years ago, I was struck by the compelling
economics of the packaged gas business. Gas
cylinders are low-cost assets with very long
useful lives, which produce recurring revenues
and steady cash flow. The gases are used in
a wide range of industries and are integral
to our customers business.
the start, we have taken a simple "plain
vanilla" approach to this business, managing
it in a straightforward and honest manner, without
a lot of complexity. It has been and will
remain a specialized distribution business,
built on local density, managed close to the customer,
leveraging its national scale, with packaged gas
at the center of what we do. I am not suggesting
that building Airgas has been easy. We have had
our growing pains as we became a larger company,
expanded our capabilities, and added the infrastructure
needed to meet and exceed our customers
requirements. But, by staying focused on our business
model for packaged gases and on running and integrating
the companies we acquired, we have become the
We have focused on this simple strategy for this
years annual report, because there is a
renewed interest in companies like ours, with
strong cash flow and easy-to-understand business
models. We think ours is a model that has worked
well for 20 years and will continue to work well
20 years from now.
The results we achieved in fiscal 2002 reflect
the strength of our core business, even during
a weak industrial economy. Sales rose slightly,
to $1.64 billion from $1.63 billion, boosted by
increases in medical gas, liquid carbon dioxide
and dry ice and by some price improvement, which
helped offset weakness in the manufacturing sector.
Adjusted earnings per share, excluding certain
gains and charges, increased 8% over the previous
year to $0.78 per diluted share. Our net result
for the year was a loss, due to mandated accounting
changes related to SFAS 142 and how we book goodwill.
Free cash flow increased 56% from $0.94 per diluted
share to $1.47 per diluted share, which helped
us reduce debt by $118 million before acquisition
and divestiture activity. As a result, in February
we were able to finance our largest acquisition the
majority of the U.S. packaged business of Air
Products and Chemicals, Inc. entirely with
senior bank debt.
During fiscal 2002, we successfully launched Project
One, which dedicated people and resources to focus
on short-term value-enhancing programs and infrastructure
programs to support future growth. We completed
the value phase, which improved pricing discipline,
contract management, and working capital management and
increased operating profit by $10 million, funding
most of our Project One costs for the year. These
early successes are vital because they help fund
longer-term infrastructure programs that will
help complete the platform needed to reach our
strategic goals of $2 billion in sales with operating
margins of at least 10% by fiscal 2005.
In 1998, when we began to integrate our business,
we mapped out two strategic objectives. The first
is to drive market-leading sales growth. The second,
to become the low-cost supplier. During fiscal
2002, we continued to make progress on both of
Heres how we increased market penetration
to drive market-leading sales growth:
Accounts grew 10% to $165 million in
sales in fiscal 2002 as larger customers
turned to us to reduce supply chain
third of our Strategic Account customers
buy all three major product categories gases,
hardgoods, and safety.
gases through our Puritan Medical Products
division increased 8%.
sales of liquid carbon dioxide and dry
ice increased 8%. We are strengthening
our national position through plant
upgrades and a new plant in Hopewell,
Va., which opens January 2003.
rolled out our b2b.airgas.com website
in September 2001, with an electronic
catalog of almost 200,000 items. The
site already has 5,000 registered users
and we expect website sales to reach
$10 million annually by the end
of fiscal 2003. These sales and other
electronic-channel sales are targeted
to reach $100 million annually
by fiscal year end.
also took steps to improve our low-cost
position, primarily through Project
One initiatives designed to increase
operating efficiencies. These entail
standardizing business practices,
centralizing procurement and other
key functions, cylinder management,
sharing best practices, and outsourcing
certain financial services through
a shared services center, which begins
operation in July 2002.
for the future
Our highest priority for fiscal 2003
is to complete the integration of
the Air Products acquisition. We remain
confident that we will achieve the
anticipated synergies as this business
fits well into our existing national
network. This acquisition will move
us closer to reaching our strategic
objectives: the pursuit of market-leading
growth and the low-cost position.
On the following pages, you will find
more about this landmark acquisition
and all it offers.
the 80s and 90s, Airgas
generated shareholder value through
acquisitions. We are well past the
roll-up phase now. When you look at
all we have today: nearly 800 locations,
8,500 associates, and 5 million cylinders,
its clear that we now have the
opportunity to generate shareholder
value simply by maximizing the richness
of what we acquired.
Airgas today is better positioned
than ever to make successful acquisitions,
and we expect to see opportunities.
More than half the market is served
by about 900 independent distributors,
and vertically integrated producers
have another 30% market share. We
believe industry consolidation will
continue and stand ready to pursue
strategic acquisitions when they arise.
I write this letter, the economic
outlook is uncertain. However, our
current capabilities leave us well
positioned to grow, regardless of
overall market trends, by serving
current customers with more products,
by attracting customers who will need
our unique capabilities, and by using
our geographic and product diversity
to capitalize on areas of market-leading
While our success is built on a simple
strategy, it is our 8,500 Airgas associates
who bring this strategy to life. We
have the strongest team in the packaged
gas business from engineers and
chemists to sales specialists, process
welding experts, fillers and drivers,
and an experienced management team.
But, it is not just about their skills.
people have created a culture
that is unique a culture that
has helped us integrate diverse companies,
launch bold business initiatives,
and add new products and services.
Most companies have a vision and mission.
A few companies have a culture that
is aligned with their vision and mission,
and Airgas is one of them.
people have a passion and energy about
their work that truly is an asset
to Airgas. With their continued commitment
to winning in the packaged gas business,
the next 20 years should provide even
more value to customers, shareholders
and associates alike.