To our Shareholders, Customers, Associates and
Friends,
I remember back in 1983 when we made our third
acquisition, a company called Potomac Oxygen with
a branch in Alexandria, Virginia. The store was
a trailer and the cylinder storage shed was an
old icehouse. TDH Capital Company had financed
us, and I took the partners to see what we were
buying. As we walked away from the shed, one said:
“Peter, there sure isn’t a lot of
romance in this business.”
Maybe not “romance,” but there has
always been a passion about running this business
at the local level, in facilities close to our
customers. Through more than 300 acquisitions,
and now nearly 800 locations, Airgas has sustained
the same local focus and entrepreneurial spirit
we had in Alexandria 20 years ago.
We’ve come a long way since that icehouse,
as you would see in a visit to Cheshire, Connecticut—with
its fast-fill plant and specialty gas labs—or
our new carbon dioxide plant in Hopewell, Virginia.
We have emerged as the industry leader in packaged
gases and related supplies, a leading distributor
of safety products, and one of the top five industrial
distributors in the U.S.
We’ve built a dynamic organization, with
a clear national strategy, yet filled with people
passionate about succeeding locally. We give local
leaders autonomy, and they act like owners. We’ve
structured the business to help customers with
solutions, regardless of their size.
Proving our strength
This past year proved the strength of our organization.
We faced a business environment that was tough
for all industrial distributors. Existing customers
bought less. New customers were not buying much.
And, the elusive economic recovery always seemed
two quarters away. Yet, Airgas found ways to grow,
increase earnings, improve margins, and execute
strategic initiatives to strengthen our infrastructure.
At the same time, we successfully integrated our
largest acquisition ever, the U.S. packaged gas
business of Air Products, and closed four additional
acquisitions by year-end.
Total sales increased 9% to nearly $1.8 billion.
Acquisition growth, as well as targeted growth
in specialty, medical and bulk gases, and Strategic
Accounts, helped offset an extremely difficult
industrial economy, as reflected in a 2% decline
in same-store sales.
As outlined in our Financial Highlights, we
grew our adjusted earnings per share by 24% to
$0.97, excluding three cents in restructuring
charges, which was in line with our expectations.
Last year’s adjusted earnings per share,
excluding a change in accounting and other charges,
were $0.78. Free cash flow remained strong at
$104 millon, contributing to debt reduction of
$96 millon. Return on capital was 9.1 percent,
a 60-basis-point increase over last year.
Demonstrating our confidence, we declared our
first quarterly cash dividend of $0.04 per share
payable on June 30, 2003. We believe shareholders
deserve a return without needing to sell their
shares. We are confident that our cash flow will
allow us to pay dividends without compromising
our ability to make acquisitions, to fund capital
investments, and to pay down debt.
Finding growth in challenging times
So, where did Airgas find growth in a bleak U.S.
industrial economy? Fortunately, we began broadening
our customer base in the mid 1990s into targeted
service industries, which now represent about
20% of total revenue, helping to counterbalance
industrial cycles. These customers are more likely
to use non-traditional products, such as medical
gases, specialty gases, and carbon dioxide and
dry ice.
Among the key growth contributors were:
Medical Gases: Puritan
Medical Products and Airgas regional companies
achieved 8% growth in medical gases for the second
consecutive year, driving growth through innovation.
For example, Puritan Medical Products sold 30,000
Walk O2 Bout portable oxygen delivery systems
and expanded the Puritan Plus program to deliver
gas and equipment on behalf of home care providers.
Specialty Gas: Specialty
gas sales for the year were $127 million, up 6%
after adjusting for the business acquired from
Air Products. As expected, that acquisition added
new products, some strong customer relationships
and new expertise. Now we are working to build a world-class
specialty gas infrastructure to sustain our leadership
position. Recently, 20 of our 52 specialty gas
laboratories received ISO 9001:2000 certification
for the manufacture and sale of specialty gases, demonstrating our
commitment to quality and consistency.
Strategic Accounts:
We grew sales to larger customers looking for
ways to manage supply chains and reduce vendors
to $226 million, up 7% from a year ago on a same-store
sales basis. In addition to integrating about
$20 million in business from Air Products, we
signed 80 new accounts in fiscal 2003.
Acquisitions: We
successfully integrated the Air Products acquisition
and made additional acquisitions. Most notably,
we acquired the assets of Welding Metals, a Detroit-based distributor of packaged gas and
welding supplies with about $10 million in annual
sales, and we added 14 branches in Florida, Georgia
and California from Union Industrial Gas Group
with more than $20 million in gas and hardgoods
sales.
In addition, we increased bulk gas sales by
9% and grew our Red-D-Arc welder rental business
8%. Safety telesales grew 4%, despite a flat overall
safety market due to the decline in industrial
employment.
We also positioned the company to better serve
customers by strengthening our infrastructure
and streamlining processes. We moved to centralize
purchasing into four buying centers and implement
demand-planning software. We continued to pursue
brand strategies to promote our own Radnor®
private-label products and generate more sales
from our largest suppliers.
We launched a sales effectiveness program to
help sales reps set goals, target accounts, measure
their progress and monitor their performance.
We also migrated 13,000 safety-only field accounts
to telesales to more effectively serve those customers
and free up field sales reps to pursue other business.
Cultivating Strategic Planning and Leadership
I have spent much of the past year developing
a formal strategic planning process. Kelly Justice,
vice president of strategic planning and market
development, leads a strategy council that will
continually review and update our strategies, as well as help us find new strategies
to meet emerging customer needs.
I also
have started a formal process to promote leadership
at every level of Airgas. Last fall, Airgas
leaders reviewed the factors responsible for Airgas’
success, including our entrepreneurial culture
and our decentralized organizational structure.
We developed a leadership model, which includes
two sets of attributes. One set—including
collaboration, flexibility, integrity and communication—relates
to our people and our customers. The other set—with vision, entrepreneurship, accountability and prioritization—focuses
on our business performance.
Using this model, we are driving leadership training
to the “next wave” of 200 to 300 Airgas
managers, to ensure “Leadership at Every
Level.” This will enhance the organizational
health of Airgas, which is the foundation for
sustainable growth.
This year, we also sadly lost John Musselman,
a good friend who epitomized the Airgas leader.
Muss attacked his illness like he did his job—head-on
with honesty, strength and determination. In honor
of his fight, Airgas made a contribution in Muss’
name to leukemia research at the Dana-Farber Cancer
Institute—to help others in their fight
against this disease.
The Year Ahead
The year ahead will continue to prove our leadership.
I remain convinced that Airgas has the ability
to execute in any environment and the stamina
to continue toward our goal of $2 billion in sales
with operating margins of at least 10% by the
end of fiscal 2005.
We will look for ways to control costs, manage
our margins, and continue to pursue core growth
niches like medical and specialty gas, and Strategic
Accounts. We will find profitable growth with
or without a general upswing in the industrial
market by selling more product lines to customers
in our traditional markets, including safety,
Red-D-Arc welder rentals and bulk and MicroBulk
gas delivery. We also plan to stay disciplined
in finding the right opportunities to make acquisitions
and integrate those operations into our national
network.
Finally, we have agreed that Airgas needs to
rededicate itself to traditional industrial gas
and welding supply customers, the kind served
from that icehouse 20 years ago. We will begin
a long-term project to improve the buying experience
of these customers by enhancing training programs,
launching retail marketing programs, and focusing
on our local facilities and the services they
provide.
I’d like to thank customers for entrusting
us with their business and associates for their
leadership at every level. By listening to our
customers and associates through the years, by
thinking nationally and leading locally, we have
become the industry leader and have repositioned
Airgas for long-term success.
Sincerely,
Peter McCausland
| Chairman and Chief Executive Officer
June 7, 2003
|
