AIRGAS INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


[X]		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended:		December 31, 2002

Commission file number:		1-9344

AIRGAS, INC.

(Exact name of registrant as specified in its charter)


Delaware		56-0732648

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


259 North Radnor-Chester Road, Suite 100 Radnor, PA		19087-5283

(Address of principal executive offices)		(ZIP code)

(610) 687-5253

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ___

Common Stock outstanding(State or other jurisdiction of ing at February 11, 2003: 71,999,946 shares

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED STATEMENTS OF EARNINGS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
FORM 10-Q DATED DECEMBER 31, 2002
CALCULATIONS OF EARNINGS PER SHARE
CERTIFICATION OF CHAIRMAN AND CEO OF AIRGAS, INC.
CERTIFICATION OF SENIOR VP AND CFO OF AIRGAS, INC.

AIRGAS, INC.

FORM 10-Q

December 31, 2002

INDEX


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings for the Three and Nine Months Ended December 31, 2002 and 2001(Unaudited)		3
Consolidated Balance Sheets as of December 31, 2002 (Unaudited) and March 31, 2002.		4
Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2002 and 2001(Unaudited)		5
Notes to Consolidated Financial Statements(Unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3. Quantitative and Qualitative Disclosures About Market Risk		36
Item 4. Controls and Procedures		38
PART II – OTHER INFORMATION
Item 1. Legal Proceedings		39
Item 6. Exhibits and Reports on Form 8-K		39
SIGNATURES		40
CERTIFICATIONS		41

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AIRGAS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)
(In thousands, except per share amounts)


					Three Months Ended						Nine Months Ended
					December 31,						December 31,
					2002			2001			2002			2001

Net sales
		Distribution			$	399,659		$	357,769		$	1,232,043		$	1,108,428
		Gas Operations				35,680			34,664			112,017			111,662

			Total net sales			435,339			392,433			1,344,060			1,220,090

Costs and expenses
	Cost of products sold (excluding depreciation)
			Distribution			193,248			181,824			605,447			574,577
			Gas Operations			10,959			11,966			35,113			39,496
		Selling, distribution and administrative expenses				172,403			149,529			523,439			453,483
		Depreciation				19,080			16,051			55,708			47,497
		Amortization				1,559			1,869			4,935			6,220
		Special charges				—			—			2,694			—

			Total costs and expenses			397,249			361,239			1,227,336			1,121,273

Operating income
	Distribution					31,781			25,711			97,560			80,069
	Gas Operations					6,309			5,483			21,858			18,748
	Special charges					—			—			(2,694	)		—

			Total operating income			38,090			31,194			116,724			98,817
Interest expense, net						(10,965	)		(12,448	)		(36,126	)		(35,211	)
Discount on securitization of trade receivables						(804	)		(1,063	)		(2,554	)		(4,047	)
Other income (expense), net						(339	)		1,971			(591	)		1,793
Equity in earnings of unconsolidated affiliates						731			645			3,027			2,875

	Earnings before income taxes and the cumulative effect of a change in accounting principle					26,713			20,299			80,480			64,227
Income taxes						10,017			8,454			30,540			24,378

	Earnings before the cumulative effect of a change in accounting principle					16,696			11,845			49,940			39,849
Cumulative effect of a change in accounting principle						—			—			—			(59,000	)

Net earnings (loss)					$	16,696		$	11,845		$	49,940		$	(19,151	)

Basic earnings (loss) per share:
	Earnings per share before the cumulative effect of a change in accounting principle				$	.24		$	.17		$	.71		$	.59
	Cumulative effect per share of a change in accounting principle					—			—			—			(.87	)

	Net earnings (loss) per share				$	.24		$	.17		$	.71		$	(.28	)

Diluted earnings (loss) per share:
	Earnings per share before the cumulative effect of a change in accounting principle				$	.23		$	.17		$	.69		$	.57
	Cumulative effect per share of a change in accounting principle					—			—			—			(.85	)

	Net earnings (loss) per share				$	.23		$	.17		$	.69		$	(.28	)

Weighted average shares outstanding:
				Basic		70,600			68,300			70,300			67,900

				Diluted		72,300			70,300			72,100			69,400

Comprehensive income (loss)					$	16,065		$	12,579		$	50,279		$	(23,654	)

See accompanying notes to consolidated financial statements.

AIRGAS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)


		(Unaudited)
		December 31,			March 31,
		2002			2002

ASSETS
Current Assets
Trade receivables, less allowances for doubtful accounts of $9,323 at December 31, 2002 and $8,176 at March 31, 2002		$	72,738		$	88,634
Inventories, net			146,133			154,045
Deferred income tax asset, net			13,583			13,210
Prepaid expenses and other current assets			30,799			47,654

	Total current assets		263,253			303,543

Plant and equipment, at cost			1,329,247			1,309,001
Less accumulated depreciation			(463,348	)		(415,986	)

	Plant and equipment, net		865,899			893,015
Goodwill			427,738			406,548
Other intangible assets, net			21,529			25,718
Investments in unconsolidated affiliates			65,605			64,626
Other non-current assets			39,765			23,607

	Total assets	$	1,683,789		$	1,717,057

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable, trade		$	77,745		$	82,485
Accrued expenses and other current liabilities			110,406			136,390
Current portion of long-term debt			2,377			2,456

	Total current liabilities		190,528			221,331

Long-term debt			693,809			764,124
Deferred income taxes, net			199,043			198,173
Other non-current liabilities			30,176			30,343
Commitments and contingencies
Stockholders’ Equity
Preferred stock, no par value, 20,000 shares authorized, no shares issued or outstanding at December 31, 2002 and March 31, 2002			—			—
Common stock, par value $.01 per share, 200,000 shares authorized, 76,099 and 75,193 shares issued at December 31, 2002 and March 31, 2002, respectively			761			752
Capital in excess of par value			210,777			198,500
Retained earnings			395,121			345,181
Accumulated other comprehensive loss			(4,062	)		(4,401	)
Treasury stock, 547 common shares at cost at December 31, 2002 and March 31, 2002			(4,289	)		(4,289	)
Employee benefits trust, 3,723 and 4,331 common shares at cost at December 31, 2002 and March 31, 2002, respectively			(28,075	)		(32,657	)

	Total stockholders’ equity		570,233			503,086

	Total liabilities and stockholders’ equity	$	1,683,789		$	1,717,057

See accompanying notes to consolidated financial statements.

AIRGAS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


			Nine Months Ended			Nine Months Ended
(Dollars in thousands)			December 31, 2002			December 31, 2001

CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)			$	49,940		$	(19,151	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
	Depreciation and amortization			60,643			53,717
	Deferred income taxes			4,494			9,574
	Equity in earnings of unconsolidated affiliates			(3,027	)		(2,875	)
	(Gains) losses on divestitures			241			(1,916	)
	(Gains) losses on sales of plant and equipment			(105	)		278
	Stock issued for employee stock purchase plan			6,719			5,463
	Cumulative effect of a change in accounting principle			—			59,000
	Other non-cash charges			—			1,068
Changes in assets and liabilities, excluding effects of business acquisitions and divestitures:
	Securitization of trade receivables			17,100			65,400
	Trade receivables, net			(2,158	)		14,229
	Inventories, net			6,689			1,270
	Prepaid expenses and other current assets			16,575			1,719
	Accounts payable, trade			(4,719	)		(15,777	)
	Accrued expenses and other current liabilities			(13,176	)		4,378
	Other assets and liabilities, net			(359	)		240

		Net cash provided by operating activities		138,857			176,617

CASH FLOWS FROM INVESTING ACTIVITIES
	Capital expenditures			(52,399	)		(41,340	)
	Proceeds from sales of plant and equipment			5,788			2,909
	Proceeds from divestitures			3,167			10,200
	Business acquisitions and settlements of acquisition related liabilities			(9,947	)		(11,268	)
	Dividends and fees from unconsolidated affiliates			2,118			2,217
	Other, net			(1,518	)		886

		Net cash used in investing activities		(52,791	)		(36,396	)

CASH FLOWS FROM FINANCING ACTIVITIES
	Proceeds from borrowings			212,581			420,005
	Repayment of debt			(296,257	)		(540,151	)
	Financing costs			—			(8,753	)
	Exercise of stock options			6,037			2,517
	Cash overdraft			(8,427	)		(13,839	)

		Net cash used in financing activities		(86,066	)		(140,221	)

Change in cash			$	—		$	—
	Cash – Beginning of period			—			—

	Cash – End of period		$	—		$	—

Cash paid during the period for:
	Interest		$	46,498		$	31,114
	Income taxes, net of refunds		$	805		$	18,329

See accompanying notes to consolidated financial statements.

AIRGAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Airgas, Inc. and its subsidiaries (the “Company”). Intercompany accounts and transactions are eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These statements do not include all disclosures required for annual financial statements. These financial statements should be read in conjunction with the more complete disclosures contained in the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2002.

The consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature except for the accounting changes and special charges, which are discussed in these notes to the consolidated financial statements. The interim operating results are not necessarily indicative of the results to be expected for an entire year.

(2) NEW ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES

FASB Financial Interpretation No. 45

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.

Based on a review of the Company’s material contracts and finance agreements, the only additional disclosure required by the interpretation relates to the Company’s residual value guarantee associated with certain leased vehicles. The Company leases approximately $32 million in fleet vehicles under long-term operating leases with varying terms. Additionally, the Company guarantees a residual value of $7.9 million related to its leased vehicles.

FASB Financial Interpretation No. 46

In January 2003, the FASB issued a Financial Interpretation of Accounting Research Bulletin No. 51 (“ARB 51”) entitled, Consolidation of Variable Interest Entities (“FIN 46”). The interpretation is effective for the first interim period beginning after June 15, 2003. It defines a variable interest entity (“VIE”) as a legal structure, such as a corporation, partnership or joint venture, created to conduct activities or hold assets. The interpretation introduces the concept of a “Primary Beneficiary” and requires VIEs, which do not effectively disperse risk among parties associated with the VIE, to be consolidated by the party deemed to be the Primary Beneficiary. The Primary Beneficiary approach is a departure from the voting interest approach typically used under ARB 51 when determining which of the parties associated with a VIE should consolidate it.

As disclosed Notes 11 and 12, the Company participates in a joint venture and a leasing arrangement with a grantor trust. The Company is reviewing these arrangements and believes it is reasonably possible that its joint venture arrangement and its leasing arrangement may be required to be consolidated under this interpretation.

As of December 31, 2002, the Company had variable interests in a securitization bank conduit (see Note 6). The Bank conduit is a qualified special purpose entity, which is exempt from the consolidation requirements of FIN 46.

AIRGAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(2)&nbs

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