Summary of AIRGAS INC - Yahoo! Finance

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW
Airgas, Inc. and its subsidiaries ("Airgas" or the "Company") had net sales for the quarter ended June 30, 2009 ("current quarter") of $979 million compared to $1.1 billion for the quarter ended June 30, 2008 ("prior year quarter"), a decline of 12%. Total same-store sales declined 17%, with hardgoods down 27% and gas and rent down 10%. Acquisitions contributed 5% sales growth in the quarter. The same-store sales decline was principally volume related with sales volumes down 19% and pricing contributing 2% to growth. Lower sales volumes reflect broad-based weakness across most customer segments and geographies.
The Company's operating margin declined 110 basis points to 11.0% in the current quarter compared to 12.1% in the prior year quarter. The operating margin reflects the effect of lower sales, partially offset by gross margin expansion and the impact of expense reduction initiatives. The gross profit margin (excluding depreciation) expansion is primarily a result of the Company's product mix shifting away from hardgoods towards gas and rent, which carry a higher gross margin than hardgoods. Selling, distribution and administrative ("SD&A") expenses in the current quarter increased to 38.3% of sales, an increase of 340 basis points over the prior year quarter. The increase in operating expense as a percent of sales was driven by the decline in sales and the mix shift to gas and rent, which carry higher operating expenses in relation to sales. Net earnings per diluted share declined 19% in the current quarter to $0.66 compared to $0.81 in the prior year quarter. Expense Reduction Initiatives
In response to the slowing economy, the Company reacted quickly and effectively to mitigate the impact of declining sales. Between December and March, as previously announced, the Company fully implemented $45 million of annual expense reductions, which were in addition to $10 million of expected annual savings in fiscal 2010 from ongoing efficiency initiatives. As a result, the Company experienced only a modest decline in operating margin, to 11.0%. In light of the continued weak business climate, the Company has identified an additional $12 million of annual expense reductions that will be fully implemented by the end of the second quarter. Business Segments
The Company aggregates its operations, based on products and services, into two reportable business segments, Distribution and All Other Operations. During the fourth quarter of fiscal 2009, the Company changed the operating practices and organization of its air separation production facilities and national specialty gas labs. The new operating practices and organization reflect the evolution of these businesses and their role to support the regional distribution companies. The regional distribution companies market to and manage the end customer relationships, coordinating and cross-selling the Company's multiple product and service offerings in a closely coordinated and integrated manner. As a result of these changes, the air separation production facilities and national specialty gas labs are now reflected in the Distribution business segment. Also as a result of an organizational realignment, Airgas National Welders is now part of the Distribution business segment.
Looking Forward
Current challenging economic conditions provide limited visibility into future sales and earnings, which should be taken into consideration when evaluating the Company's guidance. Looking forward, the Company expects net earnings for the second quarter ending September 30, 2009 to range from $0.64 to $0.69 per diluted share. For the full year 2010, the Company expects earnings per diluted share of $2.65 to $2.85. The guidance incorporates the benefit of the $45 million of annual expense reductions already implemented, as well as the incremental $12 million of annual expense reductions that will be implemented by the end of the second quarter.

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AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2008
STATEMENT OF EARNINGS COMMENTARY
Net Sales
Net sales decreased 12% to $979 million for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, driven by a same-store sales decline of 17% partially offset by incremental sales of 5% contributed by acquisitions. Gas and rent same-store sales declined 10% and hardgoods declined 27%. Same-store sales were driven by volume declines of 19% and a price gain of 2%. 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, environmental regulatory acceleration, strong cross-selling opportunities or a combination thereof. In the aggregate, these products declined 9% on a same-store sales basis in the current quarter compared to the prior year quarter with growth in medical offset by declines in bulk and specialty gas and by more significant slowing in carbon dioxide, dry ice and safety products.
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.

                                      Three Months Ended
       Net Sales                           June 30,               Increase/
       (In thousands)                2009           2008         (Decrease)
       Distribution                $ 871,857     $ 1,020,297     $  (148,440 )     -15 %
       All Other Operations          113,024         102,236          10,788        11 %
       Intercompany eliminations      (5,624 )        (5,819 )           195

                                   $ 979,257     $ 1,116,714     $  (137,457 )     -12 %

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 ("MRO") supplies.
Distribution business segment sales declined 15% compared to the prior year quarter with a decline in same-store sales of 17%, partially offset by incremental sales of 2% contributed by current and prior year acquisitions. The Distribution business segment gas and rent same-store sales declined 9% with volumes down 12%, slightly offset by a positive 3% pricing impact. Hardgoods same-store sales declined 27% with volumes down 28% and pricing up 1%. Both gas and rent and hardgoods volumes were negatively impacted by the general slowdown in economic activity and customers' delaying or deferring capital projects.

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AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sales of strategic gas products sold through the Distribution business segment in the current quarter declined 3%. Among strategic products, bulk gas sales were down 5% due to the impact of production slowdowns in the metal fabrication and steel segments, and reduced activity by oil field supply customers. Medical gases were up 4% from expanding business with existing customers and utilizing the Company's broad product offering to obtain new business. Specialty gases were down 10% resulting from a general softening in demand in the chemicals processing industry and electronics manufacturing.
Sales of core industrial gases, which experienced the sharpest volume declines, were down 16% for the quarter. In addition, revenues from the Company's rental welder business experienced a 20% decline in same-store sales.
Distribution hardgoods same-store sales declined 27% with volumes down 28%, slightly offset by 1% in pricing gains. The most significant volume declines were in equipment and welding consumables. Safety product sales declined 18% in the quarter attributed to plant shutdowns, shift reductions, and rising unemployment. Our Radnor® private label line was down 22% for the quarter, driven by the overall drop 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 increased 11% compared to the prior year quarter with a 17% decline in same-store sales more than offset by increases from acquisitions. The decline in same-store sales reflects lower pricing for ammonia products, a decline in carbon dioxide and dry ice volume, as well as reduced refrigerants volume. Lower ammonia pricing reflects lower product costs. Reduced carbon dioxide volume reflects weakness in the beverage carbonation segment. Dry ice volumes were impacted by a decline in the airline services segment. Refrigerants volume declined primarily due to mild weather during the current quarter in the Eastern half of the U.S. along with customers deferring HVAC maintenance and conversion projects as a result of the economic downturn.
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.
Consolidated gross profits (excluding depreciation) decreased 7% principally due to same-store sales decline offset somewhat by an expansion of gross profit margins (excluding depreciation). The consolidated gross profit margin (excluding depreciation) in the current quarter increased 330 basis points to 55.1% compared to 51.8% in the prior year quarter primarily driven by margin expansion in the Distribution business segment resulting from a favorable product mix shift toward gas and rent, which carry a higher gross margin than hardgoods.

                                       Three Months Ended
         Gross Profits (ex. Depr.)          June 30,              Increase/
         (In thousands)                2009          2008        (Decrease)
         Distribution                $ 486,670     $ 532,704     $   (46,034 )     -9 %
         All Other Operations           52,751        45,545           7,206       16 %

                                     $ 539,421     $ 578,249     $   (38,828 )     -7 %

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AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Distribution business segment's gross profits (excluding depreciation) decreased 9% compared to the prior year quarter. The Distribution business segment's gross profit margin (excluding depreciation) was 55.8% versus 52.2% in the prior year quarter, an increase of 360 basis points. The improvement in the Distribution business segment's gross profit margin (excluding depreciation) largely reflects a shift in sales 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 60.9% in the current quarter as compared to 55.0% in the prior year quarter. The All Other Operations business segment's gross profits (excluding depreciation) increased 16% driven primarily by acquisition growth and by margin expansion in the ammonia business. The All Other Operations business segment's gross profit margin (excluding depreciation) increased 220 basis points to 46.7% in the current quarter from 44.5% in the prior year quarter. The increase in the All Other Operations business segment's gross profit margin (excluding depreciation) was driven by the margin improvement in the ammonia business, reflecting lower product costs, and production process efficiencies for dry ice, partially offset by a shift in sales mix towards lower-margin refrigerants. Operating Expenses
SD&A expenses consist of labor and overhead associated with the purchasing, marketing and distribution 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.
SD&A expenses declined $15 million, or 4%, in the current quarter as compared to the prior year quarter resulting from a $29 million decline in operating costs offset by approximately $14 million of incremental operating costs associated with acquired businesses. The $29 million decrease in SD&A expense attributable to factors other than acquisitions reflects lower variable costs due to the decline in sales and the benefit of savings from operating efficiencies, the impact of expense reduction initiatives, and lower diesel fuel costs. As a percentage of net sales, SD&A expense increased 340 basis points to 38.3% compared to 34.9% in the prior year quarter driven by the overall decline in sales and by the shift in sales mix to gas, which carries higher operating expenses and higher gross margins.
Depreciation expense of $52 million increased $3 million, or 7%, in the current quarter as compared to the prior year quarter. Acquired businesses contributed approximately $1 million of the increase. The balance of the increase primarily reflects current and prior years' capital investments in revenue generating assets to support customer demand, primarily cylinders, bulk tanks and rental welders, the New Carlisle, Indiana and Carrollton, Kentucky air separation units, and branch stores. Amortization expense of $5 million in the current quarter was even with the prior year quarter. Operating Income
Consolidated operating income of $108 million decreased 20% in the current quarter on significant slowing in sales partially offset by gross profit margin (excluding depreciation) expansion, operating efficiencies and the impact of cost-reduction efforts. The operating income margin decreased 110 basis points to 11.0% compared to 12.1% in the prior year quarter.

                                    Three Months Ended
           Operating Income              June 30,              Increase/
           (In thousands)           2009          2008        (Decrease)
           Distribution           $  89,748     $ 121,799     $   (32,051 )     -26 %
           All Other Operations      18,161        13,053           5,108        39 %

                                  $ 107,909     $ 134,852     $   (26,943 )     -20 %

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AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating income in the Distribution business segment decreased 26% in the current quarter. The Distribution business segment's operating income margin decreased 160 basis points to 10.3% compared to 11.9% in the prior year quarter. Operating margin decline was driven by the significant decline in sales partially offset by favorable mix-driven gross profit margin (excluding depreciation) expansion, a continued focus on operating efficiency programs, and the impact of cost reduction efforts that were implemented in response to slowing sales.
Operating income in the All Other Operations business segment increased 39% compared to the prior year quarter. The All Other Operations business segment's operating income margin of 16.1% was 330 basis points higher than the operating income margin of 12.8% in the prior year quarter. The increase in operating margin resulted principally from margin expansion in the ammonia business generated by declining product costs, and to a lesser extent production process efficiencies in dry ice.
Interest Expense and Discount on Securitization of Trade Receivables Interest expense, net, and the discount on securitization of trade receivables totaled $20 million representing a decrease of 9% compared to the prior year quarter. 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 common stock repurchases in the prior year.
The Company participates in a securitization agreement with three commercial banks to sell up to $345 million of qualifying trade receivables ($360 million at June 30, 2008). The amount of outstanding receivables under the agreement was $295 million at June 30, 2009 versus $360 million at June 30, 2008. 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 June 30, 2009 was 57% fixed to 43% variable. A majority of the Company's variable rate debt is based on a spread over the London Interbank Offered Rate ("LIBOR"). Income Tax Expense
The effective income tax rate was 38.5% of pre-tax earnings in the current quarter compared to 39.1% in the prior year quarter. The Company expects the overall effective tax rate for fiscal 2010 to be between 39.0% and 39.5% of pre-tax earnings. The lower tax rate for the current year quarter resulted from the state tax benefit from the current quarter's expiration of the statute of limitations related to various issues.
Net Earnings
Net earnings were $54.8 million, or $0.66 per diluted share, compared to $68.9 million, or $0.81 per diluted share, in the prior year quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash provided by operating activities was $162 million for the three months ended June 30, 2009 compared to $129 million in the comparable prior year period. The increase in cash provided by operating activities was primarily driven by lower working capital requirements. Exclusive of the cash used by the trade receivables securitization agreement, working capital provided $43 million of cash in the current period versus the use of $25 million of cash during the prior year period. Lower trade receivables and inventory levels in response to declining sales were the primary drivers of the improvement. The trade receivables securitization used cash of $16 million during the current quarter, reflecting the lower level of trade receivables. Net earnings adjusted for non-cash and non-operating items provided cash of $137 million versus $154 million in the prior year quarter.

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AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net cash used in investing activities totaled $69 million and primarily consisted of cash used for capital expenditures. The decrease in capital expenditures from $86 million to $67 million, year over year, primarily reflects the completion of the New Carlisle, Indiana and Carrollton, Kentucky air separation units and reduced expenditures in response to the decline in sales. The Company made acquisition-related cash payments of $3 million in the three months ended June 30, 2009 primarily to settle holdback liabilities associated with prior year acquisitions. During the prior year quarter, the Company acquired three businesses for $22 million, including the settlement of holdback liabilities.
Net cash used by financing activities totaled $81 million, principally reflecting the net repayment of $75 million of debt. During the prior year quarter, the Company issued $400 million in fixed rate senior subordinated notes and used the net proceeds to pay down approximately $400 million of its floating rate revolving credit line. Lower proceeds from stock options also contributed to the increase in cash used in financing activities. The Company also paid dividends of $15 million, or $0.18 per share, in the current quarter, as compared to $10 million, or $0.12 per share, in the prior year quarter. Financial Instruments
Senior Credit Facility
The Company maintains a senior credit facility (the "Credit Facility") with a syndicate of lenders. At June 30, 2009, 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. $34.4 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 June 30, 2009, the Company had approximately $1.1 billion of borrowings under the Credit Facility: $696 million under the U.S. dollar revolver, $375 million under the term loans, $31 million (in U.S. dollars) under the multi-currency revolver and C$15 million (U.S. $13 million) under the Canadian dollar revolver. The Company also had outstanding letters of credit of $42 million issued under the Credit Facility. The U.S. dollar revolver borrowings and the term loans bear interest at LIBOR plus 62.5 basis points. The multi-currency revolver bears interest based on a spread of 62.5 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 62.5 basis points. As of June 30, 2009, the average effective interest rates on the U.S. dollar revolver, the term loans, the multi-currency revolver and the Canadian dollar revolver were 1.04%, 1.22%, 1.41% and 1.12%, respectively. In July, the Company's credit ratings were upgraded resulting in a lowering of the interest rate spreads on the borrowings above to 50 basis points effective July 31, 2009.

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AIRGAS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The debt covenants under the Company's revolving 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 June 30, 2009, the Company's leverage ratio was 2.7 times and its interest coverage ratio was 7.8 times. Based on the leverage ratio at June 30, 2009, the Company could incur an additional $974 million of debt. However, the Company's borrowing capacity under the Credit Facility is limited to the size of the facility. As of June 30, 2009, approximately $319 million remained unused under the Credit Facility. Therefore, the financial covenants do not limit the Company's ability to borrow the unused portion of the Credit Facility. The Credit Facility contains customary events of default, including nonpayment and breach covenants. In the event of default, repayment of borrowings under the Credit Facility may be accelerated. The Company's Credit Facility also contain cross-default provisions whereby a default under the Credit Facility would likely result in defaults under the senior subordinated notes discussed below. The Company's domestic subsidiaries, exclusive of the bankruptcy-remote special purpose entity (the "domestic subsidiaries"), guarantee the U.S. dollar revolver, term loans, multi-currency revolver and Canadian dollar revolver. The multi-currency revolver and Canadian dollar revolver are also guaranteed by the Company and the Company's foreign subsidiaries. The guarantees are full and unconditional and are made on a joint and several basis. The Company has 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 provides for the release of the guarantees and collateral if the Company attains an investment grade credit rating and a similar release on certain other debt.
Money Market Loans
The Company 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, 2009, 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 . . .