ARG - 12.31.12 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: December 31, 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 February 6, 2013 was 75,917,262.
 

Table of Contents

AIRGAS, INC.

FORM 10-Q
December 31, 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
 
Nine Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
(In thousands, except per share amounts)
 
 
 
 
 
 
 
Net Sales
$
1,207,708

 
$
1,153,751

 
$
3,694,574

 
$
3,505,134

Costs and Expenses:
 
 
 
 

 

Cost of products sold (excluding depreciation)
527,452

 
520,409

 
1,648,503

 
1,603,282

Selling, distribution and administrative expenses
462,288

 
433,050

 
1,380,720

 
1,279,933

Restructuring and other special charges (benefits), net (Note 15)
(1,729
)
 
2,431

 
6,426

 
18,261

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

 
(1,170
)
 
—

 
(7,870
)
Depreciation
65,804

 
61,575

 
194,820

 
182,224

Amortization
6,614

 
6,437

 
19,950

 
18,841

Total costs and expenses
1,060,429

 
1,022,732

 
3,250,419

 
3,094,671

Operating Income
147,279

 
131,019

 
444,155

 
410,463

Interest expense, net
(16,472
)
 
(15,741
)
 
(48,102
)
 
(49,815
)
Other income, net (Note 2)
805

 
1,375

 
10,329

 
1,524

Earnings before income taxes
131,612

 
116,653

 
406,382

 
362,172

Income taxes
(48,697
)
 
(44,095
)
 
(151,649
)
 
(136,766
)
Net Earnings
$
82,915

 
$
72,558

 
$
254,733

 
$
225,406

Net Earnings Per Common Share:
 
 
 
 
 
 
 
Basic earnings per share
$
1.07

 
$
0.96

 
$
3.30

 
$
2.94

Diluted earnings per share
$
1.05

 
$
0.93

 
$
3.23

 
$
2.88

Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
Basic
77,417

 
75,940

 
77,123

 
76,632

Diluted
78,944

 
77,705

 
78,883

 
78,340


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
 
Nine Months Ended
 
December 31,
 
December 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Net earnings
$
82,915

 
$
72,558

 
$
254,733

 
$
225,406

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
  Foreign currency translation adjustments
(135
)
 
588

 
361

 
(5,023
)
  Reclassification of hedging loss included in net earnings
129

 
129

 
388

 
388

Other comprehensive income (loss), before tax
(6
)
 
717

 
749

 
(4,635
)
  Net tax expense of other comprehensive income items
(48
)
 
(48
)
 
(144
)
 
(144
)
Other comprehensive income (loss), net of tax
(54
)
 
669

 
605

 
(4,779
)
Comprehensive income
$
82,861

 
$
73,227

 
$
255,338

 
$
220,627


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

See accompanying notes to consolidated financial statements.



4


Table of Contents


AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
(In thousands, except per share amounts)
December 31,
2012
 
March 31,
2012
ASSETS
 
 
 
Current Assets
 
 
 
Cash
$
66,606

 
$
44,663

Trade receivables, less allowances for doubtful accounts of $38,505 and $31,845 at December 31, 2012 and March 31, 2012, respectively
645,174

 
652,439

Inventories, net
462,379

 
408,438

Deferred income tax asset, net
53,898

 
49,617

Prepaid expenses and other current assets
160,900

 
119,049

Total current assets
1,388,957

 
1,274,206

Plant and equipment at cost
4,523,456

 
4,306,420

Less accumulated depreciation
(1,849,198
)
 
(1,690,361
)
Plant and equipment, net
2,674,258

 
2,616,059

Goodwill
1,198,698

 
1,163,803

Other intangible assets, net
230,469

 
214,204

Other non-current assets
46,679

 
52,313

Total assets
$
5,539,061

 
$
5,320,585

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable, trade
$
157,384

 
$
174,868

Accrued expenses and other current liabilities
347,724

 
356,344

Short-term debt
284,305

 
388,452

Current portion of long-term debt
305,342

 
10,385

Total current liabilities
1,094,755

 
930,049

Long-term debt, excluding current portion
1,706,926

 
1,761,902

Deferred income tax liability, net
811,547

 
793,957

Other non-current liabilities
88,087

 
84,419

Commitments and contingencies


 


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

 
—

Common stock, par value $0.01 per share, 200,000 shares authorized, 87,074 and 86,874 shares issued at December 31, 2012 and March 31, 2012, respectively
871

 
869

Capital in excess of par value
718,426

 
649,551

Retained earnings
1,811,421

 
1,701,478

Accumulated other comprehensive income
5,991

 
5,386

Treasury stock, 10,514 and 10,207 shares at cost at December 31, 2012 and March 31, 2012, respectively
(698,963
)
 
(607,026
)
Total stockholders’ equity
1,837,746

 
1,750,258

Total liabilities and stockholders’ equity
$
5,539,061

 
$
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)
 
Nine Months Ended
 
December 31,
(In thousands)
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net earnings
$
254,733

 
$
225,406

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
194,820

 
182,224

Amortization
19,950

 
18,841

Impairment
1,729

 
2,500

Deferred income taxes
14,163

 
38,088

Gain on sales of plant and equipment
(126
)
 
(65
)
Gain on sale of businesses
(6,822
)
 
—

Stock-based compensation expense
22,744

 
21,352

Changes in assets and liabilities, excluding effects of business acquisitions and divestitures:
 
 
 
Trade receivables, net
15,579

 
(37,360
)
Inventories, net
(49,972
)
 
(27,954
)
Prepaid expenses and other current assets
(37,410
)
 
(10,908
)
Accounts payable, trade
(19,594
)
 
(9,801
)
Accrued expenses and other current liabilities
(6,526
)
 
(62,329
)
Other non-current assets
2,626

 
2,059

Other non-current liabilities
(836
)
 
(1,002
)
Net cash provided by operating activities
405,058

 
341,051

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(244,052
)
 
(263,398
)
Proceeds from sales of plant, equipment and businesses
23,438

 
12,199

Business acquisitions and holdback settlements
(94,630
)
 
(96,970
)
Other, net
(1,668
)
 
(1,473
)
Net cash used in investing activities
(316,912
)
 
(349,642
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net (decrease) increase in short-term debt
(104,181
)
 
406,701

Proceeds from borrowings of long-term debt
260,372

 
1,065,560

Repayment of long-term debt
(18,115
)
 
(1,147,735
)
Financing costs
(2,076
)
 
(4,567
)
Purchase of treasury stock
(222,163
)
 
(300,000
)
Proceeds from the exercise of stock options
78,091

 
22,890

Stock issued for the Employee Stock Purchase Plan
12,781

 
11,361

Tax benefit realized from the exercise of stock options
33,352

 
10,914

Dividends paid to stockholders
(92,655
)
 
(70,819
)
Change in cash overdraft
(11,609
)
 
2,858

Net cash used in financing activities
(66,203
)
 
(2,837
)
Change in cash
$
21,943

 
$
(11,428
)
Cash – Beginning of period
44,663

 
57,218

Cash – End of period
$
66,606

 
$
45,790


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
Current Year 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 three months ended December 31, 2012, the Company purchased seven businesses with historical annual sales of approximately $75 million. A total of $76.2 million in cash was paid for the seven businesses and for the settlement of holdback liabilities and payments related to contingent consideration arrangements associated with prior year acquisitions.
During the nine months ended December 31, 2012, the Company purchased fifteen businesses with historical annual sales of approximately $94 million. A total of $94.6 million in cash was paid for the fifteen 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 nine months ended December 31, 2012 were $1.0 million and were included in selling, distribution and administrative expenses in the Company’s Consolidated Statement of Earnings. These acquisitions contributed approximately $10 million in net sales for the nine months ended December 31, 2012.
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, production and service networks. The acquisition purchase price for each business is allocated based on the fair values of the assets acquired and liabilities assumed, which are based on management estimates and third-party appraisals. Purchase price allocations for the businesses acquired during the nine months ended December 31, 2012 are primarily based on provisional fair values and are subject to revision as the Company finalizes appraisals and other analyses. Final determination of the fair values will result in further adjustments to the values presented below. 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. Valuation adjustments related to prior year acquisitions were not significant.


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



(In thousands)
Distribution
Business
Segment
 
All Other
Operations
Business Segment
 
Total
Current assets, net
$
14,018

 
$
534

 
$
14,552

Plant and equipment
24,284

 
1,169

 
25,453

Goodwill
34,305

 
2,509

 
36,814

Other intangible assets
35,188

 
2,000

 
37,188

Current liabilities
(12,165
)
 
(2,551
)
 
(14,716
)
Non-current liabilities
(3,939
)
 
(722
)
 
(4,661
)
Total cash consideration
$
91,691

 
$
2,939

 
$
94,630

The fair value of trade receivables acquired with the fiscal 2013 acquisitions was $9.7 million, with gross contractual amounts receivable of $10.1 million. Goodwill associated with fiscal 2013 acquisitions was $37.9 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, and the addition of businesses complementary to the Company’s portfolio of products and services. Other intangible assets related to fiscal 2013 acquisitions represent customer relationships and non-competition agreements, and amounted to $28.8 million and $9.6 million, respectively. See Note 4 for further information on goodwill and other intangible assets.
Pro Forma Operating Results
The following table provides unaudited pro forma results of operations for the nine months ended December 31, 2012 and 2011, as if fiscal 2013 acquisitions had occurred on April 1, 2011. The pro forma results were prepared from financial information obtained from the sellers of the businesses, as well as information obtained during the due diligence process associated with the acquisitions. The unaudited pro forma results reflect certain adjustments related to the acquisitions, such as increased depreciation and amortization expense resulting from the stepped-up basis to fair value of assets acquired and adjustments to reflect the Company’s borrowing and tax rates. The pro forma operating results do not include any anticipated synergies related to combining the businesses. Accordingly, such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of April 1, 2011 or of results that may occur in the future.
 
Nine Months Ended
 
December 31,
(In thousands, except per share amounts)
2012
 
2011
Net sales
$
3,752,201

 
$
3,556,780

Net earnings
257,229

 
225,097

Diluted earnings per share
$
3.26

 
$
2.87

Prior Year Acquisitions
During the nine months ended December 31, 2011, the Company purchased six businesses. A total of $97.0 million in cash was paid for the six businesses, the settlement of holdback liabilities and the settlement of a contingent consideration arrangement associated with a prior year acquisition. Transaction and other integration costs incurred during the nine months ended December 31, 2011 were approximately $1.7 million. The acquired businesses had aggregate historical annual sales of approximately $73 million. These acquisitions contributed approximately $43 million in net sales for the nine months ended December 31, 2011. The Company acquired these businesses in order to expand its geographic coverage and strengthen its national network of branch-store locations.
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 the “Other income, net” line item of the Company’s Consolidated Statement of Earnings. The operations were included in the Distribution business segment and

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



contributed net sales that were not material to the Company’s Consolidated Statement of 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)
December 31, 2012
 
March 31, 2012
Hardgoods
$
327,243

 
$
307,242

Gases
135,136

 
101,196

 
$
462,379

 
$
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 nine months ended December 31, 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)
34,305

 
2,509

 
36,814

Other adjustments, including divestitures and foreign currency translation
(1,928
)
 
9

 
(1,919
)
Balance at December 31, 2012
$
1,001,771

 
$
196,927

 
$
1,198,698

____________________
(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:
 
December 31, 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
 
$
293,374

 
$
(86,312
)
 
$
207,062

 
15
 
$
270,096

 
$
(74,253
)
 
$
195,843

Non-competition agreements
7
 
43,671

 
(20,383
)
 
23,288

 
8
 
38,378

 
(20,427
)
 
17,951

Other
 
 
1,420

 
(1,301
)
 
119

 
 
 
1,240

 
(830
)
 
410

 
 
 
$
338,465

 
$
(107,996
)
 
$
230,469

 
 
 
$
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

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



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 - $7.0 million; 2014 - $26.2 million; 2015 - $24.6 million; 2016 - $23.1 million; 2017 - $21.2 million; and $128.4 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). See Note 8 for further information on the valuation methodology used in determining the impairment loss.
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 prior year annual goodwill impairment test.
Annual Test for Goodwill Impairment
The Company is required to perform an assessment of the carrying value of goodwill associated with each of its reporting
units at least annually and whenever events or circumstances indicate that it is more likely than not that goodwill may be
impaired. The Company performs its annual assessment of the carrying value of goodwill as of October 31 of each
year. As of October 31, 2012, the Company had 18 reporting units in the Distribution business segment and 6 reporting units
in the All Other Operations business segment.
Under new accounting guidance adopted by the Company during fiscal 2012, prior to performing the two-step goodwill impairment test, the Company is first permitted to perform a qualitative assessment about the likelihood of the
carrying value of a reporting unit exceeding its fair value, referred to as the “Step 0” assessment. The Step 0 assessment requires the evaluation of certain events and circumstances such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, as well as company and reporting unit-specific items. After performing the Step 0 assessment, should the Company determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it is required to perform the prescribed two-step goodwill impairment test to identify the potential goodwill impairment and measure the amount of the goodwill impairment loss, if any, to be recognized for that reporting unit. However, if the Company concludes otherwise based on the Step 0 assessment, the two-step goodwill impairment test is not required. The Step 0 assessment can be applied to none, some or all of the Company’s reporting units in any period, and the Company may also bypass the Step 0 assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test for the given reporting unit.
For the October 31, 2012 goodwill impairment test, the Company applied the Step 0 assessment to all of the 18 reporting units in its Distribution business segment and 5 of the 6 reporting units in its All Other Operations business segment. After performing the Step 0 assessment for these reporting units, the Company concluded that it is not more likely than not that the fair value of each reporting unit is less than its carrying amount. Therefore, the two-step goodwill impairment test is not necessary for these reporting units.
However, for the same reporting unit within the All Other Operations business segment for which the interim goodwill impairment evaluation was performed in June 2012 (see “Impairment Evaluation” section above), the Company bypassed the option to perform the Step 0 assessment and proceeded directly to performing the first step of the two-step goodwill impairment test. The Company determined the estimated fair value of this reporting unit as of October 31, 2012 using a

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



discounted cash flow model and compared this value to the carrying value of the reporting unit. Significant assumptions used in the cash flow model include revenue growth rates and profit margins based on the reporting unit’s business plan, future capital expenditures, working capital needs, and discount and perpetual growth rates. The discount rate used to estimate the fair value of the reporting unit exceeded the Company’s weighted average cost of capital as a whole, as the discount rate used for this purpose assigns a higher risk premium to the smaller entity. The perpetual growth rate assumed in the discounted cash flow model was in line with the long-term growth rate as measured by the U.S. Gross Domestic Product and the industry’s long-term rate of growth. In addition to Company and reporting unit-specific growth targets, general economic conditions, the long-term economic outlook for the U.S. economy, and market conditions affecting borrowing costs and returns on equity all influence the estimated fair value of the reporting unit.
The result of the goodwill impairment test 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. 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.

(5) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include:
(In thousands)
December 31, 2012
 
March 31, 2012
Accrued payroll and employee benefits
$
91,378

 
$
99,474

Business insurance reserves (a)
54,066

 
51,435

Taxes other than income taxes
24,593

 
20,273

Cash overdraft
60,836

 
72,445

Deferred rental revenue
31,810

 
29,720

Other accrued expenses and current liabilities
85,041

 
82,997

 
$
347,724

 
$
356,344

____________________
(a) 
With respect to the business insurance reserves above, the Company had corresponding insurance receivables of $13.9 million at December 31, 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)




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

 
$
—

Commercial paper
284,305

 
388,452

Short-term debt
$
284,305

 
$
388,452

 
 
 
 
Long-term
 
 
 
Trade receivables securitization
$
295,000

 
$
295,000

Revolving credit borrowings - U.S.
—

 
—

Revolving credit borrowings - Multi-currency
38,813

 
43,472

Revolving credit borrowings - France
7,322

 
6,338

Senior notes, net
1,452,799

 
1,205,881

Senior subordinated notes
215,446

 
215,446

Other long-term debt
2,888

 
6,150

Total long-term debt
2,012,268

 
1,772,287

Less current portion of long-term debt
(305,342
)
 
(10,385
)
Long-term debt, excluding current portion
$
1,706,926

 
$
1,761,902

 
 
 
 
Total debt
$
2,296,573

 
$
2,160,739

Money Market Loans
The Company has an agreement with a financial institution to provide access to short-term advances not to exceed $35 million. On December 17, 2012, the agreement was extended and now expires on January 1, 2014. The agreement 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 December 31, 2012, there were no advances outstanding under the agreement.
The Company also has an agreement with another financial institution which provides access to additional 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 December 31, 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 December 31, 2012, $284 million was outstanding under the commercial paper program and the average effective interest rate on these borrowings was 0.48%.
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

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



accounted for as a secured borrowing under which qualified trade receivables collateralize amounts borrowed from the 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 75 basis points.
On December 5, 2012, the Company entered into the Third Amendment to the Securitization Agreement which extended the expiration date of the Securitization Agreement from December 21, 2013 to December 4, 2015. At December 31, 2012, the amount of outstanding borrowing under the Securitization Agreement was $295 million, and it was classified as long-term debt on the Company’s 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 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 December 31, 2012, the Company had $39 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 December 31, 2012. The Company also had outstanding U.S. letters of credit of $51 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 December 31, 2012, the average effective interest rate on the multi-currency revolver was 1.62%. 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 December 31, 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. At December 31, 2012, the Company was in compliance with all covenants under all of its debt agreements. In the event of default, repayment of borrowings under the Credit Facility may be accelerated. As of December 31, 2012, $376 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. $10.6 million) to fund its operations in France. These revolving credit borrowings are outside of the Company’s Credit Facility. On November 15, 2012, this revolving line of credit was extended from December 31, 2012 to July 19, 2016. At December 31, 2012, these revolving credit borrowings were €5.6 million (U.S. $7.3 million) and are classified as long-term debt on the Company’s Consolidated Balance Sheet. The variable interest rates on the French revolving credit borrowings are based on the Euro currency rate plus 125 basis points. As of December 31, 2012, the effective interest rate on the French revolving credit borrowings was 1.3%.
Senior Notes
On November 26, 2012, the Company issued $250 million of 2.90% senior notes maturing on November 15, 2022 (the “2022 Notes”). The 2022 Notes were issued at a discount and yield 2.913%. The net proceeds from the sale of the 2022 Notes were used for general corporate purposes, including to fund acquisitions, repay indebtedness under the Company’s commercial paper program and repurchase shares pursuant to the Company’s stock repurchase program. Interest on the 2022 Notes is payable semi-annually on May 15 and November 15 of each year, commencing May 15, 2013.
At December 31, 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

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



semi-annually on April 1 and October 1 of each year. At December 31, 2012, the 2013 Notes were reclassified to the “Current portion of long-term debt” line item on the Company’s Consolidated Balance Sheet based on the maturity date.
At December 31, 2012, the Company had $400 million outstanding of 4.50% 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 December 31, 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 December 31, 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 semi-annually on June 15 and December 15 of each year.
The 2013, 2014, 2015, 2016 and 2022 Notes (collectively, the “Senior Notes”) contain covenants that 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 December 31, 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 December 31, 2012, other long-term debt totaled $2.9 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 December 31, 2012 are as follows:
 
(In thousands)
Debt Maturities  (a)
December 31, 2013
$
301,653

March 31, 2014
229

March 31, 2015
400,549

March 31, 2016
545,263

March 31, 2017
296,321

Thereafter
465,454

 
$
2,009,469

____________________
(a) 
Outstanding borrowings under the Securitization Agreement at December 31, 2012 are reflected as maturing at the agreement’s expiration in December 2015.

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 $0.9 million at December 31, 2012. The 2013 Notes also include additional carrying value of $3.7 million at December 31, 2012 related to the Company’s fair value hedges — see Note 7 for additional disclosure.

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



(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 December 31, 2012, the Company was party to a total of five interest rate swap agreements with an aggregate notional amount of $300 million.
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 both the nine months ended December 31, 2012 and 2011, $388 thousand of the loss on the treasury rate lock was reclassified to interest expense. At December 31, 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 December 31, 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 December 31, 2012, these swap agreements required the Company to make variable interest payments based on a weighted average forward rate of 1.19% 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 nine months ended December 31, 2012, the fair value of the variable interest rate swaps decreased by $3.0 million to an asset of $3.7 million and was recorded in prepaid expenses and other current assets as of December 31, 2012 and in other non-current assets as of March 31, 2012. The corresponding decrease in the carrying value of the 2013 Notes caused by the hedged risk was $3.0 million and was recorded in the current portion of long-term debt as of December 31, 2012 and in long-term debt as of March 31, 2012. 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 nine months ended December 31, 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

 
December 31, 2012
 
March 31, 2012
(In thousands)
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Interest rate swaps:
 
 
 
 
 
 
 
Variable interest rate swaps
Prepaid expenses and other current assets
 
$
3,725

 
Other non-current
assets
 
$
6,734


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



Effect of Derivative Instruments on Earnings and Stockholders’ Equity

 
Amount of Gain Recognized in OCI on
Derivatives
(In thousands)
Nine Months Ended December 31,
Derivatives in Cash Flow Hedging Relationships
2012
 
2011
Interest rate contracts
$
388

 
$
388

Tax effect
(144
)
 
(144
)
Net effect
$
244

 
$
244


 

 
Amount of Loss Reclassified from AOCI
into Pre-tax Income (a)
(In thousands)
 
Nine Months Ended December 31,
Location of Loss Reclassified from AOCI into Pre-tax Income for Derivatives in Cash Flow Hedging Relationships
 
2012
 
2011
Interest expense, net
 
$
388

 
$
388

____________________
(a) The tax effects of the reclassification adjustments were $144 thousand for the nine months ended December 31, 2012 and 2011.
 
Location of Gain (Loss)
Recognized in Pre-tax
Income
 
Amount of Gain (Loss) Recognized in Pre-Tax Income
(In thousands)
 
Nine Months Ended December 31,
Derivatives in Fair Value Hedging Relationships
2012
 
2011
Change in fair value of variable interest rate swaps
Interest expense, net
 
$
(3,009
)
 
$
1,951

Change in carrying value of 2013 Notes
Interest expense, net
 
3,034

 
(1,485
)
Net effect
Interest expense, net
 
$
25

 
$
466


(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 December 31, 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)
December 31, 2012
 
 
 
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
$
12,730

 
$
12,730

 
$
—

 
$
—

Derivative assets - variable interest rate swap agreements
3,725

 
—

 
3,725

 
—

Total assets measured at fair value on a recurring basis
$
16,455

 
$
12,730

 
$
3,725

 
$
—

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities
$
12,730

 
$
12,730

 
$
—

 
$
—

Contingent consideration liability
4,104

 
—

 
—

 
4,104

Total liabilities measured at fair value on a recurring basis
$
16,834

 
$
12,730

 
$
—

 
$
4,104


 
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 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 prepaid expenses and other current assets as of December 31, 2012 and within other non-current assets as of March 31, 2012 on the Consolidated Balance Sheets. See Note 7 for additional derivatives disclosures.
Contingent consideration liability — As part of the consideration for certain acquisitions, the Company has arrangements in place whereby future consideration in the form of cash may be transferred to the sellers contingent upon the achievement of certain earnings targets. The fair values of the contingent consideration arrangements were estimated using the income approach with inputs that are not observable in the market. Key assumptions for each arrangement, as applicable, include a discount rate commensurate with the level of risk of achievement, time horizon and other risk factors, and probability adjusted

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(UNAUDITED)



earnings growth, all of which the Company believes are appropriate and representative of market participant assumptions. Of the total liability for contingent consideration arrangements at December 31, 2012, $3.4 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 arrangements for the three and nine months ended December 31, 2012 and 2011 was immaterial.
Changes in the fair value of recurring fair value measurements using significant unobservable inputs (Level 3) for the nine months ended December 31, 2012 were as follows (in thousands):

Balance at March 31, 2012
$
2,512

Contingent consideration liabilities recorded
1,750

Settlements made during the period
(140
)
Adjustments to fair value measurement
(18
)
Balance at December 31, 2012
$
4,104

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 nine months ended December 31, 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 nine months ended December 31, 2012 or 2011.

 
 
Quoted prices in
active markets
Level 1
 
Significant other
observable inputs
Level 2
 
Significant
unobservable inputs
Level 3
 
Total losses (nine months ended December 31, 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 (nine months ended December 31, 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 nine months ended December 31, 2012, which was reflected in the “Restructuring and other special charges (benefits), net” line item of the Company’s Consolidated Statement of Earnings for the nine months ended December 31, 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 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 liquid

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



carbon dioxide plant and recognized an impairment charge of $2.5 million which was reflected in the “Restructuring and other special charges (benefits), net” line item of the Company’s Consolidated Statement of Earnings for the nine months ended December 31, 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)
December 31, 2012
 
December 31, 2012
 
March 31, 2012
 
March 31, 2012
Commercial paper
$
284,305

 
$
284,305

 
$
388,452

 
$
388,452

Trade receivables securitization
295,000

 
295,000

 
295,000

 
295,000

Revolving credit borrowings
46,135

 
46,135

 
49,810

 
49,810

2013 Notes
303,689

 
308,915

 
306,677

 
314,881

2014 Notes
399,832

 
423,890

 
399,760

 
429,530

2015 Notes
249,792

 
263,459

 
249,736

 
260,325

2016 Notes
249,761

 
263,747

 
249,708

 
257,821

2018 Notes
215,446

 
232,412

 
215,446

 
234,836

2022 Notes
249,725

 
248,024

 
—

 
—

Other long-term debt
2,888

 
3,036

 
6,150

 
6,410

Total debt
$
2,296,573

 
$
2,368,923

 
$
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)
200

 
 
Reissuance of treasury stock for stock option exercises
 
 
(2,164
)
Purchase of treasury stock (b)
 
 
2,471

Balance at December 31, 2012
87,074

 
10,514


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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
 
 
 
 
254,733

 
 
 
 
 
254,733

Other comprehensive income
 
 
 
 
 
 
605

 
 
 
605

Common stock issuances and reissuances from treasury stock - employee benefit plans (c) 
2

 
12,779

 
(52,135
)
 
 
 
130,226

 
90,872

Tax benefit from stock option exercises
 
 
33,352

 
 
 
 
 
 
 
33,352

Dividends paid on common stock ($1.20 per share)
 
 
 
 
(92,655
)
 
 
 
 
 
(92,655
)
Stock-based compensation (d)
 
 
22,744

 
 
 
 
 
 
 
22,744

Purchase of treasury stock (b)
 
 
 
 
 
 
 
 
(222,163
)
 
(222,163
)
Balance at December 31, 2012
$
871

 
$
718,426

 
$
1,811,421

 
$
5,991

 
$
(698,963
)
 
$
1,837,746

___________________
(a) 
Issuance of common stock for purchases through the Employee Stock Purchase Plan.
(b) 
On October 23, 2012, the Company announced a $600 million share repurchase program. During the three months ended December 31, 2012, the Company repurchased 2.47 million shares on the open market at an average price of $89.93.
(c) 
Issuance of common stock for purchases through the Employee Stock Purchase Plan and reissuance of treasury stock for stock option exercises.
(d) 
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 nine months ended December 31, 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
361

 
 
 
361

Derivative instruments:
 
 
 
 
 
Reclassification of hedging loss included in net earnings
 
 
388

 
388

Tax effect of other comprehensive income items
 
 
(144
)
 
(144
)
Net change after tax of other comprehensive income items
361

 
244

 
605

Balance at December 31, 2012
$
6,888

 
$
(897
)
 
$
5,991



(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 nine months ended December 31, 2012 and 2011.


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



 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Stock-based compensation expense related to:
 
 
 
 
 
 
 
Equity Incentive Plan
$
3,528

 
$
3,311

 
$
19,682

 
$
18,450

Employee Stock Purchase Plan - options to purchase stock
1,024

 
971

 
3,062

 
2,902

 
4,552

 
4,282

 
22,744

 
21,352

Tax benefit
(1,443
)
 
(1,410
)
 
(7,826
)
 
(7,370
)
Stock-based compensation expense, net of tax
$
3,109

 
$
2,872

 
$
14,918

 
$
13,982

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 nine months ended December 31, 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 nine months ended December 31, 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
(2,165
)
 
$
36.13

Forfeited
(51
)
 
$
73.15

Outstanding at December 31, 2012
5,334

 
$
59.32

Vested or expected to vest at December 31, 2012
5,315

 
$
59.23

Exercisable at December 31, 2012
2,949

 
$
49.04

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 Second Amended and Restated 2006 Equity Incentive Plan as of December 31, 2012.
As of December 31, 2012, $43.6 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 1.8 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 December 31, 2012, the ESPP had 1.6 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 nine months ended December 31, 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 nine months ended December 31, 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
(200)
 
$
63.84

Outstanding at December 31, 2012
122
 
$
69.65


(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 1.4 million and 1.7 million shares covered by outstanding stock options that were not dilutive for the three months ended December 31, 2012 and 2011, respectively. There were approximately 1.3 million and 1.8 million shares covered by outstanding stock options that were not dilutive for the nine months ended December 31, 2012 and 2011, respectively.
The table below presents the computation of basic and diluted weighted average common shares outstanding for the three and nine months ended December 31, 2012 and 2011:

 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Weighted average common shares outstanding:
 
 
 
 
 
Basic
77,417

 
75,940

 
77,123

 
76,632

Incremental shares from assumed exercises of stock options and options under the ESPP
1,527

 
1,765

 
1,760

 
1,708

Diluted shares outstanding
78,944

 
77,705

 
78,883

 
78,340


(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 nine months ended December 31, 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 under selling, distribution and administrative expenses in the “Eliminations and Other” column below. Additionally, the Company’s net restructuring and

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



other special charges (benefits) 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. 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
 
December 31, 2012
 
December 31, 2011
(In thousands)
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
 
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
Gas and rent
$
642,884

 
$
138,152

 
$
(8,062
)
 
$
772,974

 
$
611,005

 
$
119,409

 
$
(8,959
)
 
$
721,455

Hardgoods
433,218

 
1,518

 
(2
)
 
434,734

 
430,724

 
1,578

 
(6
)
 
432,296

Total net sales (a)
1,076,102

 
139,670

 
(8,064
)
 
1,207,708

 
1,041,729

 
120,987

 
(8,965
)
 
1,153,751

Cost of products sold (excluding depreciation) (a)
461,917

 
73,599

 
(8,064
)
 
527,452

 
467,592

 
61,782

 
(8,965
)
 
520,409

Selling, distribution and administrative expenses
408,704

 
44,866

 
8,718

 
462,288

 
379,894

 
40,002

 
13,154

 
433,050

Restructuring and other special charges (benefits), net
—

 
—

 
(1,729
)
 
(1,729
)
 
—

 
—

 
2,431

 
2,431

Costs (benefits) related to unsolicited takeover attempt
—

 
—

 
—

 
—

 
—

 
—

 
(1,170
)
 
(1,170
)
Depreciation
60,372

 
5,432

 
—

 
65,804

 
56,695

 
4,880

 
—

 
61,575

Amortization
5,384

 
1,230

 
—

 
6,614

 
5,171

 
1,266

 
—

 
6,437

Operating income
$
139,725

 
$
14,543

 
$
(6,989
)
 
$
147,279

 
$
132,377

 
$
13,057

 
$
(14,415
)
 
$
131,019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
Nine Months Ended
 
December 31, 2012
 
December 31, 2011
(In thousands)
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
 
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
Gas and rent
$
1,914,092

 
$
444,371

 
$
(26,370
)
 
$
2,332,093

 
$
1,827,302

 
$
404,554

 
$
(28,584
)
 
$
2,203,272

Hardgoods
1,357,502

 
4,984

 
(5
)
 
1,362,481

 
1,297,343

 
4,533

 
(14
)
 
1,301,862

Total net sales (a)
3,271,594

 
449,355

 
(26,375
)
 
3,694,574

 
3,124,645

 
409,087

 
(28,598
)
 
3,505,134

Cost of products sold (excluding depreciation) (a)
1,441,482

 
233,396

 
(26,375
)
 
1,648,503

 
1,413,164

 
218,716

 
(28,598
)
 
1,603,282

Selling, distribution and administrative expenses
1,222,697

 
130,749

 
27,274

 
1,380,720

 
1,131,263

 
120,258

 
28,412

 
1,279,933

Restructuring and other special charges (benefits), net
—

 
—

 
6,426

 
6,426

 
—

 
—

 
18,261

 
18,261

Costs (benefits) related to unsolicited takeover attempt
—

 
—

 
—

 
—

 
—

 
—

 
(7,870
)
 
(7,870
)
Depreciation
178,759

 
16,061

 
—

 
194,820

 
168,026

 
14,198

 
—

 
182,224

Amortization
16,171

 
3,779

 
—

 
19,950

 
15,075

 
3,766

 
—

 
18,841

Operating income
$
412,485

 
$
65,370

 
$
(33,700
)
 
$
444,155

 
$
397,117

 
$
52,149

 
$
(38,803
)
 
$
410,463

____________________
(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:
 
Nine Months Ended
 
December 31,
(In thousands)
2012
 
2011
Interest paid
$
55,263

 
$
55,803

Income taxes (net of refunds) (a)
120,093

 
77,320

____________________
(a)
During the nine months ended December 31, 2011, the Company applied for and received federal income tax refunds of $10.5 million. The Company did not receive federal income tax refunds during the nine months ended December 31, 2012.

(15) RESTRUCTURING AND OTHER SPECIAL CHARGES (BENEFITS), NET
The following table presents the components of restructuring and other special charges (benefits), net:
 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Restructuring costs (benefits), net
$
(3,332
)
 
$
748

 
$
(2,535
)
 
$
14,078

Other related costs
1,603

 
1,683

 
7,232

 
1,683

Asset impairment charges
—

 
—

 
1,729

 
2,500

Total restructuring and other special charges (benefits), net
$
(1,729
)
 
$
2,431

 
$
6,426

 
$
18,261

Restructuring Costs (Benefits), Net
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 Airgas, Inc. 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. As a result of the realignment plan, the Company recorded a restructuring charge of $13.3 million during the three months ended June 30, 2011 for severance benefits expected to be paid under the Airgas, Inc. Severance Pay Plan to employees whose jobs were eliminated as a result of the realignment.
During the three and nine months ended December 31, 2012, the Company recorded $3.3 million and $2.5 million, respectively, in net restructuring benefits. During the three months ended December 31, 2012, the Company re-evaluated its remaining severance liability related to the divisional realignment and, as a result of this analysis, reduced its severance liability by $3.7 million. The reduction in the severance liability was driven by fewer than expected individuals meeting the requirements to receive severance benefits. This reduction was due to both the retention of employees through relocation or acceptance of new positions, as well as former associates who chose not to remain with the Company through their designated separation dates. Offsetting the benefit from the reduction to the severance liability were additional restructuring costs of $0.4 million and $1.2 million for the three and nine months ended December 31, 2012, respectively, primarily related to relocation and other costs.
During the three and nine months ended December 31, 2011, the Company recorded $0.7 million and $14.1 million, respectively, in restructuring costs. The majority of the costs for the nine-month period ended December 31, 2011 related to the $13.3 million severance restructuring charge recorded during the three months ended June 30, 2011.

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



 
The activity in the accrued liability balances associated with the restructuring plan was as follows for the nine months ended December 31, 2012:
(In thousands)
Severance Costs
 
Facility Exit and Other Costs
 
Total
Balance at March 31, 2012
$
13,138

 
$
990

 
$
14,128

Restructuring charges
—

 
1,165

 
1,165

Cash payments
(3,120
)
 
(1,831
)
 
(4,951
)
Other adjustments
(3,700
)
 
—

 
(3,700
)
Balance at December 31, 2012
$
6,318

 
$
324

 
$
6,642

Of the $6.6 million in accrued restructuring costs at December 31, 2012, $4.8 million was included in accrued expenses and other current liabilities and $1.8 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 nine months ended December 31, 2012, the Company also incurred $1.6 million and $7.2 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. For both the three and nine months ended December 31, 2011, the Company incurred $1.7 million of other restructuring related costs, primarily related to transition staffing for the BSCs and legal costs associated with the realignment.
The divisional realignment is expected to be completed by the end of fiscal 2013, with the final regional distribution company’s implementation of SAP, integration into the divisional structure and merger into the LLC anticipated during the three months ending March 31, 2013. However, the payout of severance benefits under the plan is expected to continue through fiscal 2014 based on the payment of benefits over time (rather than in a lump sum), extended benefits earned by a number of associates through the Airgas, Inc. Severance Pay Plan and payments to associates at other distribution businesses yet to convert to SAP and/or merge into the LLC. For the three months ending March 31, 2013, the Company expects to incur additional restructuring and other related costs, primarily related to transition staffing, legal and relocation costs, of approximately $2 million.
Asset Impairment Charges
The Company recorded special charges of $1.7 million and $2.5 million related to asset impairments during the nine months ended December 31, 2012 and 2011, respectively – see Notes 4 and 8 for further information.

(16) UNSOLICITED TAKEOVER ATTEMPT
On February 11, 2010, 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 and nine months ended December 31, 2011, the Company recognized benefits of $1.2 million and $7.9 million, respectively, from lower than previously estimated net costs related to the unsolicited takeover attempt.

(17) SUBSEQUENT EVENTS
In January 2013, the United States Congress passed the American Taxpayer Relief Act of 2012, which retroactively extended various tax provisions. The Company does not expect the change in law to have a material impact on its income tax provision for the three months ending March 31, 2013.


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




On January 29, 2013, the Company announced that its Board of Directors declared a regular quarterly cash dividend of $0.40 per share. The dividend is payable March 28, 2013 to stockholders of record as of March 14, 2013.



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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 December 31, 2012 (“current quarter”) of $1.21 billion compared to $1.15 billion for the quarter ended December 31, 2011 (“prior year quarter”), an increase of 5%. Total organic sales increased 4%, with gas and rent up 6% and hardgoods down 1%. Acquisitions, net of a divestiture, contributed sales growth of 1% in the current quarter. The Company’s organic sales growth reflected the impact of continued economic uncertainty and moderation in business conditions on its diversified customer base, with moderating activity levels in its industrial customer base throughout the quarter further exacerbated in late December by uncertainty around the fiscal cliff and by the timing of the holidays during the work week. Higher pricing contributed 5% to total organic sales growth, more than offsetting the negative 1% impact from volume declines. Higher pricing was primarily driven by a broad-based price increase on gases and hardgoods effective October 1, 2012. The pricing action was designed to address rising product, operating and distribution costs, as well as to support ongoing investments in production and distribution capabilities and technologies in order to more efficiently and effectively 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 56.3%, an increase of 140 basis points from the prior year quarter, driven by a sales mix shift toward higher-margin gas and rent and by margin expansion on gases and hardgoods, reflecting in part more effective management of pricing and discounting practices, as enabled by SAP during the current quarter.
The Company’s operating income margin increased to 12.2%, an 80 basis-point increase from the prior year quarter. The current quarter's operating income margin benefited from a net 10 basis points of lower than previously expected restructuring charges, while the prior year quarter’s operating income margin was burdened by 40 basis points of net special charges. The current and prior year quarters also included 90 basis points and 110 basis points, respectively, of negative impact from SAP implementation costs and depreciation expense (see “Enterprise Information System” section below).
Net earnings per diluted share increased to $1.05 in the current quarter versus $0.93 in the prior year quarter. The current quarter’s earnings per diluted share included $0.03 of SAP implementation and depreciation costs, net of realized benefits, representing a favorable $0.07 year-over-year change from the $0.10 per diluted share of SAP related expenses in the prior year quarter. Net earnings per diluted share in the current quarter included a net $0.01 per diluted share benefit related to lower than previously estimated restructuring charges, while the prior year quarter's net earnings included net special charges of $0.04 per diluted share. Net special items in each quarter consisted of the following:
 
Three Months Ended
 
December 31,
Effect on Diluted EPS
2012
 
2011
Restructuring and other related (costs) benefits, net
$
0.01

 
$
(0.02
)
(Costs) benefits related to unsolicited takeover attempt
—

 
0.01

Multi-employer pension plan withdrawal charges
—

 
(0.03
)
Special items, net
$
0.01

 
$
(0.04
)
Supply Constraints
The global industrial gas industry continues to work through supply constraints related to helium. Disruption in crude helium production overseas has been the primary cause of the worldwide helium shortage, aggravated by outages and temporary shutdowns at the Federal Helium Reserve and shutdowns at a major private helium source. The Company procures helium from its primary suppliers under long-term supply agreements. As a result of the helium shortage, however, over the past 18 months the Company’s suppliers have instituted helium volume allocations, which have limited the Company’s ability to supply helium to its own customers. These supply constraints have also forced the Company to shed non-contract helium customers at times and to allocate its limited helium supply to contract and critical need customers. To help mitigate the financial impact to Airgas, the Company has and will continue to explore alternative sources of helium and has instituted product allocations and price increases related to its helium customers at appropriate times.
During the current quarter, the Company’s helium suppliers were able to meet their volume allocation commitments to the Company, but continue to fall short of their volume commitments under the long-term supply agreements. As such, the

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Company continues to expect some level of supply chain disruption at least through the end of fiscal 2013 and most likely into fiscal 2014 and anticipates that the time frame for regaining lost customers and recovering lost sales may 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 December 2012, the Company had successfully converted its Safety telesales and hardgoods infrastructure businesses and eleven of its twelve regional distribution companies to the SAP platform. The Company expects that its remaining regional distribution company will be converted in the Company’s fiscal fourth quarter ending March 31, 2013. 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's financial results, and the Company will continue to monitor these items carefully going forward.
With eleven 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 now focusing more on attaining benefits. The current quarter marked an important inflection point in the Company's execution of its SAP initiative, in that it was the first quarter in which the Company realized meaningful economic benefits, including more effective management of pricing and discounting practices, as well as expansion of its telesales platform, each enabled by SAP. SAP implementation costs and depreciation expense, net of benefits realized, were $0.03 per diluted share for the current quarter, as compared to $0.10 per diluted share in the prior year quarter. SAP implementation costs and depreciation expense, net of expected benefits, are estimated to be in the range of $0.16 to $0.18 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 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 Airgas, Inc. 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 a net benefit of $1.7 million related to lower than previously expected restructuring costs. As a result of the restructuring plan described above, the Company recorded a restructuring charge of $13.3 million during the three months ended June 30, 2011 for severance benefits expected to be paid under the Airgas, Inc. Severance Pay Plan to employees whose jobs were eliminated as a result of the realignment. During the three months ended December 31, 2012, the Company re-evaluated its remaining severance liability related to the realignment and, as a result of this analysis, reduced its severance liability by $3.7 million. The reduction in the severance liability was driven by fewer than expected individuals meeting the requirements to receive severance benefits. This reduction was due to both the retention of employees through relocation or acceptance of new positions, as well as former associates who chose not to remain with the Company through their designated separation dates. Offsetting the benefit from the reduction to the severance liability were additional restructuring and other related costs of $2.0 million for the three months ended December 31, 2012, primarily related to transition staffing, legal and other costs associated with the realignment and LLC formation.
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 $2 million for the three months ending March 31, 2013.
Stock Repurchase Program

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On October 23, 2012, the Company announced a program to repurchase up to $600 million of its outstanding shares of common stock on the open market, with the timing and amount of any repurchases subject to the Company's 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.
During the three months ended December 31, 2012, the Company repurchased 2.47 million shares on the open market at an average price of $89.93. At December 31, 2012, $378 million was available for additional share repurchases under the program. The impact of share repurchases on weighted average diluted shares outstanding was largely offset by stock option exercises in the current quarter. The impact from potential repurchases under the October 2012 stock repurchase program is not reflected in the Company's forward-looking guidance for its fourth fiscal quarter ending March 31, 2013.
Acquisitions and Divestitures
During the nine months ended December 31, 2012, the Company purchased fifteen businesses with aggregate historical annual sales of approximately $94 million. During the prior year period, the Company purchased six businesses with aggregate historical annual sales of approximately $73 million.
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 deemed to be immaterial to the Company’s consolidated earnings.

Fourth Quarter Outlook
The Company expects earnings per diluted share for the fourth fiscal quarter ending March 31, 2013 to be in the range of $1.17 to $1.23, an increase of 4% to 10% over earnings per diluted share of $1.12 in the fourth fiscal quarter ended March 31, 2012. The Company expects its organic sales growth rate for the quarter ending March 31, 2013 to be in the low single digits.


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RESULTS OF OPERATIONS: THREE MONTHS ENDED DECEMBER 31, 2012 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 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”) method 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 net restructuring and other special charges (benefits) 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 5% to $1.21 billion for the current quarter compared to the prior year quarter, driven by organic sales growth of 4%. Acquisitions, net of a divestiture, contributed sales growth of 1% in the current quarter. Gas and rent organic sales increased 6%, wh