-store gross profit growth of 3.9% or
19
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
approximately $19 million. Same-store gross profit growth resulted from margin
improvement of $2 million and sales volume growth of $17 million. On a same-
store basis, the Distribution gross margin was 50.9% which represented an
improvement of .2% compared to the prior year. Same-store gross margins
improved as a result of selective price increases to customers, leveraging the
Company's purchasing power through national purchasing programs and
improvements in rent margins. Compared to the prior year, the Distribution
gross margin of 49.7% is down 100 basis points due primarily to acquisitions
which have an average gross margin of approximately 45%. Acquisitions have had
an average sales mix of 53% hardgoods/47% gas and rent compared to the
Company's sales mix for fiscal 1996 of 49% hardgoods/51% gas and rent.
The gross profit margin of 26.9% for ADI does not reflect a full year of
Rutland's operations which has historically had gross margins of approximately
40%. Gross margins for the fourth quarter of fiscal 1997 for ADI were 29.5%,
reflecting Rutland's operations for the full period.
Selling, distribution and administrative expenses ("SG&A") increased $91.4
million compared to the prior year primarily due to acquisitions. As a
percentage of net sales, SG&A expenses decreased 140 basis points to 32%
compared to the prior year. Excluding ADI which has a lower SG&A
expense-to-sales ratio, SG&A expenses as a percentage of net sales decreased
30 basis points compared to the prior year. The improvement in the SG&A
expenses relative to sales was somewhat offset by higher operating expenses
associated with the consolidation and integration of certain Distribution
acquisitions, costs associated with the start-up of new Distribution branches
and expenses related to the expansion of ADI. As the Company continues to
integrate such acquisitions and complete such start-up and expansion
activities, SG&A expenses relative to net sales should improve, although such
increased expenses could recur as a result of future acquisitions and expansion
activities.
Depreciation and amortization increased $16.7 million compared to the
prior year primarily due to acquisitions and from increased capital
expenditures. Of the $33.1 million increase in capital expenditures,
approximately 60% of the increase resulted from purchases of cylinders, bulk
tanks and machinery and equipment which are necessary to facilitate gas sales
growth and the integration of acquisitions. Depreciation, depletion and
amortization as a percentage of sales decreased 10 basis points as a result of
ADI which has depreciation and amortization relative to sales of 2.9% compared
to the Distribution segment of 5.7%.
Excluding special charges of $31.4 million, operating income increased 22%
in 1997 compared to 1996:
(in thousands)
1997 1996 Increase
____ ____ __________
Distribution $102,571 $ 86,130 $ 16,441
Direct Industrial 3,076 -- 3,076
Manufacturing 8,063 6,855 1,208
_______ _______ _______
$113,710 $ 92,985 $ 20,725
======= ======= =======
20
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Distribution segment's operating income margin decreased 60 basis
points to 10.1% compared to the prior year. The decrease was primarily the
result of recent industrial gas distribution acquisitions which have operating
margins averaging around 8% and from an increase in operating costs associated
with the integration and consolidation of certain acquisitions and new branch
start-ups. Excluding three subsidiaries undergoing difficult consolidations, a
product-line company which was written down during the Company's fourth quarter
and the new branch start-ups, the Distribution operating income margin
reflected a slight improvement compared to the prior year. Subject to the
effects of future acquisitions and the Company's ability to increase sales and
expand margins, the Company believes that its Distribution operating income
margin should improve.
The operating income margin for ADI was 3.1%. The Company believes that
ADI's operating income margin will continue to be impacted in the foreseeable
future by expansion costs related to information systems, logistics and
facility enhancements.
The Manufacturing segment's operating income increased $1.2 million
compared to the prior year primarily as a result of the Jackson Dome
acquisition. Higher operating margins related to the Jackson Dome acquisition
also accounted for the 100 basis point increase in operating margins compared
to the prior year.
Interest expense, net, increased $14.9 million compared to the prior year
primarily as a result of the increase in average outstanding debt associated
with the acquisition of businesses acquired since April 1, 1995, the joint
venture investment in National Welders Supply Company, costs associated with
the fraudulent breach of contract by a third-party refrigerant gas supplier and
the repurchase of Airgas common stock. As discussed in "Liquidity and Capital
Resources" below, the Company has hedged floating interest rates under certain
borrowings with interest rate swap agreements.
Equity in earnings of unconsolidated affiliates of $958 thousand is
primarily attributable to the Company's 45% interest in National Welders Supply
Company.
Income tax expense, excluding the special charges and the loss related to
the sale of a medical home-care business represented 41% of pre-tax earnings
for the year ended March 31, 1997 compared to 41.8% in the prior year. The
decrease in the effective income tax rate is primarily a result of equity
affiliate income which is recorded net-of-tax.
Net earnings for the year ended March 31, 1997, before fourth quarter
special charges and the loss on the sale of a medical home-care business,
increased 11% to $44.3 million, or $.65 per share, from $39.7 million, or $.60
per share in 1996. Net earnings for the year, after the special charges and the
loss, were $23.3 million, or $.34 per share.
21
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS: 1996 COMPARED TO 1995
____________________________________________
Net sales increased 22% in 1996 compared to 1995:
(in thousands)
1996 1995 Increase
____ ____ __________
Distribution $801,552 $654,381 $147,171
Manufacturing 36,592 33,602 2,990
_______ _______ _______
$838,144 $687,983 $150,161
======= ======= =======
For the year ended March 31, 1996, Distribution sales increased
approximately $133 million resulting from the acquisition of 66 distributors
of industrial, medical and specialty gases and related equipment since April
1, 1994 and approximately $14 million from same-store sales growth. The
Company estimates that had all acquisitions during the year ended March 31,
1996 been consummated on April 1, 1995, distribution sales for the year ended
March 31, 1996 would have increased by an additional $100 million. The
increase in same-store sales of approximately 2% was the result of slightly
higher prices based on selected price increases to certain customers and
increased volume within its gas, rental and hardgoods businesses. During 1996,
the Company's same-store sales increased 3% in the first quarter, 2% in the
second and third quarters and 1% in the fourth quarter. Excluding the impact
of the inclement weather, the Company estimates same-store sales growth during
the fourth quarter would have been approximately 2%. The Company estimates
same-store sales based on a comparison of current period sales to the prior
period's sales, adjusted for acquisitions.
Sales for the Company's Manufacturing operations increased 9% during the
year ended March 31, 1996 compared to the prior year, primarily as a result of
an increase in the volume of lower margin exports and increased demand for
carbon products and nitrous oxide.
The increase in Distribution gross profit of $72.6 million over 1995 was
attributable to increases associated with acquisitions of $62.7 million and
same-store gross profit growth of $9.9 million. The majority of the $9.9
million same-store gross profit growth was derived from volume growth in gas
and increases in cylinder rent. Higher gas volumes were partially attributable
to the success of gas marketing programs, principally small bulk and specialty
gases. On a same-store basis, distribution gross margins increased an
estimated 0.3% compared to 1995 primarily due to improved rent gross margins
combined with slightly higher margins in gases and hardgoods. Increased
volumes of lower margin bulk gases partially offset the gas margin
improvements.
22
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, distribution and administrative expenses decreased as a
percentage of sales to 33.4% in 1996 compared to 34.3% in 1995. The decrease
was a result of acquisition consolidation efforts and lower operating costs,
such as a reduction in business insurance costs through improved claims
management and reduced incident rates. In addition, certain operating costs,
such as occupancy costs, are relatively fixed and do not increase proportion-
ately with the increase in same-store sales. Partially offsetting these
improvements were normal salary increases and slightly higher distribution
costs.
Operating income increased 28% in 1996 compared to 1995:
(in thousands)
1996 1995 Increase
____ ____ __________
Distribution $86,130 $66,521 $19,609
Manufacturing 6,855 6,079 776
______ ______ ______
$92,985 $72,600 $20,385
====== ====== ======
Distribution operating income as a percentage of net distribution sales
increased to 10.7% for the year ended March 31, 1996 compared to 10.2% in 1995.
The increase in distribution operating income in 1996 was the result of the
increase in gross profits from higher same-store sales, improved gross profit
margins and operating income provided by acquisitions.
Manufacturing operating income increased $776 thousand in 1996 compared
to 1995 due to strong demand for carbon products and nitrous oxide, and lower
production and delivery costs related to calcium carbide and nitrous oxide
business, partially offset by an increase in lower margin sales of carbon
products.
Interest expense, net, increased $7.2 million in 1996 compared to 1995
primarily as a result of the increase in average outstanding debt associated
with the acquisition of industrial gas distributors since April 1, 1994,
interest costs associated with the repurchase of Company common stock and
slightly higher interest rates, partially offset by an increase in positive
cash flow. As discussed in "Liquidity and Capital Resources" below, the
Company has hedged floating interest rates under certain borrowings with
interest rate swap agreements.
Income tax expense represented 41.8% of pre-tax earnings in 1996 compared
to 43.2% in 1995. The decrease in the effective income tax rate was primarily
due to an increase in pre-tax earnings relative to permanent differences and
as a result of the implementation of certain tax planning strategies.
Net earnings increased 26% to $39.7 million or $.60 per share in 1996 from
$31.5 million or $.48 per share in 1995.
23
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
The Company has primarily financed its operations, capital expenditures,
stock repurchases, and acquisitions with borrowings, the issuance of common
stock and funds provided by operating activities.
Cash flows from operating activities totaled $81.2 million ($106.5 million
excluding the special charges and loss related to the sale of a medical home-
care business) for the year ended March 31, 1997. Depreciation, depletion and
amortization represented $62.5 million of cash flows from operating activities.
Cash flows from working capital components increased $1.7 million as a result
of a decrease in prepaid expenses and other current assets, an increase in
accounts payable and an increase in accrued expenses and other current
liabilities partially offset by an increase in accounts receivable associated
with higher same-store sales and an increase in inventory levels to meet
increased hardgoods and gas sales volumes. The increase in other assets and
liabilities, net, primarily related to amounts paid in connection with securing
product-supply agreements and a decrease in deferred interest related to
interest rate swap agreements. Days' sales outstanding and distribution
hardgoods days' supply of inventory improved slightly compared to March 31,
1996 levels. Total inventories have increased primarily as a result of an
increase in distribution inventories of approximately $3 million to support
sales growth and gases of approximately $9 million associated with specialty
gas sales initiatives.
Cash used by investing activities totaled $276.0 million in fiscal 1997,
which was primarily comprised of capital expenditures of $74.4 million and
acquisitions and investments totaling $202.7 million.
The Company's use of cash for capital expenditures was attributable to the
continued assimilation of certain acquisitions requiring capital expenditures
for combining cylinder fill plants, improving truck fleets and purchasing
cylinders in order to return cylinders which were rented from third parties.
Additionally, capital expenditures include the purchase of cylinders and bulk
tanks necessary to facilitate gas sales growth. Approximately 60% of fiscal
1997's capital expenditures were for the purchase of cylinders, bulk tanks and
machinery and equipment. The Company estimates that its Distribution
maintenance capital expenditures are approximately 2% of net sales. The
Company considers the replacement of existing capital assets to be maintenance
capital expenditures.
The Company has undertaken initiatives to develop further its industrial
gas customer base to include customers which require large-volume supplies of
gases, such as nitrogen. For these customers, the Company plans to enter into
long-term supply contracts in conjunction with air separation plants which will
be built near customers' facilities. The Company has entered into agreements
with two customers which require the construction of two air separation plants
which will begin production late in calendar 1997. Capital costs incurred
during fiscal 1998 associated with these plants are estimated to total $40
million.
Financing activities provided cash of $194.8 million with total debt out-
standing increasing by $257.1 million from March 31, 1996. Funds from
financing activities were used primarily for the purchase of distributors,
equity investments, capital expenditures and the repurchase of Airgas common
stock.
24
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company's primary source of borrowing is a $500 million unsecured
revolving credit facility with various commercial banks which matures on
September 30, 2001. At March 31, 1997, the Company had approximately $282
million in borrowings under the facility and approximately $76 million
committed under letters of credit, resulting in unused availability under the
facility of approximately $142 million.
On August 8, 1996, the Company commenced a medium-term note program
pursuant to a registration statement filed with the Securities and Exchange
Commission on July 15, 1996, which provides for the issuance of its securities
with an aggregate public offering price of up to $450 million. In September
1996, the Company issued the following long-term debt under the medium-term
note program: $100 million of unsecured notes due September 2006 bearing
interest at a fixed rate of 7.75%; $50 million of unsecured notes due September
2001 bearing interest at a fixed rate of 7.15%. In March 1997, the Company
issued $75 million of unsecured notes due March 2004 at a fixed rate of 7.14%.
The proceeds from the medium-term note issuances were used to repay bank debt.
The Company has a Canadian credit facility totalling C$50 million (US$37
million) with various commercial banks which matures on November 14, 1998. At
March 31, 1997, the Company had approximately C$41 million (US$30 million) in
borrowings outstanding under the facility, resulting in unused availability
under the facility of approximately C$9 million (US$7 million).
The Company also has unsecured line of credit agreements with various com-
mercial banks. At March 31, 1997, these agreements totaled $50 million, under
which the Company had no borrowings outstanding.
At March 31, 1997, the effective interest rate related to outstanding
borrowings under all credit lines was approximately 6.07%.
The Company's loan agreements contain covenants which include the
maintenance of a minimum equity level and maintenance of certain financial
ratios.
In managing interest rate exposure, principally under the Company's
floating rate revolving credit facilities, the Company has entered into 23
interest rate swap agreements during the period from June 1992 through March
31, 1997. The swap agreements are with major financial institutions and
aggregate $358 million in notional principal amount at March 31, 1997.
Approximately $208 million of the notional principal amount of the swap
agreements require fixed interest payments based on an average effective rate
of 6.49% for remaining periods ranging between 1 and 8 years. Five swap
agreements require floating rates ($149.5 million notional amount at 5.72% at
March 31, 1997). Under the terms of seven of the swap agreements, the Company
has elected to receive the discounted value of the counterparty's interest
payments upfront. At March 31, 1997, approximately $18.7 million of such
payments were included in other liabilities. The Company continually monitors
its positions and the credit ratings of its counterparties, and does not
anticipate nonperformance by the counterparties.
The Company will continue to look for appropriate acquisitions and expects
to fund such acquisitions, future capital expenditure requirements and commit-
ments related to foreign investments primarily through the use of cash flow
from operations, debt, common stock for certain acquisition candidates and
other available sources. In connection with the acquisition of Rutland, the
Company issued approximately 3.4 million shares of its common stock, including
approximately 2.4 million treasury shares.
25
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In June 1997, the Company closed the acquisition of CIC, which was merged
into a newly-formed subsidiary of the Company in exchange for a combination of
the Company's common stock and cash.
Subsequent to March 31, 1997, the Company has acquired six businesses,
including CIC, with aggregate annual sales of approximately $69 million for an
aggregate purchase price of approximately $82 million. In addition, the
Company has signed letters of intent for nine companies with annual sales of
approximately $107 million and an aggregate purchase price of approximately $56
million.
In December 1996, the Board of Directors authorized the repurchase of up
to 1,600,000 shares of Airgas Common Stock, and on April 16, 1997, the
Board of Directors authorized the repurchase of up to 1,000,000 additional
shares. The Company purchased 800,000 shares of Airgas common stock
during the year ended March 31, 1997. Subsequent to March 31, 1997, the
Company repurchased 1,154,000 shares, leaving a total of 646,000 shares
available under the repurchase programs. The Company's treasury shares will
be used to fund acquisitions and employee benefit programs and will be acquired
in open-market transactions, from time-to-time, depending on market conditions.
The Company does not currently pay dividends.
Other
New Accounting Pronouncements
In the first quarter of fiscal 1997, Airgas adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The statement requires the recognition of an impairment
loss for an asset held for use when the estimate of undiscounted future cash
flows expected to be generated by the asset is less than its carrying amount.
Measurement of the impairment loss is based on fair value of the asset.(See
Note 3 to the consolidated financial statements of the Company under Item 8.)
The Company accounts for stock options according to the provisions of
Accounting Principles Board Opinion 25 (APB 25), "Accounting for Stock Issued
to Employees." In October 1995, the Financial Accounting Standards Board
issued FASB Statement No. 123, "Accounting for Stock-Based Compensation." The
new standard defines a fair value method of accounting for stock options and
similar equity instruments. Companies may elect to continue to use existing
accounting rules or adopt the fair value method for expense recognition.
Companies that elect to continue to use existing accounting rules are required
to provide pro forma disclosures of net income and earnings per share assuming
the fair value method was adopted. Airgas has elected to continue to use
existing accounting rules under APB 25. Accordingly, Airgas has presented the
required pro forma disclosure provisions for its fiscal year ended March 31,
1997. (See Note 11 to the consolidated financial statements of the Company
under Item 8.) As the Company will continue to account for stockbased
compensation using the intrinsic value method, this statement does not have a
material impact on earnings, financial condition or liquidity of the Company.
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers of
26
AIRGAS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
financial assets that are sales from transfers that are secured borrowings.
Under the financial-components approach, after a transfer of financial assets,
an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The financial-components
approach focuses on the assets and liabilities that exist after the transfer.
If a transfer does not meet the criteria for a sale, the transfer is accounted
for as a secured borrowing with pledge of collateral. This statement is
effective for transfer and servicing of financial assets and extinguishments
of liabilities for fiscal years beginning after December 15, 1996 and is to be
applied prospectively. Management believes that the adoption of this statement
will not have a material impact on earnings, financial condition or liquidity
of the Company.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1 (SOP), which prescribes generally accepted
accounting principles for environmental remediation liabilities. This SOP more
specifically identifies future, long-term monitoring and administration
expenditures as remediation liabilities that need to be accrued on the balance
sheet as an existing obligation. This SOP is effective for fiscal years
beginning after December 15, 1996. Management believes that the adoption of
this statement will not have a material impact on earnings, financial condition
or liquidity of the Company.
In February 1997, the Financial Accounting Standards Board issued FASB
Statement No. 128 "Earnings Per Share." SFAS No. 128 establishes new standards
for computing and presenting earnings per share, effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. All prior periods will be restated to reflect the new Basic and
Diluted earnings per share amounts. The Company's Basic earnings per share is
essentially net income divided by the weighted shares outstanding, and the
Diluted earnings per share is not expected to be materially different than
currently reported earnings per share amounts. The Company will adopt SFAS No.
128 in the first quarter of fiscal 1998.
Forward-looking Statements
This report contains forward-looking statements. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, there are certain important factors that could cause the Company's actual
results to differ materially from those included in such forward-looking
statements. Some of the important factors which could cause actual results to
differ materially from those projected include, but are not limited to: the
Company's ability to continue to identify, complete and integrate strategic
acquisitions to enter new markets and expand existing business (including CIC);
continued availability of financing to provide additional sources of funding
for future acquisitions; capital expenditure requirements and foreign
investments; the effects of competition from independent distributors and
vertically integrated gas producers on products and pricing, growth and
acceptance of new product lines through the Company's sales and marketing
programs; changes in product prices from gas producers and name-brand
manufacturers and suppliers of hardgoods; uncertainties regarding accidents or
litigation which may arise in the ordinary course of business; the Company's
ability to recover assets in connection with the fraudulent breach of contract
related to refrigerant R-12 purchases; 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
27
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and financial statement schedule of
the Company are set forth at pages F-1 to F-33 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 1997 Annual Meeting of
Stockholders is incorporated herein by reference. Biographical information
relating to the Company's executive officers is set forth in Item 1 of Part I
of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information under "Board of Directors and Committees" and "Certain
Transactions" appearing in the Proxy Statement relating to the Company's 1997
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 1997 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 1997 Annual Meeting of Stockholders is
incorporated herein by reference.
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 24,1997, the Company filed a current report on Form 8-K to
announce, under Item 5, that its earnings for the third quarter ended December
31, 1996.
28
On February 5, 1997, the Company filed a current report on Form 8-K, to
announce, under Item 5, that it named Thomas C. Deas, Jr., as its Chief
Financial Officer, effective February 24, 1997.
On March 18, 1997, the Company filed a current report on Form 8-K to
announce, under Item 5, certain organizational changes and management
appointments.
(c) Index to Exhibits and Exhibits filed as a part of this report.
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 November 29, 1994. (Incorporated
by reference to Exhibit 3.2 to the Company's March 31, 1996 report on Form
10-K).
4.1 Eighth Amended and Restated Loan Agreement dated September 27, 1996
between Airgas, Inc. and certain banks and Nationsbank of North Carolina,
N.A. ($500,000,000 credit facility).
4.2 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).
4.3 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).
4.4 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.
4.5 Form of Rights Agreement, dated as of August 1, 1988, between Airgas, Inc.
and The Philadelphia National Bank, which includes as Exhibit a thereto
the Form of Rights Certificate: (Incorporated by reference to Exhibit (1)
(2) to the Company's Form 8-A dated August 11, 1988.)
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 to the Rights Agreement Dated as of August 1, 1988, dated
as of April 1, 1997, between Airgas, Inc. and The Bank of New York.
(Incorporated by reference to Exhibit 1.2 to the Company's Form 8-A filed
on April 28, 1997.)
29
* 10.1 Agreement between the Company and Peter McCausland, dated January 8,
1991, and form of Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 10.16 to the Company's March 31, 1992 report on
Form 10-K).
* 10.2 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).
* 10.3 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).
* 10.4 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).
* 10.5 1994 Employee Stock Purchase Plan. (Incorporated by reference to
exhibit 10.19 to the Company's March 31, 1993 report on Form 10-K).
* 10.6 Amended and Restated Joint Venture Agreement dated March 31, 1992
between American Carbide and Carbon Corporation and Elkem Metals
Company. (Incorporated by reference to Exhibit 10.5 to the Company's
March 31, 1992 report on Form 10-K).
* 10.7 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).
* 10.8 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).
* 10.9 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.
30
(11) Statement re: computation of earnings per share.
(21) Subsidiaries of the Company.
(23.1) Consent of KPMG Peat Marwick LLP.
(23.2) Consent of KPMG Peat Marwick LLP (to be filed by amendment)
(23.3) Consent of KPMG Peat Marwick LLP (to be filed by amendment)
(23.4) Consent of Arthur Andersen LLP
(23.5) Report of Independent Public Accountants - Arthur Andersen LLP
(27) Financial data schedule
(99.1) Form 11-K for the Registrant's 401(K) Plan (to be filed by amendment)
(99.2) Form 11-K for the Registrant's Employee Stock Purchase Plan (to be
filed by amendment)
_____________
* A management contract or compensatory plan required to be filed by Item
14(c) of this Report.
31
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 11, 1997
Airgas, Inc.
By: /s/ Peter McCausland
_________________________
Peter McCausland
Chairman of the Board, President
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 11, 1997
____________________________ President and Chief Executive Officer
(Peter McCausland)
/s/ Thomas C. Deas, Jr. Vice President-Finance and June 11, 1997
____________________________ Chief Financial Officer
(Thomas C. Deas, Jr.)
/s/ Jeffrey P. Cornwell Assistant Vice President and
____________________________ Corporate Controller June 11, 1997
(Jeffrey P. Cornwell)
/s/ W. Thacher Brown Director June 11, 1997
____________________________
(W. Thacher Brown)
/s/ Frank B. Foster, III Director June 11, 1997
____________________________
(Frank B. Foster, III)
/s/ Robert E. Naylor Director June 11, 1997
____________________________
(Robert E. Naylor)
32
/s/ Robert L. Yohe Director June 11, 1997
____________________________
(Robert L. Yohe)
/s/ John A.H. Shober Director June 11, 1997
____________________________
(John A.H. Shober)
/s/ Merril L. Stott Director June 11, 1997
____________________________
(Merril L. Stott)
/s/ Erroll C. Sult Director June 11, 1997
____________________________
(Erroll C. Sult)
/s/ Argeris N. Karabelas Director June 11, 1997
_____________________________
(Argeris N. Karabelas)
33
AIRGAS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
Reference In
Report on
Form 10-K
_________
Independent Auditors' Report . . . . . . . . . . . . . . . . . . F-2
Statement of Management's Financial Responsibility . . . . . . . F-3
Consolidated Balance Sheets at March 31, 1997 and 1996 . . . . . F-4
Consolidated Statements of Earnings for the Years Ended
March 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1996 and 1995. . . . . . . . . .. . . . . . . . F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts . . . . . . F-33
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-1
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Airgas, Inc.:
We have audited the consolidated financial statements of Airgas, Inc. and
subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements 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
did not audit the financial statements of National Welders Supply Company, Inc.
(National Welders), (a 45% percent-owned investee company). The Company's
investment in National Welders at December 31, 1997 was $49,800,000, and its
equity in earnings of National Welders was $935,000 for the year ended 1997.
The financial statements of National Welders were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for National Welders, is based solely on the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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, based on our audits and the report of other auditors, 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, 1997 and 1996, and the results of their operations and their cash
flows for each of the years in the three-year period ended March 31, 1997, in
conformity with generally accepted accounting principles. 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 thereon.
Philadelphia, Pennsylvania KPMG PEAT MARWICK LLP
May 8, 1997
F-2
35
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. The statements are prepared in conformity
with generally accepted accounting principles. 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, which undergoes periodic evaluation, is designed to provide
reasonable assurance that assets are safeguarded and records are adequate for
the preparation of reliable financial data. 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 Peat Marwick
LLP, independent auditors. Their Independent Auditors' Report, which is based
on an audit made in accordance with generally accepted auditing standards is
presented on the previous page. In performing their audit, KPMG Peat Marwick
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 and management to satisfy itself that they are properly discharging
their responsibilities. The auditors have direct access to the Audit
Committee.
Airgas, Inc.
/s/ Thomas C. Deas, Jr. /s/ Peter McCausland
________________________ _______________________
Thomas C. Deas, Jr. Peter McCausland
Vice President, Chairman, President and
Chief Financial Officer Chief Executive Officer
May 8, 1997
F-3
36
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS March 31,
________________
(In thousands, except per share amounts) 1997 1996
________________________________________ ____ ____
ASSETS
Current Assets
Trade receivables, less allowances for doubtful
accounts of $4,443 in 1997 and $3,396 in 1996 . . . . .$ 151,053 $120,811
Inventories (Note 5) . . . . . . . . . . . . . . . . . . 129,372 86,162
Prepaid expenses and other current assets. . . . . . . . 31,574 11,601
_______ _______
Total current assets. . . . . . . . . . . . . . . . 311,999 218,574
_______ _______
Plant and Equipment, at cost (Note 6). . . . . . . . . . 736,083 586,328
Less accumulated depreciation. . . . . . . . . . . . . . (183,922) (147,451)
_______ _______
Plant and equipment, net . . . . . . . . . . . . . . . 552,161 438,877
_______ _______
Other Non-current Assets (Note 7) . . . . . . . . . . . 132,257 60,948
Goodwill, net of accumulated amortization
of $29,503 in 1997 and $19,552 in 1996. . . . . . . . . 294,614 165,243
_______ _______
$1,291,031 $883,642
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note 9) . . . . . . .$ 25,158 $ 12,179
Accounts payable, trade. . . . . . . . . . . . . . . . . 74,329 52,528
Accrued expenses and other current liabilities (Note 8). 87,663 72,279
_______ _______
Total current liabilities . . . . . . . . . . . . . 187,150 136,986
_______ _______
Long-Term Debt (Note 9). . . . . . . . . . . . . . . . . 629,931 385,832
Deferred Income Taxes (Note 15). . . . . . . . . . . . . 104,266 88,400
Other Non-current Liabilities (Note 9) . . . . . . . . . 29,565 34,490
Minority Interest in Subsidiaries (Note 21). . . . . . . 3,462 1,725
Commitments and Contingencies (Note 19)
Stockholders' Equity (Note 10)
Common Stock, par value $.01 per share, 200,000 shares
authorized, 68,762 and 66,314 shares issued in
1997 and 1996, respectively . . . . . . . . . . . . . . 688 663
Capital in Excess of Par Value . . . . . . . . . . . . . 155,543 91,512
Retained Earnings. . . . . . . . . . . . . . . . . . . . 196,626 173,360
Cumulative Translation Adjustments . . . . . . . . . . . (468) (410)
Treasury Stock, 800 and 2,355 common shares at cost
in 1997 and 1996, respectively. . . . . . . . . . . . . (15,732) (28,916)
_______ _______
Total stockholders' equity. . . . . . . . . . . . . 336,657 236,209
_______ _______
$1,291,031 $883,642
======= =======
See accompanying notes to consolidated financial statements.
F-4
37
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended March 31,
(In thousands, except per share amounts) ______________________________
_______________________________________ 1997 1996 1995
____ ____ ____
Net Sales
Distribution . . . . . . . . . . . . . . . .$1,018,704 $801,552 $654,381
Direct Industrial. . . . . . . . . . . . . . 99,216 -- --
Manufacturing . . . . . . . . . . . . . . . 40,974 36,592 33,602
________ _______ _______
Total net sales . . . . . . . . . . . . 1,158,894 838,144 687,983
________ _______ _______
Costs and Expenses
Cost of products sold (excluding depreciation,
depletion and amortization)
Distribution . . . . . . . . . . . . . . . 512,309 395,370 320,800
Direct Industrial. . . . . . . . . . . . . 72,543 -- --
Manufacturing. . . . . . . . . . . . . . . 26,531 24,121 22,076
Selling, distribution and administrative
expenses . . . . . . . . . . . . . . . . . 371,310 279,906 235,639
Depreciation, depletion and amortization . . 62,491 45,762 36,868
Special charges (Note 3) . . . . . . . . . . 31,425 -- --
________ _______ _______
Total costs and expenses. . . . . . . . 1,076,609 745,159 615,383
________ _______ _______
Operating Income
Distribution. . . . . . . . . . . . . . . . 102,571 86,130 66,521
Distribution - special charges. . . . . . . (31,425) -- --
Direct Industrial . . . . . . . . . . . . . 3,076 -- --
Manufacturing. . . . . . . . . . . . . . . . 8,063 6,855 6,079
________ _______ _______
Total operating income . . . . . . . . 82,285 92,985 72,600
Interest expense, net (Note 13). . . . . . . (39,752) (24,862) (17,625)
Other income, net (Note 14). . . . . . . . . 1,672 782 1,067
Equity in earnings of unconsolidated
affiliates (Note 12) . . . . . . . . . . . 958 -- --
Minority interest (Note 21). . . . . . . . . (817) (663) (669)
_________ _______ _______
Earnings before income taxes. . . . . 44,346 68,242 55,373
Income taxes (Note 15) . . . . . . . . . . . 21,080 28,522 23,894
_________ _______ _______
Net earnings. . . . . . . . . . . . .$ 23,266 $ 39,720 $ 31,479
========= ======= =======
Earnings Per Share (Notes 4 and 10). . . . .$ .34 $ .60 $ .48
========= ======= =======
Weighted average shares. . . . . . . . . . . 68,640 66,215 65,525
========= ======= =======
See accompanying notes to consolidated financial statements.
F-5
38
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Years Ended March 31, 1997, 1996 and 1995
_________________________________________
Shares of Capital in
Common Stock Common Excess of
(In thousands) $.01 Par Value Stock Par Value
______________ ______________ ______ __________
Balance--April 1, 1994. . . . . . . . . 65,794.2 $658 $56,001
Net earnings . . . . . . . . . . . . . .
Foreign currency translation adjustment.
Retirement of treasury stock . . . . . . (3,754.4) (37) (1,445)
Purchase of treasury stock (Note 10) . .
Issuance of stock in connection
with acquisitions . . . . . . . . . . . 123.2 1 1,436
Stock warrants and options exercised . . 538.9 5 1,265
Tax benefit associated with exercise
of stock options and warrants (Note 15) 1,859
Shares issued in connection with
Employee Stock Purchase Plan (Note 11). 300.2 3 2,704
________ ___ ______
Balance--March 31, 1995. . . . . . . . . 63,002.1 $630 $61,820
Net earnings . . . . . . . . . . . . . .
Foreign currency translation adjustment.
Purchase of treasury stock (Note 10) . .
Issuance of stock in connection
with acquisitions . . . . . . . . . . . 843.7 9 11,435
Stock warrants and options exercised . . 1,841.6 17 3,705
Tax benefit associated with exercise
of stock options and warrants (Note 15) 7,613
Shares issued upon acquisition of minority
interests (Note 21) 258.1 3 3,547
Shares issued in connection with
Employee Stock Purchase Plan (Note 11). 368.2 4 3,392
________ ___ ______
Balance--March 31, 1996. . . . . . . . . 66,313.7 $663 $91,512
Net earnings . . . . . . . . . . . . . .
Foreign currency translation adjustment.
Purchase of treasury stock (Note 10) . .
Reissuance of treasury stock . . . . . .
Issuance of stock in connection
with acquisitions . . . . . . . . . . . 1,102.9 11 49,556
Stock warrants and options exercised . . 872.6 9 3,370
Tax benefit associated with exercise
of stock options and warrants (Note 15) 4,229
Shares issued upon acquisition of minority
interests (Note 21). . . . . . . . . . 76.5 1 1,724
Shares issued in connection with
Employee Stock Purchase Plan (Note 11). 395.9 4 5,152
________ ___ ______
Balance--March 31, 1997 . . . . . . . . 68,761.6 $688 $155,543
======== === ======
COLUMNS CONTINUED ON NEXT PAGE
F-6
39 AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY - (Continued)
Years Ended March 31, 1997, 1996 and 1995
_________________________________________
Cumulative
Retained Translation Treasury
(In thousands) Earnings Adjustments Stock
______________ _________ ___________ ________
Balance--April 1, 1994. . . . . . . . . .$102,161 $(471) $(1,482)
Net earnings. . . . . . . . . . . . . . . 31,479
Foreign currency translation adjustment . 2
Retirement of treasury stock. . . . . . . 1,482
Purchase of treasury stock (Note 10). . . (5,969)
Issuance of stock in connection
with acquisitions. . . . . . . . . . . .
Stock warrants and options exercised. . .
Tax benefit associated with exercise
of stock options and warrants (Note 15).
Shares issued in connection with
Employee Stock Purchase Plan (Note 11) .
_______ ____ ______
Balance--March 31, 1995 . . . . . . . . .$133,640 $(469) $(5,969)
Net earnings. . . . . . . . . . . . . . . 39,720
Foreign currency translation adjustment . 59
Purchase of treasury stock (Note 10). . . (22,947)
Issuance of stock in connection
with acquisitions. . . . . . . . . . . .
Stock warrants and options exercised. . .
Tax benefit associated with exercise
of stock options and warrants (Note 15).
Shares issued upon acquisition of minority
interests (Note 21). . . . . . . . . . .
Shares issued in connection with
Employee Stock Purchase Plan (Note 11) .
________ ____ ______
Balance--March 31, 1996 . . . . . . . . .$173,360 $(410) $(28,916)
Net earnings. . . . . . . . . . . . . . . 23,266
Foreign currency translation adjustment . (58)
Purchase of treasury stock (Note 10). . . (15,732)
Reissuance of treasury stock. . . . . . . 28,916
Issuance of stock in connection
with acquisitions. . . . . . . . . . . .
Stock warrants and options exercised. . .
Tax benefit associated with exercise
of stock options and warrants (Note 15).
Shares issued upon acquisition of minority
interests (Note 21). . . . . . . . . . .
Shares issued in connection with
Employee Stock Purchase Plan (Note 11) .
________ ____ _______
Balance--March 31, 1997 . . . . . . . . $196,626 $(468) $(15,732)<