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Airgas 10-K 2010 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-K
For the fiscal year ended March 31, 2010 or
For the transition period from to Commission File No. 1-9344
AIRGAS, INC. (Exact name of registrant as specified in its charter)
(610) 687-5253 (Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12 (b) of the Act:
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x 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 ¨
Table of ContentsIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) YES ¨ 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. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x The aggregate market value of the 74,061,560 shares of voting stock held by non-affiliates of the registrant was approximately $3.6 billion computed by reference to the closing price of such stock on the New York Stock Exchange as of the last day of the registrant’s most recently completed second quarter, September 30, 2009. 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 25, 2010 was 83,470,423.
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders (when it is filed) are incorporated by reference into Part III of this Report.
Table of ContentsTABLE OF CONTENTS PART I
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GENERAL Airgas, Inc. and subsidiaries (“Airgas” or the “Company”) became a publicly traded company in 1986 and, through its subsidiaries, is the largest U.S. distributor of industrial, medical, and specialty gases (delivered in “packaged” or cylinder form), and hardgoods, such as welding equipment and supplies. Airgas is also one of the largest U.S. distributors of safety products, the largest U.S. producer of nitrous oxide and dry ice, the largest liquid carbon dioxide producer in the Southeast, and a leading distributor of process chemicals, refrigerants, and ammonia products. The Company markets these products to its diversified customer base through multiple sales channels including branch-based sales representatives, retail stores, strategic customer account programs, telesales, catalogs, eBusiness and independent distributors. Products reach customers through an integrated network of more than 14,000 employees and approximately 1,100 locations including branches, retail stores, packaged gas fill plants, cylinder testing facilities, specialty gas labs, production facilities and distribution centers. The Company’s national scale and strong local presence offer a competitive edge to its diversified customer base. The Company’s consolidated sales were $3.86 billion, $4.35 billion and $4.02 billion in the fiscal years ended March 31, 2010, 2009 and 2008, respectively. The Company’s operations are predominantly in the United States. However, the Company does conduct operations outside of the United States, principally in Canada and, to a lesser extent, Mexico, Russia, Dubai and Europe. Revenues derived from foreign countries are based on the point of sale and were $77 million, $86 million and $63 million in the fiscal years ended March 31, 2010, 2009 and 2008, respectively. Long-lived assets attributable to the Company’s foreign operations represent less than 4.0% of the consolidated total long-lived assets of the Company and were $141 million, $116 million and $74 million at March 31, 2010, 2009 and 2008, respectively. Since its inception, the Company has made approximately 400 acquisitions. During fiscal 2010, the Company acquired six businesses with aggregate historical annual sales of more than $47 million. The largest of these businesses was Tri-Tech, a Florida-based industrial gas and welding supply distributor with 16 locations throughout Florida, Georgia, and South Carolina with historical annual sales of approximately $31 million. The Company acquired these businesses in order to expand its geographic coverage and strengthen its national network of branch-store locations. The Company paid a total of $80.8 million in cash to acquire these businesses and settle holdback liabilities and contingent consideration arrangements associated with certain prior year acquisitions. See Note 3 to the Company’s Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for a description of current and prior year acquisition activity. The Company has two reporting segments, Distribution and All Other Operations. The Distribution business segment primarily engages in the distribution of industrial, medical and specialty gases and hardgoods, and in the production of gases to supply the regional distribution companies. The All Other Operations business segment consists of six business units which primarily manufacture and/or distribute carbon dioxide, dry ice, nitrous oxide, ammonia and refrigerant gases. Financial information by business segment can be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), and in Note 23 to the Company's Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.” A more detailed description of the Company’s business segments follows.
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Table of ContentsDISTRIBUTION BUSINESS SEGMENT The Distribution business segment accounted for approximately 90% of consolidated sales in each of the fiscal years 2010, 2009 and 2008. Principal Products and Services The Distribution business segment’s principal products include industrial, medical and specialty gases sold in packaged and bulk quantities, as well as hardgoods. The Company’s air separation facilities and national specialty gas labs primarily produce gases that are sold by the Distribution business segment’s business units. Gas sales include nitrogen, oxygen, argon, helium, hydrogen, welding and fuel gases such as acetylene, propylene and propane, carbon dioxide, nitrous oxide, ultra high purity grades, special application blends and process chemicals. Business units in the Distribution business segment also recognize rental revenue, derived from gas cylinders, cryogenic liquid containers, bulk storage tanks, tube trailers and welding and welding related equipment. Gas and rent represented 61%, 57% and 56% of the Distribution business segment’s sales in fiscal years 2010, 2009 and 2008, respectively. Hardgoods consist of welding consumables and equipment, safety products, construction supplies, and maintenance, repair and operating supplies. Hardgoods sales represented 39%, 43% and 44% of the Distribution business segment’s sales in fiscal years 2010, 2009 and 2008, respectively. Principal Markets and Methods of Distribution The industry has three principal modes of gas distribution: on-site or pipeline supply, bulk or merchant supply, and cylinder or packaged supply. Airgas’ market focus has primarily been on packaged gas distribution supplying customers with product in gaseous form in cylinders, in liquid form in dewars, and in less-than-truckload liquid bulk quantities. Generally, packaged gas distributors also sell welding hardgoods. The Company believes the U.S. market for packaged gases and welding hardgoods to have been approximately $12 billion in annual revenue during its fiscal 2010, and expects the market to expand in fiscal 2011. Packaged gases and welding hardgoods are generally delivered to customers on Company-owned trucks, although third-party carriers are also used in the delivery of welding and safety products, and customers can purchase products at retail branch stores and through catalogs and eBusiness. Airgas is the largest distributor of packaged gases and welding hardgoods in the United States, with an estimated 25% market share. The Company’s competitors in this market include local and regional independent distributors that account for about half of the market’s annual revenues, and large independent distributors and vertically integrated gas producers, which account for the remainder of the market. Packaged gas distribution is a regional business because it is generally not economical to transport gas cylinders more than 50 to 100 miles. The regionalized nature of the business makes these markets highly competitive. Competition is generally based on reliable product delivery, product availability, technical support, quality, and price. The Company also sells safety products. The Company believes the U.S. market for safety products was more than $6 billion during its fiscal 2010, and expects the market to expand in fiscal 2011. Airgas’ share is almost 10%. Customer Base The Company’s operations are predominantly in the United States. The Company’s customer base is diverse and sales are not dependent on a single or small group of customers. The Company’s largest customer accounts for approximately 0.5% of total net sales. The Company estimates the following industry segments account for the indicated percentages of its total fiscal 2010 net sales:
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Supply The Company’s internal atmospheric gas production capacity includes 16 air separation plants that produce oxygen, nitrogen and argon, making Airgas the fifth largest producer of atmospheric gases in North America. In addition, the Company purchases industrial, medical and specialty gases pursuant to contracts with national and regional producers of industrial gases. The Company is party to a long-term take-or-pay supply agreement in effect through August 2017, under which Air Products and Chemicals, Inc. (“Air Products”) will supply the Company with bulk nitrogen, oxygen, argon, helium and hydrogen. The Company is committed to purchase approximately $55 million annually in bulk gases under the Air Products supply agreements. The Company also has long-term take-or-pay supply agreements with The Linde Group, AG (“Linde AG”) to purchase oxygen, nitrogen, argon, helium and acetylene. The agreements expire at various dates through July 2019 and represent almost $55 million in annual bulk gas purchases. Additionally, the Company has long-term take-or-pay supply agreements to purchase oxygen, nitrogen, argon and helium from other major producers. The agreements expire at various dates through 2024, and annual purchases under these contracts are approximately $20 million. The annual purchase commitments above reflect estimates based on fiscal 2010 purchases. The supply agreements noted above contain periodic pricing adjustments based on certain economic indices and market analyses. The Company believes the minimum product purchases under the agreements are within the Company’s normal product purchases. Actual purchases in future periods under the supply agreements could differ materially from those presented above due to fluctuations in demand requirements related to varying sales levels as well as changes in economic conditions. If a long-term supply agreement with a major supplier of gases or other raw materials were terminated, the Company would look to utilize available internal production capacity and locate alternative sources of supply to meet customer requirements. The Company purchases hardgoods from major manufacturers and suppliers. For certain products, the Company has negotiated national purchasing arrangements. The Company believes that if an arrangement with any supplier of hardgoods were terminated, it would be able to negotiate comparable alternative supply arrangements. ALL OTHER OPERATIONS The All Other Operations business segment consists of six business units. The primary products manufactured and/or distributed are carbon dioxide, dry ice (solid form of carbon dioxide), nitrous oxide, ammonia and refrigerant gases. The business units reflected in the All Other Operations business segment individually do not meet the thresholds to be reported as separate business segments.
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Table of ContentsCarbon Dioxide & Dry Ice Airgas is the second largest U.S. manufacturer and distributor of liquid carbon dioxide, and the largest U.S. manufacturer and a leading distributor of dry ice. Customers for carbon dioxide and dry ice include food processors, food service businesses, pharmaceutical and biotech industries, and wholesale trade and grocery outlets, with food and beverage applications accounting for approximately 70% of the market. Some seasonality is experienced within this business, as the Company generally experiences a higher level of dry ice sales during the warmer months. With 11 dry ice plants (converting liquid carbon dioxide into dry ice), Airgas has the largest network of dry ice conversion plants in the United States. Additionally, Airgas operates five carbon dioxide production facilities. The Company’s carbon dioxide production capacity is supplemented by long-term take-or-pay supply contracts. Nitrous Oxide Airgas is the largest manufacturer of nitrous oxide gas in North America, with four nitrous oxide production facilities operated by the Company. Nitrous oxide is used as an anesthetic in the medical and dental fields, as a propellant in the packaged food business and in the manufacturing process of certain electronics industries. The raw materials utilized in nitrous oxide production are purchased under contracts with major manufacturers and suppliers. Specialty Products Airgas Specialty Products is a distributor of anhydrous and aqua ammonia. Industrial ammonia applications primarily include the abatement of nitrogen oxide compounds in the utilities industry (“DeNOx”), chemicals processing, commercial refrigeration, water treatment and metal treatment. Airgas Specialty Products operates 28 distribution facilities across the U.S. and purchases ammonia from suppliers under agreements. Refrigerants Refrigerants are used in a wide variety of commercial and consumer freezing and cooling applications. Airgas purchases and distributes refrigerants and provides technical and refrigerant reclamation services. The primary focus of the refrigerants business is on the sale and distribution of refrigerants, with a varied customer base that includes small and large HVAC contractors, facility owners, transportation companies, manufacturing facilities and government agencies. The refrigerants business typically experiences some seasonality, with higher sales levels during the warmer months as well as during the March and April timeframe in preparation for the cooling season. AIRGAS GROWTH STRATEGIES The Company’s primary objective is to maximize shareholder value by driving market-leading sales growth through core and strategic product offerings that leverage the Company’s infrastructure and customer base, by pursuing acquisitions in the Company’s core business and in adjacent businesses, by providing outstanding customer service and by improving operational efficiencies. To meet this objective, the Company is focusing on:
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REGULATORY AND ENVIRONMENTAL MATTERS The Company’s subsidiaries are subject to federal and state laws and regulations adopted for the protection of the environment and the health and safety of employees and users of the Company’s products. The Company has programs for the operation and design of its facilities to achieve compliance with applicable environmental regulations. The Company believes that it is in compliance, in all material respects, with such laws and regulations. Expenditures for environmental compliance purposes during fiscal 2010 were not material. INSURANCE The Company has established insurance programs to cover workers’ compensation, business automobile and general liability claims. During fiscal 2010, 2009 and 2008, these programs had high deductible limits of $1 million per occurrence. For fiscal 2011, the high deductible limits will remain $1 million per occurrence. The Company accrues estimated losses using actuarial methods and assumptions based on the Company’s historical loss experience. EMPLOYEES On March 31, 2010, the Company employed more than 14,000 associates. Less than 5% of the Company’s associates were covered by collective bargaining agreements. The Company believes it has good relations with its employees and has not experienced a significant strike or work stoppage in over ten years. PATENTS, TRADEMARKS AND LICENSES The Company holds the following registered trademarks: “Airgas,” “Radnor,” “Gold Gas,” “SteelMIX,” “StainMIX,” “AluMIX,” “Outlook,” “Ny-Trous+,” “Powersource,” “Red-D-Arc,” “RED-D-ARC WELDERENTALS,” “Aspen,” “Gaspro,” “GAIN,” “Walk- O2-Bout,” “Airgas Puritan Medical,” “Penguin Brand Dry Ice,” “Kangaroo Kart,” “National Farm and Shop,” “National/HEF,” “UNAMIX,” “UNAMIG Xtra,” “UNAMIG Six,” and “UNATIG.” The Company also holds trademarks for “Airgas National Welders,” “Airgas National Carbonation,” “Airgas National Cryogenics,” “Airgas Retail Solutions,” “AcuGrav,” “AIM,” “AiRx,” “AIR BOSS,” “EZ-Cyl,” “FreezeRight,” “Freshblend,” “Aspen Refrigerants,” “MasterCut,” “Reklaim,” “Safe-T-Cyl,” “StatusChecker,” “Smart-Logic,” “When You’re Ready To Weld,” “WelderHelper,” and “Your Total Ammonia Solution” and a service mark for “You’ll find it with us.” The Company believes that its businesses as a whole are not materially dependent upon any single patent, trademark or license.
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Table of ContentsEXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows:
Mr. McCausland has been Chairman of the Board and Chief Executive Officer of the Company since May 1987. Mr. McCausland also currently serves as President. Mr. McCausland serves as a director of the Fox Chase Cancer Center and the Independence Seaport Museum, and also serves on the Board of Visitors of the College of Arts and Sciences at the University of South Carolina and on the Board of Visitors at the Boston University School of Law. Mr. Molinini has been Executive Vice President and Chief Operating Officer since January 2005. Prior to that time, Mr. Molinini served as Senior Vice President - Hardgoods Operations from August 1999 to January 2005 and as Vice President - Airgas Direct Industrial from April 1997 to July 1999. Prior to joining Airgas, Mr. Molinini served as Vice President of Marketing of National Welders Supply Company, Inc. (“National Welders”) from 1991. Mr. McLaughlin has been Senior Vice President and Chief Financial Officer since October 2006 and served as Vice President and Controller since joining Airgas in June 2001 to September 2006. Prior to joining Airgas, Mr. McLaughlin served as Vice President Finance for Asbury Automotive Group from 1999 to 2001, and was a Vice President and held various senior financial positions at Unisource Worldwide, Inc. from 1992 to 1999. Mr. Dougherty has been Senior Vice President and Chief Information Officer since joining Airgas in January 2001. Prior to joining Airgas, Mr. Dougherty served as Vice President and Chief Information Officer from 1998 to 2000 and as Director of Information Systems from 1993 to 1998 of Subaru of America, Inc. Mr. Wilson has been Senior Vice President - Human Resources since January 2004. Prior to joining Airgas, Mr. Wilson served as Senior Vice President, Corporate Resources at DecisionOne Corporation from October 1995 to December 2003. Mr. Graff has been Senior Vice President - Corporate Development since August 2006. Prior to that, Mr. Graff held various positions since joining the Company in 1989, including Director of Corporate Finance, Director of Corporate Development, Assistant Vice President - Corporate Development, and Vice President – Corporate Development. He has directed the in-house acquisition department since 2001. Prior to joining Airgas, Mr. Graff served with KPMG LLP from 1983 to 1989.
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Table of ContentsMr. Young has been Senior Vice President and General Counsel since October 2007. Prior to joining Airgas, Mr. Young was a shareholder of McCausland Keen & Buckman, which he joined in 1985, and served as outside counsel for the Company on many acquisitions and other corporate legal matters. At McCausland Keen & Buckman, Mr. Young focused his practice on general corporate law for both public and private corporations, mergers and acquisitions, and venture capital financing. Mr. Young began his legal career as an attorney at Drinker Biddle & Reath in Philadelphia. Mr. Hooper has been Division President—West since December 2005. Prior to this role, Mr. Hooper had been President of Airgas West from 1996. Prior to joining Airgas, Mr. Hooper served for three years as General Manager and President of an independent distributor, Arizona Welding Equipment Company, in Phoenix, AZ and nine years with BOC Gases in various sales and management roles. Mr. Hooper began his career with AG Pond Welding Supply in San Jose, CA in 1983. Mr. Powers has been Division President—East since joining Airgas in April 2001. Prior to joining Airgas, Mr. Powers served as Senior Vice President of Industrial Gases at AGA from October 1995 to March 2001. Mr. Powers has more than 25 years of experience in the industrial gas industry. Mr. Cichocki has been Division President—Process Gases and Chemicals since July 2008. Prior to that time, Mr. Cichocki served as President of Airgas National Welders and Airgas’ joint venture, National Welders, from 2003. Prior to that, Mr. Cichocki served in key corporate roles for Airgas, including Senior Vice President of Human Resources, Senior Vice President of Business Operations and Planning, and ten years as Vice President of Corporate Development. Mr. Smyth has been Vice President and Controller since November 2006. Prior to that, Mr. Smyth served as Director of Internal Audit since joining Airgas in February 2001 and became Vice President in August 2004. Prior to joining Airgas, Mr. Smyth served in internal audit, controller and chief accounting roles at Philadelphia Gas Works from 1997 to 2001. Prior to that, Mr. Smyth spent 12 years with Bell Atlantic, now Verizon, in a variety of internal audit and general management roles and in similar positions during eight years at Amtrak. COMPANY INFORMATION The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed with or furnished to the Securities and Exchange Commission (“SEC”) are available free of charge on the Company’s website (www.airgas.com) under the “Investors” section. The Company makes these documents available as soon as reasonably practicable after they are filed with or furnished to the SEC, but no later than the end of the day in which they are filed with or furnished to the SEC. Code of Ethics and Business Conduct The Company has adopted a Code of Ethics and Business Conduct applicable to its employees, officers and directors. The Code of Ethics and Business Conduct is available on the Company’s website, under the link “Corporate Governance” under “Company Information” and “About Airgas.” Amendments to and waivers from the Code of Ethics and Business Conduct will also be disclosed promptly on the website. In addition, stockholders may request a printed copy of the Code of Ethics and Business Conduct, free of charge, by contacting the Company’s Investor Relations department at: Airgas, Inc. Attention: Investor Relations 259 N. Radnor-Chester Rd. Radnor, PA 19087-5283 Telephone: (610) 902-6206
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Table of ContentsCorporate Governance Guidelines The Company adopted Corporate Governance Guidelines as well as charters for its Audit Committee, Finance Committee and Governance & Compensation Committee. These documents are available on the Company’s website, noted above. Stockholders may also request a copy of these documents, free of charge, by contacting the Company’s Investor Relations department at the address and phone number noted above. Certifications The Company has filed certifications of its Chairman and Chief Executive Officer and Senior Vice President and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as exhibits to its annual report on Form 10-K for each of the years ended March 31, 2010, 2009 and 2008.
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In addition to risk factors discussed elsewhere in this report, the Company believes the following, which have not been sequenced in any particular order, are the most significant risks related to our business that could cause actual results to differ materially from those contained in any forward-looking statements. We face risks related to general economic conditions, which may impact the demand for and supply of our products and our results of operations. Demand for our products depends in part on the general economic conditions affecting the United States and, to a lesser extent, the rest of the world. Although our diverse product offering and customer base help provide relative stability to our business in difficult times, the weak economic conditions experienced in the United States over the last 18 months have been broad-based. This general downturn has resulted in customers postponing capital projects and may continue to negatively impact the demand for our products and services as well as our customers’ ability to fulfill their obligations to us. Falling demand may lead to lower sales volumes, lower pricing and/or lower profit margins. A protracted period of lower product demand and profitability may result in diminished values for both tangible and intangible assets, increasing the possibility of future impairment charges. Further, suppliers may be impacted by an economic downturn, which could impact their ability to fulfill their obligations to us. Although current economic conditions show signs of improvement, should economic conditions deteriorate, our financial condition and cash flows could be adversely affected. We operate in a highly competitive environment and such competition could negatively impact us. The U.S. industrial gas industry operates in a highly competitive environment. Competition is generally based on price, reliable product delivery, product availability, technical support, quality and service. If we are unable to compete effectively with our competitors, we may suffer lower revenue and/or a loss of market share. Increases in product and energy costs could reduce our profitability. The cost of industrial gases represents a significant percentage of our operating costs. The production of industrial gases requires significant amounts of electric energy. Therefore, industrial gas prices have historically increased as the cost of electric power increases. Price increases for oil and natural gas have historically resulted in electric power surcharges. In addition, a significant portion of our distribution expenses consists of diesel fuel costs. Although prices of oil, natural gas and diesel fuel moderated during fiscal 2010 as compared to the volatility experienced during fiscal 2009, energy prices may rise in the future, resulting in an increase in the cost of industrial gases. While we have historically been able to pass increases in the cost of our products and operating expenses on to our customers, we cannot guarantee our ability to do so in the future, which could negatively impact our operations, financial results or liquidity. Our financial results may be adversely affected by gas supply disruptions/constraints. We are the largest U.S. distributor of industrial, medical and specialty gases in packaged form and have long-term supply contracts with the major gas producers. Additionally, we operate 16 air separation plants and five carbon dioxide liquification plants, which provide us with substantial production capacity. Our long-term supply contracts and our own production capacity mitigate supply disruptions to various degrees. However, natural disasters, plant shut downs, labor strikes and other supply disruptions may occur within our industry. Regional supply disruptions may create shortages of certain products. Consequently, we may not be able to obtain the products required to meet our customers’ demands or may incur significant cost to ship product from other regions of the country to meet customer requirements. Such additional costs may adversely impact operating results until product sourcing can be restored. In the past, we successfully met customer demand by arranging for alternative supplies and transporting product into an affected region, but we cannot guarantee that we will be successful in arranging alternative product supplies or passing the additional transportation or other costs on to customers in the event of future supply disruptions, which could negatively impact our operations, financial results or liquidity.
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Table of ContentsU.S. credit markets may impact our ability to obtain financing or increase the cost of future financing. As of March 31, 2010, we had total consolidated debt of approximately $1.5 billion, which includes $548 million related to our senior credit facility with a syndicate of lenders (“Credit Facility”) that matures on July 25, 2011. We also participate in a trade receivables securitization agreement (the “Securitization Agreement”) with three commercial banks to sell up to $295 million in qualified trade receivables. At March 31, 2010, the amount of outstanding trade receivables sold under the program was $295 million. The Securitization Agreement expires in March 2012. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7. During periods of volatility and disruption in the U.S. credit markets, obtaining additional or replacement financing may be more difficult and the cost of issuing new debt or replacing the Credit Facility could be higher than under our current facilities. Higher cost of new debt may limit our ability to finance future acquisitions on terms that are acceptable to us. Additionally, although we actively manage our interest rate risk through derivative and diversified debt obligations, approximately 50% of our debt (including the trade receivables securitization and the effect of interest rate swap agreements) has a variable interest rate. If interest rates increase, our interest expense could increase, affecting earnings and reducing cash flows available for working capital, capital expenditures and acquisitions. Finally, our cost of borrowing can be affected by debt ratings assigned by independent rating agencies which are based in large part on our performance as measured by certain liquidity metrics. An adverse change in these debt ratings could increase the cost of borrowing and make it more difficult to obtain financing on favorable terms. We may not be successful in integrating acquisitions and achieving intended benefits and synergies. We have successfully integrated approximately 400 acquisitions in our history and consider the acquisition and integration of businesses to be a core competency. However, the process of integrating acquired businesses into our operations may result in unexpected operating difficulties and may require significant financial and other resources. Unexpected difficulties may impair our ability to achieve targeted synergies or planned operating results, which could diminish the value of acquired tangible and intangible assets resulting in future impairment charges. Acquisitions involve numerous risks, including:
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Table of ContentsWe depend on our key personnel to manage our business effectively and they may be difficult to replace. Our performance substantially depends on the efforts and abilities of our senior management team, including our Chairman and Chief Executive Officer, other executive officers and key employees. Furthermore, much of our competitive advantage is based on the expertise, experience and know-how of our key personnel regarding our distribution infrastructure, systems and products. The loss of key employees could have a negative effect on our business, revenues, results of operations and financial condition. We are subject to litigation risk as a result of the nature of our business, which may have a material adverse effect on our business. From time to time, we are involved in lawsuits that arise from our business. Litigation may, for example, relate to product liability claims, vehicle accidents, contractual disputes, or employment matters. The defense and ultimate outcome of lawsuits against us may result in higher operating expenses. Those higher operating expenses could have a material adverse effect on our business, results of operations or financial condition. We have established insurance programs with significant deductibles and maximum coverage limits which could result in the recognition of significant losses. We maintain insurance coverage for workers’ compensation, auto and general liability claims with significant per claim deductibles and, in some policy years, aggregate per claim retentions above those deductibles. In the past, we have incurred significant workers’ compensation, auto and general liability losses. Such losses could impact our profitability. Additionally, claims in excess of our insurance limits could have a material adverse effect on our financial condition, results of operations or liquidity. Catastrophic events may disrupt our business and adversely affect our operating results. Although our operations are widely distributed across the U.S., a catastrophic event such as a fire or explosion at one of the Company’s fill plants or natural disasters, such as hurricanes, tornadoes and earthquakes, could result in significant property losses, employee injuries and third-party damage claims. Additionally, such events may severely impact our regional customer base and supply sources resulting in lost revenues, higher product costs, and increased bad debts. We are subject to environmental, health and safety regulations that generate ongoing environmental costs and could subject us to liability. We are subject to laws and regulations relating to the protection of the environment and natural resources. These include, among other things, reporting on chemical inventories and risk management plans, and management of hazardous substances and wastes, air emissions and water discharges. Violations of existing laws and enactment of future legislation and regulations could result in substantial penalties, temporary or permanent plant closures and legal consequences. Moreover, the nature of our existing and historical operations exposes us to the risk of liabilities to third parties. These potential claims include property damage, personal injuries and cleanup obligations. See Item 1, “Business—Regulatory and Environmental Matters” above.
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Table of ContentsMore recently, the issue of greenhouse gas emissions has been subject to increased scrutiny, public awareness and evolving legislation, both internationally and in the U.S. Increased regulation of greenhouse gas emissions could impose additional costs on us, both directly through new compliance and reporting requirements as well as indirectly through increased industrial gas and energy costs. Until such time that federal legislation is passed in the United States, it will remain unclear as to what industries would be impacted, the period of time within which compliance would be required, the significance of the greenhouse gas emissions reductions and the costs of compliance. Although we do not believe that increased greenhouse gas emissions regulation will have a material adverse effect on our financial condition, results of operations or liquidity, we cannot provide assurance that such costs will not increase in the future or will not become material. We face risks in connection with our current project to install a new enterprise information system for our business. We continue our phased implementation project of a new enterprise information system for many aspects of our business. The implementation is a technically intensive process, requiring testing, modifications and project coordination. Although our implementation process includes more than fifteen months of design and testing, which is intended to provide minimal business disruption and to minimize conversion risks, we may experience disruptions in our business operations related to this implementation effort. Such disruptions could result in material adverse consequences, including delays in the design and implementation of the system, loss of information, damage to our ability to process transactions or harm to our control environment, and unanticipated increases in costs. Market conditions and other uncertainties may unfavorably impact our withdrawal liabilities from multi-employer pension plans. We participate in several multi-employer pension plans that provide defined benefits to union employees under the provisions of collective bargaining agreements. The plans generally provide retirement benefits to participants based on their service to contributing employers. As we negotiate changes in collective bargaining agreements and cease making contributions to certain multi-employer pension funds, estimates for withdrawal liabilities must be recorded in our consolidated financial statements. However, the estimates are based on numerous assumptions that continually change and information that is not always current, and can take a number of years to settle. Furthermore, the investment assets in these plans are subject to market fluctuations and may significantly increase potential withdrawal liabilities during market downturns. As a result, increases in future withdrawal liabilities from multi-employer pension plans could have a material adverse effect on our financial condition, results of operations or liquidity. Air Products & Chemicals, Inc.’s (“Air Products”) unsolicited takeover attempt may require us to incur significant additional costs. In February 2010, Air Products made public an unsolicited proposal to acquire the Company and subsequently commenced a tender offer for all outstanding shares of common stock of the Company and initiated a proxy fight to elect three directors to our board. Our Board of Directors carefully evaluated each proposal made by Air Products and, after consultation with its financial and legal advisors, unanimously determined that Air Products’ proposals were not in the best interests of the Company or our shareholders, as they grossly undervalued Airgas. In response to Air Products’ actions, we have recognized charges of $23.4 million in fiscal 2010 consisting of legal and professional fees, a significant portion of which represents up-front accruals for the minimum obligations to the Company’s advisors. Responding to Air Products’ unsolicited tender offer and proxy contest may require us to incur significant additional costs.
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None.
The Company operates in 48 states, Canada and to a lesser extent Mexico, Russia, Dubai and Europe. The principal executive offices of the Company are located in leased space in Radnor, Pennsylvania. The Company’s Distribution business segment operates a network of multiple use facilities consisting of more than 875 branches, more than 325 cylinder fill plants, 63 regional specialty gas laboratories, eight national specialty gas laboratories, one medical equipment facility, one research and development center, two specialty gas equipment centers, 18 acetylene plants and 16 air separation units, as well as six national hardgoods distribution centers, various customer call centers, buying centers and administrative offices. The Distribution business segment conducts business in 48 states and internationally in Canada, Mexico, Russia, Dubai and Europe. The Company owns approximately 40% of these facilities. The remaining facilities are primarily leased from third parties. A limited number of facilities are leased from employees and are on terms consistent with commercial rental rates prevailing in the surrounding rental market. The Company’s All Other Operations business segment consists of businesses, located throughout the United States, which operate multiple use facilities consisting of approximately 70 branch/distribution locations, five liquid carbon dioxide and 11 dry ice production facilities, and four nitrous oxide production facilities. The Company owns approximately 25% of these facilities. The remaining facilities are leased from third parties. During fiscal 2010, the Company’s production facilities operated at approximately 73% of capacity based on an average daily production period of 15 hours. If required, additional shifts could be run to expand production capacity. The Company believes that its facilities are adequate for its present needs and that its properties are generally in good condition, well maintained and suitable for their intended use.
The Company is involved in various legal and regulatory proceedings that have arisen in the ordinary course of business and have not been fully adjudicated. In addition, the Company is the target of an unsolicited tender offer and proxy contest commenced by Air Products & Chemicals, Inc. (“Air Products”). In connection with this tender offer, Air Products filed an action against the Company and members of its Board in the Delaware Court of Chancery. In the suit, Air Products seeks, among other things, an order declaring that members of the Company’s Board breached their fiduciary duties by refusing to negotiate with Air Products. The Company and its directors believe that the claims made by Air Products are without merit and intend to defend them vigorously. Additionally, a number of purported stockholder class action lawsuits were commenced against the Company and/or the members of the Airgas Board in the Delaware Court of Chancery. These suits, which have now been consolidated, allege, among other things, that the members of the Airgas Board have failed to fulfill their fiduciary duties by refusing to negotiate with Air Products, failing to seek more valuable alternatives and failing to redeem the Company’s shareholder rights plan. The plaintiffs seek equitable relief, as well as an award of compensatory damages, costs and attorneys’ fees. The Company and its directors believe that the claims made by the stockholder plaintiffs are without merit and intend to defend them vigorously.
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Table of ContentsAs disclosed in Note 25 to the Consolidated Financial Statements, the Company has incurred substantial legal and professional fees related to the Air Products takeover attempt and litigation through March 31, 2010. A significant portion of these fees represent up-front accruals for the minimum obligations to the Company’s advisors. The Company expects to incur additional costs in the future in connection with the tender offer, proxy contest and the related litigation.
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Table of ContentsPART II
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 closing price per share for the common stock as reported by the New York Stock Exchange and cash dividends per share for the period from April 1, 2008 to March 31, 2010:
The closing sale price of the Company’s common stock as reported by the New York Stock Exchange on May 25, 2010, was $62.23 per share. As of May 25, 2010, there were 396 stockholders of record. On May 25, 2010, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.22 per share, which is payable on June 30, 2010 to stockholders of record as of June 15, 2010. Future dividend declarations and associated amounts paid will depend upon the Company's earnings, financial condition, loan covenants, capital requirements and other factors deemed relevant by management and the Company’s Board of Directors. Stockholder Return Performance Presentation Below is a graph comparing the yearly change in the cumulative total stockholder return on the Company’s common stock against broad equity market indices for the five-year period that began April 1, 2005 and ended March 31, 2010. During fiscal 2010, the Company was added to the Standard & Poor’s 500 Stock Index (“S&P 500 Index”). Accordingly, the Company updated the equity indices to which it compares its total shareholder return to be the S&P 500 Index and the S&P 500 Chemicals Index. In prior periods, the Company compared its total shareholder return to the S&P MidCap 400 Index and the S&P 400 Chemicals Index. The Company was formerly a component of both the S&P MidCap 400 Index and the S&P 400 Chemicals Index. The total shareholder returns of the S&P MidCap 400 Index and the S&P 400 Chemicals Index have been presented below for comparison to the Company’s performance versus both its former and new indices.
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Table of ContentsThe Company believes the use of the S&P 500 Index and S&P 500 Chemicals Index for purposes of this performance comparison is appropriate because Airgas is a component of the indices and they include companies of similar size as Airgas.
The graph above assumes that $100 was invested on April 1, 2005 in Airgas, Inc. common stock, the S&P 500 Index, the S&P 500 Chemicals Index, the S&P MidCap 400 Index and the S&P 400 Chemicals Index.
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Selected financial data for the Company are presented in the table below and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 and the Company's consolidated financial statements and notes thereto included in Item 8 herein.
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RESULTS OF OPERATIONS: 2010 COMPARED TO 2009 OVERVIEW Airgas, Inc. and its subsidiaries (“Airgas” or the “Company”) had net sales for the fiscal year ended March 31, 2010 (“fiscal 2010” or “current year”) of $3.9 billion compared to $4.3 billion for the fiscal year ended March 31, 2009 (“fiscal 2009” or “prior year”). The fiscal 2010 net sales reflect a challenging sales environment due to the economic downturn in the U.S., with a modest improvement in the fiscal fourth quarter ended March 31, 2010 relative to the first three quarters of the fiscal year. Fourth quarter sales were $980 million compared to $992 million in the prior year, a decline of 1%. Total same-store sales in the fourth quarter declined 3%, with hardgoods sales down 2% and gas and rent down 3%. Acquisitions contributed 2% sales growth in the quarter. Company management regularly reviews sales results in not only a year-over-year manner, but also in terms of sales per selling day, a metric commonly used in operating the business. Daily sales increased 2% sequentially from the third to the fourth quarter of fiscal 2010, marking the second consecutive quarter of sequential daily sales growth. Due to the current year’s improving fourth quarter sales environment, management has provided a separate discussion on fourth quarter fiscal 2010 versus fourth quarter fiscal 2009 below. For fiscal 2010, net sales decreased by 11% driven by a decline in same-store sales offset slightly by the impact of current and prior year acquisitions. The decline in same-store sales contributed 14% to the decrease in total sales, driven by a 13% decrease in sales volume and a 1% decrease in pricing. Acquisitions contributed sales growth of 3% for the current year. Lower sales volumes reflect the effects of the economic recession in the U.S. and decreased demand, especially in the first three quarters of the fiscal year, across all customer and geographic segments. Steep declines in the Company’s selling price to customers in response to price reductions from the Company’s suppliers for ammonia and filler metals accounted for the majority of the pricing decline. The Company’s strategic products and related growth initiatives helped to somewhat mitigate the impact of the economic downturn. Operating income margin declined 180 basis points to 10.3% in fiscal 2010 compared to 12.1% in the prior year. The decline in the current year’s operating income margin reflects the impact of lower sales as well as $23.4 million ($14.8 million after tax) or $0.18 per diluted share in costs related to an unsolicited takeover attempt and $6.7 million ($4.1 million after tax) or $0.05 per diluted share in multi-employer pension plan (“MEPP”) withdrawal charges, partially offset by the impact of cost reduction and operating efficiency initiatives and a favorable sales mix shift from hardgoods to gas and rent sales. The costs related to the unsolicited takeover attempt and the MEPP charges accounted for 80 basis points (44%) of the decline in operating income margin. Net earnings per diluted share fell 25% to $2.34 in fiscal 2010 versus $3.12 in the prior year. The results reflect lower operating income as well as losses on the extinguishment of debt of $17.9 million ($11.3 million after tax) or $0.14 per diluted share, partially offset by lower borrowing costs in the current fiscal year and a $2.2 million or $0.03 per diluted share income tax benefit associated with the reorganization of certain facilities within the All Other Operations business segment. The costs related to the unsolicited takeover attempt, MEPP charges and debt extinguishment charges accounted for over half of the decline in net earnings per diluted share.
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Table of ContentsAcquisitions In fiscal 2010, the Company acquired a total of six businesses with aggregate historical annual sales of more than $47 million. The largest of these acquisitions was Tri-Tech, an independent distributor with 16 locations throughout Florida, Georgia and South Carolina and historical annual sales of $31 million. The Company also improved its presence and density in Oklahoma and Texas with its acquisition of Fitch Industrial and Welding Supply, a Lawton, Oklahoma-based distributor with historical annual sales of $10 million. Both of these acquisitions were merged into the operations of the Distribution business segment. The acquisitions expand the Company’s coverage in key geographies and strengthen its national distribution network. Acquisition activity slowed during the current year as potential sellers opted to wait out the economic downturn. Unsolicited Takeover Attempt In February 2010, Air Products & Chemicals, Inc. (“Air Products”) made public an unsolicited proposal to acquire the Company and subsequently commenced a tender offer for all outstanding shares of common stock of the Company and initiated a proxy fight to elect three directors to our board. The Company’s Board of Directors carefully evaluated each proposal made by Air Products and, after consultation with its financial and legal advisors, unanimously determined that Air Products’ proposals were not in the best interests of the Company or our shareholders. In response to Air Products’ actions, the Company incurred $23.4 million of legal and professional fees, which principally represent up-front accruals for the minimum obligations to the Company’s advisors. The Company expects to incur additional costs in the future in connection with Air Products’ unsolicited tender offer and proxy contest. Multi-employer Pension Plan Withdrawal The Company participates, with other employers, in a number of MEPPs providing defined benefits to union employees under the terms of collective bargaining agreements (“CBAs”). Contributions are made to the plans in accordance with those CBAs. The plans generally provide retirement benefits to participants based on their service to contributing employers. In connection with the renewal of certain CBAs during the current year, the Company negotiated its withdrawal from participation in underfunded MEPPs and will instead contribute to a defined contribution plan for the affected union employees. Ratification of the CBAs led to $6.7 million in MEPP withdrawal charges during the current year. Over the next two years, the Company intends to negotiate its withdrawal from the MEPPs provided for in five remaining CBAs that provide for such plans. These CBAs cover approximately 60 employees. Cost Reduction and Operating Efficiency Initiatives In response to the economic downturn, the Company reacted quickly and effectively to mitigate the impact of declining sales. Between December 2008 and September 2009, the Company fully implemented $57 million of annualized expense reductions, which were in addition to $10 million of annualized savings in fiscal 2010 from ongoing efficiency initiatives. Financing and Losses on the Extinguishment of Debt In September 2009, the Company issued $400 million of 4.50% senior notes due September 15, 2014 (the “2009 Notes”). Additionally, in March 2010, the Company issued $300 million of 2.85% senior notes due October 1, 2013 (the “2010 Notes”). The net proceeds from both offerings were used to repay debt under the Company’s senior credit facility with a syndicate of lenders (“Credit Facility”). Additionally, in March 2010, the Company signed a two year, $295 million securitization agreement replacing the previous $345 million agreement that was expiring. At March 31, 2010, $295 million of accounts receivable had been sold under the securitization agreement.
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Table of ContentsIn October 2009, the Company redeemed in full its $150 million 6.25% senior subordinated notes due July 15, 2014 (the “2004 Notes”) at a premium of 103.125% of the principal amount with borrowings under the Company’s Credit Facility. In conjunction with the redemption of the 2004 Notes, the Company recognized a loss on the early extinguishment of debt of $6.1 million. Also during the current year, the Company repurchased $154.6 million of its original $400 million 7.125% senior subordinated notes that are due on October 1, 2018 (the “2008 Notes”) at an average price of 106.4%. In conjunction with the repurchase of the 2008 Notes, the Company recognized losses on the early extinguishment of debt of $11.8 million. As a result of the redemption of the 2004 Notes and the repurchases of the 2008 Notes, the Company recognized total losses on the early debt extinguishment of $17.9 million. The losses reflected the redemption premiums as well as writing-off the associated unamortized debt issuance costs. As of March 31, 2010, approximately $823 million remained unused under the Company’s Credit Facility. Based on the financial covenants of the Credit Facility, the Company’s borrowing capacity at March 31, 2010 was limited to $748 million. Enterprise Information System During the current year, the Company continued with the design and configuration phase of its SAP enterprise information system (“SAP”). Through the two-year period ended March 31, 2010, the Company has incurred capital expenditures of approximately $50 million related to the project. During the summer of fiscal 2011, the Company will begin its phased, multi-year rollout of the SAP platform, whereby business units will implement the new system in succession. The Company believes the implementation of SAP will standardize work processes across all facets of its distribution business, drive operating efficiencies and improve the customer’s buying experience. Looking Forward Looking forward, the Company expects earnings per diluted share of $0.70 to $0.72 for the first quarter ending June 30, 2010, an increase of 6% to 9% over prior year, which includes $0.02 per diluted share of incremental expense associated with the SAP implementation. For the full year fiscal 2011, the Company expects earnings per diluted share of $2.95 to $3.05, an increase of 10% to 14% over prior year, which includes $0.10 per diluted share of incremental expense associated with the SAP implementation. The first quarter and fiscal 2011 guidance does not incorporate the impact of further debt extinguishment charges and future MEPP withdrawal charges, if any, and future costs related to the unsolicited takeover attempt.
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Table of ContentsINCOME STATEMENT COMMENTARY – Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009 Net Sales Net sales decreased 1% to $980 million for the three months ended March 31, 2010 (“current quarter”) compared to the three months ended March 31, 2009 (“prior year quarter”), driven by acquisition growth of 2% and same-store sales decline of 3%. Gas and rent same-store sales declined 3% and hardgoods declined 2%. Gas volumes for the current quarter were 2% lower than the prior year quarter while pricing was down 1%. Hardgoods volumes were 1% lower than the prior year quarter while pricing was down 1%, as declines in costs and prices for filler metals had the most significant impact on hardgoods pricing, with most other product lines stable to slightly down. On a sequential basis, net sales increased 4% from the quarter ended December 31, 2009 (“third quarter”), driven by an incremental selling day and a 2% sequential increase in daily sales. Strategic products account for about 40% of revenues and include safety products, bulk, medical and specialty gases, as well as carbon dioxide and dry ice. The Company has identified these products as strategic because it believes they have good long-term growth profiles relative to the Company’s core industrial gas and welding products due to favorable end customer markets, application development, increasing environmental regulation, strong cross-selling opportunities or a combination thereof. Many of the strategic products are sold to customers whose growth profile tends to outperform GDP, including medical, life sciences, food processing and environmental markets. While consolidated same-store sales declined 3%, strategic products increased 1% on a same-store sales basis in the current quarter compared to the prior year quarter. The Company estimates same-store sales growth based on a comparison of current period sales to prior period sales, adjusted for acquisitions and divestitures. The pro forma adjustments consist of adding acquired sales to, or subtracting sales of divested operations from, sales reported in the prior period. The table below reflects actual sales and does not include the pro forma adjustments used in calculating the same-store sales metric. The intercompany eliminations represent sales from the All Other Operations business segment to the Distribution business segment.
The Distribution business segment’s principal products include industrial, medical and specialty gases, and process chemicals; cylinder and equipment rental; and hardgoods. Industrial, medical and specialty gases are distributed in cylinders and bulk containers. Equipment rental fees are generally charged on cylinders, cryogenic liquid containers, bulk and micro-bulk tanks, tube trailers, and welding equipment. Hardgoods consist of welding consumables and equipment, safety products, construction supplies, and maintenance, repair and operating supplies.
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Table of ContentsDistribution business segment sales declined 1% compared to the prior year quarter with incremental sales of 2% contributed by current and prior year acquisitions partially offsetting a decline in same-store sales of 3%. The Distribution business segment gas and rent same-store sales declined 3% with volumes down 2% and pricing down 1%. The decline in pricing was driven by lower costs related to both purchased and produced gases, increased price competition as well as some pricing decline in welder rentals. Hardgoods same-store sales declined 2% with both volumes and pricing each down 1%. The decline in pricing reflects a decline in costs and pricing for filler metals. Both gas and rent and hardgoods volumes were negatively impacted by the general slowdown in economic activity, but have shown sequential improvement. On a sequential basis, Distribution business segment sales increased 4% from the third quarter, driven by a 2% increase in sequential daily sales rates and an incremental selling day. Both gas and rent and hardgoods sales increased sequentially on a daily sales basis from the third quarter, with hardgoods up 5%. Sales of strategic gas products sold through the Distribution business segment increased 1% compared to the prior year quarter. Among strategic products, bulk gas sales were up 3% as sales of bulk nitrogen for food-freezing applications continued to show strength, and bulk sales to industrial manufacturing customers continued to recover in the steel, auto and alternative energy customer segments. Sales of medical gases were up 1% as a result of new business signings, partially offset by slowing in elective and non-critical medical procedures. Sales of specialty gases were down 7% driven primarily by a softening in demand in the chemical processing industry. Sales of core industrial gases, which experienced the sharpest volume declines, were down 7% compared to the prior year quarter, with the related rental revenues down 5.5%. However, the Company’s rental welder business experienced a 16% decline in same-store sales as a result of sluggish construction activity. Mitigating the decline in Distribution business segment hardgoods sales was an increase in safety products sales. Safety product sales increased 5% compared to the prior year quarter as a result of increased cross-sell opportunities. The Company’s Radnor® private label line was down 1% compared to the prior year quarter, relatively consistent with the overall decline in hardgoods volumes. The All Other Operations business segment consists of six business units. The primary products manufactured and distributed are carbon dioxide, dry ice, nitrous oxide, ammonia and refrigerant gases. The All Other Operations business segment sales decreased 3% compared to the prior year quarter with a 4% decline in same-store sales partially offset by acquisitions. Positive same-store sales in the carbon dioxide business were more than offset by declines in refrigerants and ammonia. On a sequential basis, All Other Operations business segment sales increased 4% from the third quarter, driven by an incremental selling day and a seasonal improvement in the refrigerants business offset somewhat by normal seasonal declines in the dry ice and carbon dioxide businesses, as well as lower ammonia pricing. Gross Profits (Excluding Depreciation) Gross profits (excluding depreciation) do not reflect deductions related to depreciation expense and distribution costs. The Company reflects distribution costs as an element of selling, distribution and administrative expenses and recognizes depreciation on all its property, plant and equipment in the Consolidated Statement of Earnings line item, “Depreciation.” Other companies may report certain or all of these costs as elements of their cost of products sold and, as such, the Company’s gross profits (excluding depreciation) discussed below may not be comparable to those of other businesses.
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Table of ContentsConsolidated gross profits (excluding depreciation) decreased 3% principally due to a same-store sales decline as well as a decline in gross profit margins (excluding depreciation). The consolidated gross profit margin (excluding depreciation) in the current quarter decreased 80 basis points to 54.1% compared to 54.9% in the prior year quarter, reflecting a sales mix shift within gas and rent and lower growth incentive rebates on hardgoods.
The Distribution business segment’s gross profits (excluding depreciation) decreased 2% compared to the prior year quarter. The Distribution business segment’s gross profit margin (excluding depreciation) was 55.0% versus 55.7% in the prior year quarter, a decrease of 70 basis points. The decline in the Distribution business segment’s gross profit margin (excluding depreciation) reflects a shift in sales mix within gas and rent and lower growth incentive rebates on hardgoods. The All Other Operations business segment’s gross profits (excluding depreciation) decreased 6% compared to the prior year quarter, primarily as a result of lower sales pricing for ammonia and lower volumes for refrigerants. The All Other Operations business segment’s gross profit margin (excluding depreciation) decreased 110 basis points to 43.3% in the current quarter from 44.4% in the prior year quarter. The decrease in the All Other Operations business segment’s gross profit margin (excluding depreciation) was driven primarily by margin compression on ammonia products as a result of rising product costs. Operating Expenses Selling, distribution and administrative (“SD&A”) expenses consist of labor and overhead associated with the purchasing, marketing and distributing of the Company’s products, as well as costs associated with a variety of administrative functions such as legal, treasury, accounting, tax and facility-related expenses. Current quarter SD&A expenses of $364 million declined $8 million, or 2%, as compared to the prior year quarter, primarily driven by an approximately $13 million decline in operating costs offset by approximately $5 million of incremental operating costs associated with acquired businesses. The $13 million decrease in operating costs was primarily due to benefits from the Company’s cost reduction and operating efficiency initiatives. As a percentage of net sales, SD&A expense decreased 30 basis points to 37.2% compared to 37.5% in the prior year quarter, again reflecting the cost reduction and operating efficiency initiatives. During the current quarter, the Company incurred $23.4 million of legal and professional fees in response to Air Products’ unsolicited takeover attempt and accompanying litigation, which principally represent up-front accruals for the minimum obligations to the Company’s advisors. Depreciation expense of $55 million increased $4 million, or 7%, in the current quarter as compared to the prior year quarter. The increase primarily reflects depreciation on two new air separation units in New Carlisle, Indiana and Carrollton, Kentucky, which came on-line in late fiscal 2009 and early fiscal 2010, respectively. The current quarter’s depreciation expense also reflects the current year’s capital investments in revenue generating assets to support customer demand, such as cylinders, bulk tanks, and rental welders, and infrastructure spending on cylinder fill plants and branch locations. Amortization expense of $6 million in the current quarter was consistent with the prior year quarter.
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Table of ContentsOperating Income Consolidated operating income decreased 28% in the current quarter driven primarily by the $23.4 million of costs related to the unsolicited takeover attempt. The operating income margin decreased 310 basis points to 8.4% compared to 11.5% in the prior year quarter. Costs related to the unsolicited takeover attempt accounted for approximately 230 basis points of the decline in operating income margin. The legal and professional fees incurred as a result of the unsolicited takeover attempt were not allocated to the Company’s business segments, and are reflected in the “Other” line item in the table below.
Operating income in the Distribution business segment decreased 5% in the current quarter. The Distribution business segment's operating income margin decreased 50 basis points to 11.3% compared to 11.8% in the prior year quarter. The operating income margin decline was driven by a sales mix shift within gas and rent as well as lower growth incentive hardgood rebates, partially offset by a continued focus on operating efficiency programs and the impact of cost reduction efforts. Operating income in the All Other Operations business segment decreased 41% compared to the prior year quarter. The All Other Operations business segment's operating income margin of 5.4% was 350 basis points lower than the operating income margin of 8.9% in the prior year quarter. The decline in operating income margin resulted primarily from margin compression in the ammonia business. In the prior year quarter, the market moved in the opposite direction (ammonia product costs were falling and pricing was stable), thus creating incremental margins in the prior year. INCOME STATEMENT COMMENTARY – Fiscal Year Ended March 31, 2010 Compared to Fiscal Year Ended March 31, 2009 Net Sales Net sales decreased 11% in fiscal 2010 compared to fiscal 2009 driven by a same-store sales decline of 14% partially offset by incremental sales of 3% contributed by acquisitions. Gas and rent same-store sales declined 10% and hardgoods declined 20%. Same-store sales were driven by volume declines of 13% and a 1% price decline. Strategic products account for about 40% of revenues. In the aggregate, strategic products declined 6% on a same-store sales basis in the current year compared to the prior year with growth in medical gases offset by declines in all other strategic product categories.
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Distribution business segment sales decreased 12% compared to the prior year with a decline in same-store sales of 13%, slightly offset by incremental sales of 1% contributed by current and prior year acquisitions. The Distribution business segment’s gas and rent same-store sales declined 8% driven entirely by volumes. Hardgoods same-store sales declined 20% driven by volume declines of 19% and a 1% pricing decline. Hardgoods as well as gas and rent volumes were negatively impacted by the general slowdown in economic activity and customers delaying or deferring capital projects. Sales of strategic gas products sold through the Distribution business segment declined 4%. Among strategic gas products, bulk gas sales were down 5% due to the impact of production slowdowns in the metal fabrication and steel customer segments, as well as reduced activity from oil field service customers. The decline in bulk gas sales related to these customer segments was partially offset by growth in sales of bulk nitrogen for food-freezing applications. Sales of medical gases grew 2% as a result of new business signings, which were partially offset by slowing in overall demand for medical gases used in elective and non-critical medical procedures. Specialty gas sales declined 9% as a result of a general softening in demand in the chemicals processing industry as well as strong sales of high-value rare gases in the prior year. Sales of core industrial gases, which experienced the sharpest volume declines, were down 15% for the current year, while the related rental revenues were down only 4%. However, revenues from the Company’s rental welder business experienced a 21% decline in same-store sales as compared to the prior year. Distribution hardgoods same-store sales declined 20% driven by volume declines of 19% and a 1% pricing decline. Sales of safety products decreased 9% in the current year resulting from plant shutdowns, shift reductions and relatively high unemployment levels. The Company’s Radnor® private label line was down 16% for the current year driven by the overall drop in hardgoods volumes. The All Other Operations business segment sales decreased 8% compared to the prior year with a 17% decline in same-store sales offset by incremental sales of 9% contributed by acquisitions, primarily the prior year acquisition related to the refrigerants business. The decline in same-store sales reflects lower pricing for ammonia products, a decline in carbon dioxide and dry ice volumes, and reduced refrigerant volumes. After a significant run-up in the costs of ammonia products in the first half of fiscal 2009, ammonia costs from suppliers suddenly dropped in the fourth quarter of fiscal 2009, while pricing to customers initially remained stable. Progressing through fiscal 2010, pricing to customers has been under increasing pressure contributing to the same-store sales decline, while the cost of ammonia from suppliers has been rising. Reduced carbon dioxide volumes reflect weakness in the beverage carbonation customer segment. Dry ice volumes were impacted by a decline in the airline services customer segment and strong prior year sales during the second quarter in the wake of major hurricanes. Refrigerants volume declined primarily due to mild summer weather in the eastern U.S. along with customers’ deferral of HVAC maintenance and conversion projects in light of the economic downturn.
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Table of ContentsGross Profits (Excluding Depreciation) Consolidated gross profits (excluding depreciation) decreased 8% principally due to a same-store sales decline offset by an expansion of gross profit margins (excluding depreciation). The consolidated gross margin (excluding depreciation) in the current year increased 220 basis points to 55.2% compared to 53.0% in the prior year primarily driven by margin expansion in the Distribution business segment resulting from a favorable shift in sales mix.
The Distribution business segment’s gross profits (excluding depreciation) decreased 8% compared to the prior year. The Distribution business segment’s gross profit margin (excluding depreciation) was 55.8% versus 53.7% in the prior year. The 210 basis point increase in the gross profit margin (excluding depreciation) largely reflects the favorable shift in product mix toward gas and rent, which carry higher gross profit margins (excluding depreciation) than hardgoods. As a percentage of the Distribution business segment’s sales, gas and rent increased to 60.7% in the current year as compared to 57.2% in the prior year. The All Other Operations business segment’s gross profits (excluding depreciation) were consistent with the prior year as a result of lower same-store sales offset by acquisitions (primarily the prior year acquisition in the refrigerants business) and margin expansion in the ammonia business. The All Other Operations business segment’s gross profit margin (excluding depreciation) increased 350 basis points to 47.1% versus 43.6% in the prior year. The year-over-year improvement in the All Other Operations business segment’s gross profit margin (excluding depreciation) was driven by the margin improvement in the ammonia business. The improved ammonia margin reflects the impact of the fourth quarter of fiscal 2009 drop in the cost of ammonia and a lag in a corresponding drop in the selling price to customers. Throughout fiscal 2010, ammonia margins have declined as customer pricing has fallen in line with product costs. Product mix also contributed to the margin improvement. Operating Expenses SD&A expenses of $1,474 million declined $85 million (5%) as compared to the prior year resulting from a $118 million decline in operating costs partially offset by approximately $33 million of incremental operating costs associated with acquired businesses. The $118 million decrease in operating costs reflects lower variable costs due to the decline in sales and the benefits from the Company’s cost reduction and operating efficiency initiatives. Also included in the current year SD&A expenses are $6.7 million related to withdrawals from multi-employer pension plans. As a percentage of net sales, SD&A expense increased 230 basis points to 38.1% compared to 35.8% in the prior year reflecting the overall decline in sales and by the shift in sales mix to gas, which carry higher operating expense in relation to sales and corresponding higher gross margins. During the fourth quarter, the Company incurred $23.4 million of legal and professional fees in response to Air Products’ unsolicited takeover attempt and accompanying litigation, which principally represent up-front accruals for the minimum obligations to the Company’s advisors.
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Table of ContentsDepreciation expense of $213 million increased $15 million (7%) as compared to the prior year. Acquired businesses added approximately $2 million to depreciation expense. The remaining increase primarily reflects the two new air separation units in New Carlisle, Indiana and Carrollton, Kentucky, which came on-line in late fiscal 2009 and early fiscal 2010, respectively. The current year’s depreciation expense also reflects capital investments in revenue generating assets to support customer demand, such as cylinders, bulk tanks and rental welders, and infrastructure spending on cylinder fill plants and branch locations. Amortization expense of $22 million was $1 million (2%) lower than the prior year primarily due to lower amortization of acquired customer lists and non-compete agreements due to reduced acquisition activity. Operating Income Consolidated operating income of $400 million decreased 24% in the current year on lower sales and special charges of approximately $30 million related to the unsolicited takeover attempt and MEPP withdrawal charges, partially offset by gross profit margin (excluding depreciation) expansion and the benefits from the Company’s cost reduction and operating efficiency initiatives. The operating income margin decreased 180 basis points to 10.3% compared to 12.1% in the prior year; of the decline, 80 basis points was the result of the costs related to the unsolicited takeover attempt and MEPP withdrawal charges. The legal and professional fees incurred as a result of the unsolicited takeover attempt were not allocated to the Company’s business segments, and are reflected in the “Other” line item in the table below.
Operating income in the Distribution business segment decreased 21% in the current year. The Distribution business segment's operating income margin decreased 130 basis points to 10.7% compared to 12.0% in the prior year. The operating income margin decline was driven by lower sales and the $6.7 million (20 basis points) MEPP withdrawal charges, partially offset by favorable mix-driven gross profit margin (excluding depreciation) expansion and the Company’s cost reduction and operating efficiency initiatives that were implemented in response to the economic downturn. Operating income in the All Other Operations business segment decreased 6% compared to the prior year mainly as a result of lower same-store sales partially offset by acquisition growth (primarily the prior year acquisition in the refrigerants business). The segment's operating income margin of 12.3% was 30 basis points higher than the operating income margin of 12.0% in the prior year. The increase in operating income margin was driven principally by gross margin expansion in the ammonia business. Interest Expense, Net, and Discount on Securitization of Trade Receivables Interest expense, net, and the discount on securitization of trade receivables totaled $69 million representing a decrease of $26 million, or 28%, compared to the prior year. The decrease resulted from lower weighted-average interest rates related to the Company’s variable rate debt instruments, the Company’s redemption of higher interest rate notes, as well as lower average debt levels from the pay down during the current year of approximately $268 million of debt and borrowings under the trade receivables securitization.
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Table of ContentsThe Company participates in the Securitization Agreement with three commercial banks to sell up to $295 million of qualifying trade receivables ($345 million at March 31, 2009). The amount of outstanding receivables under the securitization agreements was $295 million at March 31, 2010 versus $311 million at March 31, 2009. The discount on the securitization of trade receivables represents the difference between the carrying value of the receivables and the proceeds from their sale. The amount of the discount varies on a monthly basis depending on the amount of receivables sold and market rates. The Company manages its exposure to interest rate risk through participation in interest rate swap agreements. Including the effect of the interest rate swap agreements and the trade receivables securitization, the Company's ratio of fixed to variable rate debt at March 31, 2010 was 50% fixed to 50% variable. A majority of the Company’s variable rate debt is based on a spread over the London Interbank Offered Rate (“LIBOR”). Based on the Company’s fixed to variable interest rate ratio, for every 25 basis point increase in LIBOR, the Company estimates that its annual interest expense would increase approximately $2.2 million. Losses on the Extinguishment of Debt During the current year, the Company redeemed in full its $150 million of 2004 Notes at a price of 103.125% of the principal amount. Additionally, the Company repurchased approximately $154 million of its 2008 Notes at an average price of 106.4%. In conjunction with these transactions, the Company recognized losses on the early extinguishment of debt of $17.9 million. The losses related to the redemption premiums and the write-off of unamortized debt issuance costs. Income Tax Expense The effective income tax rate in fiscal 2010 was 37.5% of pre-tax earnings compared to 39.2% in the prior year. The lower tax rate for the current year reflects the impact of tax benefits of $2.2 million associated with the reorganization of certain facilities within the All Other Operations business segment and the recognition of previously unrecognized tax benefits associated with uncertain tax positions. Net Earnings Net earnings were $196 million, or $2.34 per diluted share, compared to $261 million, or $3.12 per diluted share, in the prior year. The current year’s net earnings include costs related to the unsolicited takeover attempt of $23.4 million ($14.8 million after tax) or $0.18 per diluted share, losses related to the early extinguishment of debt of $17.9 million ($11.3 million after tax) or $0.14 per diluted share and charges related to withdrawals from multi-employer pension plans of $6.7 million ($4.1 million after tax) or $0.05 per diluted share, slightly offset by an income tax benefit of $2.2 million or $0.03 per diluted share.
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Table of ContentsRESULTS OF OPERATIONS: 2009 COMPARED TO 2008 OVERVIEW Airgas had net sales for fiscal 2009 of $4.3 billion compared to $4.0 billion for the fiscal year ended March 31, 2008 (“fiscal 2008”). Net sales increased by 8% in fiscal 2009 driven by the impact of acquisitions and same-store sales growth. Acquisitions accounted for 7% of the overall sales growth in fiscal 2009. Same-store sales growth contributed 1% to the increase in total sales, driven by a 4% increase in pricing, offset by a 3% decrease in sales volumes. Price increases were designed to offset rising product, operating and distribution costs. Lower sales volumes reflected the effects of the slowing economy and the decreased demand experienced in the second half of fiscal 2009 across all customer and geographic segments. The Company’s strategic products and related growth initiatives mitigated the impact of the economic slowdown. Operating leverage and the benefit of acquisition synergies resulted in a 30 basis point expansion in the operating income margin to 12.1% in fiscal 2009 compared to 11.8% in fiscal 2008. Net earnings per diluted share grew 17% to $3.12 in fiscal 2009 versus $2.66 in fiscal 2008. The strong performance was driven by good sales growth in the first half of the year and effective management of costs in response to the slowing economy in the second half of the year. Fiscal 2008 included $0.06 of integration expense primarily associated with the June 30, 2007 acquisition of Linde AG’s U.S. packaged gas business, a one-time, non-cash charge of $0.03 per diluted share related to the conversion of National Welders Supply Company, Inc. (“National Welders”) from a joint venture to a 100% owned subsidiary, and $0.01 per diluted share tax benefit related to a change in state tax law. Acquisitions In fiscal 2009, the Company acquired a total of 14 businesses with aggregate historical annual sales of more than $205 million. The largest of these acquisitions was Refron, Inc. (“Refron”), a New York-based distributor of refrigerant gases with historical annual sales of $93 million, acquired on July 31, 2008. With the acquisition of Refron, the Company formed Airgas Refrigerants, Inc. and merged the newly acquired operations with its existing refrigerant gas business. Airgas Refrigerants, Inc. is reflected in the All Other Operations business segment. Other significant acquisitions included Oilind Safety, a Arizona-based provider of industrial safety services including rental equipment, safety supplies, and technical support and training, with historical annual sales of $23 million; A&N Plant, a European-based supplier of positioning and welding equipment for sale and rent with historical annual sales of $20 million; and Gordon Woods Welding Supply, an industrial gas and welding supply distributor in the northern Los Angeles area with historical annual sales of $25 million. These acquisitions were merged into the operations of the Distribution business segment. The acquisitions expand the Company’s coverage in key geographies, strengthen its national distribution network and broaden its refrigerant gas and safety product offerings. The acquisition of A&N Plant provides for increased international presence and an expansion of the Red-D-Arc rental welder business into Europe. Stock Repurchase Plan In November 2005, the Company’s Board of Directors approved a stock repurchase plan (the “Repurchase Plan”) that provided the Company with the authorization to repurchase up to $150 million of its common stock. During the year ended March 31, 2009, the Company purchased 2.4 million shares for $115.6 million to complete the Repurchase Plan.
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Table of ContentsINCOME STATEMENT COMMENTARY – Fiscal Year Ended March 31, 2009 Compared to Fiscal Year Ended March 31, 2008 Net Sales Net sales increased 8% in fiscal 2009 compared to fiscal 2008 driven by acquisition growth of 7% and same-store sales growth of 1%. Pricing contributed 4% to same-store sales growth, which was largely offset by volume declines of 3%. The Company estimates same-store sales based on a comparison of current period sales to prior period sales, adjusted for acquisitions and divestitures. The pro forma adjustments consist of adding acquired sales to, or subtracting sales of divested operations from, sales reported in the prior period. The table below reflects actual sales and does not include the pro forma adjustments used in calculating the same-store sales metric. The intercompany eliminations represent sales from the All Other Operations business segment to the Distribution business segment.
Distribution business segment sales increased 6% in fiscal 2009 compared to fiscal 2008 driven by sales contributed by both fiscal 2009 and fiscal 2008 acquisitions of $234 million (6%) and flat same-store sales growth. Flat same-store sales in fiscal 2009 reflects growth in gas and rent same-store sales of $66 million (3%), offset by lower hardgoods sales of $70 million (-4%). Same-store sales growth from gas and rent reflect strong strategic product growth which mitigated same-store sales declines in the Company’s industrial gas and welding hardgoods business. The same-store sales declines in the Company’s industrial gas and welding hardgoods business reflects the impact of the economic downturn on manufacturing and the steep decline in demand for equipment and welding consumables experienced in the second half of fiscal 2009. The Distribution business segment’s gas and rent same-store sales growth of 3% in fiscal 2009 reflects both price increases of 4% and a decline in volume of 1%. Sales of strategic gas products sold through the Distribution business segment increased 8% in fiscal 2009 driven by bulk, medical, and specialty gas sales gains. Bulk gas sales were up 10% in fiscal 2009 reflecting both price and volume increases. Volume growth benefited from new production capabilities and the Company’s ability to engineer solutions for customer applications, leading to an increase in new bulk accounts during the year. Medical gas sales grew 7% in fiscal 2009 attributable to continued success with the hospital, physician, and dental care markets. These markets continue to perform well and have good future growth prospects. Strong specialty gas sales growth of 8% in fiscal 2009 was driven by demand from key customers in bio-tech, life sciences, research, and environmental monitoring markets. Sales of core industrial gases were down 1% in fiscal 2009. Revenues from the Company’s rental welder business contributed growth of 21% in fiscal 2009 with acquisition growth of 22%, offset by a 1% decline in same-store sales. The decline in hardgoods same-store sales of 4% in fiscal 2009 reflects a combination of price gains and volume declines, with pricing adding about 3%, offset by a 7% volume decline. The Company’s successful Radnor® private label brand of products generated sales growth of 21% in fiscal 2009, reaching a total of $192 million. Sales of safety products increased 1% in fiscal 2009 resulting from the success of the telemarketing operations (telesales) and effective cross-selling of safety products to new and existing customers helping to mitigate the significant decline in fourth quarter sales in fiscal 2009 related to the economic downturn.
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Table of ContentsFiscal 2009 sales of the All Other Operations business segment increased $114 million (33%) compared to fiscal 2008 resulting from acquisitions and same-store sales growth. Acquisitions contributed 23% to the segment’s sales growth in fiscal 2009, which was primarily driven by $55 million in sales contributed by Refron (a part of Airgas Refrigerants), which was acquired on July 31, 2008. Same-store sales growth of 10% in fiscal 2009 was driven by sales gains of anhydrous ammonia and carbon dioxide products. Gross Profits (Excluding Depreciation) Gross profits (excluding depreciation) increased 10% in fiscal 2009 principally from acquisitions and gas and rent sales growth. The consolidated gross margin (excluding depreciation) in fiscal 2009 increased 100 basis points to 53% compared to 52% in fiscal 2008, with the increase driven primarily by a favorable shift in product mix towards higher-margin gas and rent as well as the impact of pricing.
The Distribution business segment’s gross profits (excluding depreciation) increased 10% in fiscal 2009 compared to fiscal 2008. The Distribution business segment’s gross profit margin (excluding depreciation) was 53.7% in fiscal 2009 versus 52.0% in fiscal 2008. The 170 basis point increase in the gross profit margin (excluding depreciation) reflected the favorable shift in product mix toward gas and rent as well as the impact of price increases. Gas and rent as a percentage of the Distribution business segment’s sales was 57.2% in fiscal 2009 as compared to 55.5% in fiscal 2008. The All Other Operations business segment’s gross profits (excluding depreciation) increased 18% in fiscal 2009 primarily from strong growth of anhydrous ammonia, refrigerant, and carbon dioxide products. The segment’s gross margin (excluding depreciation) decreased 560 basis points to 43.6% in fiscal 2009 versus 49.2% in fiscal 2008 driven by the growth of refrigerants, which generally have lower gross profit margins (excluding depreciation) than the other products within the businesses in the All Other Operations business segment. Operating Expenses As a percentage of net sales, SD&A expense increased 40 basis points to 35.8% in fiscal 2009 compared to 35.4% in fiscal 2008 reflecting the impact of the deteriorating business climate in the second half of fiscal 2009. SD&A expenses increased $137 million (10%) in fiscal 2009 primarily from operating costs of acquired businesses. Acquisitions contributed estimated incremental SD&A expenses of approximately $105 million in fiscal 2009. The increase in SD&A expense attributable to factors other than acquisitions was approximately $32 million, or an increase of 2%, in fiscal 2009 primarily due to salaries and wages and distribution-related expenses primarily related to the higher sales levels in the first half of fiscal 2009.
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Table of ContentsDepreciation expense of $198 million increased $22 million (13%) in fiscal 2009 compared to fiscal 2008. Acquired businesses added approximately $10 million to depreciation expense in fiscal 2009. The remainder of the increase primarily reflects capital investments in both fiscal 2009 and fiscal 2008 in revenue generating assets to support customer demand, primarily cylinders, bulk tanks and rental welders, as well as the addition of new fill plants, the New Carlisle, Indiana air separation unit in late fiscal 2009, and branch stores. Amortization expense of $23 million was $9 million (63%) higher in fiscal 2009 than fiscal 2008 driven by the amortization of customer lists and non-compete agreements associated with acquisitions. Operating Income Operating income increased 10% in fiscal 2009 driven by higher sales levels and improvement of operating income margins. The operating income margin increased 30 basis points to 12.1% in fiscal 2009 compared to 11.8% in fiscal 2008.
Operating income in the Distribution business segment increased 10% in fiscal 2009. The Distribution business segment's operating income margin increased 50 basis points to 12.0% in fiscal 2009 compared to 11.5% in fiscal 2008. The operating income margin improvement reflects lower integration expenses which contributed 20 basis points, gross profit margin (excluding depreciation) expansion resulting from pricing actions during fiscal 2009 and a shift in product mix toward higher margin gas and rent and attainment of acquisition synergies and cost savings from expense reduction and operating efficiency programs. Operating income in the All Other Operations business segment increased 10% in fiscal 2009 compared to fiscal 2008, principally driven by strong growth in ammonia. The segment's operating income margin of 12.0% was 250 basis points lower in fiscal 2009 than the operating income margin of 14.5% in fiscal 2008. The margin decline resulted from margin pressure on ammonia products in the first half of fiscal 2009 and from a shift in sales mix toward refrigerants, which carry a lower margin than other products in the segment. The shift in product mix toward refrigerants was driven by the acquisition of Refron in fiscal 2009. Interest Expense and Discount on Securitization of Trade Receivables Interest expense, net, and the discount on securitization of trade receivables totaled $95 million in fiscal 2009 representing a decrease of 11% compared to fiscal 2008. The decrease primarily resulted from lower weighted-average interest rates related to the Company’s variable rate debt instruments, partially offset by higher average debt levels associated with acquisitions and the Company’s share repurchases. The Company participated in the Securitization Agreement with three commercial banks to sell up to $345 million of qualifying trade receivables at March 31, 2009 ($360 million at March 31, 2008). The amount of outstanding receivables under the Securitization Agreement was $311 million at March 31, 2009 versus $360 million at March 31, 2008. Net proceeds from the sale of trade receivables were used to reduce borrowings under the Company's Credit Facilities. The discount on the securitization of trade receivables represents the difference between the carrying value of the receivables and the proceeds from their sale.
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Table of ContentsIncome Tax Expense The effective income tax rate in fiscal 2009 was 39.2% of pre-tax earnings compared to 38.9% in fiscal 2008. The fiscal 2008 effective income tax rate includes a $0.01 per diluted share tax benefit associated with a change in the Texas state income tax law, which reduced the effective tax rate by 0.3%. The fiscal 2008 tax benefit was based on additional guidance issued by the state of Texas regarding a prior year change in law. These tax benefits reflect the reduction of deferred tax liabilities previously established for temporary differences under the prior state tax law. Net Earnings Net earnings were $261 million, or $3.12 per diluted share, in fiscal 2009 compared to $223 million, or $2.66 per diluted share, in fiscal 2008. Net earnings in fiscal 2008 included $0.06 per diluted share of integration expense primarily associated with the June 30, 2007 acquisition of Linde AG’s U.S. packaged gas business, a one-time, non-cash charge of $0.03 per diluted share related to the conversion of National Welders from a joint venture to a 100% owned subsidiary, and a $0.01 per diluted share tax benefit related to a change in Texas state income tax law.
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Table of ContentsLIQUIDITY AND CAPITAL RESOURCES Fiscal 2010 Cash Flows Net cash provided by operating activities was $600 million in fiscal 2010 compared to $583 million in fiscal 2009. Fiscal 2010 cash from operations reflects lower net earnings adjusted for non-cash and non-operating items more than offset by lower working capital requirements. Net earnings adjusted for non-cash and non-operating items provided cash of $541 million in fiscal 2010 versus $605 million in the prior year. Reduced inventory levels, principally as a result of lower hardgoods sales and a draw-down of refrigerants gases, drove the lower working capital requirements. Exclusive of the cash used by the trade receivables securitization agreement, lower working capital requirements provided cash of $79 million in fiscal 2010 versus providing cash of $27 million in the prior year. The trade receivables securitization used cash of $16 million during the current period as a result of the March 2010 agreement renewal, which reduced the maximum amount of receivables that could be sold under the agreement. On April 1, 2010, the Company adopted new guidance establishing revised standards on accounting for the transfers of financial assets. These standards apply to the Company’s trade receivable securitization agreement and effectively require the Company to recognize the trade receivable securitization agreement as a secured borrowing, as it no longer meet the conditions required for sales accounting treatment. This change in accounting also requires that the cash proceeds received under the Securitization Agreement no longer be treated as a source of cash from operating activities, but to be recognized in the statement of cash flows as a source of cash from financing activities. With the adoption of the new standards, cash provided by operating activities is expected to decrease by the amount of the secured borrowing, which was $295 million at March 31, 2010. Net cash used in investing activities during fiscal 2010 totaled $322 million and primarily consisted of cash used for capital expenditures and acquisitions. Cash used in investing activities decreased $288 million from the prior year primarily due to a $99 million reduction in capital spending and less acquisition activity during the current year. The decrease in capital expenditures reflects the completion of major capital projects such as the New Carlisle, Indiana and Carrollton, Kentucky air separation units, and the carbon dioxide plant in Deer Park, Texas and reduced capital expenditures in response to the decline in sales. Cash of $81 million was paid in the current year to acquire six businesses, the largest of which was Tri-Tech, a Florida-based industrial gas and welding supply distributor, and to settle acquisition holdback liabilities associated with prior year acquisitions. During fiscal 2009, the Company paid $274 million to acquire 14 businesses, the largest of which was Refron, Inc., now a part of Airgas Refrigerants, Inc., and to settle acquisition holdback liabilities. Net cash used in financing activities totaled $278 million in fiscal 2010, principally reflecting the net repayment of $254 million of debt. On September 11, 2009, the Company issued $400 million of 4.5% fixed rate senior notes. The 2009 Notes were issued at a discount and mature on September 15, 2014 with an effective yield of 4.527%. On March 15, 2010, the Company issued $300 million of 2.85% fixed rate senior notes. The 2010 Notes were issued at a discount and will mature on October 1, 2013 with an effective yield of 2.871%. The Company used the net proceeds from both offerings to reduce the borrowings under its Credit Facility. During fiscal 2010, the Company also repurchased portions of its higher fixed rate senior subordinated notes. On October 13, 2009, the Company redeemed in full its $150 million 6.25% 2004 Notes at a price of 103.125% of the principal. During fiscal 2010, the Company also repurchased $154.6 million of its original $400 million 7.125% 2008 Notes at an average price of 106.4%. As a result of the redemption of the 2004 Notes and the repurchases of the 2008 Notes, the Company recognized total losses of $17.9 million on the early debt extinguishment. The losses reflected the redemption premiums as well as writing-off the associated unamortized debt issuance costs.
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Table of ContentsDividends The Company paid its stockholders quarterly cash dividends of $0.18 per share at the end of each of the first three quarters of fiscal 2010. In the fourth quarter of fiscal 2010, the Company paid dividends of $0.22 per share. On May 25, 2010, the Company’s Board of Directors declared a cash dividend of $0.22 per share, which is payable on June 30, 2010 to the stockholders of record as of June 15, 2010. During fiscal 2009, the Company paid regular quarterly cash dividends of $0.12 per share at the end of each of the first two quarters and $0.16 per share in the third and fourth quarters. During fiscal 2008, the Company paid regular quarterly cash dividends of $0.09 per share during the first three quarters and $0.12 per share during the fourth quarter. Future dividend declarations and associated amounts paid will depend upon the Company’s earnings, financial condition, loan covenants, capital requirements and other factors deemed relevant by management and the Company’s Board of Directors. Financial Instruments Senior Credit Facility At March 31, 2010, the Credit Facility permitted the Company to borrow up to $991 million under a U.S. dollar revolving credit line, up to $75 million (U.S. dollar equivalent) under the multi-currency revolving credit line, and up to C$40 million (U.S. $39 million) under a Canadian dollar revolving credit line. The Credit Facility also contains a term loan provision through which the Company borrowed $600 million with scheduled repayment terms. The term loans are repayable in quarterly installments of $22.5 million through June 30, 2010. The quarterly installments then increase to $71.2 million from September 30, 2010 to June 30, 2011. Principal payments due over the next twelve months on the term loans are classified as “Long-term debt” in the Company’s Consolidated Balance Sheets based on the Company’s ability and intention to refinance the payments with borrowings under its long-term revolving credit facilities. As principal amounts under the term loans are repaid, no additional borrowing capacity is created under the term loan provision. The Credit Facility will mature on July 25, 2011. As of March 31, 2010, the Company had approximately $548 million of borrowings under the Credit Facility: $199 million under the U.S. dollar revolver, $31 million (in U.S. dollars) under the multi-currency revolver, C$10 million (U.S. $10 million) under the Canadian dollar revolver, and $308 million under the term loans. The Company also had outstanding letters of credit of $42 million issued under the Credit Facility. The U.S. dollar borrowings and the term loans under the Credit Facility bear interest at LIBOR plus 50 basis points. The multi-currency revolver bears interest based on a spread of 50 basis points over the Euro currency rate applicable to each foreign currency borrowing. The Canadian dollar borrowings bear interest at the Canadian Bankers’ Acceptance Rate plus 50 basis points. As of March 31, 2010, the average effective interest rates on the U.S. dollar revolver, the term loans, the multi-currency revolver, and the Canadian dollar revolver were 0.73%, 0.79%, 0.96%, and 1.00%, respectively. On January 25, 2010, the Company obtained a committed revolving line of credit of up to 3 million Euro (U.S. $4 million) to fund its expansion into France. The French revolving credit borrowings are outside of the Company’s Credit Facility. At March 31, 2010, French revolving credit borrowings were 1 million Euro (U.S. $1.35 million). The Company intends to refinance the French revolving credit borrowings with the Credit Facility. The variable interest rates on the French revolving credit borrowings are based on the Euro currency rate plus 50 basis points. As of March 31, 2010, the effective interest rate on the French revolving credit borrowings was 0.90%.
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Table of ContentsTotal Borrowing Capacity As of March 31, 2010, approximately $823 million remained unused under the Company’s Credit Facility. The Company believes that it has sufficient liquidity from cash from operations and under its revolving credit facilities to meet its working capital, capital expenditure and other financial commitments. The debt covenants under the Company’s Credit Facility require the Company to maintain a leverage ratio not higher than 4.0 times and an interest coverage ratio not lower than 3.5 times. The leverage ratio is a contractually defined amount principally reflecting debt and certain elements of the Company’s off-balance sheet financing divided by a contractually defined Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) for the trailing twelve-month period with pro forma adjustments for acquisitions. The interest coverage ratio reflects the same contractually defined EBITDA divided by total interest expense also with pro forma adjustments for acquisitions. Both ratios measure the Company’s ability to meet current and future obligations. At March 31, 2010, the Company’s leverage ratio was 2.9 times and its interest coverage ratio was 9.0 times. Based on the leverage ratio at March 31, 2010, the Company’s borrowing capacity is limited to $748 million. The Credit Facility contains customary events of default, including nonpayment and breach of covenants. In the event of default, repayment of borrowings under the Credit Facility may be accelerated. The Company’s Credit Facility also contains cross default provisions whereby a default under the Credit Facility would likely result in defaults under the senior and senior subordinated notes discussed below. With the October 13, 2009 redemption of the 2004 Notes, the guarantees and collateral under the Credit Facility were released. Prior to the redemption of the 2004 Notes, the Company’s domestic subsidiaries, exclusive of the bankruptcy-remote special purpose entity (the “domestic subsidiaries”), guaranteed the U.S. dollar revolver, term loans, multi-currency revolver and Canadian dollar revolver. The multi-currency revolver and Canadian dollar revolver were also guaranteed by the Company’s foreign subsidiaries. The guarantees were full and unconditional and were made on a joint and several basis. The Company had pledged 100% of the stock of its domestic subsidiaries and 65% of the stock of its foreign subsidiaries as surety for its obligations under the Credit Facility. The Credit Facility provided for the release of the guarantees and collateral if the Company attained an investment grade credit rating and a similar release on its 2004 Notes. The Company continues to look for acquisition candidates. The financial covenant calculations of the Credit Facility include the pro forma results of acquired businesses. Therefore, total borrowing capacity is not reduced dollar-for-dollar with acquisition financing. The Company continually evaluates alternative financing and believes that it can obtain financing on reasonable terms. The terms of any future financing arrangements depend on market conditions and the Company’s financial position at that time. Money Market Loans The Company also has an agreement with a financial institution that provides access to short-term advances not to exceed $35 million. The agreement expires on December 1, 2010, but may be extended subject to renewal provisions contained in the agreement. The advances are generally overnight or for up to seven days. The amount, term and interest rate of an advance are established through mutual agreement with the financial institution when the Company requests such an advance. At March 31, 2010, there were no advances outstanding under the agreement.
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Table of ContentsSenior Notes On September 11, 2009, the Company issued $400 million of senior notes. The 2009 Notes were issued at a discount and mature on September 15, 2014 with an effective yield of 4.527%. The net proceeds from the sale of the 2009 Notes were used to reduce the borrowings under the Company’s revolving credit line under the Credit Facility. The 2009 Notes bear interest at a fixed annual rate of 4.5%, payable semi-annually on March 15 and September 15 of each year, commencing March 15, 2010. Additionally, the Company has the option to redeem the 2009 Notes prior to their maturity, in whole or in part, at 100% of the principal plus any accrued but unpaid interest and any applicable make-whole amounts. On March 15, 2010, the Company issued $300 million of senior notes. The 2010 Notes were issued at a discount and mature on October 1, 2013 with an effective yield of 2.871%. The net proceeds from the sale of the 2010 Notes were used to reduce the borrowings under the Company’s revolving credit line under the Credit Facility. The 2010 Notes bear interest at a fixed annual rate of 2.85%, payable semi-annually on April 1 and October 1 of each year, commencing October 1, 2010. Additionally, the Company has the option to redeem the 2010 Notes prior to their maturity, in whole or in part, at 100% of the principal plus any accrued but unpaid interest and any applicable make-whole amounts. Senior Subordinated Notes At March 31, 2010, the Company had $245 million of its 2008 Notes outstanding with a maturity date of October 1, 2018. The 2008 Notes bear interest at a fixed annual rate of 7.125%, payable semi-annually on October 1 and April 1 of each year. The 2008 Notes have a redemption provision, which permits the Company, at its option, to call the 2008 Notes at scheduled dates and prices. The first scheduled optional redemption date is October 1, 2013 at a price of 103.563% of the principal amount. The 2008, 2009 and 2010 Notes contain covenants that could restrict the payment of dividends, the repurchase of common stock, the issuance of preferred stock, and the incurrence of additional indebtedness and liens. With the July 31, 2009 credit rating upgrades and the October 13, 2009 redemption of the 2004 Notes, the subsidiary guarantees on the 2008 and 2009 Notes were released. Acquisition Notes and Other The Company's long-term debt also includes acquisition and other notes, principally consisting of notes issued to sellers of businesses acquired, which are repayable in periodic installments. At March 31, 2010, acquisition and other notes totaled $16 million with an average interest rate of approximately 6% and an average maturity of approximately two years. Trade Receivables Securitization The Company participates in the Securitization Agreement with three commercial banks to which it sells qualifying trade receivables on a revolving basis. Upon its renewal in March 2010, the maximum amount of the facility was established at $295 million, down from $345 million at March 31, 2009. The Securitization Agreement expires in March 2012 and contains customary events of termination, including standard cross default provisions with respect to outstanding debt. During the year ended March 31, 2010, the Company sold approximately $3.5 billion of trade receivables and remitted to bank conduits, pursuant to a servicing agreement, approximately $3.5 billion in collections on those receivables. The amount of receivables sold under the securitization agreements was $295 million at March 31, 2010 and $311 million at March 31, 2009.
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Table of ContentsThe Company retains a subordinated interest in trade receivables sold under the Securitization Agreement. The fair value of the retained interest, which was $142 million at March 31, 2010, is measured based on management’s best estimate of the undiscounted expected future cash collections on the receivables sold in which the Company has a retained interest. Changes in the fair value are recognized as bad debt expense. Historically, bad debt expense reflected in the Company’s financial results has generally been in the range of 0.3% to 0.5% of sales. As disclosed in Note 12 to the Consolidated Financial Statements, fair values of the retained interest are classified as Level 3 inputs on the fair value hierarchy because of the judgment required by management to determine the ultimate collectability of receivables. The amounts ultimately collected on past due trade receivables are subject to numerous factors including general economic conditions, the condition of the receivable portfolio assumed in acquisitions, the financial condition of individual customers, and the terms of reorganization for accounts exiting bankruptcy. The Company monitors the credit risk associated with the aforementioned factors, as well as aging trends and historic collections and records additional bad debt expense when appropriate. The Company is exposed to the risk of loss for any uncollectable amounts associated with the subordinated retained interest in trade receivables sold. Interest Rate Swap Agreements The Company manages its exposure to changes in market interest rates. The Company’s involvement with derivative instruments is limited to highly effective interest rate swap agreements used to manage well-defined interest rate risk exposures. The Company monitors its positions and credit ratings of its counterparties and does not anticipate non-performance by the counterparties. Interest rate swap agreements are not entered into for trading purposes. The Company recognizes certain derivative instruments as either assets or liabilities at fair value on the Consolidated Balance Sheet. At March 31, 2010, the Company was party to a total of twelve interest rate swap agreements with an aggregate notional amount of $550 million. The Company designates fixed interest rate swap agreements as cash flow hedges of interest payments on variable-rate debt associated with the Company’s Credit Facility. For derivative instruments designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“AOCI”) and is reclassified into earnings in the same period or periods during which the hedge transaction affects earnings. Gains and losses on the derivative instruments representing hedge ineffectiveness are recognized in current earnings. During fiscal 2010, eleven fixed interest rate swap agreements with an aggregate notional amount of $377 million matured. At March 31, 2010, the Company had seven fixed interest rate swap agreements outstanding with a notional amount of $250 million. These swaps effectively convert $250 million of variable interest rate debt associated with the Company’s Credit Facility to fixed rate debt. At March 31, 2010, these swap agreements required the Company to make fixed interest payments based on a weighted average effective rate of 3.21% and receive variable interest payments from the counterparties based on a weighted average variable rate of 0.59%. The remaining terms of these swap agreements range from six to nine months. For the year ended March 31, 2010, the fair value of the liability for the fixed interest rate swap agreements decreased and the Company recorded a corresponding adjustment to “Accumulated other comprehensive income (loss)” of $8.6 million, or $5.6 million after tax. For the year ended March 31, 2009, the fair value of the liability for the fixed interest rate swap agreements decreased and the Company recorded a corresponding adjustment to “Accumulated other comprehensive income (loss)” of $8.3 million, or $5.4 million after tax. For the year ended March 31, 2008, the fair value of the liability for the fixed interest rate swap agreements increased and the Company recorded a corresponding adjustment to “Accumulated other comprehensive income (loss)” of $21.0 million, or $13.6 million after tax.
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Table of ContentsThe Company also has variable interest rate swap agreements, which are designated as fair value hedges. For derivative instruments designated as fair value hedges, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. On March 15, 2010, the Company entered into five variable interest rate swaps to effectively convert its $300 million of fixed rate 2010 Notes to variable rate debt. At March 31, 2010, these swap agreements required the Company to make variable interest payments based on a weighted average forward rate of 2.96% and receive fixed interest payments from the counterparties based on a fixed rate of 2.85%. The maturity of these fair value swaps coincides with the maturity date of the Company’s 2010 Notes in October 2013. Through March 31, 2010, the fair value of the variable interest rate swaps decreased to a liability of $625 thousand and was recorded in “Other Non-Current Liabilities.” The corresponding reduction in the carrying value of the 2010 Notes caused by the hedged risk was $392 thousand and was recorded in “Long-Term Debt.” The Company records the gain or loss on the hedged item (the 2010 Notes) and the loss or gain on the variable interest rate swaps in interest expense. Accordingly, the ineffective portion of the hedge was $233 thousand for fiscal 2010 and was reflected as additional interest expense. At March 31, 2009 and 2008, the Company had no outstanding variable interest rate swaps. The Company measures the fair value of its interest rate swaps using observable market rates to calculate the forward yield curves used to determine expected cash flows for each interest rate swap agreement. The discounted present values of the expected cash flows are calculated using the same forward yield curve. The discount rate assumed in the fair value calculations is adjusted for non-performance risk, dependent on the classification of the interest rate swap as an asset or liability. If an interest rate swap is a liability, the Company assesses the credit and non-performance risk of Airgas by determining an appropriate credit spread for entities with similar credit characteristics as the Company. If, however, an interest rate swap is in an asset position, a credit analysis of counterparties is performed assessing the credit and non-performance risk based upon the pricing history of counterparty specific credit default swaps or credit spreads for entities with similar credit ratings to the counterparties. The Company does not believe it is at risk for non-performance by its counterparties. However, if an interest rate swap is in an asset position, the failure of one or more of its counterparties would result in an increase in interest expense and a reduction of earnings. The Company compares its fair value calculations to the fair values calculated by the counterparties for each swap agreement for reasonableness. OTHER Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements included under Item 8, “Financial Statements and Supplementary Data,” describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, determining the net carrying value of trade receivables, inventories, goodwill, other intangible assets, business insurance reserves and deferred tax assets. Uncertainties about future events make these estimates susceptible to change. Management evaluates these estimates regularly and believes they are the best estimates, appropriately made, given the known facts and circumstances. For the three years ended March 31, 2010, there were no material changes in the valuation methods or assumptions used by management. However, actual results could differ from these estimates under different assumptions and circumstances. The Company believes the following accounting estimates are critical due to the subjectivity and judgment necessary to account for these matters, their susceptibility to change and the potential impact that different assumptions could have on operating performance.
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Table of ContentsTrade Receivables/Subordinated Retained Interest The Company maintains an allowance for doubtful accounts, which includes sales returns, sales allowances, and bad debts. The allowance adjusts the carrying value of trade receivables and the subordinated retained interest in trade receivables sold under the trade receivables securitization agreement (collectively referred to as trade receivables) to fair value based on estimates of accounts that will not ultimately be collected. An allowance for doubtful accounts is generally established as trade receivables age beyond their due date. As past due balances age, higher valuation allowances are established lowering the net carrying value of receivables. The amount of valuation allowance established for each past due period reflects the Company’s historical collections experience and current economic conditions and trends. The Company also establishes valuation allowances for specific problem accounts and bankruptcies. The amounts ultimately collected on past due trade receivables are subject to numerous factors including general economic conditions, the condition of the receivable portfolio assumed in acquisitions, the financial condition of individual customers, and the terms of reorganization for accounts emerging from bankruptcy. Changes in these conditions impact the Company’s collection experience and may result in the recognition of higher or lower valuation allowances. Management evaluates the allowance for doubtful accounts monthly. Historically, bad debt expense reflected in the Company’s financial results has generally been in the range of 0.3% to 0.5% of sales. The Company has a low concentration of credit risk due to its broad and diversified customer base across multiple industries and geographic locations, and its relatively low average order size. The Company’s largest customer accounts for approximately 0.5% of total net sales. Inventories The Company's inventories are stated at the lower of cost or market. The majority of the products the Company carries in inventory have long shelf lives and are not subject to technological obsolescence. The Company writes its inventory down to its estimated market value when it believes the market value is below cost. The Company estimates its ability to recover the costs of items in inventory by product type based on its age, the rate at which that product line is turning in inventory, its physical condition as well as assumptions about future demand and market conditions. The ability of the Company to recover its cost for products in inventory can be affected by factors such as future customer demand, general market conditions and the relationship with significant suppliers. Management evaluates the recoverability of its inventory at least quarterly. In aggregate, inventory turns at four-to-five times per year. Goodwill and Other Intangible Assets Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment at least annually and whenever events or circumstances indicate that it is more likely than not that they may be impaired. The Company has elected to perform its annual tests for indications of goodwill impairment as of October 31 of each year or whenever indicators of impairment exist.
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Table of ContentsThe goodwill impairment analysis is a two-step process. The first step used to identify potential impairment involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. The Company uses a discounted cash flow approach to develop the estimated fair value of its reporting units. Management judgment is required in developing the assumptions for the discounted cash flow model. These assumptions include revenue growth rates, profit margins, future capital expenditures, working capital needs, discount rates, perpetual growth rates, etc. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated potential impairment. The implied fair value of goodwill is determined in a manner similar to how goodwill is calculated in a business combination. That is, the estimated fair value of the reporting unit, as calculated in step one, is allocated to the individual assets and liabilities as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded to write down the carrying value. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit and the loss establishes a new basis in the goodwill. Subsequent reversal of an impairment loss is not permitted. The discount rate, sales growth and profitability assumptions and perpetual growth rate are the material assumptions utilized in the discounted cash flow model used to estimate the fair value of each reporting unit. The Company’s discount rate reflects a weighted average cost of capital (“WACC”) for a peer group of companies in the chemical manufacturing industry with an equity size premium added, as applicable, for each reporting unit. The WACC is calculated based on observable market data. Some of this data (such as the risk free or treasury rate and the pretax cost of debt) are based on market data at a point in time. Other data (such as beta and the equity risk premium) are based upon market data over time. The discounted cash flow analysis requires estimates, assumptions and judgments about future events. The Company’s analysis uses internally generated budgets and long-range forecasts. The Company’s discounted cash flow analysis uses the assumptions in these budgets and forecasts about sales trends, inflation, working capital needs, and forecasted capital expenditures along with an estimate of the reporting unit’s terminal value (the value of the reporting unit at the end of the forecast period) to determine the implied fair value of each reporting unit. The Company’s assumptions about working capital needs and capital expenditures are based on historical experience. The perpetual growth rate assumed in the discounted cash flow model was consistent with the long-term rate of growth as measured by the U.S. Gross Domestic Product. The Company believes the assumptions used in its discounted cash flow analysis are appropriate and result in reasonable estimates of the implied fair value of each reporting unit. However, the Company may not meet its sales growth and profitability targets, working capital needs and capital expenditures may be higher than forecast, changes in credit markets may result in changes to the Company’s discount rate and general business conditions may result in changes to the Company’s terminal value assumptions for its reporting units. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, the Company applied a hypothetical 7% decrease to the estimated fair value of each reporting unit. In most cases, the estimated fair value of the reporting units exceeded the carrying value of the reporting units by a substantial amount. However, this hypothetical 7% decrease in fair value would have triggered the need to perform additional step two analyses for one of the Company’s reporting units. The amount of goodwill associated with this reporting unit was $88 million at October 31, 2009.
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Table of ContentsBusiness Insurance Reserves The Company has established insurance programs to cover workers’ compensation, business automobile and general liability claims. During fiscal 2010, 2009 and 2008, these programs had high deductible limits of $1 million per occurrence. For fiscal 2011, the high deductible limits will remain $1 million per occurrence with no additional aggregate retention. The Company reserves for its self-insured retention based on individual claim evaluations establishing loss estimates for known claims based on the current facts and circumstances. These known claims are then “developed” through actuarial computations, to reflect the expected ultimate loss for the known claims, as well as incurred but not reported claims. Actuarial computations use the Company’s specific loss history, payment patterns and insurance coverage, plus industry trends and other factors to estimate the required reserve for all open claims by policy year and loss type. Reserves for the Company’s self-insurance retention are evaluated monthly. Semi-annually, the Company obtains a third-party actuarial report to validate that the computations and assumptions used are consistent with actuarial standards. Certain assumptions used in the actuarial computations are susceptible to change. Loss development factors are influenced by items such as medical inflation, changes in workers’ compensation laws, and changes in the Company’s loss payment patterns, all of which can have a significant influence on the estimated ultimate loss related to the Company’s self-insured retention. Accordingly, the ultimate resolution of open claims may be for amounts more or less than the reserve balances. The Company’s operations are spread across a significant number of locations, which helps to mitigate the potential impact of any given event that could give rise to an insurance-related loss. Over the last three years, business insurance expense has generally been in the range of 0.6% to 0.8% of sales. Income Taxes At March 31, 2010, the Company had deferred tax assets of $104.0 million (net of valuation allowances of $8.2 million), deferred tax liabilities of $707.8 million and a net $8.1 million of unrecognized tax benefits associated with uncertain tax positions (see Note 6 to the consolidated financial statements). The Company estimates income taxes based on diverse legislative and regulatory structures that exist in various jurisdictions where the Company conducts business. Deferred income tax assets and liabilities represent tax benefits or obligations that arise from temporary differences due to differing treatment of certain items for accounting and income tax purposes. The Company evaluates deferred tax assets each period to ensure that estimated future taxable income will be sufficient in character (e.g., capital gain versus ordinary income treatment), amount and timing to result in their recovery. A valuation allowance is established to reduce the deferred income tax assets to their realizable value when management determines that it is more likely than not that a deferred tax asset will not be realized. Considerable judgments are required in establishing deferred tax valuation allowances and in assessing exposures related to tax matters. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences and carryforward deferred tax assets become deductible or utilized. Management considers the reversal of taxable temporary differences and projected future taxable income in making this assessment. As events and circumstances change, related reserves and valuation allowances are adjusted to income at that time. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets reverse, at March 31, 2010 management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances. Unrecognized tax benefits represent income tax positions taken on income tax returns that have not been recognized in the consolidated financial statements. The Company’s tax returns are subject to audit and local taxing authorities could challenge the Company’s tax positions. The Company’s practice is to review tax filing positions by jurisdiction and to record provisions for uncertain income tax positions, including interest and penalties when applicable. The Company does not anticipate significant changes in the amount of unrecognized income tax benefits over the next year.
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Table of ContentsContractual Obligations The following table presents the Company’s contractual obligations as of March 31, 2010:
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The Company also has long-term take-or-pay supply agreements with Linde AG to purchase oxygen, nitrogen, argon, helium and acetylene. The agreements expire at various dates through July 2019 and represent almost $55 million in annual bulk gas purchases. Additionally, the Company has long-term take-or-pay supply agreements to purchase oxygen, nitrogen, argon and helium from other major producers. Annual purchases under these contracts are approximately $20 million and they expire at various dates through 2024. The purchase commitments for future periods contained in the table above reflect estimates based on fiscal 2010 purchases. The supply agreements noted above contain periodic adjustments based on certain economic indices and market analysis. The Company believes the minimum product purchases under the agreements are within the Company’s normal product purchases. Actual purchases in future periods under the supply agreements could differ materially from those presented in the table due to fluctuations in demand requirements related to varying sales levels as well as changes in economic conditions.
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Table of ContentsThe Company signed a 15-year take-or-pay supply agreement with First United Ethanol LLC, (“FUEL”) to supply the Company with feed stock of raw carbon dioxide. The agreement is expected to commence in mid-calendar year 2010 after the Company completes its 450 tons per day liquification plant at FUEL’s new complex in Camilla, Georgia. Annual purchases under this contract will be approximately $1.3 million annually.
Off-Balance Sheet Arrangements As disclosed in Note 4 to the Company’s consolidated financial statements under Item 8, “Financial Statements and Supplementary Data,” the Company participates in the Securitization Agreement with three commercial banks to sell, on a revolving basis, up to $295 million of qualifying trade receivables. The Securitization Agreement was renewed in March 2010 for two years. Under the Securitization Agreement, trade receivables are sold on a monthly basis to three commercial banks through a bankruptcy-remote special purpose entity. The Company retains a subordinated interest in the receivables sold, which is included in “Trade receivables” on the accompanying Consolidated Balance Sheet. At March 31, 2010, the amount of retained interest in the receivables sold was approximately $142 million. The Securitization Agreement is a form of off-balance sheet financing. The discount taken by the commercial banks reduces the proceeds from the sale of trade receivables. The table below reflects the amount of trade receivables sold at March 31, 2010 and the amount of the anticipated discount to be taken, based on market rates at March 31, 2010, on the sale of that quantity of receivables each month through the expiration date of the Securitization Agreement. The Securitization Agreement expires in March 2012.
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Table of ContentsAccounting Pronouncements Issued But Not Yet Adopted In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”), regarding the allocation of revenue in arrangements containing multiple deliverables. Specifically, ASU 2009-13 modifies existing U.S. generally accepted accounting principles (“GAAP”) by providing new guidance concerning (1) the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting, and (2) the manner in which arrangement consideration should be allocated to such deliverables. The guidance requires the use of an entity’s best estimate of the selling price of a deliverable if vendor specific objective evidence or third-party evidence of the selling price cannot be determined. Additionally, ASU 2009-13 eliminates the use of the residual method of allocating consideration when vendor specific objective evidence or third-party evidence of the selling price is known for some, but not all, of the delivered items in a multiple element arrangement. Finally, ASU 2009-13 requires expanded qualitative and quantitative disclosures in the financial statements. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Upon adoption, the guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements, or it may be applied retrospectively. The Company currently has contracts in place that contain multiple deliverables, principally product supply agreements for gases and container rental. The Company treats the deliverables in these arrangements under current GAAP as separate units of accounting with selling prices derived from Company specific or third-party evidence, and the new guidance is not expected to significantly modify the accounting for these types of arrangements. The Company is continuing to evaluate the effects that ASU 2009-13 and its method of adoption may have on its consolidated financial statements. In December 2009, the FASB issued ASU No. 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets (“ASU 2009-16”), which codifies a previous accounting standard and amends existing GAAP to establish new standards that will change how companies account for transfers of financial assets. Significant changes include (1) elimination of the qualifying special purpose entity (“QSPE”) concept, (2) new requirements for determining whether transfers of portions of financial assets are eligible for sale accounting, (3) clarification of the derecognition criteria for a transfer to qualify as a sale, (4) changes in recognition of gains or losses on transfers accounted for as sales, and (5) extensive new disclosures. ASU 2009-16 is effective for transfers of financial assets occurring in fiscal years beginning after November 15, 2009, and in interim periods within those fiscal years, with early adoption prohibited. The disclosure provisions of ASU 2009-16 shall be applied to transfers that occur both before and after the effective date of ASU 2009-16. On April 1, 2010, the Company adopted ASU 2009-16. The Company currently participates in the Securitization Agreement, which expires in March 2012, with three commercial banks to which it sells qualifying trade receivables on a revolving basis. The adoption of ASU 2009-16 affects the Company’s Securitization Agreement and effectively requires the Company to recognize the trade receivables sold under the Securitization Agreement and the related short-term borrowings on its balance sheet as debt. The Securitization Agreement will be reflected as such on the Company’s balance sheet for the fiscal quarter ending on June 30, 2010. However, the Company’s debt covenants will not be impacted by the balance sheet recognition of the short-term borrowings, as borrowings under the Securitization Agreement are already factored into the debt covenant calculations. Prior to the adoption of ASU 2009-16, transfers of receivables were reflected as operating cash flows, whereas after the adoption of ASU 2009-16, only cash collections are classified as operating cash flows. Subsequent to the adoption of the new guidance, cash flows related to the transfer of receivables from the Company to the banks will be classified as financing cash flow. For the first quarter ending on June 30, 2010, the Company’s statement of cash flows will be uniquely affected by the adoption of ASU 2009-16, as the cash proceeds received under the Securitization Agreement will no longer be treated as a source of cash from operating activities, but will instead be recognized as a source of cash from financing activities. Therefore, for the period ending June 30, 2010, the Company will reflect a reduced amount of operating cash inflows from trade receivables.
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Table of ContentsIn December 2009, the FASB issued ASU No. 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”), which codifies a previous accounting standard. ASU 2009-17 establishes new standards that will change the consolidation model for variable interest entities (“VIEs”). Significant changes as a result of ASU 2009-17 include (1) changes in considerations as to whether an entity is a VIE, (2) a qualitative rather than quantitative assessment to identify the primary beneficiary of a VIE, (3) an ongoing rather than event-driven assessment of the VIE’s primary beneficiary, and (4) the elimination of the QSPE scope exception. ASU 2009-17 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009 with early adoption prohibited. Upon adoption, if a VIE is required to be consolidated, an election must be made as to whether to retrospectively apply the guidance of ASU 2009-17 or record a cumulative-effect adjustment to retained earnings on the date of adoption. Additionally, if a VIE is deconsolidated upon the adoption of ASU 2009-17, a separate cumulative-effect adjustment to retained earnings will be recognized. The new guidance did not result in the deconsolidation of the Company’s existing VIE. 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 to incur additional costs in the future in connection with Air Products’ unsolicited takeover attempt; the Company’s beliefs as to future product purchases under its long-term supply agreements and the ability to negotiate alternative supply arrangements; the Company’s intentions to negotiate its withdrawal from the multi-employer pension plans; the Company’s plan to begin its phased, multi-year rollout of the SAP platform during the summer of fiscal 2011; the Company’s belief regarding the benefits of the SAP platform; the Company’s expectations that earnings per diluted share will be $0.70 to $0.72 for the first quarter ending June 30, 2010, including and excluding anticipated charges; the Company’s expectations that earnings per diluted share for the full year of fiscal 2011 will be $2.95 to $3.05, including and excluding anticipated charges; the Company’s expectation as to the long-term growth profiles of its strategic products; the Company’s estimate that for every 25 basis point increase in LIBOR, its annual interest expense would increase approximately $2.2 million; the Company’s expectation that the adoption of the new accounting standards for the transfer of financial assets will not impact its debt covenants; the Company’s future dividend declarations; the Company’s intention to refinance its French revolving credit borrowings with its Credit Facility; the Company’s belief that it has sufficient liquidity from cash from operations and under its revolving credit facilities to meet its working capital, capital expenditure and other financial commitments; the Company’s belief that it can obtain financing on reasonable terms; the Company’s expectations as to non-performance by its counterparties to interest rate swap agreements; the Company’s belief as to its realization of the tax benefits of its deductible differences, net of the existing valuation allowances; and the Company’s belief that it has the ability and intention to refinance its principal payments on its term loan with borrowings under its long-term revolving credit line.
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Table of ContentsForward-looking statements also include any statement that is not based on historical fact, including statements containing the words “believes,” “may,” “plans,” “will,” “could,” “should,” “estimates,” “continues,” “anticipates,” “intends,” “expects” and similar expressions. The Company intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors and should not be regarded as a representation by the Company or any other person that the results expressed therein will be achieved. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. Important factors that could cause actual results to differ materially from those contained in any forward-looking statement include: adverse changes in customer buying patterns resulting from deterioration in current economic conditions; weakening in the operating and financial performance of the Company’s customers, which can negatively impact the Company’s sales and the Company’s ability to collect accounts receivable; postponement of projects due to economic developments; customer acceptance of price increases; the success of implementing and continuing the Company’s cost reduction programs; the Company’s ability to achieve anticipated acquisition synergies; supply cost pressures; increased industry competition; the Company’s ability to successfully identify, consummate, and integrate acquisitions; the Company’s continued ability to access credit markets on satisfactory terms; significant fluctuations in interest rates; increases in energy costs and other operating expenses eroding the planned cost savings; higher than expected implementation costs of the SAP system; conversion problems related to the SAP system that disrupt the Company’s business and negatively impact customer relationships; the impact of tightened credit markets on the Company’s customers; the impact of changes in tax and fiscal policies and laws; the potential for increased expenditures relating to compliance with environmental regulatory initiatives; the impact of new environmental, healthcare, tax, accounting, and other regulation; continued potential liability under the Multiemployer Pension Plan Amendments Act of 1980 with respect to the Company’s participation in or withdrawal from multi-employer pension plans for union employees of the Company; costs incurred associated with the Air Products’ unsolicited takeover attempt and proxy contest; the timing of economic recovery in the U.S. economy; and the effect of catastrophic events and political and economic uncertainties associated with current world events.
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Interest Rate Risk The Company manages its exposure to changes in market interest rates. The interest rate exposure arises primarily from the interest payment terms of the Company’s borrowing agreements. Interest rate swap agreements are used to adjust the interest rate risk exposures that are inherent in its portfolio of funding sources. The Company has not established, and will not establish, any interest rate risk positions for purposes other than managing the risk associated with its portfolio of funding sources. Counterparties to interest rate swap agreements are major financial institutions. The Company has established counterparty credit guidelines and only enters into transactions with financial institutions with long-term credit ratings of ‘A’ or better. In addition, the Company monitors its position and the credit ratings of its counterparties, thereby minimizing the risk of non-performance by the counterparties. The table below summarizes the Company’s market risks associated with debt obligations, interest rate swaps and the trade receivables securitization at March 31, 2010. For debt obligations and the trade receivables securitization, the table presents cash flows related to payments of principal, interest and the discount on the securitization program by fiscal year of maturity. For interest rate swaps, the table presents the notional amounts underlying the agreements by year of maturity. The notional amounts are used to calculate contractual payments to be exchanged and are not actually paid or received. Fair values were computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the period.
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Limitations of the Tabular Presentation As the table incorporates only those interest rate risk exposures that exist as of March 31, 2010, 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, debt levels and the Company's credit rating. Foreign Currency Rate Risk Canadian subsidiaries and the European operations of the Company are funded 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 financial position and results of operations.
The consolidated financial statements, supplementary information and financial statement schedule of the Company are set forth at pages F-1 to F-57 of the report.
None.
(a) Evaluation of Disclosure Controls and Procedures The Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of March 31, 2010. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in the Company’s Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
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Table of Contents(b) Management’s Report on Internal Control over Financial Reporting The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company’s management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on this assessment, management concluded that, as of March 31, 2010, the Company’s internal control over financial reporting was effective. See Management’s Report on Internal Control Over Financial Reporting preceding the Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.” KPMG LLP, an independent registered public accounting firm, issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of March 31, 2010, included under Item 8, “Financial Statements and Supplementary Data.” (c) Changes in Internal Control There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None. PART III
Certain information from the Company’s 2010 Definitive Proxy Statement (“Proxy Statement”) (when it is filed) is incorporated by reference as specified by the Item number of Regulation S-K below. Item 401 Information The biographical information for the directors including the names, ages, terms of office, directorships in other companies and business experience is included in the Proxy Statement section “Election of Directors” and is incorporated herein by reference. The biographical information relating to the Company's executive officers set forth in Item 1 of Part I of this Form 10-K report is incorporated by reference. Item 405 Information Disclosure of the failure by any director, officer, or beneficial owner of more than ten percent of a class of the Company’s equity securities to file Forms 3, 4, or 5 reporting their ownership and changes in ownership in the Company is included in the Proxy Statement section “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated by reference.
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Table of ContentsItem 406 Information Disclosure of the Company’s adoption of a code of ethics and the employees to which it applies is included in the Proxy Statement section “Governance of the Company” under subsection “Charters and Code of Ethics and Business Conduct” and is incorporated by reference. Item 407(c)(3) Information The procedure followed to nominate persons to the Company’s board of directors is included in the Proxy Statement section “Governance of the Company” under subsection “Director Nomination Process” and is incorporated by reference. Item 407(d)(4) and 407(d)(5) Information The identification of each audit committee member, their independence with regard to the Company, and the Company’s audit committee financial expert are contained in the Proxy Statement section “Election of Directors” under subsection “Audit Committee.” The information in that section is incorporated by reference.
The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K is included in Proxy Statement sections “Compensation Discussion and Analysis,” “Report of the Governance and Compensation Committee,” and “Executive Compensation.” The information in these sections is incorporated by reference, provided that the Report of the Governance and Compensation Committee will be deemed to be furnished and will not be deemed incorporated by reference into any other filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
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Item 201(d) Information The information required by Item 201(d) of Regulation S-K regarding the number of securities issuable under equity compensation plans is presented below. Equity Compensation Plan Information The following table sets forth information as of March 31, 2010 with respect to the shares of the Company's common stock that may be issued upon the exercise of options, warrants and rights under the Company’s equity compensation plans, which were approved by the stockholders.
Item 403 Information The information required by Item 403 of Regulation S-K regarding the disclosure of the amount of the Company’s voting securities beneficially owned by each director individually, by all directors and officers as a group, and by any owner of 5% or more of the securities is set forth in the Proxy Statement section “Security Ownership.” The information is incorporated herein by reference.
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Information required by Item 404 of Regulation S-K regarding material transactions and relationships between the Company and the Company’s directors, executive officers, nominees for election as directors, major shareholders, and business and professional entities affiliated with them is included in the Proxy Statement sections “Governance of the Company” and “Certain Relationships and Related Transactions.” These sections of the Proxy Statement are incorporated herein by reference. The information required by Item 407(a) of Regulation S-K regarding the disclosure of the independence of directors and committee members is also included in Proxy Statement section “Governance of the Company” and is incorporated herein by reference.
The information required by this Item is set forth in the Proxy Statement under the section “Proposal to Ratify Independent Registered Public Accounting Firm” and such information is incorporated by reference. PART IV
(a)(1) and (2): The response to this portion of Item 15 is submitted as a separate section of this report beginning on page F-1. All other schedules have been omitted as inapplicable, or are not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (b) Index to Exhibits and Exhibits filed as a part of this report.
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Table of ContentsSIGNATURES 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: May 27, 2010
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.
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Table of ContentsAIRGAS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
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
Table of ContentsSTATEMENT OF MANAGEMENT’S FINANCIAL RESPONSIBILITY Management of Airgas, Inc. and subsidiaries (the “Company”) prepared and is responsible for the consolidated financial statements and related financial information in this Annual Report on Form 10-K. The consolidated statements are prepared in conformity with U.S. generally accepted accounting principles. The consolidated 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, which includes internal control over financial reporting, at each business unit. The Company’s system of internal control is designed to provide reasonable assurance that records are maintained in reasonable detail to properly reflect transactions and permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, that transactions are executed in accordance with management’s and the Board of Directors’ authorization, and that unauthorized transactions are prevented or detected on a timely basis such that they could not materially affect the financial statements. The Company also maintains a staff of internal auditors who review and evaluate the system of internal control on a continual basis. 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 judgment by management. Management evaluated the effectiveness of the Company’s internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. KPMG LLP, an independent registered public accounting firm, as stated in their report appearing herein, issued their opinion on the effectiveness of the Company’s internal control over financial reporting as of March 31, 2010 and an opinion on the fair presentation of the financial position of the Company as of March 31, 2010 and 2009, and the results of the Company’s operations and cash flows for each of the years in the three-year period ended March 31, 2010. The Audit Committee of the Board of Directors, consisting solely of independent directors, meets regularly (jointly and separately) with the independent registered public accounting firm, the internal auditors and management to satisfy itself that they are properly discharging their responsibilities. The independent registered public accounting firm has direct access to the Audit Committee.
May 27, 2010
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Table of ContentsMANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Airgas, Inc. and subsidiaries (the “Company”) is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on this assessment, management concluded that, as of March 31, 2010, the Company’s internal control over financial reporting was effective. KPMG LLP, an independent registered public accounting firm, as stated in their report, has issued their opinion on the effectiveness of the Company’s internal control over financial reporting as of March 31, 2010.
May 27, 2010
F-3
Table of ContentsReport of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Airgas, Inc.: We have audited the accompanying 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. We also have audited Airgas, Inc.’s internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Airgas, Inc.’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
F-4
Table of ContentsIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Airgas, Inc. and subsidiaries as of March 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2010, in conformity with U.S. 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 therein. Also in our opinion, Airgas, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. /S/ KPMG LLP Philadelphia, Pennsylvania May 27, 2010
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Table of ContentsAIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
See accompanying notes to consolidated financial statements.
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Table of ContentsAIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
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Table of ContentsAIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
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Table of ContentsAIRGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—(Continued)
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