ARG - 9.30.12 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
_______________________________________
FORM 10-Q
________________________________________
ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2012
Commission file number: 1-9344 
________________________________________
AIRGAS, INC.
(Exact name of registrant as specified in its charter)
________________________________________
Delaware
 
56-0732648
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
259 North Radnor-Chester Road, Suite 100
Radnor, PA
 
19087-5283
(Address of principal executive offices)
 
(ZIP code)
(610) 687-5253
(Registrant’s telephone number, including area code) 
________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Preferred Stock Purchase Rights
 
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None.
______________________________________
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  ý    No  ¨
Indicate 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  ý    No  ¨
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
o  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of common stock outstanding as of November 6, 2012 was 78,102,150.
 


Table of Contents

AIRGAS, INC.

FORM 10-Q
September 30, 2012
TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements


AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
(In thousands, except per share amounts)
 
 
 
 
 
 
 
Net Sales
$
1,229,610

 
$
1,187,083

 
$
2,486,866

 
$
2,351,383

Costs and Expenses:
 
 
 
 

 

Cost of products sold (excluding depreciation)
552,313

 
552,334

 
1,121,051

 
1,082,873

Selling, distribution and administrative expenses
458,301

 
423,437

 
918,432

 
846,883

Restructuring and other special charges (Note 15)
2,443

 
2,500

 
8,155

 
15,830

Costs (benefits) related to unsolicited takeover attempt (Note 16)

 

 

 
(6,700
)
Depreciation
64,649

 
60,382

 
129,016

 
120,649

Amortization
6,718

 
6,255

 
13,336

 
12,404

Total costs and expenses
1,084,424

 
1,044,908

 
2,189,990

 
2,071,939

Operating Income
145,186

 
142,175

 
296,876

 
279,444

Interest expense, net
(15,880
)
 
(17,424
)
 
(31,630
)
 
(34,074
)
Other income (expense), net (Note 2)
1,161

 
(581
)
 
9,524

 
149

Earnings before income taxes
130,467

 
124,170

 
274,770

 
245,519

Income taxes
(49,447
)
 
(46,316
)
 
(102,952
)
 
(92,671
)
Net Earnings
$
81,020

 
$
77,854

 
$
171,818

 
$
152,848

Net Earnings Per Common Share:
 
 
 
 
 
 
 
Basic earnings per share
$
1.05

 
$
1.03

 
$
2.23

 
$
1.99

Diluted earnings per share
$
1.03

 
$
1.01

 
$
2.18

 
$
1.94

Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
Basic
77,078

 
75,630

 
76,973

 
76,980

Diluted
78,892

 
77,262

 
78,860

 
78,672


Note: Prior year amounts have been adjusted for the change in accounting for LIFO inventories.

See accompanying notes to consolidated financial statements.


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Table of Contents


AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
(In thousands)
2012
 
2011
 
2012
 
2011
Net earnings
$
81,020

 
$
77,854

 
$
171,818

 
$
152,848

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
  Foreign currency translation adjustments
2,661

 
(6,466
)
 
496

 
(5,611
)
  Reclassification of hedging loss included in net earnings
129

 
129

 
259

 
259

Other comprehensive income (loss), before tax
2,790

 
(6,337
)
 
755

 
(5,352
)
  Net tax expense of other comprehensive income items
(48
)
 
(48
)
 
(96
)
 
(96
)
Other comprehensive income (loss), net of tax
2,742

 
(6,385
)
 
659

 
(5,448
)
Comprehensive income
$
83,762

 
$
71,469

 
$
172,477

 
$
147,400


Note: Prior year amounts have been adjusted for the change in accounting for LIFO inventories.

See accompanying notes to consolidated financial statements.



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Table of Contents


AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
(In thousands, except per share amounts)
September 30,
2012
 
March 31,
2012
ASSETS
 
 
 
Current Assets
 
 
 
Cash
$
47,867

 
$
44,663

Trade receivables, less allowances for doubtful accounts of $36,579 and $31,845 at September 30, 2012 and March 31, 2012, respectively
686,940

 
652,439

Inventories, net
439,263

 
408,438

Deferred income tax asset, net
55,269

 
49,617

Prepaid expenses and other current assets
112,471

 
119,049

Total current assets
1,341,810

 
1,274,206

Plant and equipment at cost
4,436,947

 
4,306,420

Less accumulated depreciation
(1,790,812
)
 
(1,690,361
)
Plant and equipment, net
2,646,135

 
2,616,059

Goodwill
1,166,323

 
1,163,803

Other intangible assets, net
204,513

 
214,204

Other non-current assets
50,197

 
52,313

Total assets
$
5,408,978

 
$
5,320,585

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable, trade
$
166,194

 
$
174,868

Accrued expenses and other current liabilities
362,234

 
356,344

Short-term debt
329,427

 
388,452

Current portion of long-term debt
8,567

 
10,385

Total current liabilities
866,422

 
930,049

Long-term debt, excluding current portion
1,752,515

 
1,761,902

Deferred income tax liability, net
800,574

 
793,957

Other non-current liabilities
82,875

 
84,419

Commitments and contingencies


 


Stockholders’ Equity
 
 
 
Preferred stock, 20,030 shares authorized, no shares issued or outstanding at September 30, 2012 and March 31, 2012

 

Common stock, par value $0.01 per share, 200,000 shares authorized, 87,014 and 86,874 shares issued at September 30, 2012 and March 31, 2012, respectively
870

 
869

Capital in excess of par value
681,181

 
649,551

Retained earnings
1,804,164

 
1,701,478

Accumulated other comprehensive income
6,045

 
5,386

Treasury stock, 9,848 and 10,207 shares at cost at September 30, 2012 and March 31, 2012, respectively
(585,668
)
 
(607,026
)
Total stockholders’ equity
1,906,592

 
1,750,258

Total liabilities and stockholders’ equity
$
5,408,978

 
$
5,320,585


See accompanying notes to consolidated financial statements.

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Table of Contents


AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
September 30,
(In thousands)
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net earnings
$
171,818

 
$
152,848

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
129,016

 
120,649

Amortization
13,336

 
12,404

Impairment
1,729

 
2,500

Deferred income taxes
1,560

 
21,859

Gain on sales of plant and equipment
(99
)
 
(532
)
Gain on sale of businesses
(6,822
)
 

Stock-based compensation expense
18,192

 
17,070

Changes in assets and liabilities, excluding effects of business acquisitions and divestitures:
 
 
 
Trade receivables, net
(34,147
)
 
(43,248
)
Inventories, net
(29,976
)
 
(7,303
)
Prepaid expenses and other current assets
(10,538
)
 
(4
)
Accounts payable, trade
(5,220
)
 
(9,692
)
Accrued expenses and other current liabilities
16,625

 
(66,009
)
Other non-current assets
1,327

 
2,067

Other non-current liabilities
(2,852
)
 
(1,357
)
Net cash provided by operating activities
263,949

 
201,252

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(162,199
)
 
(166,812
)
Proceeds from sales of plant, equipment and businesses
20,201

 
8,387

Business acquisitions and holdback settlements
(18,652
)
 
(93,943
)
Other, net
(842
)
 
(443
)
Net cash used in investing activities
(161,492
)
 
(252,811
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net decrease in short-term debt
(59,121
)
 

Proceeds from borrowings of long-term debt
7,677

 
1,063,083

Repayment of long-term debt
(17,378
)
 
(704,220
)
Financing costs

 
(4,203
)
Purchase of treasury stock

 
(300,000
)
Proceeds from the exercise of stock options
13,860

 
10,862

Stock issued for the Employee Stock Purchase Plan
8,512

 
7,381

Tax benefit realized from the exercise of stock options
4,927

 
4,722

Dividends paid to stockholders
(61,634
)
 
(46,474
)
Change in cash overdraft
3,904

 
(109
)
Net cash (used in) provided by financing activities
(99,253
)
 
31,042

Change in cash
$
3,204

 
$
(20,517
)
Cash – Beginning of period
44,663

 
57,218

Cash – End of period
$
47,867

 
$
36,701


Note: Prior year amounts have been adjusted for the change in accounting for LIFO inventories.
See accompanying notes to consolidated financial statements.

6



Table of Contents
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Airgas, Inc. and its subsidiaries (“Airgas” or the “Company”). Intercompany accounts and transactions are eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These consolidated financial statements do not include all disclosures required for annual financial statements. These consolidated financial statements should be read in conjunction with the complete disclosures contained in the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2012.
The preparation of financial statements in accordance with GAAP requires the use of estimates. The consolidated financial statements reflect, in the opinion of management, reasonable estimates and all adjustments necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods presented. The interim operating results are not necessarily indicative of the results to be expected for the entire year.
Effective January 1, 2012, the Company changed its method of accounting for the portion of its hardgoods inventory valued using the last-in, first-out (“LIFO”) method to the average-cost method. The Company applied this change in accounting principle through retrospective application to the prior year’s consolidated financial statements. The impact of the change was immaterial.

(2) ACQUISITIONS AND DIVESTITURES
Acquisitions
Acquisitions have been recorded using the acquisition method of accounting and accordingly, results of their operations have been included in the Company’s consolidated financial statements since the effective date of each respective acquisition.
During the six months ended September 30, 2012, the Company purchased eight businesses with historical annual sales of approximately $19 million. A total of $18.7 million in cash was paid for the eight businesses and for the settlement of holdback liabilities and payments related to contingent consideration arrangements associated with prior year acquisitions. Transaction and other integration costs incurred during the six months ended September 30, 2012 were $0.7 million and were included in selling, distribution and administrative expenses in the Company’s Consolidated Statement of Earnings. These acquisitions contributed approximately $4 million in net sales for the six months ended September 30, 2012. The acquired businesses complement the Company’s portfolio of products and services while expanding the Company’s geographic coverage.
The Company negotiated the respective purchase prices of the businesses based on the expected cash flows to be derived from their operations after integration into the Company’s existing distribution network and production locations. The acquisition purchase price is allocated based on the fair values of the assets acquired and liabilities assumed, which are based on third-party appraisals and management estimates. Fiscal 2013 purchase price allocations are substantially complete, with the exception of certain tangible assets associated with two acquisitions that were purchased in August 2012 as the Company finalizes appraisals and other analyses. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed related to fiscal 2013 acquisitions, as well as adjustments to finalize the valuations of certain prior year acquisitions.
(In thousands)
Distribution
Business
Segment
 
All Other
Operations
Business Segment
 
Total
Current assets, net
$
2,887

 
$
551

 
$
3,438

Plant and equipment
8,511

 
1,169

 
9,680

Goodwill
1,963

 
2,432

 
4,395

Other intangible assets
2,948

 
2,000

 
4,948

Current liabilities
111

 
(2,491
)
 
(2,380
)
Non-current liabilities
(707
)
 
(722
)
 
(1,429
)
Total cash consideration
$
15,713

 
$
2,939

 
$
18,652

The fair value of trade receivables acquired with the fiscal 2013 acquisitions was $1.8 million, which approximated gross

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Table of Contents
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



contractual amounts receivable. Goodwill associated with fiscal 2013 acquisitions was $5.7 million and is deductible for income tax purposes. Goodwill largely consists of expected synergies resulting from the acquisitions, including the expansion of geographical coverage that will facilitate the sale of industrial, medical, and specialty gases and related supplies. Intangible assets related to fiscal 2013 acquisitions represent customer relationships and non-competition agreements and amounted to $3.5 million and $2.7 million, respectively. See Note 4 for further information on goodwill and intangible assets.
Pro forma results of operations for these acquisitions have not been presented since the impact is not material to the Company’s Consolidated Statements of Earnings, either individually or in aggregate.
Divestitures
On June 1, 2012, the Company divested the assets and operations of five branch locations in western Canada. The Company realized a gain on the sale of $6.8 million ($5.5 million after tax) recorded in “Other income (expense), net” in its Consolidated Statement of Earnings. The operations were included in the Distribution business segment and contributed net sales that were not material to the Company’s consolidated earnings. Proceeds from the sale were used primarily to pay down outstanding debt under the Company’s multi-currency revolving credit line.

(3) INVENTORIES, NET
Inventories, net, consist of:
(In thousands)
September 30, 2012
 
March 31, 2012
Hardgoods
$
317,046

 
$
307,242

Gases
122,217

 
101,196

 
$
439,263

 
$
408,438


(4) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to the assets acquired and liabilities assumed in a business combination. The valuations of assets acquired and liabilities assumed from certain recent acquisitions are based on preliminary estimates of fair value and are subject to revision as the Company finalizes appraisals and other analyses. Changes in the carrying amount of goodwill by business segment for the six months ended September 30, 2012 were as follows:
(In thousands)
Distribution Business Segment
 
All Other
Operations
Business
Segment
 
Total
Balance at March 31, 2012
$
969,394

 
$
194,409

 
$
1,163,803

Acquisitions (a)
1,963

 
2,432

 
4,395

Other adjustments, including divestitures and foreign currency translation
(1,894
)
 
19

 
(1,875
)
Balance at September 30, 2012
$
969,463

 
$
196,860

 
$
1,166,323

____________________
(a) 
Includes acquisitions completed during the current year and adjustments made to prior year acquisitions.
Other Intangible Assets
Other intangible assets by major class are as follows:

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Table of Contents
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



 
September 30, 2012
 
March 31, 2012
(In thousands)
Weighted Average Amortization Period (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Weighted Average Amortization Period (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer relationships
15
 
$
268,795

 
$
(82,238
)
 
$
186,557

 
15
 
$
270,096

 
$
(74,253
)
 
$
195,843

Non-competition agreements
8
 
40,170

 
(22,430
)
 
17,740

 
8
 
38,378

 
(20,427
)
 
17,951

Other
 
 
1,418

 
(1,202
)
 
216

 
 
 
1,240

 
(830
)
 
410

 
 
 
$
310,383

 
$
(105,870
)
 
$
204,513

 
 
 
$
309,714

 
$
(95,510
)
 
$
214,204

Other intangible assets primarily consist of customer relationships, which are amortized over the estimated benefit periods which range from seven to 17 years, and non-competition agreements, which are amortized over the terms of the agreements. The determination of the estimated benefit periods associated with customer relationships is based on an analysis of historical customer sales attrition information and other customer-related factors at the date of acquisition. There are no expected residual values related to these intangible assets. The Company evaluates the estimated benefit periods and recoverability of its intangible assets when facts and circumstances indicate that the lives may not be appropriate and/or the carrying values of the assets may not be recoverable. If the carrying value is not recoverable, impairment is measured as the amount by which the carrying value exceeds its estimated fair value. Fair value is generally estimated based on appraised value or other techniques. Estimated future amortization expense by fiscal year is as follows: remainder of fiscal 2013 - $12.4 million; 2014 - $23.2 million; 2015 - $21.6 million; 2016 - $20.1 million; 2017 - $18.2 million; and $109.0 million thereafter.
Impairment Evaluation
In June 2012, the Company re-evaluated the economic viability of a small hospital piping construction business associated with a reporting unit in the Company’s All Other Operations business segment. In accordance with relevant accounting guidance, if events or circumstances exist indicating that it is more likely than not that goodwill may be impaired, the Company is required to perform an interim assessment of the carrying value of goodwill. However, prior to performing the test for goodwill impairment, the Company is required to perform an assessment of the recoverability of the long-lived assets (including amortizing intangible assets) of the business. Long-lived assets are not considered recoverable when the carrying amount of the long-lived asset or asset group exceeds the undiscounted expected future cash flows. If long-lived assets are not recoverable, an impairment loss is recognized to the extent that the carrying amount exceeds fair value.
As a result of the impairment analysis performed on the long-lived assets at this reporting unit, the Company recorded a charge of $1.7 million related to certain of the intangible assets associated with this business during the three months ended June 30, 2012. The charge was reflected in the “Restructuring and other special charges” line item of the Company’s Consolidated Statement of Earnings and was not allocated to the Company’s business segments (see Note 13).
Subsequent to the intangible asset write-down, the Company performed an assessment of the carrying value of goodwill associated with the reporting unit. The assessment did not indicate that the reporting unit’s goodwill was potentially impaired. However, the fair value of the reporting unit was not substantially in excess of its carrying amount, consistent with the Company’s most recent annual goodwill impairment test. The Company will continue to monitor this business and consider additional interim analyses of goodwill as appropriate; however, the amount of goodwill associated with this reporting unit is not material to the Company’s consolidated financial statements. The Company performs its annual impairment assessment of the carrying value of goodwill associated with each of its reporting units as of October 31 of each year.

(5) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include:

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Table of Contents
AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



(In thousands)
September 30, 2012
 
March 31, 2012
Accrued payroll and employee benefits
$
79,752

 
$
99,474

Business insurance reserves (a)
53,510

 
51,435

Taxes other than income taxes
23,906

 
20,273

Cash overdraft
76,349

 
72,445

Deferred rental revenue
31,694

 
29,720

Other accrued expenses and current liabilities
97,023

 
82,997

 
$
362,234

 
$
356,344

____________________
(a) 
With respect to the business insurance reserves above, the Company had corresponding insurance receivables of $13.9 million at September 30, 2012 and $13.8 million at March 31, 2012, which are included within the “Prepaid expenses and other current assets” line item on the Company’s Consolidated Balance Sheets. The insurance receivables represent the balance of probable claim losses in excess of the Company’s deductible for which the Company is fully insured.


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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)




(6) INDEBTEDNESS
Total debt consists of:
(In thousands)
September 30, 2012
 
March 31, 2012
Short-term
 
 
 
Money market loans
$

 
$

Commercial paper
329,427

 
388,452

Short-term debt
$
329,427

 
$
388,452

 
 
 
 
Long-term
 
 
 
Trade receivables securitization
$
295,000

 
$
295,000

Revolving credit borrowings - U.S.

 

Revolving credit borrowings - Multi-currency
36,471

 
43,472

Revolving credit borrowings - France
6,493

 
6,338

Senior notes, net
1,204,231

 
1,205,881

Senior subordinated notes
215,446

 
215,446

Other long-term debt
3,441

 
6,150

Total long-term debt
1,761,082

 
1,772,287

Less current portion of long-term debt
(8,567
)
 
(10,385
)
Long-term debt, excluding current portion
$
1,752,515

 
$
1,761,902

 
 
 
 
Total debt
$
2,090,509

 
$
2,160,739

Money Market Loans
The Company has an agreement with a financial institution to provide access to additional short-term advances not to exceed $35 million. The agreement expires on January 2, 2013, but may be extended subject to renewal provisions contained in the agreement. The advances may be for one to six months with rates at a fixed spread over the corresponding London Interbank Offering Rate (“LIBOR”). At September 30, 2012, there were no advances outstanding under the agreement.
The Company also has an agreement with another financial institution which provides access to short-term advances not to exceed $35 million that expires on July 31, 2013, 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 September 30, 2012, there were no advances outstanding under the agreement.
Commercial Paper
The Company participates in a $750 million commercial paper program supported by its $750 million revolving credit facility (see below). This program allows the Company to obtain favorable short-term borrowing rates with maturities that may vary, but will generally not exceed 90 days from the date of issue. The Company has used proceeds from the commercial paper program to pay down amounts outstanding under its revolving credit facility and for general corporate purposes. At September 30, 2012, $329 million was outstanding under the commercial paper program and the average effective interest rate on these borrowings was 0.57%.
Trade Receivables Securitization
The Company participates in a securitization agreement with three commercial banks to which it sells qualifying trade receivables on a revolving basis (the “Securitization Agreement”). The Company’s sale of qualified trade receivables is accounted for as a secured borrowing under which qualified trade receivables collateralize amounts borrowed from the

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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



commercial banks. Trade receivables that collateralize the Securitization Agreement are held in a bankruptcy-remote special purpose entity, which is consolidated for financial reporting purposes and represents the Company’s only variable interest entity. Qualified trade receivables in the amount of the outstanding borrowing under the Securitization Agreement are not available to the general creditors of the Company. The maximum amount of the Securitization Agreement is $295 million and it bears interest at approximately LIBOR plus 70 basis points. At September 30, 2012, the amount of outstanding borrowing under the Securitization Agreement was $295 million, and it was classified as long-term debt on the Consolidated Balance Sheet. Amounts borrowed under the Securitization Agreement could fluctuate monthly based on the Company’s funding requirements and the level of qualified trade receivables available to collateralize the Securitization Agreement. The Securitization Agreement expires in December 2013 and contains customary events of termination, including standard cross-default provisions with respect to outstanding debt.
Senior Credit Facility
The Company participates in a $750 million Amended and Restated Credit Facility (the “Credit Facility”). The Credit Facility consists of a $650 million U.S. dollar revolving credit line and a $100 million (U.S. dollar equivalent) multi-currency revolving credit line. The maturity date of the Credit Facility is July 19, 2016. Under circumstances described in the Credit Facility, the revolving credit line may be increased by an additional $325 million, provided that the multi-currency revolving credit line may not be increased by more than an additional $50 million.
As of September 30, 2012, the Company had $36 million of borrowings under the Credit Facility, all of which were under the multi-currency revolver. There were no borrowings under the U.S. dollar revolver at September 30, 2012. The Company also had outstanding U.S. letters of credit of $44 million issued under the Credit Facility. U.S. dollar revolver borrowings bear interest at LIBOR plus 125 basis points. The multi-currency revolver bears interest based on a rate of 125 basis points over the Euro currency rate applicable to each foreign currency borrowing. As of September 30, 2012, the average effective interest rate on the multi-currency revolver was 1.67%. In addition to the borrowing spread of 125 basis points for U.S. dollar and multi-currency revolver borrowings, the Company pays a commitment (or unused) fee on the undrawn portion of the Credit Facility equal to 20 basis points per annum.
At September 30, 2012, the financial covenant of the Credit Facility did not restrict the Company’s ability to borrow on the unused portion of the Credit Facility. The Credit Facility contains customary events of default, including, without limitation, failure to make payments, a cross-default to certain other debt, breaches of covenants, breaches of representations and warranties, certain monetary judgments and bankruptcy and ERISA events. In the event of default, repayment of borrowings under the Credit Facility may be accelerated. As of September 30, 2012, $340 million remained available under the Company’s Credit Facility, after giving effect to the borrowings under the commercial paper program backstopped by the Credit Facility, the outstanding U.S. letters of credit and the borrowings under the multi-currency revolver.
The Company also maintains a committed revolving line of credit of up to €8.0 million (U.S. $10.3 million) to fund its operations in France. These revolving credit borrowings are outside of the Company’s Credit Facility. At September 30, 2012, these revolving credit borrowings were €5.1 million (U.S. $6.5 million). The variable interest rates on the French revolving credit borrowings are based on the Euro currency rate plus 125 basis points. As of September 30, 2012, the effective interest rate on the French revolving credit borrowings was 1.32%. This line of credit matures on December 31, 2012.
Senior Notes
At September 30, 2012, the Company had $300 million outstanding of 2.85% senior notes maturing on October 1, 2013 (the “2013 Notes”). The 2013 Notes were issued at a discount with a yield of 2.871%. Interest on the 2013 Notes is payable semi-annually on April 1 and October 1 of each year.
At September 30, 2012, the Company had $400 million outstanding of 4.5% senior notes maturing on September 15, 2014 (the “2014 Notes”). The 2014 Notes were issued at a discount with a yield of 4.527%. Interest on the 2014 Notes is payable semi-annually on March 15 and September 15 of each year.
At September 30, 2012, the Company had $250 million outstanding of 3.25% senior notes maturing on October 1, 2015 (the “2015 Notes”). The 2015 Notes were issued at a discount with a yield of 3.283%. Interest on the 2015 Notes is payable semi-annually on April 1 and October 1 of each year.
At September 30, 2012, the Company had $250 million outstanding of 2.95% senior notes maturing on June 15, 2016 (the “2016 Notes”). The 2016 Notes were issued at a discount with a yield of 2.980%. Interest on the 2016 Notes is payable

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



semi-annually on June 15 and December 15 of each year.
The 2013, 2014, 2015 and 2016 Notes (collectively, the “Senior Notes”) contain covenants that could restrict the incurrence of liens and limit sale and leaseback transactions. Additionally, the Company has the option to redeem the Senior Notes prior to their maturity, in whole or in part, at 100% of the principal plus any accrued but unpaid interest and applicable make-whole payments.
Senior Subordinated Notes
At September 30, 2012, the Company had $215 million outstanding of 7.125% senior subordinated notes maturing on October 1, 2018 (the “2018 Notes”). Interest on the 2018 Notes is payable semi-annually on April 1 and October 1 of each year. The 2018 Notes have a redemption provision which permits the Company, at its option, to call the 2018 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.
Other Long-term Debt
The Company’s other long-term debt primarily consists of vendor financing of rental welders, capitalized lease obligations and notes issued to sellers of businesses acquired, which are repayable in periodic installments. At September 30, 2012, other long-term debt totaled $3.4 million with an average interest rate of approximately 6% and an average maturity of approximately one year.
Aggregate Long-term Debt Maturities
The aggregate maturities of long-term debt at September 30, 2012 are as follows:
 
(In thousands)
Debt Maturities  (a)
September 30, 2013
$
8,567

March 31, 2014
595,371

March 31, 2015
400,547

March 31, 2016
250,261

March 31, 2017
286,653

Thereafter
215,452

 
$
1,756,851

____________________
(a) 
Outstanding borrowings under the Securitization Agreement at September 30, 2012 are reflected as maturing at the agreement’s expiration in December 2013.

The Senior Notes are reflected in the debt maturity schedule at their maturity values rather than their carrying values, which are net of aggregate discounts of $0.7 million at September 30, 2012. The 2013 Notes also include additional carrying value of $5.0 million at September 30, 2012 related to the Company’s fair value hedges — see Note 7 for additional disclosure.

(7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 and treasury rate lock agreements used to fix the interest rate related to forecasted debt issuances. The Company monitors its positions and credit ratings of its counterparties and does not anticipate non-performance by the counterparties. Interest rate swap and treasury rate lock agreements are not entered into for trading purposes. The Company recognizes derivative instruments as either assets or liabilities at fair value on the Consolidated Balance Sheets. At September 30, 2012, the Company was party to a total of five interest rate swap agreements with an aggregate notional amount of $300 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



Cash Flow Hedges
In anticipation of the issuance of the 2015 Notes, the Company entered into a treasury rate lock agreement in July 2010 with a notional amount of $100 million that matured in September 2010. The treasury rate lock agreement was designated as a cash flow hedge of the semi-annual interest payments associated with the forecasted issuance of the 2015 Notes. When the treasury rate lock agreement matured, the Company realized a loss of $2.6 million ($1.6 million after tax) which was reported as a component within Accumulated Other Comprehensive Income (“AOCI”) and is being reclassified into earnings over the term of the 2015 Notes. For the six months ended September 30, 2012 and 2011, $259 thousand of the loss on the treasury rate lock was reclassified to interest expense. At September 30, 2012, the estimated loss recorded in AOCI on the treasury rate lock agreement that is expected to be reclassified into earnings within the next twelve months is $517 thousand ($326 thousand after tax).
Fair Value Hedges
The 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.
At September 30, 2012, the Company had five variable interest rate swaps outstanding with a notional amount of $300 million. These variable interest rates swaps effectively convert the Company’s $300 million of fixed rate 2013 Notes to variable rate debt. At September 30, 2012, these swap agreements required the Company to make variable interest payments based on a weighted average forward rate of 1.21% 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 2013 Notes in October 2013. During the six months ended September 30, 2012, the fair value of the variable interest rate swaps decreased by $1.8 million to an asset of $4.9 million and was recorded in other non-current assets. The corresponding decrease in the carrying value of the 2013 Notes caused by the hedged risk was $1.8 million and was recorded in long-term debt. The Company records the gain or loss on the hedged item (i.e., the 2013 Notes) and the gain or loss on the variable interest rate swaps in interest expense. The net gain or loss recorded in earnings as a result of hedge ineffectiveness related to the designated fair value hedges was immaterial for the three and six months ended September 30, 2012 and 2011.
Tabular Disclosure
The following tables reflect the fair values of derivative instruments on the Company’s Consolidated Balance Sheets as well as the effect of derivative instruments on the Company’s earnings and stockholders’ equity. 
Fair Value of Derivatives Designated as Hedging Instruments

 
September 30, 2012
 
March 31, 2012
(In thousands)
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Interest rate swaps:
 
 
 
 
 
 
 
Variable interest rate swaps
Other non-current
assets
 
$
4,930

 
Other non-current
assets
 
$
6,734

Effect of Derivative Instruments on Earnings and Stockholders’ Equity

 
Amount of Gain Recognized in OCI on
Derivatives
(In thousands)
Six Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships
2012
 
2011
Interest rate contracts
$
259

 
$
259

Tax effect
(96
)
 
(96
)
Net effect
$
163

 
$
163



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



 

 
Amount of Loss Reclassified from AOCI
into Pre-tax Income (a)
(In thousands)
 
Six Months Ended September 30,
Location of Loss Reclassified from AOCI into Pre-tax Income for Derivatives in Cash Flow Hedging Relationships
 
2012
 
2011
Interest expense, net
 
$
259

 
$
259

____________________
(a) The tax effects of the reclassification adjustments were $96 thousand for the six months ended September 30, 2012 and 2011.
 
Location of Gain (Loss)
Recognized in Pre-tax
Income
 
Amount of Gain (Loss) Recognized in Pre-Tax Income
(In thousands)
 
Six Months Ended September 30,
Derivatives in Fair Value Hedging Relationships
2012
 
2011
Change in fair value of variable interest rate swaps
Interest expense, net
 
$
(1,804
)
 
$
3,202

Change in carrying value of 2013 Notes
Interest expense, net
 
1,802

 
(3,237
)
Net effect
Interest expense, net
 
$
(2
)
 
$
(35
)

(8) FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are classified based upon the level of judgment associated with the inputs used to measure their fair value. The hierarchical levels related to the subjectivity of the valuation inputs are defined as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities at the measurement date.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, through corroboration with observable market data at the measurement date.
Level 3 inputs are unobservable inputs that reflect management’s best estimate of the assumptions (including assumptions about risk) that market participants would use in pricing the asset or liability at the measurement date.
The carrying value of cash, trade receivables, other current receivables, trade payables and other current liabilities (e.g., deposit liabilities, cash overdrafts, etc.) approximates fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis at September 30, 2012 and March 31, 2012 are categorized in the tables below based on the lowest level of significant input to the valuation. During the periods presented, there were no transfers between fair value hierarchical levels.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



 
Balance at
 
Quoted prices in
active markets
Level 1
 
Significant other
observable inputs
Level 2
 
Significant
unobservable inputs
Level 3
(In thousands)
September 30, 2012
 
 
 
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
$
12,372

 
$
12,372

 
$

 
$

Derivative assets - variable interest rate swap agreements
4,930

 

 
4,930

 

Total assets measured at fair value on a recurring basis
$
17,302

 
$
12,372

 
$
4,930

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities
$
12,372

 
$
12,372

 
$

 
$

Contingent consideration liability
2,494

 

 

 
2,494

Total liabilities measured at fair value on a recurring basis
$
14,866

 
$
12,372

 
$

 
$
2,494


 
Balance at
 
Quoted prices in
active markets
Level 1
 
Significant other
observable inputs
Level 2
 
Significant
unobservable inputs
Level 3
(In thousands)
March 31, 2012
 
 
 
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
$
11,126

 
$
11,126

 
$

 
$

Derivative assets - variable interest rate swap agreements
6,734

 

 
6,734

 

Total assets measured at fair value on a recurring basis
$
17,860

 
$
11,126

 
$
6,734

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities
$
11,126

 
$
11,126

 
$

 
$

Contingent consideration liability
2,512

 

 

 
2,512

Total liabilities measured at fair value on a recurring basis
$
13,638

 
$
11,126

 
$

 
$
2,512


The following is a general description of the valuation methodologies used for financial assets and liabilities measured at fair value:
Deferred compensation plan assets and corresponding liabilities — The Company’s deferred compensation plan assets consist of open-ended mutual funds (Level 1) and are included within other non-current assets on the Consolidated Balance Sheets. The Company’s deferred compensation plan liabilities are equal to the plan’s assets and are included within other non-current liabilities on the Consolidated Balance Sheets. Gains or losses on the deferred compensation plan assets are recognized as other income (expense), net, while gains or losses on the deferred compensation plan liabilities are recognized as compensation expense in the Consolidated Statements of Earnings.
Derivative assets — interest rate swap agreements — The Company’s variable interest rate swap agreements are with highly rated counterparties, are designated as fair value hedges and effectively convert the Company’s fixed rate 2013 Notes to variable rate debt. The swap agreements are valued using an income approach that relies on observable market inputs such as interest rate yield curves and treasury spreads (Level 2). Expected future cash flows are converted to a present value amount based upon market expectations of the changes in these interest rate yield curves. The fair values of the Company’s interest rate swap agreements are included within other non-current assets on the Consolidated Balance Sheets. See Note 7 for additional derivatives disclosures.
Contingent consideration liability — As part of the consideration for a fiscal 2011 acquisition, the Company has an arrangement in place whereby future consideration in the form of cash may be transferred to the seller contingent upon the achievement of certain earnings targets. The fair value of the contingent consideration arrangement was estimated using the income approach with inputs that are not observable in the market. Key assumptions include a discount rate commensurate with the level of risk of achievement, time horizon and other risk factors, and probability adjusted earnings growth, all of which the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



Company believes are appropriate and representative of market participant assumptions. Of the total liability for the contingent consideration arrangement at September 30, 2012, $1.7 million is included within other non-current liabilities while the remainder is included within accrued expenses and other current liabilities on the Consolidated Balance Sheet. The impact on the Company's earnings as a result of the contingent consideration arrangement for the three and six months ended September 30, 2012 was immaterial.
Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3) for the six months ended September 30, 2012 were as follows (in thousands):

Balance at March 31, 2012
$
2,512

Contingent consideration liability recorded

Settlements made during the period
(140
)
Adjustments to fair value measurement
122

Balance at September 30, 2012
$
2,494

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition. Assets measured at fair value on a nonrecurring basis during the six months ended September 30, 2012 and 2011 are categorized in the table below based on the lowest level of significant input to the valuation, and are based on amounts as measured at the time of adjustment. There were no liabilities measured at fair value on a nonrecurring basis during the six months ended September 30, 2012 or 2011.

 
 
Quoted prices in
active markets
Level 1
 
Significant other
observable inputs
Level 2
 
Significant
unobservable inputs
Level 3
 
Total losses (six months ended September 30, 2012)
(In thousands)
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Other intangible assets
 
$

 
$

 
$
535

 
$
1,729

Total assets measured at fair value on a nonrecurring basis
 
$

 
$

 
$
535

 
$
1,729


 
 
Quoted prices in
active markets
Level 1
 
Significant other
observable inputs
Level 2
 
Significant
unobservable inputs
Level 3
 
Total losses (six months ended September 30, 2011)
(In thousands)
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Long-lived assets held and used
 
$

 
$

 
$
8,765

 
$
2,500

Total assets measured at fair value on a nonrecurring basis
 
$

 
$

 
$
8,765

 
$
2,500

In June 2012, the Company re-evaluated the economic viability of a small hospital piping construction business. As a result of an impairment analysis performed on the assets at this reporting unit, the Company recorded a charge of $1.7 million related to certain of the intangible assets associated with this business for the six months ended September 30, 2012, which was reflected in the “Restructuring and other special charges” line item of the Company’s Consolidated Statement of Earnings for the six months ended September 30, 2012. The Company used a variation of the income approach, namely the excess earnings method, to estimate the fair value of the intangible assets associated with the business. Under this approach, an intangible asset’s fair value is estimated to be the present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. Key inputs in this model include the cash flow forecast, discount rate, contributory asset charges and tax amortization benefits. As of the evaluation date, the remeasured other intangible assets related to this reporting unit totaled $0.5 million.
In September 2011, the Company performed an evaluation of the recoverability of the fixed assets related to one of its liquid carbon dioxide (“CO2”) plants. This evaluation was based upon the receipt of notice that a supplier’s hydrogen plant, which generates carbon dioxide as a by-product that serves as the feedstock for the Company's co-located liquid carbon dioxide plant, will cease operations in calendar year 2013. As a result of the analysis, the Company remeasured the fixed assets of its

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



liquid carbon dioxide plant and recognized an impairment charge of $2.5 million which was reflected in the “Restructuring and other special charges” line item of the Company’s Consolidated Statement of Earnings for the three and six months ended September 30, 2011. The remeasured plant fixed assets totaled $8.8 million at the date of evaluation and were included within plant and equipment on the Company’s Consolidated Balance Sheet. The Company used an income approach to estimate the fair value of the plant assets based on significant unobservable inputs (Level 3). Factors such as expected future revenues and margins, the likelihood of asset redeployment and the length of the remaining operating term were considered in determining the future cash flows of the plant assets.
The assets and asset groups described above will not be remeasured at fair value on a recurring basis; however, they are still subject to fair value measurements to test for recoverability of the carrying amounts should future conditions warrant an evaluation.
Fair Value of Debt
The carrying value of debt, which is reported on the Company’s Consolidated Balance Sheets, generally reflects the cash proceeds received upon its issuance, net of subsequent repayments, plus the impact of the Company’s fair value hedges. The fair value of the Company’s variable interest rate revolving credit borrowings disclosed in the table below was estimated based on observable forward yield curves and credit spreads management believes a market participant would assume for these facilities under market conditions as of the balance sheet date (Level 2). The fair values of the fixed rate notes disclosed below were determined based on quoted prices from the broker/dealer market, observable market inputs for similarly termed treasury notes adjusted for the Company’s credit spread and inputs management believes a market participant would use in determining imputed interest for obligations without a stated interest rate (Level 2). The fair values of the securitized receivables and the commercial paper approximate their carrying values.

 
Carrying Value at
 
Fair Value at
 
Carrying Value at
 
Fair Value at
(In thousands)
September 30, 2012
 
September 30, 2012
 
March 31, 2012
 
March 31, 2012
Commercial paper
$
329,427

 
$
329,427

 
$
388,452

 
$
388,452

Trade receivables securitization
295,000

 
295,000

 
295,000

 
295,000

Revolving credit borrowings
42,964

 
42,964

 
49,810

 
49,810

2013 Notes
304,906

 
311,357

 
306,677

 
314,881

2014 Notes
399,808

 
428,190

 
399,760

 
429,530

2015 Notes
249,774

 
265,449

 
249,736

 
260,325

2016 Notes
249,743

 
261,631

 
249,708

 
257,821

2018 Notes
215,446

 
232,412

 
215,446

 
234,836

Other long-term debt
3,441

 
3,607

 
6,150

 
6,410

Total debt
$
2,090,509

 
$
2,170,037

 
$
2,160,739

 
$
2,237,065


(9) STOCKHOLDERS' EQUITY
Changes in stockholders’ equity were as follows:
(In thousands of shares)
Shares of
Common
Stock $0.01
Par Value
 
Shares of
Treasury
Stock
Balance at March 31, 2012
86,874

 
10,207

Common stock issuance (a)
140

 
 
     Reissuance of treasury stock for stock option exercises
 
 
(359
)
Balance at September 30, 2012
87,014

 
9,848


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



(In thousands)
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Treasury
Stock
 
Total
Stockholders’
Equity
Balance at March 31, 2012
$
869

 
$
649,551

 
$
1,701,478

 
$
5,386

 
$
(607,026
)
 
$
1,750,258

Net earnings
 
 
 
 
171,818

 
 
 
 
 
171,818

Other comprehensive income
 
 
 
 
 
 
659

 
 
 
659

Common stock issuances and reissuances from treasury stock - employee benefit plans (b) 
1

 
8,511

 
(7,498
)
 
 
 
21,358

 
22,372

Tax benefit from stock option exercises
 
 
4,927

 
 
 
 
 
 
 
4,927

Dividends paid on common stock ($0.40 per share)
 
 
 
 
(61,634
)
 
 
 
 
 
(61,634
)
Stock-based compensation (c)
 
 
18,192

 
 
 
 
 
 
 
18,192

Balance at September 30, 2012
$
870

 
$
681,181

 
$
1,804,164

 
$
6,045

 
$
(585,668
)
 
$
1,906,592

___________________
(a) 
Issuance of common stock for purchases through the Employee Stock Purchase Plan.
(b) 
Issuance of common stock for purchases through the Employee Stock Purchase Plan and reissuance of treasury stock for stock option exercises.
(c) 
The Company recognized compensation expense with a corresponding amount recorded to capital in excess of par value.
The table below presents the gross and net changes in the balances within each component of AOCI for the six months ended September 30, 2012.
(In thousands)
Foreign Currency
Translation
Adjustments
 
Treasury Rate
Lock Agreement
 
Total Accumulated
Other Comprehensive
Income (Loss)
Balance at March 31, 2012
$
6,527

 
$
(1,141
)
 
$
5,386

Foreign currency translation adjustments
496

 
 
 
496

Derivative instruments:
 
 
 
 
 
Reclassification of hedging loss included in net earnings
 
 
259

 
259

Tax effect of other comprehensive income items
 
 
(96
)
 
(96
)
Net change after tax of other comprehensive income items
496

 
163

 
659

Balance at September 30, 2012
$
7,023

 
$
(978
)
 
$
6,045



(10) STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation expense for its Equity Incentive Plan and Employee Stock Purchase Plan. The following table summarizes stock-based compensation expense recognized by the Company for the three and six months ended September 30, 2012 and 2011.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
(In thousands)
2012
 
2011
 
2012
 
2011
Stock-based compensation expense related to:
 
 
 
 
 
 
 
Equity Incentive Plan
$
4,731

 
$
4,651

 
$
16,155

 
$
15,139

Employee Stock Purchase Plan - options to purchase stock
712

 
842

 
2,037

 
1,931

 
5,443

 
5,493

 
18,192

 
17,070

Tax benefit
(1,861
)
 
(1,794
)
 
(6,382
)
 
(5,959
)
Stock-based compensation expense, net of tax
$
3,582

 
$
3,699

 
$
11,810

 
$
11,111

Fair Value
The Company utilizes the Black-Scholes option pricing model to determine the fair value of stock options. The weighted-average grant date fair value of stock options granted during the six months ended September 30, 2012, and 2011 was $29.40 and $22.78, respectively.
Summary of Stock Option Activity
The following table summarizes the stock option activity during the six months ended September 30, 2012:

(In thousands, except per share amounts)
Number of Stock Options
 
Weighted-Average
Exercise Price
Outstanding at March 31, 2012
6,584

 
$
47.08

Granted
966

 
$
91.52

Exercised
(361
)
 
$
38.82

Forfeited
(43
)
 
$
73.15

Outstanding at September 30, 2012
7,146

 
$
53.34

Vested or expected to vest at September 30, 2012
7,121

 
$
53.24

Exercisable at September 30, 2012
4,742

 
$
43.89

On August 14, 2012, the Company's stockholders approved the Second Amended and Restated 2006 Equity Incentive Plan, which included, among other things, an increase in the maximum number of shares available for issuance under the plan from 5.8 million to 9.8 million. A total of 4.9 million shares of common stock were available for grant under the Amended and Restated 2006 Equity Incentive Plan as of September 30, 2012.
As of September 30, 2012, $49.2 million of unrecognized non-cash compensation expense related to non-vested stock options is expected to be recognized over a weighted-average vesting period of 1.9 years.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (the “ESPP”) encourages and assists employees in acquiring an equity interest in the Company. As of September 30, 2012, the ESPP had 1.5 million shares of Company common stock available for issuance.
Compensation expense is measured based on the fair value of the employees’ option to purchase shares of common stock at the grant date and is recognized over the future periods in which the related employee service is rendered. The fair value per share of employee options to purchase shares under the ESPP was $16.72 and $13.16 for the six months ended September 30, 2012 and 2011, respectively. The fair value of the employees’ option to purchase shares of common stock was estimated using the Black-Scholes model.

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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



ESPP - Purchase Option Activity
The following table summarizes the activity of the ESPP during the six months ended September 30, 2012:

(In thousands, except per share amounts)
Number of Purchase Options
 
Weighted-Average
Exercise Price
Outstanding at March 31, 2012
79
 
$
51.61

Granted
243
 
$
70.75

Exercised
(140)
 
$
60.88

Outstanding at September 30, 2012
182
 
$
70.00


(11) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net earnings by the weighted average number of shares of the Company’s common stock outstanding during the period. Outstanding shares consist of issued shares less treasury stock. Diluted earnings per share is calculated by dividing net earnings by the weighted average common shares outstanding adjusted for the dilutive effect of common stock equivalents related to stock options and the Company’s ESPP.
Outstanding stock options that are anti-dilutive are excluded from the Company’s diluted earnings per share computation. There were approximately 1.9 million and 2.0 million shares covered by outstanding stock options that were not dilutive for the three months ended September 30, 2012 and 2011, respectively. There were approximately 1.4 million and 1.7 million shares covered by outstanding stock options that were not dilutive for the six months ended September 30, 2012 and 2011, respectively.
The table below presents the computation of basic and diluted weighted average common shares outstanding for the three and six months ended September 30, 2012 and 2011:

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
(In thousands)
2012
 
2011
 
2012
 
2011
Weighted average common shares outstanding:
 
 
 
 
 
Basic
77,078

 
75,630

 
76,973

 
76,980

Incremental shares from assumed exercises of stock options and options under the ESPP
1,814

 
1,632

 
1,887

 
1,692

Diluted shares outstanding
78,892

 
77,262

 
78,860

 
78,672


(12) COMMITMENTS AND CONTINGENCIES
Litigation
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. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse effect upon the Company’s consolidated financial condition, results of operations or liquidity.

(13) SUMMARY BY BUSINESS SEGMENT
Business segment information for the Company’s Distribution and All Other Operations business segments is presented below for the three and six months ended September 30, 2012 and 2011. Business segment operating results for the prior periods were adjusted for the retrospective application of the LIFO-to-average-cost change in accounting principle implemented during the year ended March 31, 2012. Although corporate operating expenses are generally allocated to each business segment based on sales dollars, the Company reports expenses (excluding depreciation) related to the implementation of its SAP system and the Company’s withdrawal from various multi-employer pension plans (“MEPPs”) under selling, distribution and administrative expenses in the “Eliminations and Other” column below. Additionally, the Company’s

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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



restructuring and other special charges and the legal, professional and other costs (benefits) incurred as a result of the Air Products & Chemicals, Inc. (“Air Products”) unsolicited takeover attempt are not allocated to the Company’s business segments. These costs (benefits) are also reflected in the “Eliminations and Other” column below. Corporate assets have been allocated to the Distribution business segment, intercompany sales are recorded on the same basis as sales to third parties, and intercompany transactions are eliminated in consolidation. Management utilizes more than one measurement and multiple views of data to measure segment performance and to allocate resources to the segments. However, the predominant measurements are consistent with the Company’s consolidated financial statements and accordingly, are reported on the same basis below.
 
Three Months Ended
 
Three Months Ended
 
September 30, 2012
 
September 30, 2011
(In thousands)
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
 
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
Gas and rent
$
632,598

 
$
154,094

 
$
(9,129
)
 
$
777,563

 
$
611,726

 
$
143,557

 
$
(10,503
)
 
$
744,780

Hardgoods
450,293

 
1,756

 
(2
)
 
452,047

 
440,730

 
1,577

 
(4
)
 
442,303

Total net sales (a)
1,082,891

 
155,850

 
(9,131
)
 
1,229,610

 
1,052,456

 
145,134

 
(10,507
)
 
1,187,083

Cost of products sold (excluding depreciation) (a)
478,952

 
82,492

 
(9,131
)
 
552,313

 
484,169

 
78,672

 
(10,507
)
 
552,334

Selling, distribution and administrative expenses
405,174

 
44,509

 
8,618

 
458,301

 
376,142

 
41,218

 
6,077

 
423,437

Restructuring and other special charges

 

 
2,443

 
2,443

 

 

 
2,500

 
2,500

Depreciation
59,291

 
5,358

 

 
64,649

 
55,597

 
4,785

 

 
60,382

Amortization
5,420

 
1,298

 

 
6,718

 
4,989

 
1,266

 

 
6,255

Operating income
$
134,054

 
$
22,193

 
$
(11,061
)
 
$
145,186

 
$
131,559

 
$
19,193

 
$
(8,577
)
 
$
142,175

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
Six Months Ended
 
September 30, 2012
 
September 30, 2011
(In thousands)
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
 
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
Gas and rent
$
1,271,208

 
$
306,219

 
$
(18,308
)
 
$
1,559,119

 
$
1,216,297

 
$
285,145

 
$
(19,625
)
 
$
1,481,817

Hardgoods
924,284

 
3,466

 
(3
)
 
927,747

 
866,619

 
2,955

 
(8
)
 
869,566

Total net sales (a)
2,195,492

 
309,685

 
(18,311
)
 
2,486,866

 
2,082,916

 
288,100

 
(19,633
)
 
2,351,383

Cost of products sold (excluding depreciation) (a)
979,565

 
159,797

 
(18,311
)
 
1,121,051

 
945,572

 
156,934

 
(19,633
)
 
1,082,873

Selling, distribution and administrative expenses
813,993

 
85,883

 
18,556

 
918,432

 
751,369

 
80,256

 
15,258

 
846,883

Restructuring and other special charges

 

 
8,155

 
8,155

 

 

 
15,830

 
15,830

Costs (benefits) related to unsolicited takeover attempt

 

 

 

 

 

 
(6,700
)
 
(6,700
)
Depreciation
118,387

 
10,629

 

 
129,016

 
111,331

 
9,318

 

 
120,649

Amortization
10,787

 
2,549

 

 
13,336

 
9,904

 
2,500

 

 
12,404

Operating income
$
272,760

 
$
50,827

 
$
(26,711
)
 
$
296,876

 
$
264,740

 
$
39,092

 
$
(24,388
)
 
$
279,444


(a) Amounts in the Eliminations and Other column represent the elimination of intercompany sales and associated gross profit on sales from the Company's All Other Operations business segment to its Distribution business segment.


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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



(14) SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid for Interest and Income Taxes
Cash paid for interest and income taxes was as follows:
 
Six Months Ended
 
September 30,
(In thousands)
2012
 
2011
Interest paid
$
28,165

 
$
33,459

Income taxes (net of refunds) (a)
72,173

 
55,928

____________________
(a)
During the six months ended September 30, 2011, the Company applied for and received federal income tax refunds of $9.8 million. The Company did not receive federal income tax refunds during the six months ended September 30, 2012.

(15) RESTRUCTURING AND OTHER SPECIAL CHARGES
The following table presents the components of restructuring and other special charges:
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
(In thousands)
2012
 
2011
 
2012
 
2011
Restructuring costs
$
310

 
$

 
$
798

 
$
13,330

Other related costs
2,133

 

 
5,628

 

Asset impairment charges

 
2,500

 
1,729

 
2,500

Total restructuring and other special charges
$
2,443

 
$
2,500

 
$
8,155

 
$
15,830

Restructuring Costs
In May 2011, the Company announced the alignment of its twelve regional distribution companies into four new divisions, and the consolidation of its regional company accounting and certain administrative functions into four newly created Business Support Centers (“BSCs”). Additionally, the Company initiated a related change in its legal entity structure on January 1, 2012 whereby the majority of Airgas’ distribution businesses have merged or will merge into a single limited liability company (“LLC”) of which the Company is the sole member. Each of the Company’s twelve regional distribution companies operated (prior to conversion to SAP) or operates its own accounting and administrative functions. Enabled by the Company’s conversion to a single information platform across all of its regional companies as part of the SAP implementation, the restructuring will allow Airgas to more effectively utilize its resources across regional company boundaries and to form an operating structure that will help Airgas leverage the full benefits of its new SAP platform.
During the three and six months ended September 30, 2012, the Company recorded $0.3 million and $0.8 million, respectively, in restructuring costs. During the prior year period, the Company recorded $13.3 million in restructuring costs related to severance benefits to be paid out through fiscal 2014, all of which were recorded in the three months ended June 30, 2011.
 
The activity in the accrued liability balances associated with the restructuring plan was as follows for the six months ended September 30, 2012:
(In thousands)
Severance Costs
 
Facility Exit and Other Costs
 
Total
Balance at March 31, 2012
$
13,138

 
$
990

 
$
14,128

Restructuring charges

 
798

 
798

Cash payments and other adjustments
(1,704
)
 
(1,303
)
 
(3,007
)
Balance at September 30, 2012
$
11,434

 
$
485

 
$
11,919

Of the $11.9 million in accrued restructuring costs at September 30, 2012, $10.9 million was included in accrued

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AIRGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)



expenses and other current liabilities and $1.0 million was included in other non-current liabilities on the Company’s Consolidated Balance Sheet. The restructuring costs were not allocated to the Company’s business segments (see Note 13).
Other Related Costs
For the three and six months ended September 30, 2012, the Company also incurred $2.1 million and $5.6 million, respectively, of other costs related to the divisional realignment and LLC restructuring. These costs primarily related to transition staffing for the BSCs, legal costs and other expenses associated with the Company’s organizational and legal entity changes.
The realignment is expected to be completed by the end of fiscal 2013. The Company expects to incur additional restructuring and other related costs, primarily related to transition staffing, legal and relocation costs, of approximately $5 million for the remainder of the fiscal year.
Asset Impairment Charges
The Company recorded special charges of $1.7 million and $2.5 million related to asset impairments during the six months ended September 30, 2012 and 2011, respectively – see Notes 4 and 8 for further information.

(16) UNSOLICITED TAKEOVER ATTEMPT
On February 11, 2010, Air Products and Chemicals, Inc.'s (“Air Products”) initiated an unsolicited tender offer for all of the Company’s outstanding shares of common stock. In connection with this unsolicited tender offer, Air Products filed an action against the Company and members of its Board in the Delaware Court of Chancery. On February 15, 2011, the Delaware Court of Chancery denied in their entirety all requests for relief by Air Products and dismissed with prejudice all claims asserted against the Company and its directors. Air Products promptly terminated its unsolicited tender offer and no appeal of the Court’s decision was filed. In connection with the unsolicited tender offer and related litigation, the Company incurred on a cumulative basis a net $60.0 million of legal and professional fees and other costs. During the three months ended June 30, 2011, the Company recognized benefits of $6.7 million from lower than previously estimated net costs related to the unsolicited takeover attempt.

(17) SUBSEQUENT EVENTS
On October 23, 2012, the Company announced a program to purchase up to $600 million of its outstanding shares of common stock. As of October 22, 2012, the Company had approximately 77.3 million common shares outstanding. Airgas may repurchase shares from time to time for cash in open market transactions or in privately-negotiated transactions in accordance with applicable federal securities laws. The Company will determine the timing and the amount of any repurchases based on its evaluation of market conditions, share price, and other factors. The stock repurchase program has no pre-established closing date and may be suspended or discontinued at any time.





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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 September 30, 2012 (“current quarter”) of $1.23 billion compared to $1.19 billion for the quarter ended September 30, 2011 (“prior year quarter”), an increase of 4%. Total same-store sales increased 3%, with hardgoods up 1% and gas and rent up 4%. Acquisitions, net of a divestiture, contributed sales growth of 1% in the current quarter. The same-store sales growth for the current quarter was driven by pricing increases of 4%, partially offset by volume decreases of 1%. The Company’s same-store sales growth was solid, despite moderating business trends across its diversified customer base during the current quarter and in light of the year-over-year impacts of one less selling day and the impact of a disruption within the helium supply chain (see Supply Constraints section below) during the current quarter. Higher pricing reflects a broad-based price increase on gas and rent and on certain hardgoods effective December 1, 2011 and to a lesser extent the September 1, 2012 price increase on cylinder and bulk tank rental rates. The Company recently announced an additional broad-based price increase on gases and hardgoods effective October 1, 2012. The pricing actions were designed to address rising product, operating and distribution costs as well as support ongoing investments in production and distribution capabilities to support and efficiently meet the growing demands of the Company’s customers while fulfilling the safety and security requirements of its industry.
The consolidated gross profit margin (excluding depreciation) in the current quarter was 55.1%, an increase of 160 basis points from the prior year quarter, reflecting margin expansion on gases and hardgoods and a sales mix shift toward higher-margin gas and rent relative to hardgoods.
The Company’s operating income margin decreased to 11.8%, a 20 basis-point decrease from the prior year quarter. Additionally, the current and prior year quarters’ operating income margins were each burdened by 20 basis points of restructuring and other special charges. The current and prior year quarters also included 90 basis points and 70 basis points of negative impact, respectively, from SAP implementation costs and depreciation expense (see “Enterprise Information System” section below).
Net earnings per diluted share increased to $1.03 in the current quarter versus $1.01 in the prior year quarter. Lower helium sales volumes driven by the inability of suppliers to meet their supply commitments to the Company reduced diluted earnings per share by $0.02 in the current quarter compared to the prior year quarter. Additionally, the current quarter’s diluted earnings per share included $0.02 of incremental SAP costs and a year-over-year negative impact of $0.03 due to one less selling day in the current quarter. Net earnings per diluted share in both the current and prior year quarters also included restructuring and other special charges of $0.02 per diluted share. Restructuring and other special charges in each quarter consisted of the following:
 
Three Months Ended
 
September 30,
Effect on Diluted EPS
2012
 
2011
Restructuring and other related costs
$
(0.02
)
 
$

Impairment charges

 
(0.02
)
Restructuring and other special charges
$
(0.02
)
 
$
(0.02
)
Supply Constraints
The global industrial gas industry continues to work through supply constraints related to helium. Disruption in crude helium production overseas and limited liquefied natural gas demand have been the primary causes of the worldwide helium shortage, aggravated by outages and temporary shutdowns at the Federal Helium Reserve and shutdowns at a major private helium source. To help mitigate the financial impact to Airgas, the Company continues to explore alternative sources of helium and has instituted product allocations and price increases related to helium. However, these supply constraints forced the Company to shed non-contract helium customers and to allocate its limited helium supply to contract customers. During the current quarter, the Company’s helium sales significantly decreased driven by the inability of suppliers to meet their supply commitments to the Company, thereby influencing the Company’s volume of helium sales to its own customers.
Diluted earnings per share were reduced by $0.02 in the current quarter as a result of the helium supply disruption. Sales of helium represented approximately 2% and 3% of the Company’s consolidated net sales in the current and prior year quarters, respectively. The Company expects the global helium supply chain to improve in mid calendar 2013, but anticipates the time

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frame for the Company to regain lost customers and recover from year-over-year headwinds to be longer.
Enterprise Information System
The Company continued its phased, multi-year rollout of its highly-customized SAP enterprise information system during the current quarter. At this stage in the Company’s phased implementation, each of its four BSCs, into which the regional company accounting and administrative functions are being consolidated upon converting to SAP, are firmly in place. Through October 2012, the Company had successfully converted its Safety telesales and hardgoods infrastructure businesses and ten regional distribution companies to the SAP platform. One additional regional distribution company implementation is expected to take place in the third quarter ending December 31, 2012, resulting in eleven of the Company’s twelve regional distribution companies operating on the SAP platform by the end of calendar year 2012. The Company expects that the remaining regional distribution company will be converted in the Company’s fiscal fourth quarter ending March 31, 2013.

With ten out of twelve of its regional distribution companies operating successfully on SAP, the Company believes the implementation risk associated with the remaining business units has been significantly diminished and is beginning to focus more on attaining benefits. As with the implementation of any new enterprise information system, the Company has experienced distractions and disruptions as its associates learn the new system and processes. These have not had a material impact to date on the Company, and the Company will continue to monitor these items carefully going forward. Total implementation costs and depreciation expense related to the SAP system were $0.09 and $0.07 per diluted share for the quarters ended September 30, 2012 and 2011, respectively, and such costs, net of expected benefits, are estimated to be in the range of $0.12 to $0.16 per diluted share for the year ending March 31, 2013. Fiscal 2012 included $0.34 per diluted share of SAP implementation costs and depreciation expense. The Company expects the combination of lower implementation costs and the ramp-up in SAP-related benefits to yield year-over-year earnings accretion of between $0.18 and $0.22 per diluted share in fiscal 2013 above and beyond the Company’s base business performance.
The Company previously quantified the economic benefits expected to be achieved through its implementation of SAP in three key areas: accelerated sales growth through expansion of the telesales platform, price management, and administrative and operating efficiencies. By December 2013, the Company expects these areas alone to have yielded a minimum of $75 million in annual run-rate operating income benefits. Further economic benefits are expected to be identified as the implementation progresses.
New Divisional Alignment and LLC Formation
In May 2011, the Company announced the alignment of its twelve regional distribution companies into four new divisions, and the consolidation of its regional company accounting and certain administrative functions into four newly created BSCs. Additionally, the Company initiated a related change in its legal entity structure on January 1, 2012 whereby the majority of Airgas’ distribution businesses have merged or will merge into a single limited liability company (“LLC”) of which the Company is the sole member. Each of the Company’s twelve regional distribution companies operated (prior to conversion to SAP) or operates its own accounting and administrative functions. Enabled by the Company’s conversion to a single information platform across all of its regional companies as part of the SAP implementation, the restructuring will allow Airgas to more effectively utilize its resources across regional company boundaries and form an operating structure that will help Airgas leverage the full benefits of its new SAP platform.
During the current quarter, the Company recorded restructuring costs of $0.3 million associated with its organization and legal entity changes. Also during the current quarter, the Company incurred $2.1 million of other costs related to the divisional realignment and LLC restructuring. These costs primarily related to transition staffing for the BSCs, legal costs and other expenses associated with the Company’s organizational and legal entity changes. The realignment is expected to be completed by the end of fiscal 2013. The Company expects to incur additional restructuring and other related costs, primarily related to transition staffing, legal and relocation costs, of approximately $5 million for the remainder of the fiscal year.
Stock Repurchase Program
On October 23, 2012, the Company announced a new program to repurchase up to $600 million of its outstanding shares of common stock. The Company may repurchase shares from time to time for cash in open market transactions or in privately-negotiated transactions in accordance with applicable federal securities laws. The Company will determine the timing and the amount of any repurchases based on its evaluation of market conditions, share price and other factors. The stock repurchase program has no pre-established closing date and may be suspended or discontinued at any time. The impact of the October 2012 stock repurchase program has not been included in the Company’s forward-looking guidance.

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Acquisitions and Divestitures
During the six months ended September 30, 2012, the Company purchased eight businesses with aggregate historical annual sales of more than $19 million.
During the three months ended June 30, 2012, the Company divested the assets and operations of five branch locations in western Canada. The Company realized a gain on the sale of $6.8 million ($5.5 million after tax) recorded in “Other income (expense), net” in its Consolidated Statement of Earnings. The operations were included in the Distribution business segment and contributed net sales that were deemed to be immaterial to the Company’s consolidated earnings.

Fiscal 2013 Outlook
The Company expects earnings per diluted share for the quarter ending December 31, 2012 to be in the range of $1.03 to $1.09 and for fiscal 2013 to be in the range of $4.42 to $4.57. The earnings per diluted share range for fiscal 2013 includes an estimated $0.10 per diluted share of restructuring and other special charges ($0.02 of which are expected in the third quarter), a $0.07 gain related to the sale of businesses in the first quarter, an estimated year-over-year decline of $0.10 from the impact of lost sales due to helium supply constraints ($0.03 of which are expected in the third quarter) and $0.12 to $0.16 per diluted share of implementation costs and depreciation expense, net of expected benefits, associated with the Company’s SAP implementation. The Company expects its same-store sales growth rate for the quarter ending December 31, 2012 to be in the low single digits and for fiscal 2013 to be in the low to mid single digits.

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RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2011

STATEMENT OF EARNINGS COMMENTARY
Results for the prior year quarter and year-to-date periods were adjusted for the retrospective application of a change implemented in the fourth quarter of the prior year in the Company’s method of accounting for the small portion of its hardgoods inventory valued using the last-in, first-out (“LIFO”) to the average-cost method. The impact of this change was immaterial to the operating results for the prior year quarter and year-to-date periods. Business segment information and statement of earnings commentary related to the prior year quarter and year-to-date periods have been recast to reflect the change in accounting principle.
Although corporate operating expenses are generally allocated to each business segment based on sales dollars, the Company reports expenses (excluding depreciation) related to the implementation of its SAP system and the Company’s withdrawal from various multi-employer pension plans (“MEPPs”) under selling, distribution and administrative expenses in the “Other” line item in the tables below. Additionally, the Company's restructuring and other special charges and the legal, professional and other costs (benefits) incurred as a result of the Air Products and Chemicals, Inc. (“Air Products”) unsolicited takeover attempt are not allocated to the Company’s business segments. These costs (benefits) are also reflected in the “Other” line item in the tables below.
Net Sales
Net sales increased 4% to $1.23 billion for the current quarter compared to the prior year quarter, driven by same-store sales growth of 3%. Acquisitions, net of a divestiture, contributed sales growth of 1% in the quarter. Gas and rent same-store sales increased 4% and hardgoods increased 1%. Same-store sales were driven by pricing increases of 4%, partially offset by volume decreases of 1%. Same-store sales and volumes for both gas and rent and hardgoods were reduced by approximately 1% due to one less selling day in the current year quarter versus the prior year quarter, with helium supply constraints also reducing gas volumes by an additional 1%. 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, prior period sales beginning in the corresponding month in the prior period in which the Company completed the acquisition or divested the operations during the current period, and continuing through the acquisition or divestiture date for subsequent period comparisons.
Strategic products account for approximately 40% of net sales 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. For the current quarter, growth on the sales of strategic products decelerated to 3% over the prior year quarter, driven by broad-based economic softening. Each product category with the strategic products grouping posted sales growth in the 2% to 3% range in the current quarter as compared to the prior year quarter.
Strategic accounts also contributed to the increase in net sales for the quarter. Strategic accounts were up 3% over the prior year quarter, as growth from continued new account signings and cross-selling to existing customers was tempered by broad-based slowing in general activity across most customer segments. The Company’s large metal fabrication customers continued to post the strongest growth, though showing modest deceleration from first quarter growth rates. Strategic account sales in the Company’s retail customer segment experienced a double digit decline from the prior year quarter due to the helium supply disruption. Excluding this impact, strategic accounts grew 4% from the prior year quarter. The strategic accounts program, which now represents more than 20% of net sales, was designed to deliver superior product and service offerings to larger, multi-location customers, and presents the Company with strong cross-selling opportunities.
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.


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Table of Contents

 
Three Months Ended
 
 
 
 
Net Sales
(In thousands)
September 30,
 
 
 
 
2012
 
2011
 
Increase
 
 
Distribution
$
1,082,891

 
$
1,052,456

 
$
30,435

 
3
%
All Other Operations
155,850

 
145,134

 
10,716

 
7
%
Intercompany eliminations
(9,131
)
 
(10,507
)
 
1,376

 
 
 
$
1,229,610

 
$
1,187,083

 
$
42,527

 
4
%

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. Rental fees are generally charged on cylinders, dewars (cryogenic liquid cylinders), bulk and micro-bulk tanks, tube trailers and certain welding equipment. Hardgoods generally consist of welding consumables and equipment, safety products, construction supplies and maintenance, repair and operating supplies.
Distribution business segment sales increased 3% compared to the prior year quarter with an increase in same-store sales of 2%. Incremental sales growth from acquisitions, net of a divestiture, contributed sales growth of 1% in the current quarter. Same-store sales growth for the Distribution business segment was driven by price increases of 4%, partially offset by decreased volumes of 2%. The Distribution business segment’s gas and rent same-store sales increased 3%, with pricing up 5% and volumes down 2%. Hardgoods same-store sales increased 1%, with pricing up 3% and volumes down 2%. Distribution business segment same-store sales and volumes for both gas and rent and hardgoods were reduced by approximately 1% due to one less selling day in the current quarter versus the prior year quarter, with helium supply constraints also reducing gas volumes by an additional 1%. The reduction in volumes was broad-based, reflecting an overall slower pace of activity in the industrial economy. The increase in pricing was primarily driven by the broad-based price increase on gas and rent and on certain hardgoods effective December 1, 2011 and to a lesser extent the September 1, 2012 price increase on cylinder and bulk tank rental rates.
Contributing to the increase in the Distribution business segment hardgoods same-store sales were increases in both safety products and the Company’s Radnor® private-label brand product line. Safety product sales increased 3% in the current quarter from the prior year quarter. Although this compared favorably to the total hardgoods same-store sales increase for the Distribution business segment of 1%, it represented a sharp deceleration from the 11% year-over-year growth in the fiscal first quarter. Sales of the Company’s Radnor® private-label line were up 1% for the current quarter, consistent with total hardgoods same-store sales growth. Deceleration of sales growth for both safety and Radnor® brand products was driven by general slowing in activity levels in the Company’s core industrial customer base.
Revenues from the Company’s rental welder business experienced a 29% increase in same-store sales during the current quarter as compared to the prior year quarter due to increased rental demand, reflecting strength in outage work in the oil, gas and chemicals industry, including refineries, and in the power industry.
The All Other Operations business segment consists of six business units. The primary products manufactured and/or distributed are carbon dioxide, dry ice, nitrous oxide, ammonia and refrigerant gases.
The All Other Operations business segment sales increased 7% in total and on a same-store basis compared to the prior year quarter, with incremental sales related to current and prior year acquisitions contributing sales growth of less than 1% in the quarter. The same-store sales increase was primarily driven by increases in refrigerants pricing and by both price and volume in the Company’s ammonia and CO2 businesses. The Company’s refrigerant gas sales have continued to benefit from increased demand ahead of a potential EPA ruling which would accelerate the phase-out of new production of R-22, the most commonly used refrigerant gas in HVAC systems.
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 the line item “Selling, distribution and administrative expenses” and recognizes depreciation on all of its property, plant and equipment in the line item “Depreciation” in its Consolidated Statement of Earnings. 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 companies.
Consolidated gross profits (excluding depreciation) increased 7% compared to the prior year quarter, principally due to the sales increase for the current quarter, underlying margin expansion in gases and hardgoods and the sales mix shift to higher

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margin gas and rent. The consolidated gross profit margin (excluding depreciation) in the current quarter increased 160 basis points to 55.1% compared to 53.5% in the prior year quarter. The increase in consolidated gross profit margin (excluding depreciation) reflects margin expansion in gases and hardgoods, as well as a sales mix shift toward higher-margin gas and rent, as compared to the prior year quarter. Gas and rent represented 63.2% of the Company's sales mix in the current quarter, up from 62.7% in the prior year quarter.
 
Three Months Ended
 
 
 
 
Gross Profits (ex. Depr.)
(In thousands)
September 30,
 
 
 
 
2012
 
2011
 
Increase
 
 
Distribution
$
603,939

 
$
568,287

 
$
35,652

 
6
%
All Other Operations
73,358

 
66,462

 
6,896

 
10
%
 
$
677,297

 
$
634,749

 
$
42,548

 
7
%

The Distribution business segment’s gross profits (excluding depreciation) increased 6% compared to the prior year quarter. The Distribution business segment’s gross profit margin (excluding depreciation) was 55.8% versus 54.0% in the prior year quarter, an increase of 180 basis points. The increase in the Distribution business segment’s gross profit margin (excluding depreciation) reflects underlying margin improvement on gases and hardgoods and a slight sales mix shift away from lower-margin hardgoods towards higher-margin gases. As a percentage of the Distribution business segment’s sales, gas and rent increased 30 basis points to 58.4% in the current quarter as compared to 58.1% in the prior year quarter.
The All Other Operations business segment’s gross profits (excluding depreciation) increased 10% compared to the prior year quarter. The All Other Operations business segment’s gross profit margin (excluding depreciation) increased 130 basis points to 47.1% in the current quarter from 45.8% in the prior year quarter. The increase in the All Other Operations business segment’s gross profit margin (excluding depreciation) was primarily driven by margin expansion in the Company's refrigerants and CO2 businesses.
Operating Expenses
Selling, Distribution and Administrative (“SD&A”) 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. Consolidated SD&A expenses increased $35 million, or 8%, in the current quarter as compared to the prior year quarter. Contributing to the increase in SD&A expenses were $28 million of normal inflationary increases plus higher variable costs associated with growing sales, such as sales commissio