VALLEY NATIONAL GASES (VLG)

cylinder rental revenue represented 34.7% of net sales for the year ended June 30, 2006 and hard goods represented 36.9% of net sales. In comparison, packaged gases and cylinder rental revenue represented 33.6% of net sales for the year ended June 30, 2005 and hard goods represented 36.4% of net sales. Sales of hard goods increased $16.6 million or 27.1% from fiscal 2005 to fiscal 2006, reflecting increased demand from the improved economy, increased prices resulting from increased steel costs and increased sales volume. Acquisitions provided $15.3 million or 92.2% of the increase, with the balance provided by same store sales of $1.3 million. Packaged gases increased $18.2 million due to increased demand and higher prices. Acquisitions provided $12.0 million or 65.9% of the increase, with the balance provided by same store sales of $6.2 million. Propane sales represented 28.4% of net sales in fiscal 2006 compared to 30.0% of net sales in fiscal 2005. Propane sales increased $8.0 million or 17.7% in fiscal 2006 compared to fiscal 2005 due to price increases. Acquisitions provided $1.2 million or 15.0% of the increase, with the balance provided by same store sales of $6.8 million. Propane gallons sold were up 1.5% in fiscal year 2006 compared to fiscal year 2005, reflecting an increased customer base offset from higher prices of all energy sources and warmer temperatures in our markets compared to the prior year period.

 

Our cost of products sold increased $24.1 million or 30.7% to $102.4 million for the year ended June 30, 2006, compared to $78.3 million for the year ended June 30, 2005. Cost of products sold as a percentage of net sales was 48.6% and 46.7% for the years ended June 30, 2006 and 2005, respectively. Increased prices that we charged for hard goods, packaged gases and cylinder rental resulting from our efforts to standardize our product offerings and pricing were offset by higher propane costs as a percentage of net sales.

 

Operating, distribution and administrative expenses increased $12.6 million or 22.3% to $69.5 million in the year ended June 30, 2006, compared to $56.9 million for the year ended June 30, 2005. Consolidation of the variable interest entities resulted in a decrease of $2.4 million in building rent expense. Although personnel costs and equipment rent were also reduced, these reductions were partially offset by increased legal and professional fees, vehicle fuel and repair costs and expense for operating supplies. Effective July 1, 2005, the Company adopted SFAS No. 123R to account for its stock-based compensation plan. During the year ended June 30, 2006, the Company recorded approximately $185,000 as compensation expense related to stock options. Operating, distribution and administrative expenses as a percentage of net sales were 33.0% for the year ended June 30, 2006, compared to 33.9% for the year ended June 30, 2005.

 

Depreciation expense increased $1.2 million to $7.9 million for the year ended June 30, 2006, from $6.7 million for the year ended June 30, 2005, reflecting depreciation from increased capital expenditures, acquisitions and the variable interest entities.

 

Amortization of intangibles decreased $0.3 million to $0.8 million in the year ended June 30, 2006, compared to $1.1 million in the year ended June 30, 2005. This decrease was primarily the result of certain intangibles becoming fully amortized during the current fiscal year partially offset by the amortization of intangible assets related to acquisitions.

 

Interest expense remained the same at $4.3 million for the year ended June 30, 2006 and June 30, 2005. Interest expense for the year ended June 30, 2006 was partially offset by the inclusion of $0.4 million related to the variable interest entities.

 

Other income increased $0.2 million to $0.7 million for the year ended June 30, 2006, compared to $0.5 million for the year ended June 30, 2005, due primarily to income earned by the variable interest entities.

 

Minority interest earnings reflect the elimination of net pre-tax income earned by the variable interest entities. The amount eliminated is primarily the reduction in operating expense noted above, partially offset by expenses incurred by the entities.

 

Our effective tax rate increased from 37.6% for the year ended June 30, 2005 compared to 39.2% for the year ended June 30, 2006 due to higher federal graduated statutory rates resulting from higher taxable income.

 

Effective June 30, 2006, the Company adopted Financial Accounting Standards Board Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47). The $0.3 million after tax charge was recorded as the cumulative effect of a change in accounting principle related to conditional asset retirement obligations. The ongoing annual expense resulting from the adoption of FIN 47 is anticipated to be immaterial.

For the reasons stated above, our net earnings increased $2.8 million or 23.0% to $15.2 million for the year ended June 30, 2006, compared to $12.4 million for the year ended June 30, 2005. Diluted earnings per share were $1.56 for the year ended June 30, 2006, compared to $1.28 for the year ended June 30, 2005.