Delaware 56-0732648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
259 North Radnor-Chester Road, Suite 100
Radnor, PA 19087-5283
(Address of principal executive offices) (ZIP code)
(610) 687-5253
(Registrant's telephone number, including area code)
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Common Stock outstanding at February 5, 2001: 67,768,010 shares
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings for the Three and
Nine Months Ended December 31, 2000 and 1999 (Unaudited)............. 3
Consolidated Balance Sheets as of
December 31, 2000 (Unaudited) and March 31, 2000..................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 2000 and 1999 (Unaudited)......................... 5
Notes to Consolidated Financial Statements (Unaudited)............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................27
Item 6. Exhibits and Reports on Form 8-K.................................27
SIGNATURES................................................................28
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AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 2000 1999
--------------------- -----------------------
Net sales
Distribution $ 359,721 $ 339,761 $1,105,519 $1,032,701
Gas Operations 35,249 29,673 108,546 103,515
--------- --------- ---------- ----------
Total net sales 394,970 369,434 1,214,065 1,136,216
--------- --------- ---------- ----------
Costs and expenses
Cost of products sold (excluding
depreciation and amortization)
Distribution 190,319 180,126 591,718 555,205
Gas Operations 12,458 15,471 39,342 44,506
Selling, distribution and
administrative expenses 145,112 125,676 426,780 381,822
Depreciation 15,686 15,492 48,000 47,797
Amortization 5,153 6,494 17,894 19,308
Special charges (recoveries) -- (2,829) -- (2,829)
--------- --------- ---------- ----------
Total costs and expenses 368,728 340,430 1,123,734 1,045,809
--------- --------- ---------- ----------
Operating income
Distribution 22,038 26,622 74,761 79,290
Gas Operations 4,204 (447) 15,570 8,288
Special (charges) recoveries -- 2,829 -- 2,829
--------- --------- ---------- ----------
Total operating income 26,242 29,004 90,331 90,407
Interest expense, net (15,597) (13,949) (47,668) (42,167)
Discount on securitization of
trade receivables (137) -- (137) --
Other income, net 352 1,234 809 16,639
Equity in earnings of unconsolidated
affiliates 455 663 2,306 2,388
--------- --------- ---------- ----------
Earnings before income taxes and
the cumulative effect of an
accounting change 11,315 16,952 45,641 67,267
Income tax expense 4,639 7,192 18,746 28,920
--------- --------- ---------- ----------
Earnings before the cumulative
effect of an accounting change 6,676 9,760 26,895 38,347
Cumulative effect of an accounting
change, net of taxes -- -- -- (590)
--------- --------- ---------- ----------
Net earnings $ 6,676 $ 9,760 $ 26,895 $ 37,757
========= ========= ========== ==========
Basic earnings per share:
Earnings per share before the
cumulative effect of an accounting
change $ .10 $ .14 $ .41 $ .55
Cumulative effect per share of an
accounting change -- -- -- (.01)
--------- --------- ---------- ----------
Net earnings per share $ .10 $ .14 $ .41 $ .54
========= ========= ========== ==========
Diluted earnings per share:
Earnings per share before the
cumulative effect of an accounting
change $ .10 $ .14 $ .40 $ .54
Cumulative effect per share of an
accounting change -- -- -- (.01)
--------- --------- ---------- ----------
Net earnings per share $ .10 $ .14 $ .40 $ .53
========= ========= ========== ==========
Weighted average shares outstanding:
Basic 66,500 69,200 65,700 69,600
========= ========= ========== ==========
Diluted 67,200 70,800 67,000 71,000
========= ========= ========== ==========
Comprehensive income $ 6,700 $ 9,887 $ 26,732 $ 38,086
========= ========= ========== ==========
See accompanying notes to consolidated financial statements.
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AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
December 31, March 31,
2000 2000
------------ ---------
ASSETS
Current Assets
Trade receivables, less allowances for
doubtful accounts of $7,711 at December 31, 2000
and $6,194 at March 31, 2000 $ 138,933 $ 211,989
Inventories, net 163,021 159,438
Deferred income tax asset, net 12,378 13,752
Prepaid expenses and other current assets 21,142 23,611
---------- ----------
Total current assets 335,474 408,790
Plant and equipment, at cost 1,110,321 1,074,365
Less accumulated depreciation (363,223) (320,597)
---------- ----------
Plant and equipment, net 747,098 753,768
Goodwill, net of accumulated amortization of $79,047
at December 31, 2000 and $68,471 at March 31, 2000 437,850 445,498
Other non-current assets 115,656 131,275
---------- ----------
Total assets $1,636,078 $1,739,331
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 58,506 $ 78,276
Accrued expenses and other current liabilities 117,234 121,249
Current portion of long-term debt 75,039 20,071
---------- ----------
Total current liabilities 250,779 219,596
Long-term debt 694,247 857,422
Deferred income taxes 172,420 160,808
Other non-current liabilities 24,798 28,998
Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, no par, 20,000 shares authorized,
no shares issued or outstanding at December 31, 2000
and March 31, 2000 -- --
Common stock, par value $.01 per share, 200,000 shares
authorized, 74,278 and 73,144 shares issued at
December 31, 2000 and March 31, 2000, respectively 743 731
Capital in excess of par value 188,758 193,893
Retained earnings 354,268 327,373
Accumulated other comprehensive loss (759) (596)
Treasury stock, 516 and 1,126 common shares at cost at
December 31, 2000 and March 31, 2000, respectively (3,982) (8,435)
Employee benefits trust, 5,994 and 4,822 common
shares at cost at December 31, 2000 and
March 31, 2000, respectively (45,194) (40,459)
---------- ----------
Total stockholders' equity 493,834 472,507
---------- ----------
Total liabilities and stockholders' equity $1,636,078 $1,739,331
========== ==========
See accompanying notes to consolidated financial statements.
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AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended Nine Months Ended
December 31, 2000 December 31, 1999
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 26,895 $ 37,757
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 65,894 67,105
Deferred income taxes 11,550 11,025
Equity in earnings of unconsolidated affiliates (2,306) (2,388)
Gain on divestitures (751) (14,850)
Gain on sales of plant and equipment (158) (917)
Minority interest in earnings -- (51)
Stock issued for employee stock purchase plan 4,194 4,263
Other non-cash charges -- 458
Changes in assets and liabilities, excluding
effects of business acquisitions and divestitures:
Securitization of trade receivables 71,659 --
Trade receivables, net 1,615 4,921
Inventories, net (3,458) (1,107)
Prepaid expenses and other current assets 4,024 (2,314)
Accounts payable, trade (19,836) (17,074)
Accrued expenses and other current liabilities 4,717 1,317
Other assets and liabilities, net (4,420) (4,293)
---------- ----------
Net cash provided by operating activities 159,619 83,852
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (47,878) (47,609)
Proceeds from sales of plant and equipment 2,227 35,598
Proceeds from divestitures 7,506 46,596
Business acquisitions, net of cash acquired (2,139) (24,218)
Business acquisitions, holdback settlements (2,284) (1,862)
Investment in unconsolidated affiliates -- (30)
Dividends and fees from unconsolidated affiliates 2,713 2,958
Other, net 2,257 (289)
---------- ----------
Net cash (used in) provided by investing activities (37,598) 11,144
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 111,000 84,187
Repayment of debt (219,207) (149,293)
Purchase of treasury stock (11,214) (25,936)
Proceeds from exercise of stock options 1,003 1,431
Cash overdraft (3,603) (5,385)
---------- ----------
Net cash used in financing activities (122,021) (94,996)
---------- ----------
Change in Cash $ -- $ --
Cash - beginning of period -- --
---------- ----------
Cash - end of period $ -- $ --
========== ==========
Cash paid during the period for:
Interest $ 45,048 $ 38,440
Income taxes, net of refunds $ 2,679 $ 8,089
See accompanying notes to consolidated financial statements.
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(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Airgas, Inc. and its subsidiaries (the "Company"). Unconsolidated affiliates are accounted for on the equity method and generally consist of 20 - 50% owned operations where control does not exist or is considered temporary. The excess of the cost of these affiliates over the Company's share of their net assets at the acquisition date is being amortized over 20 to 40 years. Intercompany accounts and transactions are eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These statements do not include all disclosures required for annual financial statements. These financial statements should be read in conjunction with the more complete disclosures contained in the Company's audited consolidated financial statements for the fiscal year ended March 31, 2000.
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 impact of acquisitions, divestitures, an accounting change and special charge recoveries, which are discussed in the notes to the accompanying financial statements. The interim operating results are not necessarily indicative of the results to be expected for an entire year.
(2) ACCOUNTING CHANGE
In the first quarter of fiscal 2000, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98- 5"), as required, resulting in a charge to net earnings of $590 thousand, or $.01 per diluted share. In accordance with SOP 98-5, the charge has been reflected on a separate line entitled "Cumulative effect of an accounting change, net of taxes" on the consolidated statements of earnings. The charge primarily resulted from the write- off of start-up costs capitalized in connection with the Company's two air separation units constructed during fiscal 1998 and 1999.
(3) DIVESTITURES
In May 2000, the Company completed the sale of its equity investment in Bhoruka Gases, Ltd. Proceeds from the sale, including a note receivable, were $1.1 million. The investment was sold for a loss of approximately $1.7 million, which had been provided for under the Company's 1998 special charges. In August 2000, the Company completed the sale of Superior Air Products Limited ("SAPL"). Proceeds from the sale were $6.4 million. The investment was sold for a gain of approximately $500 thousand, which was recorded in "Other income, net." The Company's combined equity in the earnings of these unconsolidated affiliates was insignificant for both of the nine-month periods ended December 31, 2000 and 1999. With the completion of the SAPL sale in the quarter ended September 30, 2000, the Company reversed its remaining accrued liability of $1.3 million that was originally established in the 1998 special charges.
Effective January 1, 2001, the Company divested its Jackson Dome carbon dioxide reserves and related 183-mile pipeline. No significant gain will be recognized on the fiscal fourth quarter sale. Cash proceeds from the sale totaled approximately $42 million ($34 million after-tax). The divested operations had sales and operating income in the nine months ended December 31, 2000 of approximately $4 million and $3 million, respectively. The operations of the divested business were reported in the Gas Operations segment.
(3) DIVESTITURES - (Continued)
In August 1999, the Company completed the divestiture of its operations in Poland and Thailand. The divestitures resulted in a non- recurring gain of $14.9 million ($7.8 million after-tax, or $.11 per diluted share) which was recognized in "Other income, net." Cash proceeds from the sale were $46.2 million. The operations in Poland and Thailand had combined sales and operating losses in fiscal 2000 of $12.7 million and $550 thousand, respectively.
(4) SPECIAL CHARGE RECOVERY
The Company recorded a $2.8 million ($1.7 million after-tax) recovery during the quarter ended December 31, 1999 primarily consisting of an insurance settlement related to a fiscal 1997 loss.
(5) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net earnings by the weighted average number of shares of the Company's common stock outstanding during the period. Outstanding shares consist of issued shares less treasury stock and common stock held by the Employee Benefits Trust. Diluted earnings per share is calculated by dividing net earnings by the weighted average common shares outstanding adjusted for the dilutive effect of common stock equivalents related to stock options and contingently issuable shares.
The table below reconciles basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three and nine months ended December 31, 2000 and 1999:
Three Months Ended Nine Months Ended
December 31, December 31,
(In thousands) 2000 1999 2000 1999
------------------ -----------------
Weighted average common shares
outstanding:
Basic 66,500 69,200 65,700 69,600
Stock options 700 1,000 500 1,100
Contingently issuable shares -- 600 800 300
------ ------ ------ ------
Diluted 67,200 70,800 67,000 71,000
====== ====== ====== ======
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Contingently issuable shares represent additional shares of Company common stock that were required to be issued in connection with a prior year acquisition. In the quarter ended December 31, 2000, the Company issued approximately 800 thousand shares in connection with the acquisition. The number of issuable shares was based on the spread between the average closing market value of the Company's common stock for the ten business days ended October 1, 2000 ($6.09 per share) and $13.10 per share.
(6) TRADE RECEIVABLES SECURITIZATION
In December 2000, the Company entered into a three-year trade receivables securitization agreement with two commercial banks. The securitization helps diversify the Company's funding sources at a very efficient all-in cost of funds. Through the initial sale of receivables, the Company received proceeds of $71.7 million, which were used to repay borrowings under its revolving credit facilities.
The transaction has been accounted for as a sale under the provisions of Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under the agreement, eligible trade receivables are sold to bank conduits through a bankruptcy-remote special purpose entity, which is consolidated for financial reporting purposes. The difference between the proceeds from the sale and the carrying value of the receivables is recognized as "Discount on securitization of trade receivables" in the accompanying Consolidated Statements of Earnings and varies on a monthly basis depending on the amount of receivables sold and market rates. The Company retains a subordinated interest in the receivables sold, which is recorded at the receivables' previous carrying value. A subordinated retained interest of approximately $28 million at December 31, 2000 is included in "Trade receivables" in the accompanying Consolidated Balance Sheet. In accordance with a servicing agreement, the Company will continue to service, administer and collect the trade receivables on behalf of the bank conduits. The servicing fees charged to the bank conduits approximate the costs of collections. The Company also maintains an allowance for doubtful accounts on trade receivables that it retains.
(7) INVENTORIES
Inventories consist of:
(Unaudited)
December 31, March 31,
(In thousands) 2000 2000
----------- ---------
Finished goods $162,442 $158,549
Raw materials 579 889
-------- --------
$163,021 $159,438
======== ========
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Inventories determined by the LIFO inventory method totaled $20.1 million and $22.6 million at December 31, 2000 and March 31, 2000, respectively. If the FIFO inventory method had been used for these inventories, they would have been $1.5 million higher at December 31, 2000 and $1.4 million higher at March 31, 2000.
(8) OTHER NON-CURRENT ASSETS
Other non-current assets include:
(Unaudited)
December 31, March 31,
(In thousands) 2000 2000
----------- ---------
Investments in unconsolidated affiliates $ 64,208 $ 72,959
Non-compete agreements and other intangible
assets, at cost, net of accumulated
amortization of $104.8 million at
December 31, 2000 and $97.5 million at
March 31, 2000 41,151 48,136
Other assets 10,297 10,180
--------- ---------
$115,656 $131,275
========= =========
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(9) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include:
(Unaudited)
December 31, March 31,
(In thousands) 2000 2000
----------- --------
Cash overdraft $ 15,357 $ 18,960
Accrued payroll and employee benefits 23,952 24,441
Insurance reserves 13,933 11,475
Other accrued expenses and current liabilities 63,992 66,373
-------- --------
$117,234 $121,249
======== ========
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The cash overdraft is attributable to the float of the Company's outstanding checks.
(10) STOCKHOLDERS' EQUITY
Changes in stockholders' equity were as follows:
Employee
Shares of Common Treasury Benefits
(In thousands of shares) Stock $.01 Par Value Stock Trust
-------------------- -------- --------
Balance-April 1, 2000 73,144 1,126 4,822
Common stock issuance (a) 1,134 -- --
Purchase of treasury stock -- 1,419 --
Sale of treasury stock to Trust (b) -- (2,029) 2,029
Reissuance of stock from Trust (c) -- -- (857)
------ ------ -----
Balance-December 31, 2000 74,278 516 5,994
====== ====== =====
(a) Issuance of common stock in connection with a prior year acquisition,
as described in Note 5, and for stock option exercises.
(b) Sale of common stock from treasury to the Employee Benefits Trust.
(c) Reissuance of common stock from the Employee Benefits Trust for employee
benefit programs.
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Accumulated
Capital in Other Employee Compre-
Common Excess of Retained Comprehensive Treasury Benefits hensive
(In thousands of dollars) Stock Par Value Earnings Loss Stock Trust Income
------ ---------- -------- ------------- -------- -------- -------
Balance-April 1, 2000 $731 $193,893 $327,373 $(596) $(8,435) $(40,459) $ --
Net earnings -- -- 26,895 -- -- -- 26,895
Common stock issuance (a) 12 992 -- -- -- -- --
Foreign currency
translation adjustments -- -- -- (163) -- -- (163)
Purchase of treasury stock -- -- -- -- (11,214) -- --
Sale of treasury stock
to Trust (b) -- (4,404) -- -- 15,667 (11,263) --
Reissuance of common stock
from Trust (c) -- (2,334) -- -- -- 6,528 --
Tax benefit from stock
option exercises -- 611 -- -- -- -- --
---- -------- -------- ----- ------- -------- -------
Balance-December 31, 2000 $743 $188,758 $354,268 $(759) $(3,982) $(45,194) $26,732
==== ======== ======== ===== ======= ======== =======
(a) Issuance of common stock in connection with a prior year acquisition,
as described in Note 5, and for stock option exercises.
(b) Sale of common stock from treasury to the Employee Benefits Trust.
(c) Reissuance of common stock from the Employee Benefits Trust for employee
benefit programs.
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(11) COMMITMENTS AND CONTINGENCIES
(a) Litigation
In July 1996, Praxair, Inc. ("Praxair") filed suit against the Company in the Circuit Court of Mobile County, Alabama. The complaint alleged tortious interference with business or contractual relations with respect to Praxair's Right of First Refusal contract with the majority shareholders of National Welders Supply Company, Inc. ("National Welders") in connection with the Company's formation of a joint venture with National Welders. In June 1998, Praxair filed a motion to dismiss its own action in Alabama and commenced another action in the Superior Court of Mecklenburg County, North Carolina, alleging substantially the same tortious interference by the Company. The North Carolina action also alleges breach of contract against National Welders and certain shareholders of National Welders and unfair trade practices and conspiracy against all the defendants. In the North Carolina action, Praxair seeks compensatory damages in excess of $10 thousand, punitive damages and other unspecified relief. In August 2000, the Company's motion for summary judgment was denied. The Company anticipates that additional discovery and pretrial motions will be completed by late summer 2001 and a trial on the merits will begin in October 2001, which may result in additional costs. The Company believes that Praxair's North Carolina claims are without merit and intends to defend vigorously against such claims.
In 1997, the Company announced it was the victim of a fraudulent breach of contract by a third party supplier of refrigerant gases and recorded a non-recurring special charge related to product losses and costs associated with the Company's efforts to investigate the fraud and pursue recoveries. During the quarter ended September 30, 2000, the Company recorded a non-recurring special charge of $1.3 million related to the estimated legal fees and costs of pursuing additional recoveries from its insurance carriers. A trial date has been set for April 2001.
The Company is involved in various legal and regulatory proceedings that have arisen in the ordinary course of its business and have not been finally adjudicated. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse effect upon the Company's consolidated financial position, results of operations or liquidity.
(b) Insurance Coverage
The Company has established insurance programs to cover workers' compensation, business automobile, general and product liability. These programs have self-insured retention of $500 thousand per occurrence. Estimated losses are accrued based upon the Company's experience for the aggregate liability for claims incurred and claims incurred but not reported. The Company believes its insurance reserves are adequate.
The nature of the Company's business may subject it to product and general liability lawsuits. To the extent that the Company is subject to claims that exceed its liability insurance coverage of $100 million, such suits could have a material adverse effect on the Company's financial position, results of operations or liquidity.
(12) SUMMARY BY BUSINESS SEGMENT
Information related to the Company's operations by business segment for the three months ended December 31, 2000 and 1999 follows:
Three Months Ended Three Months Ended
December 31, 2000 December 31, 1999
---------------------------------------- ----------------------------------------
(In thousands) Gas Gas
Distribution Operations Combined Distribution Operations Combined
------------ ---------- ---------- ------------ ---------- ----------
Gas and rent $ 158,888 $ 33,874 $ 192,762 $ 144,481 $ 28,845 $ 173,326
Hardgoods 200,833 1,375 202,208 195,280 828 196,108
---------- ---------- ---------- ---------- ---------- ----------
Total net sales 359,721 35,249 394,970 339,761 29,673 369,434
Intersegment sales -- 7,661 7,661 -- 6,112 6,112
Gross profit 169,402 22,791 192,193 159,635 14,202 173,837
Gross profit margin 47.1% 64.7% 48.7% 47.0% 47.9% 47.1%
Operating income,
excluding special
(charges) recoveries 22,038 4,204 26,242 26,622 (447) 26,175
Earnings before
income taxes,
excluding special
(charges) recoveries 9,733 1,582 11,315 16,316 (2,193) 14,123
Assets 1,416,950 219,128 1,636,078 1,433,703 216,353 1,650,056
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(12) SUMMARY BY BUSINESS SEGMENT - (Continued)
Information related to the Company's operations by business segment for the nine months ended December 31, 2000 and 1999 follows:
Nine Months Ended Nine Months Ended
December 31, 2000 December 31, 1999
---------------------------------------- ----------------------------------------
(In thousands) Gas Gas
Distribution Operations Combined Distribution Operations Combined
------------ ---------- ---------- ------------ ---------- ----------
Gas and rent $ 477,792 $ 105,588 $ 583,380 $ 432,575 $ 100,740 $ 533,315
Hardgoods 627,727 2,958 630,685 600,126 2,775 602,901
---------- ---------- ---------- ---------- ---------- ----------
Total net sales 1,105,519 108,546 1,214,065 1,032,701 103,515 1,136,216
Intersegment sales -- 23,973 23,973 -- 22,497 22,497
Gross profit 513,801 69,204 583,005 477,496 59,009 536,505
Gross profit margin 46.5% 63.8% 48.0% 46.2% 57.0% 47.2%
Operating income,
excluding special
(charges) recoveries 74,761 15,570 90,331 79,290 8,288 87,578
Earnings before
income taxes,
excluding special
(charges) recoveries
and cumulative
effect of an
accounting change 37,618 8,023 45,641 44,371 20,067 64,438
Assets 1,416,950 219,128 1,636,078 1,433,703 216,353 1,650,056
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Reconciliations of the combined operating segments to the applicable line items on the consolidated financial statements follow:
Three Months Ended Nine Months Ended
(In thousands) December 31, 1999 December 31, 1999
------------------ -----------------
Segment operating income $ 26,175 $ 87,578
Special (charges) recoveries 2,829 2,829
-------- --------
Operating income $ 29,004 $ 90,407
======== ========
Segment earnings before income taxes $ 14,123 $ 64,438
Special (charges) recoveries 2,829 2,829
-------- --------
Earnings before income taxes and the
cumulative effect of an accounting change $ 16,952 $ 67,267
======== ========
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS: THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THE
INCOME STATEMENT COMMENTARY
Net Sales
Net sales increased 6.9% in the quarter ended December 31, 2000 ("current quarter") compared to the quarter ended December 31, 1999 ("prior year quarter"). Total Company same-store sales increased 2.5% in the current quarter versus the prior year quarter. The Company estimates same-store sales based on a comparison of current period sales to prior period sales, adjusted for acquisitions and divestitures.
Three Months Ended
(In thousands) December 31,
Net Sales 2000 1999 Increase
--------- ------------------- -----------------
Distribution $359,721 $339,761 $19,960 5.9%
Gas Operations 35,249 29,673 5,576 18.8%
-------- -------- -------
$394,970 $369,434 $25,536 6.9%
======== ======== =======
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The Distribution segment's principal products and services include industrial, medical and specialty gases; equipment rental; and hardgoods. Industrial gases consist of packaged and small bulk gases. Equipment rental fees are generally charged on cylinders, cryogenic liquid containers, bulk tanks and welding equipment. Hardgoods consist of welding supplies and equipment, safety products, and industrial tools and supplies. Distribution sales increased $20.0 million primarily from net acquisition and divestiture activity and same-store sales growth. Acquisition and divestiture activity accounted for a net sales increase of $11.9 million as the acquisition of three distributors since October 1, 1999 was partially offset by a divestiture during fiscal 2000. The most significant of the three acquisitions was that of Mallinckrodt Inc.'s Puritan-Bennett ("Puritan- Bennett") medical gas business in the fourth quarter of fiscal 2000. Distribution same-store sales growth of $8.1 million (2.3%) resulted from gas and rent sales growth of $6.6 million (4.3%) and hardgoods sales growth of $1.5 million (0.7%). The Distribution segment's sales growth resulted from continued success in sales initiatives such as national accounts and strategic products. Growth in gas and rent same- store sales was primarily attributable to higher volumes of strategic products, including medical and specialty gases and welder equipment rental. Hardgoods same-store sales growth was driven principally by an increase in sales of safety products. Sales growth in certain strategic product categories, such as safety products and medical and specialty gases, continued even though several of the Company's core customer segments (metal fabrication, mining, transportation equipment and automotive) were still relatively weak. Same-store sales growth slowed as a result of severe weather and a slowing economy that contributed to the extended holiday shutdowns at various customers during December 2000. The adverse weather conditions closed customer operations and prevented deliveries in certain regions. The harsh weather conditions were in sharp contrast to the rather mild winter experienced across much of the country in the prior year quarter.
Gas Operations sales primarily include dry ice and carbon dioxide that are used for cooling, food and beverage applications, chemical products, and oil and gas extraction. In addition, the segment includes businesses that produce and distribute specialty gases and nitrous oxide. Sales increased $5.6 million compared to the prior year quarter primarily from the nitrous oxide production business acquired with Puritan-Bennett and same-store sales growth. Gas Operations same- store sales increased $1.6 million (4.6%) driven by selected price increases and higher volumes of dry ice, liquid carbon dioxide, and specialty gases. Gas Operations same-store sales growth was also negatively impacted during the current quarter by the severe weather.
The Company anticipates lower sequential sales in the fiscal fourth quarter as sales typically reach a seasonal low as a result of cooler temperatures, which reduce the demand for dry ice and liquid carbon dioxide.
The Company believes that positive same-store sales momentum will continue into the fiscal fourth quarter driven by higher volumes of strategic products and price increases announced in December 2000. Price increases will be phased in throughout the fourth quarter and as customer contracts permit. The price increases are designed to help mitigate the impact of higher operating expenses, as described under the caption, "Operating expenses," below.
Gross Profits
Gross profits increased 10.6% and the gross profit margin increased 160 basis points to 48.7% during the current quarter compared to the prior year quarter.
Three Months Ended
(In thousands) December 31,
Gross Profits 2000 1999 Increase
------------- ------------------- -----------------
Distribution $169,402 $159,635 $ 9,767 6.1%
Gas Operations 22,791 14,202 8,589 60.5%
-------- -------- -------
$192,193 $173,837 $18,356 10.6%
======== ======== =======
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The increase in Distribution gross profits of $9.8 million resulted from net acquisition and divestiture activity of $8.4 million and growth in same-store gross profits of $1.4 million (0.8%). The increase in same-store gross profits resulted primarily from higher sales volumes of gas and rent. Centralized purchasing initiatives and increased sales of higher margin private label products have helped support hardgoods margins, despite the highly competitive market for these products. Distribution's gross profit margin of 47.1% in the current quarter increased 10 basis points from 47.0% in the prior year quarter primarily as a result of higher margin medical gases associated with the acquisition of Puritan-Bennett.
The increase in Gas Operations gross profits of $8.6 million resulted from nitrous oxide production business acquired with Puritan-Bennett and same-store gross profit growth. Additionally, the prior year quarter was negatively impacted by a $3.8 million inventory write-down related to certain specialty gas inventories. Same-store gross profits grew $2.0 million (9.6%) primarily due to higher sales volumes. Gas Operations gross profit margin was 64.7% in the current quarter compared to 47.9% in the prior year quarter. The gross profit margin in the prior year quarter reflects the negative impact of the specialty gas inventory write-down.
Operating Expenses
Selling, distribution and administrative expenses ("operating expenses") consist of personnel and related costs, distribution and warehouse costs, occupancy expenses and other selling, general and administrative expenses. Operating expenses increased $19.4 million (15.5%) compared to the prior year quarter primarily from net acquisition and divestiture activity and higher costs associated with personnel, insurance and distribution costs. As a percentage of net sales, operating expenses increased 270 basis points to 36.7% compared to 34.0% in the prior year quarter. The Company recognizes the possibility of a further slowing in the industrial economy and has developed a cost reduction plan that could be implemented in the fourth quarter, if necessary.
Amortization expense amounted to $5.2 million in the current quarter compared to $6.5 million in the prior year quarter. The decrease in amortization expense is primarily due to a current quarter adjustment and the expiration of certain non-compete agreements related to prior acquisitions.
Operating Income
Excluding special charge recoveries that favorably impacted the prior year quarter, operating income was essentially flat.
Three Months Ended
(In thousands) December 31,
Operating Income (Loss) 2000 1999 Increase (Decrease)
----------------------- ------------------- -------------------
Distribution $22,038 $26,622 $(4,584) (17.2%)
Gas Operations 4,204 (447) 4,651 --%
Special (Charges) Recoveries -- 2,829 (2,829) (100.0%)
------- ------- -------
$26,242 $29,004 $(2,762) (9.5%)
======= ======= =======
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The Distribution segment's operating income margin decreased 170 basis points to 6.1% in the current quarter compared to 7.8% in the prior year quarter primarily as a result of higher operating expenses. The Company believes that continued sales growth and the impact of price increases will help to offset increases in operating expenses and improve operating margins in the fiscal fourth quarter.
The Gas Operations segment's operating income was $4.7 million higher than the prior year quarter. The prior year quarter was negatively impacted by a $3.8 million inventory write-down of certain specialty gas inventories. Gas Operations' operating income margin was 11.9% compared to -1.5% in the prior year quarter.
Special charge recoveries of $2.8 million in the prior year quarter primarily consisted of an insurance settlement related to a fiscal 1997 loss.
Interest Expense, net
Interest expense, net, totaled $15.6 million representing an
increase of $1.6 million (11.8%) compared to the prior year quarter.
The increase in interest expense resulted from higher average debt
levels and an increase in weighted average interest rates. The net
increase in debt was primarily attributable to the fourth quarter
fiscal 2000 acquisition of Puritan-Bennett as well as common stock
repurchases. As discussed in "Liquidity and Capital Resources" and in
Item 3 "Quantitative and Qualitative Disclosures About Market Risk,"
the Company manages interest rate exposure of certain borrowing
instruments through participation in interest rate swap agreements.
Income Tax Expense
The effective income tax rate was 41.0% of pre-tax earnings in the current quarter compared to 42.4% in the prior year quarter. The effective income tax rate in the prior year quarter, excluding taxes on gains related to divestitures and special charges, was 41.3%.
Net Earnings
Net earnings for the quarter ended December 31, 2000 were $6.7 million, or $.10 per diluted share, compared to $9.8 million, or $.14 per diluted share, in the prior year quarter.
RESULTS OF OPERATIONS: NINE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THE
INCOME STATEMENT COMMENTARY
Net Sales
Net sales increased 6.9% for the nine months ended December 31, 2000 ("current period") compared to the nine months ended December 31, 1999 ("prior year period"). Total Company same-store sales increased 3.3% in the current period versus the prior year period.
Nine Months Ended
(In thousands) December 31,
Net Sales 2000 1999 Increase
--------- ----------------------- -----------------
Distribution $1,105,519 $1,032,701 $72,818 7.1%
Gas Operations 108,546 103,515 5,031 4.9%
---------- ---------- -------
$1,214,065 $1,136,216 $77,849 6.9%
========== ========== =======
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Distribution sales increased $72.8 million as a result of net acquisition and divestiture activity and same-store sales growth. Acquisition and divestiture activity accounted for a net sales increase of $42.8 million, primarily resulting from the fourth quarter fiscal 2000 acquisition of Puritan-Bennett. Same-store sales growth of $30.0 million (3.1%) was the result of gas and rent sales growth of $18.9 million (4.1%) and hardgoods sales growth of $11.1 million (1.8%). Gas and rent same-store sales growth was attributable to sales initiatives such as national accounts and higher volumes of strategic products, particularly medical and specialty gases and welder equipment rental. Hardgoods same-store sales growth resulted from an increase in safety and tool product sales.
Gas Operations sales increased $5.0 million in the current period as a result of same-store sales growth, partially offset by net divestiture activity. Gas Operations same-store sales increased $5.8 million (5.9%) primarily from higher volumes of dry ice, liquid carbon dioxide and specialty gases. Lower sales from the prior year divestiture of operations in Poland and Thailand were largely offset by nitrous oxide production business acquired with Puritan-Bennett.
Gross Profits
Gross profits increased 8.7% and the gross profit margin increased 80 basis points to 48.0% in the current period compared to the prior year period.
Nine Months Ended
(In thousands) December 31,
Gross Profits 2000 1999 Increase
------------- ------------------ ----------------
Distribution $513,801 $477,496 $36,305 7.6%
Gas Operations 69,204 59,009 10,195 17.3%
-------- -------- -------
$583,005 $536,505 $46,500 8.7%
======== ======== =======
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The increase in Distribution gross profits of $36.3 million resulted from net acquisition and divestiture activity of $28.4 million and same- store gross profit growth of $7.9 million (1.8%). The increase in same- store gross profits was primarily driven by higher sales volumes of gas and rent. Hardgoods gross profits have been helped by lower costs from centralized purchasing initiatives and continued sales growth of higher margin private label products. The Distribution segment's gross profit margin of 46.5% in the current period increased 30 basis points from 46.2% in the prior year period primarily from higher margin medical gases associated with the acquisition of Puritan-Bennett.
The increase in Gas Operations gross profits of $10.2 million resulted from same-store gross profit growth and net acquisition activity. In addition, the prior year period was negatively impacted by an inventory write-down of $3.8 million related to certain specialty gas inventories. Same-store gross profit growth of $5.2 million (8.4%) resulted primarily from higher sales volumes of dry ice, liquid carbon dioxide and specialty gases. Net acquisition activity contributed gross profits of $1.2 million compared to the prior year period. Gas Operations gross profit margin of 63.8% increased from 57.0% in the prior year period. The lower gross profit margin in the prior year primarily reflected the negative impact of the specialty gas inventory write-down.
Operating Expenses
Operating expenses increased $45.0 million (11.8%) compared to the prior year period primarily from acquisitions and higher costs associated with personnel, insurance and distribution costs. As a percentage of net sales, operating expenses increased 160 basis points to 35.2% compared to 33.6% in the prior year period. The Company recognizes the possibility of a further slowing in the industrial economy and has developed a cost reduction plan that could be implemented in the fourth quarter, if necessary.
Amortization expense decreased $1.4 million compared to the prior year period primarily due to a current period adjustment and the expiration of certain non-compete agreements related to prior acquisitions.
Operating Income
Excluding the special charge recoveries, operating income increased 3.1% compared to the prior year period. The operating income margin, excluding special charge recoveries in the prior year, declined 30 basis points to 7.4% in the current period compared to the prior year period.
Nine Months Ended
(In thousands) December 31,
Operating Income 2000 1999 Increase (Decrease)
---------------- ------------------ -------------------
Distribution $74,761 $79,290 $(4,529) (5.7%)
Gas Operations 15,570 8,288 7,282 87.9%
Special (Charges) Recoveries -- 2,829 (2,829) (100.0%)
------- ------- -------
$90,331 $90,407 $ (76) (0.1%)
======= ======= =======
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The Distribution segment's operating income margin decreased 90 basis points to 6.8% in the current period compared to 7.7% in the prior year period primarily as a result of higher operating expenses, partially mitigated by gross profits from same-store sales growth and acquisitions.
The Gas Operations segment's operating income margin increased to 14.3% from 8.0% in the prior year period. The prior year period was negatively impacted by an inventory write-down of certain specialty gas inventories as well as lower margins of foreign operations, which were divested during fiscal 2000.
Special charge recoveries of $2.8 million in the prior year period primarily consisted of an insurance settlement related to a fiscal 1997 loss.
Interest Expense, net
Interest expense, net, totaled $47.7 million representing an increase of $5.5 million (13.0%) compared to the prior year period. The increase in interest expense resulted from higher average debt levels and an increase in weighted-average interest rates. The net increase in debt was primarily attributable to the fourth quarter fiscal 2000 acquisition of Puritan-Bennett as well as common stock repurchases. As discussed in "Liquidity and Capital Resources" and in Item 3 "Quantitative and Qualitative Disclosures About Market Risk," the Company manages interest rate exposure of certain borrowing instruments through participation in interest rate swap agreements.
Other Income, net
Other income, net, totaled $809 thousand in the current period compared to $16.6 million in the prior year period. The prior year period included a $14.9 million gain from the divestiture of operations in Poland and Thailand.
Income Tax Expense
The effective income tax rate was 41.1% of pre-tax earnings in the current period compared to 43.0% in the prior year period. The effective income tax rate in the prior year period was affected by higher foreign tax rates on the gain from the divestiture of operations in Poland and Thailand.
Cumulative Effect of an Accounting Change
In the first quarter of fiscal 2000, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," resulting in a charge to net earnings of $590 thousand. The charge primarily resulted from the write-off of start-up costs capitalized in connection with the Company's two air separation units constructed during fiscal 1998 and 1999.
Net Earnings
Net earnings for the nine month period ended December 31, 2000 were $26.9 million, or $.40 per diluted share, compared to $37.8 million, or $.53 per diluted share, in the prior year period. Excluding special charge recoveries, a charge for the cumulative effect of an accounting change, and a divestiture gain, net earnings in the prior year period were $29.1 million, or $.41 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net earnings and the cash received from the sale of trade receivables under a securitization agreement, described below, partially offset by cash used for working capital, provided net cash from operations of $160 million, representing an increase of $76 million over the prior year. Net earnings, adjusted for non-cash earnings, of $105 million increased $2.9 million over the comparable period in the prior year. The trade receivables securitization entered into during December 2000 provided $71.7 million in cash, which was used to repay debt under the Company's revolving credit facility. Working capital components used cash of $12.9 million, an improvement of $1.3 million from the same period in the prior year. Cash used for working capital primarily related to inventory and accounts payable. Inventories used cash of $3.5 million as hardgoods days' supply of inventory increased to 92 days from 80 days at March 31, 2000. The days' supply of inventory on hand at December 31, 2000 is consistent with December 31, 1999. The higher inventory levels at December 2000 and 1999 reflect purchasing activity to take advantage of calendar year- end vendor promotions and centralized purchasing and distribution initiatives. Accounts payable used cash of $19.8 million representing an increase of $2.7 million over the prior year period. Accounts payable days outstanding were 34 days and 39 days at December 31, 2000 and 1999, respectively. The lower days outstanding reflect the Company taking advantage of vendor discounts offered on shorter payment terms.
Cash used in investing activities totaled $37.6 million during the current period. Investing activities primarily included capital expenditures that used cash of $47.9 million and divestiture proceeds that provided cash of $7.5 million. Capital expenditures in the current period were flat compared to the same period last year. Capital expenditures associated with the purchase of cylinders, bulk tanks, rental welders and machinery and equipment totaled approximately $34 million, or approximately 70% of total capital expenditures, and facilitate strategic product sales growth. Effective January 1, 2001, the Company divested its Jackson Dome carbon dioxide reserves and related 183-mile pipeline. After-tax cash proceeds from the sale totaled approximately $34 million and were used to repay debt in the fiscal fourth quarter of 2001.
Financing activities used cash of $122 million. Activities that used cash during the period primarily included net repayment of debt of $108 million and the repurchase of the Company's common stock for $11.2 million. The Company's stock repurchase program was completed in the first quarter of fiscal 2001.
The Company will continue to look for appropriate acquisitions of distributors while it focuses on reducing its financial leverage. Capital expenditures, current debt maturities and any future acquisitions are expected to be funded through the use of cash flow from operations, revolving credit facilities, potential sales of non- core businesses and other financing alternatives, including asset-based financing. The Company believes that its sources of financing are adequate for its anticipated needs and that it could arrange additional sources of financing for unanticipated requirements. The cost and terms of any future financing arrangement depend on the market conditions and the Company's financial position at that time.
The Company does not currently pay dividends.
Financial Instruments
The Company has unsecured revolving credit facilities totaling $725 million and $100 million Canadian (US $67 million) under a credit agreement with a final maturity date of December 5, 2002. The credit agreement contains covenants that include the maintenance of certain financial ratios, restrictions on additional borrowings and limitations on dividends. At December 31, 2000, the Company had borrowings under the credit agreement of approximately $463 million and $36 million Canadian (US $24 million). The Company also had commitments under letters of credit supported by the credit agreement of approximately $52 million. Based on restrictions related to cash flow to funded debt coverage, the Company had additional borrowing capacity under the credit facilities of approximately $130 million at December 31, 2000. At December 31, 2000, the effective interest rate on borrowings under the credit facilities was 7.26% on U.S. borrowings and 5.94% on Canadian borrowings. The Company anticipates refinancing its credit facilities within the next twelve months.
At December 31, 2000, the Company had the following medium-term notes outstanding: $50 million of unsecured notes due September 2001 bearing interest at a fixed rate of 7.15%; $75 million of unsecured notes due March 2004 bearing interest at a fixed rate of 7.14%; and $100 million of unsecured notes due September 2006 bearing interest at a fixed rate of 7.75%. The medium term notes due September 2001 are expected to be refinanced with borrowings under the Company's revolving credit facilities. Additionally, at December 31, 2000, long-term debt of the Company included acquisition notes and other long-term debt instruments of approximately $58 million with interest rates ranging from 6% to 10.5%. The Company also has a shelf registration with a capacity of approximately $175 million for the issuance of debt and other types of securities.
The Company manages its exposure to changes in market interest rates. At December 31, 2000, the Company was party to 21 interest rate swap agreements. The swap agreements are with major financial institutions and aggregate $535 million in notional principal amount at December 31, 2000. Seventeen swap agreements with approximately $405 million in notional principal amount require fixed interest payments based on an average effective rate of 6.33% for remaining periods ranging between one and six years. Four swap agreements with $130 million in notional principal amount require variable interest payments based on an average rate of 6.91% at December 31, 2000. Under the terms of three swap agreements, the Company has elected to receive the discounted value of the counterparties' interest payments up-front. At December 31, 2000, approximately $1.5 million of such payments was included in other current liabilities and $700 thousand was included in other non-current liabilities. The Company monitors its positions and the credit ratings of its counterparties, and does not anticipate non- performance by the counterparties. At December 31, 2000, the Company's ratio of fixed to variable rate debt was 62% to 38%.
Trade Receivables Securitization
In December 2000, the Company entered into a three-year trade receivables securitization agreement with two commercial banks. The securitization helps diversify the Company's funding sources at a very efficient all-in cost of funds. Through the initial sale of receivables, the Company received proceeds of $71.7 million, which were used to repay borrowings under its revolving credit facilities.
The transaction has been accounted for as a sale under the provisions of Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under the agreement, eligible trade receivables are sold to bank conduits through a bankruptcy-remote special purpose entity, which is consolidated for financial reporting purposes. The difference between the proceeds from the sale and the carrying value of the receivables is recognized as "Discount on securitization of trade receivables" in the accompanying Consolidated Statements of Earnings and varies on a monthly basis depending on the amount of receivables sold and market rates. The Company retains a subordinated interest in the receivables sold, which is recorded at the receivables' previous carrying value. A subordinated retained interest of approximately $28 million at December 31, 2000 is included in "Trade receivables" in the accompanying Consolidated Balance Sheet.
In accordance with a servicing agreement, the Company will continue to service, administer and collect the trade receivables on behalf of the bank conduits. The servicing fees charged to the bank conduits approximate the costs of collections. The Company also maintains an allowance for doubtful accounts on trade receivables that it retains.
OTHER
New Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Statement 140 replaces FASB Statement 125, revises the standards for accounting for securitizations and other transfers of financial assets and requires certain additional disclosures. Statement 140 is effective for applicable transactions occurring after March 31, 2001. Statement 140 disclosures are required for fiscal years ending after December 15, 2000. The adoption of the provisions of Statement 140 will not have a material impact on the results of operations, financial position and liquidity of the Company.
In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities (an amendment of FASB Statement No. 133)." The Company will adopt Statement 138 in the first quarter of fiscal 2002, as required. Management has evaluated the impact of Statement 138 and believes that it will not have a material impact on the results of operations, financial position and liquidity of the Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). The implementation date of SAB 101 has been delayed and will be effective for the Company in the fourth quarter of fiscal 2001. The Company believes that the adoption of SAB 101 will not have a material impact on its results of operations, financial position and liquidity.
Forward-looking Statements
This report contains statements that are forward looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements regarding: the Company's expectations regarding the continuation of the Distribution segment's positive same-store sales momentum into the fiscal fourth quarter; the impact of higher volumes of strategic products and price increases and their effect on sales growth; the seasonal impact on sales of the Gas Operations segment in the fiscal fourth quarter; the Company's belief that continued sales growth and the impact of price increases will help to offset increases in operating expenses in the fourth quarter of fiscal 2001; operating expense trends; the restoration of operating margins through the use of cost reduction plans; the funding of future acquisitions, capital expenditures and current debt maturities through the use of cash flow from operations, revolving credit facilities, potential sales of assets and other financing alternatives; the identification of acquisitions candidates; future debt repayment; future sources of financing; and performance of counterparties under interest rate swap agreements. These forward-looking statements involve risks and uncertainties. Factors that could cause actual results to differ materially from those predicted in any forward-looking statement include, but are not limited to: underlying market conditions; growth and continued improvement in same-store sales; the success of marketing initiatives on sales of strategic products and national accounts; the Company's ability to control operating expenses and the potential impact of higher operating expenses in future periods; the impact of seasonality on sales of the Gas Operations segment; the market acceptance and success of private label products; the ability of the Company to improve margins through sales of strategic and private label products; the success of cost reduction plans in improving operating margins; adverse changes in customer buying patterns; the market acceptance of price increases; the ability of price increases and sales growth to offset any increases in operating expenses; the success of centralized purchasing and distribution initiatives in lowering product costs;
the ability to generate sufficient cash flow from operations or other sources to repay debt, fund future acquisitions or capital expenditure requirements; the ability to identify economically attractive or willing acquisition candidates; the ability to identify alternate sources of financing; the ability to consummate sales of non-core businesses; the ability to negotiate sales prices for non-core businesses on terms economically favorable to the Company; the ability to manage interest rate exposure; the effects of competition from independent distributors and vertically integrated gas producers on products, pricing and sales growth; changes in product prices from gas producers and name-brand manufacturers and suppliers of hardgoods; reduced product supply and demand as well as higher operating expenses due to the California power crisis; the outcome and costs associated with the defense and settlement of certain lawsuits; uncertainties regarding accidents or litigation which may arise in the ordinary course of business; and the effects of, and changes in, the economy, monetary and fiscal policies, laws and regulations, inflation and monetary fluctuations and fluctuations in interest rates, both on a national and international basis. The Company does not undertake to update any forward-looking statement made herein or that may be made from time to time by or on behalf of the Company.
Interest Rate Risk
The Company's primary market risk exposure is from changes in interest rates. The Company's policy is to manage interest rate risk exposure through the use of a combination of fixed and floating rate debt and interest rate swap agreements. The Company maintains the ratio of fixed to variable rate debt within parameters established by management under policies approved by the Board of Directors. At December 31, 2000, the ratio of fixed versus floating debt was 62% to 38%. In addition, the Company monitors its positions and the credit ratings of its counterparties, thereby minimizing the risk of non- performance by the counterparties. The Company does not enter into derivative financial instruments for trading purposes.
The table below summarizes the Company's market risks associated with long-term debt obligations, interest rate swaps and off-balance sheet LIBOR based agreements as of December 31, 2000. For long-term debt obligations, the table presents cash flows related to payments of principal and interest by expected fiscal year of maturity. For interest rate swaps, the table presents the notional amounts underlying the interest rate swaps by year of maturity. The notional amounts are used to calculate contractual payments to be exchanged and are not actually paid or received. Fair values were computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the period.
[Continued on following page]
Expected Fiscal Year of Maturity
---------------------------------------------------------------------------
(In millions) Fair
2001 (a) 2002 2003 2004 2005 2006 Thereafter Total Value
---------------------------------------------------------------------------
Fixed Rate Debt:
----------------
Medium-term notes $ -- $ 50 $ -- $ 75 $ -- $ -- $100 $225 $204
Interest expense $ 4 $ 15 $ 13 $ 13 $ 8 $ 8 $ 3 $ 64
Average interest rate 7.41% 7.42% 7.49% 7.49% 7.75% 7.75% 7.75%
Acquisition notes $ 7 $ 16 $ 1 $ 22 $ -- $ 2 $ -- $ 48 $ 45
Interest expense $ -- $ 1 $ -- $ 2 $ -- $ -- $ -- $ 3
Average interest rate 7.45% 7.45% 7.45% 7.45% 7.45% 7.45% 7.45%
Other notes $ 1 $ 1 $ -- $ -- $ -- $ -- $ -- $ 2 $ 2
Average interest rate 7.55% 7.55%
Variable Rate Debt:
-------------------
Revolving credit facilities $ -- $ -- $487 $ -- $ -- $ -- $ -- $487 $487
Interest expense $ 9 $ 35 $ 26 $ -- $ -- $ -- $ -- $ 70
Interest rate (b) 7.19% 7.19% 7.19%
Other notes $ -- $ 7 $ -- $ -- $ 1 $ -- $ -- $ 8 $ 8
Average interest rate 10.50% 10.50% 7.50% 7.50% 7.50%
US denominated Swaps:
15 Swaps Receive
Variable/Pay Fixed $ 55 $177 $128 $ -- $ 40 $ -- $ -- $400 $ (6)
Variable Receive rate
(3 month LIBOR)= 6.70%
Weighted average pay
rate = 6.32%
4 Swaps Receive
Fixed/Pay Variable $ -- $ 50 $ -- $ 30 $ -- $ -- $ 50 $130 $ 4
Weighted average
receive rate = 6.99%
Variable pay rate
(6 month LIBOR)=6.91%
Canadian $ denominated Swaps:
2 Swaps Receive
Variable/Pay Fixed $ 3 $ 2 $ -- $ -- $ -- $ -- $ -- $ 5 $ --
(3 month CAD BA (c))=5.87%
Weighted average pay
rate = 7.11%
Other Off-Balance Sheet
LIBOR based agreements:
-----------------------
Operating leases with trust $ -- $ 1 $ 1 $ 43 $ -- $ -- $ -- $ 45 $ 45
Lease expense $ 1 $ 4 $ 4 $ 3 $ -- $ -- $ -- $ 12
Trade receivables
securitization $ -- $ -- $ -- $ 72 $ -- $ -- $ -- $ 72 $ 72
Discount on securitization $ 1 $ 5 $ 5 $ 5 $ -- $ -- $ -- $ 16
(a) Fiscal 2001 financial instrument maturities and interest expense relate to the
period January 1, 2001 through March 31, 2001.
(b) The variable rate of long-term debt obligations is based on the London Interbank
Offered Rate ("LIBOR") as of December 31, 2000. For future periods, the variable
interest rate is assumed to remain at 7.19% with the principal balance of long-term
debt obligations held constant at $487 million. However, the variable rate and
borrowing levels of long-term debt may fluctuate materially from those presented
above.
(c) The variable receive rate for Canadian dollar denominated interest rate swaps is
the rate on Canadian Bankers' acceptances ("CAD BA").
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As the table incorporates only those interest rate risk exposures that exist as of December 31, 2000, it does not consider those exposures or positions that could arise after that date. In addition, actual cash flows of financial instruments in future periods may differ materially from prospective cash flows presented in the table due to future fluctuations in variable interest rates and Company debt levels.
Foreign Currency Rate Risk
Canadian subsidiaries of the Company are funded in part with local currency debt. The Company does not otherwise hedge its exposure to translation gains and losses relating to foreign currency net asset exposures. The Company considers its exposure to foreign currency exchange fluctuations to be immaterial to its consolidated results of operations and financial position.
In July 1996, Praxair, Inc. ("Praxair") filed suit against the Company in the Circuit Court of Mobile County, Alabama. The complaint alleged tortious interference with business or contractual relations with respect to Praxair's Right of First Refusal contract with the majority shareholders of National Welders Supply Company, Inc. ("National Welders") in connection with the Company's formation of a joint venture with National Welders. In June 1998, Praxair filed a motion to dismiss its own action in Alabama and commenced another action in the Superior Court of Mecklenburg County, North Carolina, alleging substantially the same tortious interference by the Company. The North Carolina action also alleges breach of contract against National Welders and certain shareholders of National Welders and unfair trade practices and conspiracy against all the defendants. In the North Carolina action, Praxair seeks compensatory damages in excess of $10 thousand, punitive damages and other unspecified relief. In August 2000, the Company's motion for summary judgment was denied. The Company anticipates that additional discovery and pretrial motions will be completed by late summer 2001 and a trial on the merits will begin in October 2001, which may result in additional costs. The Company believes that Praxair's North Carolina claims are without merit and intends to defend vigorously against such claims.
In 1997, the Company announced it was the victim of a fraudulent breach of contract by a third party supplier of refrigerant gases and recorded a non-recurring special charge related to product losses and costs associated with the Company's efforts to investigate the fraud and pursue recoveries. During the quarter ended September 30, 2000, the Company recorded a non-recurring special charge of $1.3 million related to the estimated legal fees and costs of pursuing additional recoveries from its insurance carriers. A trial date has been set for April 2001.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibit is being filed as part of this Quarterly Report on Form 10-Q:
Exhibit No. Description
11 Calculation of earnings per share
b. Reports on Form 8-K
On October 27, 2000, the Company filed a Form 8-K pursuant to Item 5, reporting its earnings for the second quarter and six months ended September 30, 2000.
On November 9, 2000, the Company filed a Form 8-K pursuant to Item 9, "Regulation FD", disclosing certain information to be provided to securities market professionals, investors and prospective investors at meetings during November 2000.
Pursuant to the requirements 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.
Date: February 8, 2001 /s/ Roger F. Millay
Roger F. Millay
Senior Vice President - Finance and
Chief Financial Officer
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EXHIBIT 11
AIRGAS, INC.
EARNINGS PER SHARE CALCULATIONS
Three Months Ended Nine Months Ended
December 31, December 31,
(In thousands, except per share amounts) 2000 1999 2000 1999
------------------ -----------------
Weighted Average Shares Outstanding:
Basic shares outstanding 66,500 69,200 65,700 69,600
Stock options - incremental shares 700 1,000 500 1,100
Contingently issuable shares -- 600 800 300
------ ------ ------ ------
Diluted shares outstanding 67,200 70,800 67,000 71,000
====== ====== ====== ======
Net earnings $6,676 $9,760 $26,895 $37,757
====== ====== ======= =======
Basic earnings per share $ .10 $ .14 $ .41 $ .54
Diluted earnings per share $ .10 $ .14 $ .40 $ .53
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