ARG - 9.30.14 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
_______________________________________
FORM 10-Q
________________________________________
ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2014
Commission file number: 1-9344 
________________________________________
AIRGAS, INC.
(Exact name of registrant as specified in its charter)
________________________________________
Delaware
 
56-0732648
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
259 North Radnor-Chester Road, Suite 100
Radnor, PA
 
19087-5283
(Address of principal executive offices)
 
(ZIP code)
(610) 687-5253
(Registrant’s telephone number, including area code) 
________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Preferred Stock Purchase Rights
 
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None.
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
o  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of common stock outstanding as of November 3, 2014 was 74,702,022.
 


Table of Contents

AIRGAS, INC.

FORM 10-Q
September 30, 2014
TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS.


AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
(In thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
Net Sales
$
1,357,755

 
$
1,281,970

 
$
2,671,342

 
$
2,561,861

Costs and Expenses:
 
 
 
 
 
 
 
Cost of products sold (excluding depreciation)
600,534

 
563,012

 
1,183,940

 
1,138,555

Selling, distribution and administrative expenses
500,375

 
474,455

 
995,088

 
947,930

Depreciation
73,160

 
68,487

 
145,795

 
135,517

Amortization
7,905

 
7,247

 
15,657

 
14,476

Total costs and expenses
1,181,974

 
1,113,201

 
2,340,480

 
2,236,478

Operating Income
175,781

 
168,769

 
330,862

 
325,383

Interest expense, net
(18,562
)
 
(20,665
)
 
(34,701
)
 
(41,459
)
Other income, net
81

 
1,474

 
1,950

 
1,587

Earnings before income taxes
157,300

 
149,578

 
298,111


285,511

Income taxes
(58,988
)
 
(54,596
)
 
(110,947
)
 
(105,843
)
Net Earnings
$
98,312

 
$
94,982

 
$
187,164

 
$
179,668

Net Earnings per Common Share:
 
 
 
 
 
 
 
Basic earnings per share
$
1.32

 
$
1.29

 
$
2.52

 
$
2.45

Diluted earnings per share
$
1.30

 
$
1.27

 
$
2.48

 
$
2.41

Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
Basic
74,561

 
73,507

 
74,417

 
73,372

Diluted
75,754

 
74,815

 
75,616

 
74,676

Dividends Declared per Common Share
$
0.55

 
$
0.48

 
$
1.10

 
$
0.96


See accompanying notes to consolidated financial statements.


3

Table of Contents


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

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Net earnings
$
98,312

 
$
94,982

 
$
187,164

 
$
179,668

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
  Foreign currency translation adjustments
(5,391
)
 
2,028

 
(2,816
)
 
(537
)
  Reclassification of hedging loss included in net earnings
129

 
129

 
259

 
259

Other comprehensive income (loss), before tax
(5,262
)
 
2,157

 
(2,557
)
 
(278
)
  Net tax expense of other comprehensive income items
(48
)
 
(48
)
 
(96
)
 
(96
)
Other comprehensive income (loss), net of tax
(5,310
)
 
2,109

 
(2,653
)
 
(374
)
Comprehensive income
$
93,002

 
$
97,091

 
$
184,511

 
$
179,294


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)
September 30,
2014
 
March 31,
2014
ASSETS
 
 
 
Current Assets
 
 
 
Cash
$
65,712

 
$
69,561

Trade receivables, less allowances for doubtful accounts of $29,443 and $31,757 at September 30, 2014 and March 31, 2014, respectively
719,149

 
701,060

Inventories, net
487,778

 
478,149

Deferred income tax asset, net
57,347

 
57,961

Prepaid expenses and other current assets
98,040

 
92,356

Total current assets
1,428,026

 
1,399,087

Plant and equipment at cost
5,114,922

 
4,931,064

Less accumulated depreciation
(2,243,698
)
 
(2,128,649
)
Plant and equipment, net
2,871,224

 
2,802,415

Goodwill
1,309,247

 
1,289,896

Other intangible assets, net
253,027

 
258,836

Other non-current assets
43,250

 
43,080

Total assets
$
5,904,774

 
$
5,793,314

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable, trade
$
204,735

 
$
196,911

Accrued expenses and other current liabilities
348,409

 
345,676

Short-term debt
433,174

 
387,866

Current portion of long-term debt
205

 
400,322

Total current liabilities
986,523

 
1,330,775

Long-term debt, excluding current portion
2,006,943

 
1,706,774

Deferred income tax liability, net
820,196

 
825,897

Other non-current liabilities
88,688

 
89,219

Commitments and contingencies


 


Stockholders’ Equity
 
 
 
Preferred stock, 20,030 shares authorized, no shares issued or outstanding at September 30, 2014 and March 31, 2014

 

Common stock, par value $0.01 per share, 200,000 shares authorized, 87,456 and 87,353 shares issued at September 30, 2014 and March 31, 2014, respectively
875

 
874

Capital in excess of par value
824,707

 
789,789

Retained earnings
2,145,629

 
2,047,843

Accumulated other comprehensive income (loss)
(2,124
)
 
529

Treasury stock, 12,842 and 13,264 shares at cost at September 30, 2014 and March 31, 2014, respectively
(966,663
)
 
(998,386
)
Total stockholders’ equity
2,002,424

 
1,840,649

Total liabilities and stockholders’ equity
$
5,904,774

 
$
5,793,314


See accompanying notes to consolidated financial statements.

5



Table of Contents

 
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
September 30,
(In thousands)
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net earnings
$
187,164

 
$
179,668

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
145,795

 
135,517

Amortization
15,657

 
14,476

Deferred income taxes
(6,702
)
 
3,183

Gain on sales of plant and equipment
(1,338
)
 
(828
)
Stock-based compensation expense
20,833

 
19,965

Changes in assets and liabilities, excluding effects of business acquisitions:
 
 
 
Trade receivables, net
(12,812
)
 
9,632

Inventories, net
(7,226
)
 
8,424

Prepaid expenses and other current assets
(5,395
)
 
6,913

Accounts payable, trade
6,513

 
(13,948
)
Accrued expenses and other current liabilities
2,514

 
18,766

Other, net
(3,085
)
 
(574
)
Net cash provided by operating activities
341,918

 
381,194

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(220,872
)
 
(168,483
)
Proceeds from sales of plant and equipment
10,634

 
7,292

Business acquisitions and holdback settlements
(29,834
)
 
(15,745
)
Other, net
716

 
(1,869
)
Net cash used in investing activities
(239,356
)
 
(178,805
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net increase in short-term debt
45,112

 

Proceeds from borrowings of long-term debt
306,254

 
4,666

Repayment of long-term debt
(403,757
)
 
(119,863
)
Financing costs
(2,398
)
 

Purchase of treasury stock

 
(8,127
)
Proceeds from the exercise of stock options
19,830

 
22,946

Stock issued for the Employee Stock Purchase Plan
8,994

 
8,797

Excess tax benefit realized from the exercise of stock options
5,091

 
6,568

Dividends paid to stockholders
(81,942
)
 
(70,505
)
Change in cash overdraft and other
(3,595
)
 
(21,992
)
Net cash used in financing activities
(106,411
)
 
(177,510
)
Change in cash
$
(3,849
)
 
$
24,879

Cash – Beginning of period
69,561

 
86,386

Cash – End of period
$
65,712

 
$
111,265


See accompanying notes to consolidated financial statements.

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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, 2014.
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.

(2) ACCOUNTING AND DISCLOSURE CHANGES
Recently Adopted Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board (“FASB”) issued new guidance clarifying the accounting for the release of cumulative translation adjustments (“CTA”) into net income upon the occurrence of certain sale or other derecognition transactions related to foreign entities. The new guidance describes the circumstances in which CTA should be released (either partially or fully) into net income based on the type of transaction related to a foreign entity. The Company adopted the new guidance effective April 1, 2014. The guidance did not have an impact on the Company’s financial position, results of operation or liquidity upon adoption; rather, the Company will prospectively apply the provisions of the new guidance to applicable transactions related to its foreign entities.
In July 2013, the FASB issued new guidance clarifying the financial statement presentation of unrecognized tax benefits. The new guidance specifies that an unrecognized tax benefit (or a portion thereof) shall be presented in the financial statements as a reduction to a deferred tax asset depending on the availability of certain deferred tax assets to settle the additional income taxes resulting from the disallowance of a tax position. If the deferred tax asset is not available or the entity does not plan to use the deferred tax asset for such purpose given the option, the unrecognized tax benefit shall be presented in the financial statements as a liability and shall not be combined with deferred tax assets. The Company adopted the new guidance effective April 1, 2014, with no material impact on the balance sheet presentation of its unrecognized tax benefits.
Accounting Pronouncements Not Yet Adopted
In April 2014, the FASB issued new guidance on the reporting of discontinued operations. The guidance amends existing standards by limiting the presentation of discontinued operations to disposals that represent a strategic shift with a major effect on an entity’s operations and financial results. In contrast, many disposals under current standards, which may be more routine in nature and not change an entity’s strategy, are reported in discontinued operations. The guidance also requires new disclosures around both disposals qualifying for discontinued operations as well as significant disposals that are not considered discontinued operations. The new guidance is effective for the Company on a prospective basis starting April 1, 2015, with early adoption permitted for disposals that have not been previously reported in the Company’s financial statements. The impact of the new guidance on the Company’s consolidated financial statements will depend on the occurrence of disposal transactions subject to the guidance, and will only be applicable to new disposals subsequent to adoption.
In May 2014, the FASB issued new guidance on the accounting for revenue from contracts with customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance will replace most existing GAAP revenue recognition guidance when it becomes effective. The new standard is effective for the Company on April 1, 2017, and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

7

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


(3) ACQUISITIONS
Acquisitions have been recorded using the acquisition method of accounting and accordingly, results of their operations have been included in the Company’s consolidated financial statements since the effective date of each respective acquisition.
During the six months ended September 30, 2014, the Company acquired eight businesses with historical annual sales of approximately $36 million, all of which were in the Distribution business segment. Transaction and other integration costs incurred during the six months ended September 30, 2014 were $1 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 during the six months ended September 30, 2014.
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 six months ended September 30, 2014 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 may result in further adjustments to the values presented below. The following table summarizes the consideration paid and the estimated fair values of the assets acquired and liabilities assumed for fiscal 2015 acquisitions, as well as adjustments to finalize the valuations of certain prior year acquisitions. Valuation adjustments related to prior year acquisitions were not significant.
(In thousands)
 
Consideration
 
Cash (a)
$
29,834

Airgas, Inc. common stock (b)
4,458

Fair value of total consideration transferred
$
34,292

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed
 
Current assets, net
$
7,751

Plant and equipment
8,943

Other intangible assets
9,411

Current liabilities
(7,333
)
Non-current liabilities
(4,423
)
Total identifiable net assets
14,349

 
 
Goodwill
19,943


$
34,292

____________________
(a) 
Includes cash paid, net of cash acquired, for current year acquisitions as well as payments for the settlement of holdback liabilities and contingent consideration arrangements associated with prior year acquisitions.
(b) 
Represents 41,060 shares of Airgas, Inc. common stock issued in connection with a single acquisition. The fair value of the shares issued as part of the consideration for the acquisition was determined based on the closing sales price of Airgas, Inc. common stock on the acquisition date.
The fair value of trade receivables acquired with fiscal 2015 acquisitions was $5.2 million, with gross contractual amounts receivable of $5.7 million. Goodwill associated with fiscal 2015 acquisitions was $15.5 million, of which $11.1 million is deductible for income tax purposes. Goodwill largely consists of expected synergies resulting from the acquisitions, including increased distribution density and enhanced capabilities that will facilitate the sale of industrial, medical and specialty gases, and related supplies. Other intangible assets related to fiscal 2015 acquisitions represent customer relationships and non-competition agreements, and amounted to $6.7 million and $2.6 million, respectively. See Note 5 for further information on goodwill and other intangible assets.
Pro forma results of operations have not been presented for these acquisitions since the impact is not material to the Company’s consolidated statements of earnings, either individually or in aggregate.

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


(4) INVENTORIES, NET
Inventories, net, consist of:
(In thousands)
September 30, 2014
 
March 31, 2014
Hardgoods
$
321,179

 
$
313,127

Gases
166,599

 
165,022

 
$
487,778

 
$
478,149


(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The valuations of assets acquired and liabilities assumed from certain recent acquisitions are based on preliminary estimates of fair value and are subject to revision as the Company finalizes appraisals and other analyses. Changes in the carrying amount of goodwill by business segment for the six months ended September 30, 2014 were as follows:
(In thousands)
Distribution Business Segment
 
All Other Operations Business Segment
 
Total
Balance at March 31, 2014
$
1,092,728

 
$
197,168

 
$
1,289,896

Acquisitions (a)
19,943

 

 
19,943

Other adjustments, including foreign currency translation
(576
)
 
(16
)
 
(592
)
Balance at September 30, 2014
$
1,112,095

 
$
197,152

 
$
1,309,247

____________________
(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:
 
September 30, 2014
 
March 31, 2014
(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
17
 
$
351,908

 
$
(118,997
)
 
$
232,911

 
17
 
$
345,199

 
$
(107,577
)
 
$
237,622

Non-competition agreements
6
 
42,380

 
(22,440
)
 
19,940

 
7
 
40,316

 
(19,287
)
 
21,029

Other
 
 
200

 
(24
)
 
176

 
 
 
199

 
(14
)
 
185

 
 
 
$
394,488

 
$
(141,461
)
 
$
253,027

 
 
 
$
385,714

 
$
(126,878
)
 
$
258,836

Other intangible assets primarily consist of customer relationships, which are amortized over the estimated benefit periods ranging from seven to 25 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 other intangible assets when facts and circumstances indicate that the lives may not be appropriate and/or the carrying values of the assets may not be recoverable. If the carrying value of an other intangible asset or asset group is not recoverable, impairment is measured as the amount by which the carrying value exceeds its estimated fair value.

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

As the Company’s other intangible assets amortize and reach the end of their respective amortization periods, the fully amortized balances are removed from the gross carrying and accumulated amortization amounts. Amortization expense related to the Company’s other intangible assets for the six months ended September 30, 2014 and 2013 was $15.0 million and $13.9 million, respectively. Estimated future amortization expense for the Company’s other intangible assets by fiscal year is as follows: remainder of fiscal 2015 - $14.8 million; 2016 - $28.4 million; 2017 - $26.5 million; 2018 - $24.8 million; 2019 - $22.8 million; and $135.7 million thereafter.

(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities include:
(In thousands)
September 30, 2014
 
March 31, 2014
Accrued payroll and employee benefits
$
87,281

 
$
92,038

Business insurance reserves (a)
50,480

 
49,372

Income taxes
12,799


8,943

Taxes other than income taxes
27,622

 
25,183

Cash overdraft
64,650

 
68,245

Deferred rental revenue
33,142

 
34,557

Accrued interest
14,567

 
11,335

Other accrued expenses and current liabilities
57,868

 
56,003

 
$
348,409

 
$
345,676

____________________
(a) 
With respect to the business insurance reserves above, the Company had corresponding insurance receivables of $11.6 million at September 30, 2014 and $11.8 million at March 31, 2014, 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.

(7) INDEBTEDNESS
Total debt consists of:
(In thousands)
September 30, 2014
 
March 31, 2014
Short-term
 
 
 
Money market loans
$

 
$

Commercial paper
433,174

 
387,866

Short-term debt
$
433,174

 
$
387,866

 
 
 
 
Long-term
 
 
 
Trade receivables securitization
$
295,000

 
$
295,000

Revolving credit borrowings - U.S.

 

Revolving credit borrowings - Multi-currency
55,598

 
54,230

Revolving credit borrowings - France
7,390

 
8,056

Senior notes, net
1,648,417

 
1,748,774

Other long-term debt
743

 
1,036

Total long-term debt
2,007,148

 
2,107,096

Less current portion of long-term debt
(205
)
 
(400,322
)
Long-term debt, excluding current portion
$
2,006,943

 
$
1,706,774

 
 
 
 
Total debt
$
2,440,322

 
$
2,494,962

In July 2014, the Company extended an agreement with a financial institution that provides access to short-term advances not to exceed $35 million. The agreement now expires on July 31, 2015, and may be further extended subject to renewal provisions contained in the agreement. The advances are generally overnight or for up to seven days. The amount, term and interest rate of an advance are established through mutual agreement with the financial institution when the Company requests such an advance. At September 30, 2014, there were no advances outstanding under the agreement.

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

The Company participates in a $750 million Amended and Restated Credit Facility (the “Credit Facility”). As of September 30, 2014, the Company had $56 million of borrowings under the Credit Facility, all of which were under the multi-currency revolver. There were no borrowings under the U.S. dollar revolver at September 30, 2014. The Company also had outstanding U.S. letters of credit of $51 million issued under the Credit Facility. At September 30, 2014, the financial covenant of the Credit Facility did not restrict the Company’s ability to borrow on the unused portion of the Credit Facility, and the Company was in compliance with all covenants under all of its debt agreements. At September 30, 2014, $210 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.
On June 17, 2014, the Company issued $300 million of 3.65% senior notes maturing on July 15, 2024 (the “2024 Notes”). The 2024 Notes were issued at a discount with a yield of 3.673%. The net proceeds from the sale of the 2024 Notes were used for general corporate purposes, including to fund acquisitions and repay indebtedness under the Company’s commercial paper program. Interest on the 2024 Notes is payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2015. The 2024 Notes contain covenants that restrict the incurrence of liens and limit sale and leaseback transactions. The Company has the option to redeem the 2024 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.
In September 2014, the Company repaid $400 million of 4.50% senior notes that matured.
The aggregate maturities of long-term debt at September 30, 2014 are as follows:
(In thousands)
Debt Maturities  (a)
Remainder of fiscal 2015
$
125

March 31, 2016
250,302

March 31, 2017
608,209

March 31, 2018
325,095

March 31, 2019

Thereafter
825,000

 
$
2,008,731

____________________
(a) 
Outstanding borrowings under the Securitization Agreement at September 30, 2014 are reflected as maturing at the agreement’s expiration on December 5, 2016.
The Company’s 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 $1.6 million at September 30, 2014.

(8) FAIR VALUE MEASUREMENTS
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 directly or indirectly observable 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 values of cash, trade receivables, other current receivables, trade payables and other current liabilities (e.g., deposit liabilities, cash overdrafts, etc.) approximate fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Assets and liabilities measured at fair value on a recurring basis at September 30, 2014 and March 31, 2014 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.

 
Balance at
 
Quoted prices in
active markets
Level 1
 
Significant other
observable inputs
Level 2
 
Significant
unobservable inputs
Level 3
(In thousands)
September 30, 2014
 
 
 
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
$
15,614

 
$
15,614

 
$

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities
$
15,614

 
$
15,614

 
$

 
$


 
Balance at
 
Quoted prices in
active markets
Level 1
 
Significant other
observable inputs
Level 2
 
Significant
unobservable inputs
Level 3
(In thousands)
March 31, 2014
 
 
 
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets
$
16,387

 
$
16,387

 
$

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Deferred compensation plan liabilities
$
16,387

 
$
16,387

 
$

 
$

Contingent consideration liabilities
323

 

 

 
323

Total liabilities measured at fair value on a recurring basis
$
16,710

 
$
16,387

 
$

 
$
323


The following is a general description of the valuation methodologies used for 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, net, while gains or losses on the deferred compensation plan liabilities are recognized as compensation expense in the consolidated statements of earnings.
Contingent consideration liabilities — As part of the consideration for certain acquisitions, the Company has utilized arrangements 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 earnings growth, all of which the Company believes are appropriate and representative of market participant assumptions. The total liability for contingent consideration arrangements at September 30, 2014 and the impact on the Company’s earnings as a result of these arrangements for the three and six months ended September 30, 2014 and 2013 were immaterial.
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. The fair values of the fixed rate notes disclosed in the following table 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 revolving credit borrowings, securitized receivables and commercial paper approximate their carrying values (see Note 7).

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

 
Carrying Value at
 
Fair Value at
 
Carrying Value at
 
Fair Value at
(In thousands)
September 30, 2014
 
September 30, 2014
 
March 31, 2014
 
March 31, 2014
4.50% senior notes due 2014

 

 
399,952

 
407,092

3.25% senior notes due 2015
249,925

 
255,218

 
249,887

 
258,630

2.95% senior notes due 2016
249,883

 
257,440

 
249,848

 
259,257

1.65% senior notes due 2018
324,634

 
320,603

 
324,579

 
319,098

2.375% senior notes due 2020
274,770

 
270,421

 
274,748

 
265,600

2.90% senior notes due 2022
249,773

 
240,295

 
249,760

 
233,230

3.65% senior notes due 2024
299,432

 
300,459

 

 


(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, 2014
87,353

 
(13,264
)
Common stock issuance (a)
103

 
 
Reissuance of treasury stock for stock option exercises
 
 
381

Reissuance of treasury stock for acquisition
 
 
41

Balance at September 30, 2014
87,456

 
(12,842
)
(In thousands)
Common
Stock
 
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total
Stockholders’
Equity
Balance at March 31, 2014
$
874

 
$
789,789

 
$
2,047,843

 
$
529

 
$
(998,386
)
 
$
1,840,649

Net earnings
 
 
 
 
187,164

 
 
 
 
 
187,164

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
(2,653
)
 
 
 
(2,653
)
Common stock issuances and reissuances of treasury stock - employee benefit plans (b) 
1

 
7,626

 
(7,436
)
 
 
 
28,633

 
28,824

Reissuance of treasury stock for acquisition (Note 3)
 
 
1,368

 
 
 
 
 
3,090

 
4,458

Excess tax benefit from stock option exercises
 
 
5,091

 
 
 
 
 
 
 
5,091

Dividends paid on common stock ($1.10 per share)
 
 
 
 
(81,942
)
 
 
 
 
 
(81,942
)
Stock-based compensation (c)
 
 
20,833

 
 
 
 
 
 
 
20,833

Balance at September 30, 2014
$
875

 
$
824,707

 
$
2,145,629

 
$
(2,124
)
 
$
(966,663
)
 
$
2,002,424

___________________
(a) 
Issuance of common stock for purchases through the Employee Stock Purchase Plan.
(b) 
Issuance of common stock for purchases through the Employee Stock Purchase Plan and reissuance of treasury stock for stock option exercises.
(c) 
The Company recognized compensation expense with a corresponding amount recorded to capital in excess of par value.

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

The following table presents the gross and net changes in the balances within each component of accumulated other comprehensive income (“AOCI”) for the six months ended September 30, 2014.
(In thousands)
Foreign Currency
Translation
Adjustments
 
Treasury Rate
Lock Agreement
 
Total Accumulated
Other Comprehensive
Income (Loss)
Balance at March 31, 2014
$
1,018

 
$
(489
)
 
$
529

Other comprehensive income (loss) before reclassifications
(2,816
)
 

 
(2,816
)
Amounts reclassified from AOCI (d)

 
259

 
259

Tax effect of other comprehensive income items

 
(96
)
 
(96
)
Other comprehensive income (loss), net of tax
(2,816
)
 
163

 
(2,653
)
Balance at September 30, 2014
$
(1,798
)
 
$
(326
)
 
$
(2,124
)
___________________
(d)
The reclassifications out of AOCI were associated with a loss on a treasury rate lock agreement from July 2010 related to the issuance of the Company’s $250 million of 3.25% senior notes maturing on October 1, 2015 (the “2015 Notes”), which is being reclassified into earnings (interest expense) over the term of the 2015 Notes. The effects on the respective line items of the consolidated statements of earnings impacted by the reclassifications were not material for the six months ended September 30, 2014 and 2013.

(10) STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation expense for its Equity Incentive Plan and Employee Stock Purchase Plan. The following table summarizes stock-based compensation expense recognized by the Company for the three and six months ended September 30, 2014 and 2013.

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Stock-based compensation expense related to:
 
 
 
 
 
 
 
Equity Incentive Plan (a)
$
4,962

 
$
5,179

 
$
18,734

 
$
17,860

Employee Stock Purchase Plan - options to purchase stock
1,041

 
1,058

 
2,099

 
2,105

 
6,003

 
6,237

 
20,833

 
19,965

Tax benefit
(2,041
)
 
(2,134
)
 
(7,550
)
 
(7,428
)
Stock-based compensation expense, net of tax
$
3,962

 
$
4,103

 
$
13,283

 
$
12,537

___________________
(a) 
Stock-based compensation expense related to stock options granted under the Company’s Equity Incentive Plan is highest during the Company’s fiscal first quarter ended June 30th relative to other quarters during the year. This is primarily due to a retirement-eligible vesting provision under the plan and the timing of the majority of the Company’s stock option awards each year during its fiscal first quarter.
Fair Value
The Company utilizes the Black-Scholes option pricing model to determine the fair value of stock options. The weighted-average grant date fair value of stock options granted during the six months ended September 30, 2014 and 2013 was $28.74 and $32.40, respectively.

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

Summary of Stock Option Activity
The following table summarizes the stock option activity during the six months ended September 30, 2014:

(In thousands, except per share amounts)
Number of Stock Options
 
Weighted-Average
Exercise Price
Outstanding at March 31, 2014
5,104

 
$
69.91

Granted
973

 
$
104.79

Exercised
(381
)
 
$
52.10

Forfeited
(37
)
 
$
95.87

Outstanding at September 30, 2014
5,659

 
$
76.93

Vested or expected to vest at September 30, 2014
5,634

 
$
76.82

Exercisable at September 30, 2014
3,453

 
$
63.51

A total of 3.2 million shares of common stock were available for grant under the Second Amended and Restated 2006 Equity Incentive Plan as of September 30, 2014.
As of September 30, 2014, $54.9 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 September 30, 2014, the ESPP had 1.2 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 $21.43 and $19.27 for the six months ended September 30, 2014 and 2013, respectively. The fair value of the employees’ option to purchase shares of common stock was estimated using the Black-Scholes model.
ESPP - Purchase Option Activity
The following table summarizes the activity of the ESPP during the six months ended September 30, 2014:

(In thousands, except per share amounts)
Number of Purchase Options
 
Weighted-Average
Exercise Price
Outstanding at March 31, 2014
55

 
$
80.77

Granted
195

 
$
91.38

Exercised
(103
)
 
$
87.17

Outstanding at September 30, 2014
147

 
$
90.35


(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 2.0 million and 1.6 million shares covered by outstanding stock options that were not dilutive for the three months ended September 30, 2014 and 2013, respectively. There were approximately 1.8 million and 1.3 million shares covered by outstanding stock options that were not dilutive for the six months ended September 30, 2014 and 2013, respectively.

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

The following table presents the computation of basic and diluted weighted average common shares outstanding for the three and six months ended September 30, 2014 and 2013:

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Weighted average common shares outstanding:
 
 
 
 
 
Basic shares outstanding
74,561

 
73,507

 
74,417

 
73,372

Incremental shares from assumed exercises of stock options and options under the ESPP
1,193

 
1,308

 
1,199

 
1,304

Diluted shares outstanding
75,754

 
74,815

 
75,616

 
74,676


(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 in the following table for the three and six months ended September 30, 2014 and 2013. Although corporate operating expenses are generally allocated to each business segment based on sales dollars, the Company reported expenses (excluding depreciation) related to the implementation of its SAP system under selling, distribution and administrative expenses in the “Eliminations and Other” column. 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 in the following table.

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

 
Three Months Ended
 
Three Months Ended
 
September 30, 2014
 
September 30, 2013
(In thousands)
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
 
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
Gas and rent
$
718,743

 
$
147,821

 
$
(8,049
)
 
$
858,515

 
$
681,389

 
$
149,313

 
$
(7,916
)
 
$
822,786

Hardgoods
498,267

 
974

 
(1
)
 
499,240

 
458,187

 
997

 

 
459,184

Net sales (a)
1,217,010

 
148,795

 
(8,050
)
 
1,357,755

 
1,139,576

 
150,310

 
(7,916
)
 
1,281,970

Cost of products sold (excluding depreciation) (a)
531,867

 
76,717

 
(8,050
)
 
600,534

 
491,660

 
79,268

 
(7,916
)
 
563,012

Selling, distribution and administrative expenses
452,467

 
47,908

 

 
500,375

 
427,351

 
45,412

 
1,692

 
474,455

Depreciation
66,949

 
6,211

 

 
73,160

 
62,865

 
5,622

 

 
68,487

Amortization
6,881

 
1,024

 

 
7,905

 
6,193

 
1,054

 

 
7,247

Total costs and expenses
1,058,164

 
131,860

 
(8,050
)
 
1,181,974

 
988,069

 
131,356

 
(6,224
)
 
1,113,201

Operating income
$
158,846

 
$
16,935

 
$

 
$
175,781

 
$
151,507

 
$
18,954

 
$
(1,692
)
 
$
168,769

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
Six Months Ended
 
September 30, 2014
 
September 30, 2013
(In thousands)
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
 
Distribution
 
All Other
Ops.
 
Eliminations
and Other
 
Total
Gas and rent
$
1,415,308

 
$
283,913

 
$
(15,115
)
 
$
1,684,106

 
$
1,353,875

 
$
295,180

 
$
(16,377
)
 
$
1,632,678

Hardgoods
985,314

 
1,925

 
(3
)
 
987,236

 
926,785

 
2,400

 
(2
)
 
929,183

   Net sales (a)
2,400,622

 
285,838

 
(15,118
)
 
2,671,342

 
2,280,660

 
297,580

 
(16,379
)
 
2,561,861

Cost of products sold (excluding depreciation) (a)
1,052,800

 
146,258

 
(15,118
)
 
1,183,940

 
996,787

 
158,147

 
(16,379
)
 
1,138,555

Selling, distribution and administrative expenses
902,106

 
92,982

 

 
995,088

 
854,582

 
88,952

 
4,396

 
947,930

Depreciation
133,411

 
12,384

 

 
145,795

 
124,529

 
10,988

 

 
135,517

Amortization
13,605

 
2,052

 

 
15,657

 
12,255

 
2,221

 

 
14,476

Total costs and expenses
2,101,922

 
253,676

 
(15,118
)
 
2,340,480

 
1,988,153

 
260,308

 
(11,983
)
 
2,236,478

Operating income
$
298,700

 
$
32,162

 
$

 
$
330,862

 
$
292,507

 
$
37,272

 
$
(4,396
)
 
$
325,383

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

(14) SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid for Interest and Income Taxes
Cash paid for interest and income taxes was as follows:
 
Six Months Ended
 
September 30,
(In thousands)
2014
 
2013
Interest
$
32,667

 
$
42,107

Income taxes, net of refunds
108,847

 
74,910

Noncash Investing and Financing Activities
Liabilities assumed and stock issued as a result of acquisitions were as follows:
 
Six Months Ended
(In thousands)
September 30, 2014
Fair value of assets acquired
$
46,048

Net cash paid for acquisitions (a)
(29,834
)
Stock issued for acquisition (b)
(4,458
)
Liabilities assumed
$
11,756

____________________
(a)
Includes cash paid, net of cash acquired, for current year acquisitions as well as payments for the settlement of holdback liabilities and contingent consideration arrangements associated with prior year acquisitions.
(b) 
Represents shares of Airgas, Inc. common stock issued in connection with a single acquisition – see Note 3 for further information.

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Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW
Airgas, Inc. and its subsidiaries (“Airgas” or the “Company”) had net sales for the quarter ended September 30, 2014 (“current quarter”) of $1.36 billion compared to $1.28 billion for the quarter ended September 30, 2013 (“prior year quarter”), an increase of 6%. Organic sales increased 4% compared to the prior year quarter, with gas and rent up 3% and hardgoods up 6%. Current and prior year acquisitions contributed sales growth of 2% in the current quarter. The Company’s organic sales growth reflected strength in certain sectors, such as upstream energy, transportation and hospitals, as well as strength in its rental welder and generator business. Overall the Company is seeing modestly strengthening business conditions despite softness in some sectors. Sectors such as mining and heavy manufacturing that were significant headwinds in the prior year appeared to be stabilizing during the current quarter.
The consolidated gross profit margin (excluding depreciation) in the current quarter was 55.8%, a decrease of 30 basis points from the prior year quarter, primarily reflecting a sales mix shift toward lower margin hardgoods.
The Company’s operating income margin in the current quarter was 12.9%, a decrease of 30 basis points from the prior year quarter, primarily reflecting the sales mix shift toward lower margin hardgoods.
Net earnings per diluted share increased to $1.30 in the current quarter versus $1.27 in the prior year quarter. Net earnings per diluted share in the prior year quarter included a $0.02 per diluted share benefit related to a change in a state income tax law.
Supply Constraints and Challenges
On October 16, 2014, the U.S. Environmental Protection Agency (“EPA”) signed the final rule pertaining to allowances for virgin production and consumption of hydrochlorofluorocarbons (“HCFCs”), including Refrigerant-22 (“R-22”), for 2015 through 2019. The final rule, which was the lowest proposed five-year linear approach, establishes virgin R-22 consumption allowances which step down each year beginning with an approximately 60% reduction for 2015, with a final ban on all production effective January 1, 2020. As production and imports of R-22 are phased out by the EPA in accordance with United States regulations adopted in response to the Montreal Protocol on Substances that Deplete the Ozone Layer (the “Montreal Protocol”), the gap between demand and supply is expected to be filled increasingly by reclaimed and recycled R-22. The Company believes that as a leading reclaimer, recycler and distributor of R-22, its refrigerants business is well-positioned over the long-term to benefit from an expected increase in demand for reclaimed and recycled R-22, as well as from expected increases in market pricing of R-22 as the phase-out progresses. The timing and pace of the market’s increased reliance on reclaimed and recycled R-22, however, is difficult to predict due to the excess inventory that has accumulated throughout the industry’s supply chain and must be worked off in the near-term. As such, for fiscal 2015, the Company expects the year-over-year impact to its earnings from its refrigerants business to be neutral.
In recent years, there has been limited investment in new argon capacity in the U.S., and overall argon production has not kept pace with demand at a time when increased activity in energy and infrastructure construction has driven demand higher for the product. As a result, the Company’s costs to secure and distribute argon to serve its customers have been increasing. The Company continues to invest in production capacity and infrastructure to serve its customers as efficiently as possible and further ensure the reliability of its supply chain, but increasing demand for argon is likely to result in continued pressure on product and distribution costs for the foreseeable future.
Fiscal Third Quarter and Full Fiscal Year Outlook
The Company believes that strong growth in its rental welder business, as well as increasing requests for staging of materials for energy-related construction projects, serve as forward indicators suggesting that non-residential construction activity should increase as the Company’s fiscal year progresses, providing a lift to its construction and other key end markets. In addition, sales to sectors such as mining and heavy manufacturing that were significant headwinds in the prior year are now stabilizing. As such, the Company’s guidance range for the full fiscal year reflects the expectation for increased year-over-year organic sales growth rates in the second half of the fiscal year, while also reflecting mix pressure from outperformance in hardgoods, cost pressures related to supply disruptions, and a lower than previously expected year-over-year contribution from refrigerants.
The Company expects earnings per diluted share for the third fiscal quarter ending December 31, 2014 to be in the range of $1.20 to $1.25, an increase of 9% to 14% over earnings per diluted share of $1.10 in the third fiscal quarter ended December 31, 2013. Earnings per diluted share in the quarter ended December 31, 2013 included an $0.08 per diluted share charge related to a loss on the early extinguishment of debt. The Company expects its organic sales growth rate for the quarter ending December 31, 2014 to be in the mid single digits.

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Table of Contents

The Company expects earnings per diluted share for the full fiscal year ending March 31, 2015 to be in the range of $5.00 to $5.10, an increase of 7% to 9% over earnings per diluted share of $4.68 in the fiscal year ended March 31, 2014. Earnings per diluted share in the year ended March 31, 2014 included $0.04 per diluted share in benefits related to changes in state income tax rates and law, and a $0.08 loss on the early extinguishment of debt. The Company expects its organic sales growth for the year ending March 31, 2015 to be in the range of 4% to 5%.


20

Table of Contents

RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2013

STATEMENT OF EARNINGS COMMENTARY
Net Sales
Net sales increased 6% to $1.36 billion for the current quarter compared to the prior year quarter, driven by organic sales growth of 4% and sales growth from current and prior year acquisitions of 2% in the current quarter. Overall the Company is seeing modestly strengthening business conditions despite softness in some sectors. Gas and rent organic sales were up 3% in the current quarter, with hardgoods organic sales up 6%. Organic sales growth in the current quarter was driven by price and volume increases of 2% each.
Strategic products represent approximately 40% of net sales and are comprised of safety products and bulk, medical and specialty gases and associated rent, which are sold to end customers through the Distribution business segment, and carbon dioxide (“CO2”) and dry ice, the vast majority of which are sold to end customers through the All Other Operations business segment. The Company has identified these products as strategic because it believes they have good long-term growth profiles relative to the Company’s core industrial gas and welding products due to favorable end customer markets, application development, increasing environmental regulation, strong cross-selling opportunities or a combination thereof. During the current quarter, sales of strategic products in aggregate grew 4% on an organic basis over the prior year quarter.
The Company’s strategic accounts program, which represents approximately 25% of net sales, is designed to deliver superior product and service offerings to larger, multi-location customers, and presents the Company with strong cross-selling and greater penetration opportunities. Sales to strategic accounts in the current quarter grew 4% compared to the prior year quarter, with strength in upstream energy, transportation and hospitals, partially offset by the impact of difficult year-over-year comparisons in downstream energy.
In the following table, the intercompany eliminations represent sales from the All Other Operations business segment to the Distribution business segment.

 
Three Months Ended
 
 
 
 
Net Sales
(In thousands)
September 30,
 
Increase/(Decrease)
 
 
2014
 
2013
 
 
 
Distribution
$
1,217,010

 
$
1,139,576

 
$
77,434

 
7
 %
All Other Operations
148,795

 
150,310

 
(1,515
)
 
(1
)%
Intercompany eliminations
(8,050
)
 
(7,916
)
 
(134
)
 
 
 
$
1,357,755

 
$
1,281,970

 
$
75,785

 
6
 %

The Distribution business segment’s principal products and services include industrial, medical and specialty gases, and process chemicals; cylinder and equipment rental; and hardgoods. Industrial, medical and specialty gases are distributed in cylinders and bulk containers. Rental fees are generally charged on cylinders, dewars (cryogenic liquid cylinders), bulk and micro-bulk tanks, tube trailers and certain welding equipment. Hardgoods generally consist of welding consumables and equipment, safety products, construction supplies, and maintenance, repair and operating supplies.
Distribution business segment sales increased 7% over the prior year quarter, with an increase in organic sales of 4%. Incremental sales from current and prior year acquisitions contributed sales growth of 3% in the current quarter. Higher pricing and volume increases each contributed 2% to organic sales growth in the Distribution business segment. Gas and rent organic sales in the Distribution business segment increased 3%, with pricing up 3% and volumes flat. Hardgoods organic sales within the Distribution business segment increased 6%, with pricing up 1% and volumes up 5%.
Within the Distribution business segment, organic sales of gas related strategic products and associated rent increased 4% over the prior year quarter, comprised of the following: bulk gas and rent up 6%, primarily driven by higher pricing and volumes; specialty gas, rent, and related equipment up 5%, primarily driven by increases in core specialty gas price and volume; and medical gas and rent up 2%, as increases in hospitals and surgery centers were partially offset by weakness in wholesale sales to homecare distributors. In addition, organic sales in the Company’s Red-D-Arc business increased 13% over the prior year quarter, driven by increases in both welder and generator rentals in the non-residential construction and upstream energy customer segments.

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Within the Distribution business segment’s hardgoods sales, organic sales volumes for equipment were up year-over-year for the third consecutive quarter, with strong growth in the current quarter. Sales of safety products increased by 4% compared to the prior year quarter, primarily driven by volume gains in core industrial activity. Sales of the Company’s Radnor® private-label product line, which includes certain safety products, consumables, and other hardgoods, increased 6% in the current quarter over the prior year quarter, consistent with the 6% increase in total hardgoods organic sales in the Distribution business segment.
The All Other Operations business segment consists of five business units. The primary products manufactured and/or distributed are CO2, dry ice, nitrous oxide, ammonia and refrigerant gases.
The All Other Operations business segment sales decreased 1% in total and on an organic basis compared to the prior year quarter. Both the total and organic sales decreased as sales increases in the Company’s CO2, dry ice, and ammonia businesses were more than offset by the decline in sales in its refrigerants business. Organic sales of CO2 and dry ice, which represent one of the Company’s strategic product categories, increased 4% over the prior year quarter.
Gross Profits (Excluding Depreciation)
Gross profits (excluding depreciation) do not reflect deductions related to depreciation expense and distribution costs. The Company reflects distribution costs as an element of the line item “Selling, distribution and administrative expenses” and recognizes depreciation on all of its property, plant and equipment in the line item “Depreciation” in its consolidated statements of earnings. Other companies may report certain or all of these costs as elements of their cost of products sold and, as such, the Company’s gross profits (excluding depreciation) discussed below may not be comparable to those of other companies.
Consolidated gross profits (excluding depreciation) increased 5% compared to the prior year quarter, reflecting the overall growth in sales and margin expansion on price increases, partially offset by supplier price and internal production cost increases and a sales mix shift toward lower margin hardgoods. The consolidated gross profit margin (excluding depreciation) in the current quarter decreased 30 basis points to 55.8% compared to 56.1% in the prior year quarter. The decrease in consolidated gross profit margin (excluding depreciation) was primarily driven by the sales mix shift toward hardgoods. Gas and rent represented 63.2% of the Company’s sales mix in the current quarter, down from 64.2% in the prior year quarter.

 
Three Months Ended
 
 
 
 
Gross Profits (ex. Depr.)
(In thousands)
September 30,
 
Increase/(Decrease)
 
 
2014
 
2013
 
 
 
Distribution
$
685,143

 
$
647,916

 
$
37,227

 
6
%
All Other Operations
72,078

 
71,042

 
1,036

 
1
%
 
$
757,221

 
$
718,958

 
$
38,263

 
5
%

The Distribution business segment’s gross profits (excluding depreciation) increased 6% compared to the prior year quarter. The Distribution business segment’s gross profit margin (excluding depreciation) was 56.3% versus 56.9% in the prior year quarter, a decrease of 60 basis points. The decrease in the Distribution business segment’s gross profit margin (excluding depreciation) reflects a sales mix-shift towards lower-margin hardgoods and a sales mix-shift within hardgoods towards lower-margin equipment. Gas and rent represented 59.1% of the Distribution business segment’s sales in the current quarter, down from 59.8% in the prior year quarter.
The All Other Operations business segment’s gross profits (excluding depreciation) increased 1% compared to the prior year quarter. The All Other Operations business segment’s gross profit margin (excluding depreciation) increased 110 basis points to 48.4% in the current quarter from 47.3% in the prior year quarter. The increase in the All Other Operations business segment’s gross profit margin (excluding depreciation) was primarily driven by a sales mix shift away from lower margin refrigerants, partially offset by slight margin pressure in the Company’s CO2 and ammonia businesses.
Operating Expenses
Selling, Distribution and Administrative (“SD&A”) Expenses
SD&A expenses consist of labor and overhead associated with the purchasing, marketing and distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as legal, treasury, accounting, tax and facility-related expenses. Although corporate operating expenses are generally allocated to each business segment based on sales dollars, the Company reported expenses (excluding depreciation) related to the implementation of its SAP system as part of SD&A expenses in the “Other” line item in the SD&A expenses and operating income tables below.

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Table of Contents

Consolidated SD&A expenses increased $26 million, or 5%, in the current quarter as compared to the prior year quarter. Contributing to the increase in SD&A expenses were approximately $9 million of incremental operating costs associated with acquired businesses, representing approximately 2% of the total increase in SD&A. Normal inflation, as well as expenses associated with the Company’s investments in long-term strategic growth initiatives, including its e-Business platform, continued expansion of its telesales business through Airgas Total Access™, and regional management structure changes, also contributed to the increase. As a percentage of consolidated gross profit, consolidated SD&A expenses increased 10 basis points to 66.1% compared to 66.0% in the prior year quarter.

 
Three Months Ended
 
 
 
 
SD&A Expenses
(In thousands)
September 30,
 
Increase/(Decrease)
 
 
2014
 
2013
 
 
Distribution
$
452,467

 
$
427,351

 
$
25,116

 
6
%
All Other Operations
47,908

 
45,412

 
2,496

 
5
%
Other

 
1,692

 
(1,692
)
 
 
 
$
500,375

 
$
474,455

 
$
25,920

 
5
%

SD&A expenses in the Distribution business segment increased 6%, while SD&A expenses in the All Other Operations business segment increased 5%, compared to the prior year quarter. Contributing to the increase in SD&A expenses in the Distribution business segment were approximately $9 million of incremental operating costs associated with acquired businesses, representing approximately 2% of the increase in SD&A. Normal inflation, as well as expenses associated with the Company’s investments in long-term strategic growth initiatives, including its e-Business platform, continued expansion of its telesales business through Airgas Total Access™, and regional management structure changes, also contributed to the increase. As a percentage of Distribution business segment gross profit, SD&A expenses in the Distribution business segment were flat at 66.0% compared to the prior year quarter. As a percentage of All Other Operations business segment gross profit, SD&A expenses in the All Other Operations business segment increased 260 basis points to 66.5% compared to 63.9% in the prior year quarter, primarily driven by significant sales declines in the Company’s refrigerants business.
SD&A Expenses – Other
Enterprise Information System
While the Company has successfully converted its Safety telesales and hardgoods infrastructure businesses, as well as all of its regional distribution businesses, to the SAP platform, the Company continued to incur some post-conversion support and training expenses related to the implementation of the new system through the end of fiscal year 2014. SAP-related intergation costs were $1.7 million in the prior year quarter, and were recorded as SD&A expenses and not allocated to the Company’s business segments.
Depreciation and Amortization
Depreciation expense increased $5 million, or 7%, to $73 million in the current quarter as compared to $68 million in the prior year quarter. The increase primarily reflects the additional depreciation expense on capital investments in revenue generating assets to support customer demand (such as cylinders / bulk tanks and rental welders / generators) and $1 million of additional depreciation expense on capital assets included in acquisitions. Amortization expense of $8 million in the current quarter increased by $1 million from the prior year quarter, driven by acquisitions.
Operating Income
Consolidated operating income of $176 million increased 4% in the current quarter, primarily driven by organic sales growth. The consolidated operating income margin decreased 30 basis points to 12.9% from 13.2% in the prior year quarter, primarily reflecting a sales mix shift toward hardgoods.


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Table of Contents

 
Three Months Ended
 
 
 
 
Operating Income
(In thousands)
September 30,
 
Increase/(Decrease)
 
 
2014
 
2013
 
 
 
Distribution
$
158,846

 
$
151,507

 
$
7,339

 
5
 %
All Other Operations
16,935

 
18,954

 
(2,019
)
 
(11
)%
Other

 
(1,692
)
 
1,692

 
 
 
$
175,781

 
$
168,769

 
$
7,012

 
4
 %

Operating income in the Distribution business segment increased 5% in the current quarter compared to the prior year quarter. The Distribution business segment’s operating income margin decreased 20 basis points to 13.1% from 13.3% in the prior year quarter. The slight decline in the Distribution business segment’s operating income margin was primarily driven by the sales mix shift toward lower margin hardgoods.
Operating income in the All Other Operations business segment decreased 11% compared to the prior year quarter, primarily driven by the decline in refrigerants sales. The All Other Operations business segment’s operating income margin of 11.4% decreased by 120 basis points compared to the operating income margin of 12.6% in the prior year quarter. The decrease in the All Other Operations business segment’s operating income margin was primarily driven by margin pressure in the Company’s refrigerants and CO2 businesses.
Interest Expense, Net
Interest expense, net, was $19 million in the current quarter, representing a decrease of $2 million, or 10%, compared to the prior year quarter. The decrease in interest expense during the current quarter relates to the retirement of the Company’s $300 million of 2.85% senior notes and $215 million of 7.125% senior subordinated notes during the third quarter of the prior year, partially offset by the issuance of $300 million of 3.65% senior notes during the first quarter of fiscal year 2015.
Income Tax Expense
The effective income tax rate was 37.5% of pre-tax earnings in the current quarter compared to 36.5% in the prior year quarter. During the prior year quarter, the Company recognized a $1.5 million ($0.02 per diluted share) tax benefit related to a change in a state income tax law, allowing the Company to utilize additional net operating loss carryforwards and resulting in a 100 basis-point decrease to the effective income tax rate.
Net Earnings
Net earnings per diluted share increased 2% to $1.30 in the current quarter compared to $1.27 in the prior year quarter. Net earnings were $98 million compared to $95 million in the prior year quarter. Net earnings per diluted share in the prior year quarter included a $0.02 per diluted share benefit related to a change in a state income tax law.

RESULTS OF OPERATIONS: SIX MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 2013

STATEMENT OF EARNINGS COMMENTARY
Net Sales
Net sales increased 4% to $2.67 billion for the six months ended September 30, 2014 (“current period”) compared to the six months ended September 30, 2013 (“prior year period”), driven by organic sales growth of 2% and sales growth from current and prior year acquisitions of 2% in the current period. Gas and rent organic sales were up 2% in the current period, with hardgoods organic sales up 4%. Organic sales growth in the current period was driven by price and volume increases of 1% each.
During the current period, sales of strategic products in aggregate grew 3% on an organic basis over the prior year period.
Sales to strategic accounts in the current period grew 3% compared to the prior year period, with strength in upstream energy, transportation and hospitals, along with rental welders for construction and maintenance, offset by softness in manufacturing and general construction, as well as the impact of difficult year-over-year comparisons in downstream energy.
In the following table, the intercompany eliminations represent sales from the All Other Operations business segment to the Distribution business segment.


24

Table of Contents

 
Six Months Ended
 
 
 
 
Net Sales
(In thousands)
September 30,
 
Increase/(Decrease)
 
 
2014
 
2013
 
 
 
Distribution
$
2,400,622

 
$
2,280,660

 
$
119,962

 
5
 %
All Other Operations
285,838

 
297,580

 
(11,742
)
 
(4
)%
Intercompany eliminations
(15,118
)
 
(16,379
)
 
1,261

 
 
 
$
2,671,342

 
$
2,561,861

 
$
109,481

 
4
 %

Distribution business segment sales increased 5% over the prior year period, with an increase in organic sales of 3%. Incremental sales from current and prior year acquisitions contributed sales growth of 2% in the current period. Higher pricing contributed 2% and volume increases contributed 1% to organic sales growth in the Distribution business segment. Gas and rent organic sales in the Distribution business segment increased 3%, with pricing up 4% and volumes down 1%. Hardgoods organic sales within the Distribution business segment increased 4%, with pricing up 1% and volumes up 3%.
Within the Distribution business segment, organic sales of gas related strategic products and associated rent increased 4% over the prior year period, comprised of the following: bulk gas and rent up 5%, on higher pricing, volumes and new account implementations; specialty gas, rent, and related equipment up 5%, primarily driven by increases in core specialty gas price and volume; and medical gas and rent up 2%, as increases in physician and dental practices, as well as hospitals and surgery centers, were partially offset by weakness in wholesale sales to homecare distributors. In addition, organic sales in the Company’s Red-D-Arc business increased 11% over the prior year period, driven by increases in both welder and generator rentals in the non-residential construction and upstream energy customer segments.
Within the Distribution business segment’s hardgoods sales, organic sales volumes for equipment were up modestly year-over-year. Sales of safety products increased by 2% compared to the prior year period driven by volume gains in core industrial activity. Sales of the Company’s Radnor® private-label product line, which includes certain safety products, consumables, and other hardgoods, increased 4% in the current period over the prior year period, consistent with the 4% increase in total hardgoods organic sales in the Distribution business segment.
The All Other Operations business segment sales decreased 4% in total and on an organic basis compared to the prior year period. Both the total and organic sales decreased as sales increases in the Company’s CO2, dry ice, and ammonia businesses were more than offset by the decline in sales in its refrigerants business. Organic sales of CO2 and dry ice, which represent one of the Company’s strategic product categories, increased 2% over the prior year period.
Gross Profits (Excluding Depreciation)
Consolidated gross profits (excluding depreciation) increased 5% compared to the prior year period, reflecting the overall growth in sales, margin expansion on price increases and surcharges related to power cost spikes in the prior year's fourth quarter, partially offset by supplier price and internal production cost increases and a sales mix shift toward lower margin hardgoods. The consolidated gross profit margin (excluding depreciation) in the current period increased 10 basis points to 55.7% compared to 55.6% in the prior year period. The increase in consolidated gross profit margin (excluding depreciation) reflects the items described above. Gas and rent represented 63.0% of the Company’s sales mix in the current period, down from 63.7% in the prior year period.

 
Six Months Ended
 
 
 
 
Gross Profits (ex. Depr.)
(In thousands)
September 30,
 
Increase/(Decrease)
 
 
2014
 
2013
 
 
 
Distribution
$
1,347,822

 
$
1,283,873

 
$
63,949

 
5
%
All Other Operations
139,580

 
139,433

 
147

 
%
 
$
1,487,402

 
$
1,423,306

 
$
64,096

 
5
%

The Distribution business segment’s gross profits (excluding depreciation) increased 5% compared to the prior year period. The Distribution business segment’s gross profit margin (excluding depreciation) was 56.1% versus 56.3% in the prior year period, a decrease of 20 basis points. The decrease in the Distribution business segment’s gross profit margin (excluding depreciation) reflects margin expansion on price increases and surcharges related to power cost spikes in the prior year's fourth quarter, offset by a sales mix shift toward lower margin hardgoods. Gas and rent represented 59.0% of the Distribution business segment’s sales in the current period, down from 59.4% in the prior year period.

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Table of Contents

The All Other Operations business segment’s gross profits (excluding depreciation) were flat compared to the prior year period. The All Other Operations business segment’s gross profit margin (excluding depreciation) increased 190 basis points to 48.8% in the current period from 46.9% in the prior year period. The increase in the All Other Operations business segment’s gross profit margin (excluding depreciation) was primarily driven by a sales mix shift away from lower margin refrigerants, partially offset by slight margin pressure in the Company’s CO2 business.
Operating Expenses
SD&A Expenses
Consolidated SD&A expenses increased $47 million, or 5%, in the current period as compared to the prior year period. Contributing to the increase in SD&A expenses were approximately $17 million of incremental operating costs associated with acquired businesses, representing approximately 2% of the total increase in SD&A. Normal inflation, as well as expenses associated with the Company’s investments in long-term strategic growth initiatives, including its e-Business platform, continued expansion of its telesales business through Airgas Total Access™, and regional management structure changes, also contributed to the increase. As a percentage of consolidated gross profit, consolidated SD&A expenses increased 30 basis points to 66.9% compared to 66.6% in the prior year period.

 
Six Months Ended
 
 
 
 
SD&A Expenses
(In thousands)
September 30,
 
Increase/(Decrease)
 
 
2014
 
2013
 
 
Distribution
$
902,106

 
$
854,582

 
$
47,524

 
6
%
All Other Operations
92,982

 
88,952

 
4,030

 
5
%
Other

 
4,396

 
(4,396
)
 
 
 
$
995,088

 
$
947,930

 
$
47,158

 
5
%

SD&A expenses in the Distribution business segment increased 6%, while SD&A expenses in the All Other Operations business segment increased 5%, compared to the prior year period. Contributing to the increase in SD&A expenses in the Distribution business segment were approximately $17 million of incremental operating costs associated with acquired businesses, representing approximately 2% of the increase in SD&A. Normal inflation, as well as expenses associated with the Company’s investments in long-term strategic growth initiatives, including its e-Business platform, continued expansion of its telesales business through Airgas Total Access™, and regional management structure changes, also contributed to the increase. As a percentage of Distribution business segment gross profit, SD&A expenses in the Distribution business segment increased 30 basis points to 66.9% compared to 66.6% in the prior year period. As a percentage of All Other Operations business segment gross profit, SD&A expenses in the All Other Operations business segment increased 280 basis points to 66.6% compared to 63.8% in the prior year period, primarily driven by significant sales declines in the Company’s refrigerants business.
SD&A Expenses – Other
Enterprise Information System
SAP-related implementation costs were $4.4 million in the prior year period, and were recorded as SD&A expenses and not allocated to the Company’s business segments.
Depreciation and Amortization
Depreciation expense increased $10 million, or 8%, to $146 million in the current period as compared to $136 million in the prior year period. The increase primarily reflects the additional depreciation expense on capital investments in revenue generating assets to support customer demand (such as cylinders / bulk tanks and rental welders / generators) and $2 million of additional depreciation expense on capital assets included in acquisitions. Amortization expense of $16 million in the current period increased by $1 million from the prior year period, driven by acquisitions.
Operating Income
Consolidated operating income of $331 million increased 2% in the current period, primarily driven by organic sales growth. The consolidated operating income margin decreased 30 basis points to 12.4% from 12.7% in the prior year period, primarily reflecting a sales mix shift toward hardgoods.


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Table of Contents

 
Six Months Ended
 
 
 
 
Operating Income
(In thousands)
September 30,
 
Increase/(Decrease)
 
 
2014
 
2013
 
 
 
Distribution
$
298,700

 
$
292,507

 
$
6,193

 
2
 %
All Other Operations
32,162

 
37,272

 
(5,110
)
 
(14
)%
Other

 
(4,396
)
 
4,396

 
 
 
$
330,862

 
$
325,383

 
$
5,479

 
2
 %

Operating income in the Distribution business segment increased 2% in the current period compared to the prior year period. The Distribution business segment’s operating income margin decreased 40 basis points to 12.4% from 12.8% in the prior year period. The decline in the Distribution business segment’s operating income margin primarily reflects the sales mix shift toward lower margin hardgoods.
Operating income in the All Other Operations business segment decreased 14% compared to the prior year period, primarily driven by the decline in refrigerants sales. The All Other Operations business segment’s operating income margin of 11.3% decreased by 120 basis points compared to the operating income margin of 12.5% in the prior year period. The decrease in the All Other Operations business segment’s operating income margin was primarily driven by margin pressure in the Company’s refrigerants and CO2 businesses.
Interest Expense, Net
Interest expense, net, was $35 million in the current period, representing a decrease of $7 million, or 16%, compared to the prior year period. The decrease in interest expense during the current period related to the retirement of the Company’s $300 million of 2.85% senior notes and $215 million of 7.125% senior subordinated notes during the third quarter of the prior year, partially offset by the issuance of $300 million of 3.65% senior notes during the first quarter of fiscal year 2015.
Income Tax Expense
The effective income tax rate was 37.2% of pre-tax earnings in the current period compared to 37.1% in the prior year period. During the prior year period, the Company recognized a $1.5 million ($0.02 per diluted share) tax benefit related to a change in a state income tax law, allowing the Company to utilize additional net operating loss carryforwards and resulting in a 50 basis-point decrease to the effective income tax rate.
Net Earnings
Net earnings per diluted share increased 3% to $2.48 in the current period compared to $2.41 in the prior year period. Net earnings were $187 million compared to $180 million in the prior year period. Net earnings per diluted share in the prior year period included a $0.02 per diluted share benefit related to a change in a state income tax law.


27

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash provided by operating activities was $342 million in the current period compared to $381 million in the prior year period.
The following table provides a summary of the major items affecting the Company’s cash flows from operating activities for the periods presented:
 
Six Months Ended
 
September 30,
(In thousands)
2014
 
2013
Net earnings
$
187,164

 
$
179,668

Non-cash and non-operating activities (1)
174,245

 
172,313

Changes in working capital
(16,406
)
 
29,787

Other operating activities
(3,085
)
 
(574
)
Net cash provided by operating activities
$
341,918

 
$
381,194

____________________
(1)
Includes depreciation, amortization, deferred income taxes, gain on sales of plant and equipment, and stock-based compensation expense.
The cash outflow related to working capital in the current period was primarily driven by increased investment in working capital in support of sales growth in addition to the comparison of a particularly strong prior year period which benefited from improvements in accounts receivable following SAP conversions and lower required investment in working capital, reflecting a low organic sales growth environment. Net earnings plus non-cash and non-operating activities provided cash of $361 million in the current period and $352 million in the prior year period.
As of September 30, 2014, $21 million of the Company’s $66 million cash balance was held by foreign subsidiaries. The Company does not believe it will be necessary to repatriate cash held outside of the U.S. and anticipates its domestic liquidity needs will be met through other funding sources such as cash flows generated from operating activities and external financing arrangements. Accordingly, the Company intends to permanently reinvest the cash in its foreign operations to support working capital needs, investing and financing activities, and future business development. Were the Company’s intention to change, the amounts held within its foreign operations could be repatriated to the U.S., although any repatriations under current U.S. tax laws would be subject to income taxes, net of applicable foreign tax credits.
The following table provides a summary of the major items affecting the Company’s cash flows from investing activities for the periods presented:
 
Six Months Ended
 
September 30,
(In thousands)
2014
 
2013
Capital expenditures
$
(220,872
)
 
$
(168,483
)
Proceeds from sales of plant and equipment
10,634

 
7,292

Business acquisitions and holdback settlements
(29,834
)
 
(15,745
)
Other investing activities
716

 
(1,869
)
Net cash used in investing activities
$
(239,356
)
 
$
(178,805
)
Capital expenditures as a percentage of sales were 8.3% and 6.6% for the current and prior year periods, respectively. The increase in capital expenditures in the current period compared to the prior year period reflects higher investments in revenue generating assets, such as rental welding and generator equipment, cylinders and bulk tanks to support sales growth; the construction of new air separation units in Kentucky and Illinois and a new hardgoods distribution center in Wisconsin; and the development of the Company’s e-Business platform. During the current period, the Company used cash of $30 million for the purchase of eight businesses and the settlement of holdback liabilities associated with prior year acquisitions. The businesses acquired during the current period had historical annual sales of approximately $36 million.

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Table of Contents

Free cash flow* in the current period was $147 million compared to $238 million in the prior year period. The decrease in free cash flow from the prior year period was primarily driven by a decrease in cash from operations, which was $342 million in the current period compared to $381 million in the prior year period, as well as higher capital expenditures in the current period.
* Free cash flow is a financial measure calculated as net cash provided by operating activities minus capital expenditures, adjusted for the impacts of certain items. See Non-GAAP reconciliation and components of free cash flow at the end of this section.
The following table provides a summary of the major items affecting the Company’s cash flows from financing activities for the periods presented:
 
Six Months Ended
 
September 30,
(In thousands)
2014
 
2013
Net cash repayments
$
(52,391
)
 
$
(115,197
)
Purchase of treasury stock

 
(8,127
)
Dividends paid to stockholders
(81,942
)
 
(70,505
)
Other financing activities
27,922

 
16,319

Net cash used in financing activities
$
(106,411
)
 
$
(177,510
)
During the current period, net financing activities used cash of $106 million. Net cash repayments on debt obligations in the current period were $52 million, primarily related to the repayment of $400 million of 4.50% senior notes that matured on September 15, 2014, partially offset by the June 2014 issuance of $300 million of 3.65% senior notes maturing on July 15, 2024 and borrowing of $45 million under the commercial paper program. Other financing activities, primarily comprised of proceeds and excess tax benefits related to the exercise of stock options and stock issued for the employee stock purchase plan, generated cash of $28 million during the current period.
In the prior year period, net financing activities used cash of $178 million. Net cash repayments used cash of $115 million, primarily related to the pay down of $118 million on the trade receivables securitization agreement. On October 23, 2012, the Company announced a $600 million share repurchase program. During the six months ended March 31, 2013, the Company completed the program, repurchasing 6.29 million shares on the open market at an average price of $95.37. The final repurchase under the program, however, settled subsequent to the fiscal 2013 year end, resulting in a cash outflow of $8 million related to the repurchase program in the prior year period. Other financing activities, primarily comprised of proceeds and excess tax benefits related to the exercise of stock options and stock issued for the employee stock purchase plan, partially offset by the change in cash overdrafts, generated cash of $16 million during the prior year period.
Dividends
During the current period, the Company paid its stockholders dividends of $82 million or $0.55 per share. During the prior year period, the Company paid dividends of $71 million or $0.48 per share. Future dividend declarations and associated amounts paid will depend upon the Company’s earnings, financial condition, loan covenants, capital requirements and other factors deemed relevant by management and the Company’s Board of Directors.
Financial Instruments and Sources of Liquidity
Money Market Loans
The Company has an agreement with a financial institution to provide access to short-term advances not to exceed $35 million that expires on December 30, 2014. The agreement may be further extended subject to renewal provisions contained in the agreement. The advances may be for one to six months with rates at a fixed spread over the corresponding London Interbank Offering Rate (“LIBOR”). At September 30, 2014, there were no advances outstanding under the agreement.
The Company also has an agreement with another financial institution that provides access to additional short-term advances not to exceed $35 million. The agreement may be extended subject to renewal provisions contained in the agreement. The advances are generally overnight or for up to seven days. The amount, term and interest rate of an advance are established through mutual agreement with the financial institution when the Company requests such an advance. At September 30, 2014, there were no advances outstanding under the agreement. In July 2014, the agreement was extended and now expires on July 31, 2015.


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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 vary, but will generally not exceed 90 days from the date of issue, and is classified as short-term debt. At maturity, the commercial paper balances are often rolled over rather than repaid or refinanced, depending on the Company’s cash and liquidity positions. The Company has used proceeds from commercial paper issuances for general corporate purposes. During the current period, proceeds from the issuance of an aggregate $300 million of senior notes in June 2014 were principally used to pay down commercial paper. Subsequently, the Company principally used commercial paper to redeem its $400 million 4.50% senior notes (the “2014 Notes”) which matured in September 2014. At September 30, 2014, $433 million of borrowings was outstanding under the commercial paper program and the average interest rate was 0.32%. There were $388 million of borrowings outstanding under the commercial paper program at March 31, 2014.
Trade Receivables Securitization
The Company participates in a securitization agreement with three commercial bank conduits to which it sells qualifying trade receivables on a revolving basis (the “Securitization Agreement”). The Company’s sale of qualified trade receivables is accounted for as a secured borrowing under which qualified trade receivables collateralize amounts borrowed from the commercial bank conduits. 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 available under the Securitization Agreement is $295 million and it bears interest at approximately LIBOR plus 75 basis points.
At September 30, 2014, the amount of outstanding borrowing under the Securitization Agreement was $295 million. Amounts borrowed under the Securitization Agreement could fluctuate monthly based on the Company’s funding requirements and the level of qualified trade receivables available to collateralize the Securitization Agreement. The Securitization Agreement expires on December 5, 2016 and contains customary events of termination, including standard cross-default provisions with respect to outstanding debt.
Senior Credit Facility
The Company participates in a $750 million Amended and Restated Credit Facility (the “Credit Facility”). The Credit Facility consists of a $650 million U.S. dollar revolving credit line, with a $65 million letter of credit sublimit and a $50 million swingline sublimit, and a $100 million (U.S. dollar equivalent) multi-currency revolving credit line. The expiration date of the Credit Facility is July 19, 2016. Under circumstances described in the Credit Facility, the revolving credit line may be increased by an additional $325 million, provided that the multi-currency revolving credit line may not be increased by more than an additional $50 million.
As of September 30, 2014, the Company had $56 million of borrowings under the Credit Facility, all of which were under the multi-currency revolver. There were no borrowings under the U.S. dollar revolver at September 30, 2014. 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 September 30, 2014, the average interest rate on the multi-currency revolver was 1.73%. 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&#