SEC Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
________________________________________
FORM 10-K
________________________________________

ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: March 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  ¨   No  ý
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  ¨


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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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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.
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 aggregate market value of the 65,464,408 shares of voting stock held by non-affiliates of the registrant was approximately $5.8 billion computed by reference to the closing price of such stock on the New York Stock Exchange as of the last day of the registrant’s most recently completed second quarter, September 30, 2015. For purposes of this calculation, only executive officers and directors were deemed to be affiliates.
The number of shares of common stock outstanding as of May 6, 2016 was 72,807,594.
 





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AIRGAS, INC.

FORM 10-K
March 31, 2016

TABLE OF CONTENTS
ITEM NO.
 
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PART I
ITEM 1.
BUSINESS.
GENERAL
Airgas, Inc., together with its subsidiaries (“Airgas,” the “Company,” “we,” “our” or “us”), became a publicly-traded company on the New York Stock Exchange (“NYSE”) in 1986. Through a combination of organic growth initiatives and acquisitions in both its core and adjacent lines of business, the Company has become one of the nation’s leading suppliers of industrial, medical and specialty gases, and hardgoods, such as welding equipment and related products. Airgas is a leading U.S. producer of atmospheric gases, carbon dioxide, dry ice and nitrous oxide, one of the largest U.S. suppliers of safety products, and a leading U.S. supplier of refrigerants, ammonia products and process chemicals. Airgas’ production network and supply agreements, full range of gas supply modes (from cylinders to truckload quantities to on-site pipeline supply) and national footprint make it one of the few fully-integrated industrial gas companies in the U.S. The Company also offers supply chain management services and solutions, and product and process technical support across many diverse customer segments.
The Company markets its products and services through multiple sales channels, including branch-based sales representatives, retail stores, strategic customer account programs, telesales, catalogs, e-Business and independent distributors. Products reach customers through an integrated network of approximately 17,000 associates and more than 1,100 locations, including branches, retail stores, gas fill plants, specialty gas labs, production facilities and distribution centers. The Company’s product and service offering, full range of supply modes, national scale and strong local presence offer a competitive edge to its diversified base of more than one million customers.
The Company’s consolidated net sales were $5.31 billion, $5.30 billion and $5.07 billion in the fiscal years ended March 31, 2016, 2015 and 2014, respectively. The Company’s operations are predominantly in the United States. While the Company does conduct operations outside of the United States in Canada, Mexico, Russia, Dubai and several European countries, revenues from foreign countries represent less than 2% of the Company’s net sales. Information on revenues derived from foreign countries as well as long-lived assets attributable to the Company’s foreign operations can be found in Note 22 to the Company’s consolidated financial statements under Item 8, “Financial Statements and Supplementary Data.”
Since its inception, the Company has made approximately 480 acquisitions. During fiscal 2016, the Company acquired 18 businesses with aggregate historical annual sales of approximately $85 million. The Company acquired these businesses in order to expand its geographic coverage to facilitate the sale of industrial, medical and specialty gases, and related supplies, the addition of businesses that offer products and services complementary to the Company’s existing portfolio, and enhanced geographical coverage abroad to strengthen the Company’s welder and generator rental business. See Note 4 to the Company’s consolidated financial statements under Item 8, “Financial Statements and Supplementary Data,” for a description of current and prior year acquisition activity.
The Company has two business segments, Distribution and All Other Operations. The businesses within the Distribution business segment offer a portfolio of related gas and hardgoods products and services to the end customers. The All Other Operations business segment consists of six business units which primarily manufacture and/or distribute carbon dioxide, dry ice, nitrous oxide, ammonia and refrigerant gases, along with a nitrogen services business. Financial information by business segment can be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), and in Note 22 to the Company’s consolidated financial statements under Item 8, “Financial Statements and Supplementary Data.” A more detailed description of the Company’s business segments follows.
On November 17, 2015, the Company announced that it had entered into a definitive agreement for the acquisition of the Company by L’Air Liquide, S.A. (“Air Liquide”) in a merger pursuant to an Agreement and Plan of Merger, dated as of November 17, 2015, by and among the Company, Air Liquide and AL Acquisition Corporation (“Merger Sub”), an indirect wholly owned subsidiary of Air Liquide (the “Merger Agreement”). The Merger Agreement provides that, among other things and subject to the terms and conditions thereof, Merger Sub will be merged with and into the Company (the “Merger”) with the Company continuing as the surviving corporation in the Merger as an indirect wholly owned subsidiary of Air Liquide. On February 23, 2016, at a special meeting of the Company’s stockholders, the stockholders voted to approve the Merger. See Note 2, “Merger Agreement,” to the Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for more information on the Merger Agreement.
DISTRIBUTION BUSINESS SEGMENT
The Distribution business segment accounted for approximately 90% of consolidated net sales in each of the fiscal years 2016, 2015 and 2014.

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Principal Products and Services
The Distribution business segment’s principal products include industrial, medical and specialty gases sold in packaged and bulk quantities, as well as hardgoods. The Company’s air separation facilities and national specialty gas labs primarily produce gases that are sold by the various regional and other business units within the Distribution business segment as part of the complementary suite of similar products and services for the Company’s customers. Gas sales primarily include the following: atmospheric gases including nitrogen, oxygen and argon; helium; hydrogen; welding and fuel gases such as acetylene, propylene and propane; carbon dioxide; nitrous oxide; ultra high purity grades of various gases; special application blends; and process chemicals. Within the Distribution business segment, the Company also recognizes rent revenue derived from the rental of its gas cylinders, cryogenic liquid containers, bulk storage tanks, tube trailers and welding-related and other equipment. Gas and rent represented 61%, 59% and 60% of the Distribution business segment’s sales in fiscal years 2016, 2015 and 2014, respectively. Hardgoods consist of welding consumables and equipment, safety products, construction supplies, and maintenance, repair and operating supplies. Hardgoods sales represented 39%, 41% and 40% of the Distribution business segment’s sales in fiscal years 2016, 2015 and 2014, respectively.
Principal Markets and Methods of Distribution
The industry has three principal modes of gas distribution: on-site or pipeline supply, bulk or merchant supply, and cylinder or packaged supply. The on-site mode includes the supply of gaseous product to a customer facility via pipeline from a gas supplier’s plant located on or off the customer’s premises. The bulk mode consists of the supply of gases to customers in liquid form in full and partial truckload quantities or in gaseous form in tube trailers. The packaged gas mode includes the supply of gases to customers in gaseous form in cylinders, in liquid form in less-than-truckload quantities of bulk (also known as microbulk), or in liquid form in portable cryogenic vessels known as dewars. Generally, packaged gas distributors, including the Company and its competitors in the packaged gas market, also supply welding-related hardgoods required by customers to complement their use of gases.
The Company participates in all three modes of supply to varying degrees, with the packaged supply mode representing the most significant portion of its gas sales. The Company is one of the nation’s leading suppliers in the U.S. packaged gas and welding hardgoods market, with an estimated share of more than 25%. The Company’s competitors in this market include local and regional independent distributors, which are estimated to account for nearly half of the market’s annual revenues, and certain vertically-integrated gas producers, which account for the remainder of the market.
The Company markets its products and services through multiple sales channels, including branch-based representatives, retail stores, telesales, strategic customer account programs, catalogs, e-Business, and other distributors. Packaged gases and welding-related hardgoods are generally delivered to customers on Company-owned or leased trucks, although third-party carriers are also used in the delivery of welding-related hardgoods and safety products. Packaged gas distribution is a localized business because it is generally not economical to transport gas cylinders more than 50 to 100 miles from a plant or branch. The localized nature of the business makes these markets highly competitive, and competition is generally based on reliable product delivery and availability, technical support, quality and price.
Customer Base
The Company’s operations are predominantly in the United States. The Company’s customer base is diverse and sales are not dependent on a single or small group of customers. The Company’s largest customer accounts for less than 1% of total net sales. The Company estimates the following industry segments account for the approximate indicated percentages of its net sales:
Manufacturing & Metal Fabrication (29%)
Non-Residential (Energy & Infrastructure) Construction (15%)
Life Sciences & Healthcare (14%)
Food, Beverage & Retail (13%)
Energy & Chemical Production & Distribution (12%)
Basic Materials & Services (11%)
Government & Other (6%).
Supply
The Company’s atmospheric gas production capacity includes 17 air separation plants that produce oxygen, nitrogen and argon, making Airgas the fifth largest U.S. producer of atmospheric gases. In addition, the Company purchases atmospheric and other gases pursuant to contracts with national and regional producers of industrial gases. The Company is a party to take-or-pay supply agreements under which Air Products and Chemicals, Inc. (“Air Products”) will supply the Company with bulk

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nitrogen, oxygen, argon, hydrogen and helium. The Company is committed to purchase a minimum of approximately $61 million in bulk gases within the next fiscal year under the Air Products supply agreements. The agreements expire at various dates through 2020. The Company also has take-or-pay supply agreements with The Linde Group AG (“Linde”) to purchase oxygen, nitrogen, argon and helium. The agreements expire at various dates through 2025 and represent approximately $95 million in minimum bulk gas purchases for the next fiscal year. Additionally, the Company has take-or-pay supply agreements to purchase oxygen, nitrogen, argon, helium and ammonia from other major producers. Minimum purchases under these contracts for the next fiscal year are approximately $36 million and they expire at various dates through 2026. The level of annual purchase commitments under the Company’s supply agreements beyond the next fiscal year vary based on the expiration of agreements at different dates in the future, among other factors.
The Company’s annual purchase commitments under all of its supply agreements reflect estimates based on fiscal 2016 purchases. The Company’s supply agreements contain periodic pricing adjustments, most of which are based on certain economic indices and market analyses. The Company believes the minimum product purchases under the agreements are within the Company’s normal product purchases. Actual purchases in future periods under the supply agreements could differ materially from those presented due to fluctuations in demand requirements related to varying sales levels as well as changes in economic conditions. If a supply agreement with a major supplier of gases or other raw materials was terminated, the Company would attempt to locate alternative sources of supply to meet customer requirements, including utilizing excess internal production capacity for atmospheric gases. The Company purchases hardgoods from major manufacturers and suppliers. For certain products, the Company has negotiated national purchasing arrangements. The Company believes that if an arrangement with any supplier of hardgoods was terminated, it would be able to negotiate comparable alternative supply arrangements.
ALL OTHER OPERATIONS BUSINESS SEGMENT
The All Other Operations business segment consists of six business units, which in aggregate accounted for approximately 10% of sales in each of the fiscal years 2016, 2015 and 2014. The primary products produced and/or supplied are carbon dioxide, dry ice (carbon dioxide in solid form), nitrous oxide, ammonia and refrigerant gases, along with a nitrogen services business. The following sections describe the primary products and services offered by the Company through the business units within the All Other Operations business segment in further detail.
Carbon Dioxide & Dry Ice
Airgas is a leading U.S. producer of liquid carbon dioxide and dry ice. Customers for carbon dioxide and dry ice include food processors, food service businesses, various businesses in the pharmaceutical and biotech industries, and wholesale trade and grocery outlets, with food and beverage applications accounting for approximately 70% of the market. Some seasonality is experienced within these businesses, as the Company generally experiences a higher level of sales during the warmer months. With 14 dry ice plants (converting liquid carbon dioxide into dry ice), Airgas has the largest network of dry ice conversion plants in the U.S. Additionally, Airgas operates eight liquid carbon dioxide production facilities. The Company’s carbon dioxide production capacity is supplemented by take-or-pay supply contracts with other regional and national liquid carbon dioxide producers.
Nitrous Oxide
Airgas is the largest producer of nitrous oxide gas in the U.S. through its three nitrous oxide production facilities. Nitrous oxide is used as an anesthetic in the medical and dental fields, as a propellant in the packaged food industry and in certain manufacturing processes in the electronics industry. The raw materials utilized in nitrous oxide production are purchased under contracts with major manufacturers and suppliers.
Ammonia Products
Airgas is a leading U.S. distributor of anhydrous and aqua ammonia. Industrial ammonia applications primarily include the abatement of nitrogen oxide compounds (“DeNOx”) in the utilities industry, chemicals processing, commercial refrigeration, water treatment and metal treatment. The Company operates 29 distribution facilities across the U.S. and purchases ammonia from suppliers under agreements.
Refrigerants
Refrigerants are used in a wide variety of commercial and consumer freezing and cooling applications. Airgas purchases and distributes refrigerants and provides technical and refrigerant reclamation services. The primary focus of the refrigerants business is on the sale, distribution and reclamation of refrigerants, with a varied customer base that includes small and large HVAC contractors and distributors, facility owners, transportation companies, manufacturing facilities and government agencies. The refrigerants business typically experiences some seasonality, with higher sales levels during the warmer months as well as during the March and April time frame in preparation for the cooling season.

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Nitrogen Services
Airgas provides nitrogen pumping services and solutions to the pipeline and energy processing industries. There are a broad range of industrial applications for these services at chemical plants, refineries, power plants, oilfield sites, and shipyards. The majority of revenues are generated from pipeline project work such as purging, pressure testing, cooling, and freezing.
AIRGAS GROWTH STRATEGIES
The Company’s primary objective is to maximize shareholder value by: driving market-leading sales growth through product and service offerings that leverage the Company’s infrastructure, technical expertise, and diverse customer base; executing on strategic organic growth initiatives; pursuing acquisitions in the Company’s core distribution business and in adjacent lines of business to increase customer density; providing outstanding customer service; and improving operational efficiencies. To meet this objective, the Company is focused on the following:
alignment of the sales and marketing organization with key customer segments, particularly within the strategic accounts program, to provide leadership and support throughout all sales channels in tailoring the Company’s broad product and service offerings to the unique needs of each customer segment;
leveraging all sales channels, including branch-based sales representatives, product and industry specialists, retail stores, the strategic accounts program, telesales, catalogs, e-Business and independent distributors;
fully leveraging the new District Manager structure to drive local sales and branch operations accountability, enhance depth of customer relationships, continuously improve transaction accuracy, and increase speed to deliver exceptional customer service through the Districts;
enhancing the effectiveness of the field-based sales organization through improved sales management disciplines at the District and branch levels;
driving customer adoption of the Company’s new Airgas.com e-Business platform;
strategic products, which have strong growth profiles due to favorable customer segments, application development, increasing environmental regulation, strong cross-selling opportunities, or a combination thereof (e.g., bulk gases, specialty gases, medical products, carbon dioxide/dry ice and safety products);
leveraging the Company’s enterprise information system (“SAP”) by capturing strategic pricing benefits, expanding the Airgas Total Access™ telesales platform, developing key metrics, analytics and tools for continuous improvement, optimizing sales channels and maximizing hardgoods and packaged gas distribution efficiencies;
effective utilization of the Company’s divisional operating structure and Business Support Centers (“BSCs”) to leverage the full benefits of the SAP platform, maximize back-office efficiencies, ensure data integrity, and streamline customer relationship management;
reducing costs associated with gaseous production, cylinder filling, gas asset utilization and maintenance and distribution logistics; and
adding density through organic growth, acquisitions and growing share to complement and expand its business and to leverage its significant national platform.
ENVIRONMENTAL MATTERS
The Company is subject to federal and state laws and regulations adopted for the protection of the environment and the health and safety of employees and users of the Company’s products. The Company has programs for the design and operation of its facilities to achieve compliance with applicable environmental regulations. The Company believes that it is in compliance, in all material respects, with such laws and regulations. Expenditures for environmental compliance purposes during fiscal 2016 were not material.
INSURANCE
The Company has established insurance programs to cover workers’ compensation, business automobile and general liability claims. During fiscal years 2016, 2015 and 2014, these programs had deductible limits of $1 million per occurrence and costs related to the programs were approximately 0.5% of sales during each of these years. For fiscal year 2017, the deductible limits are expected to remain at $1 million per occurrence. The Company accrues estimated losses using actuarial methods and assumptions based on the Company’s historical loss experience.

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EMPLOYEES
As of March 31, 2016, the Company employed approximately 17,000 associates. Less than 5% of the Company’s associates were covered by collective bargaining agreements. The Company believes it has good relations with its employees and has not experienced a significant strike or work stoppage in over ten years.
PATENTS, TRADEMARKS AND LICENSES
The Company holds the following trademarks and service marks: “Airgas,” “National Carbonation,” “Airgas National Carbonation,” “Airgas Total Access,” “Airgas Retail Solutions,” “Airgas University,” “AcuGrav,” “AcuVend,” “AIR BOSS,” “Aspen,” “Aspen Refrigerants,” “Any Refrigerant, Any Place, Any Time,” “ChillRight,” “Cooler Than Ice,” “EZ-Vend,” “EasyLease,” “For All Your Refrigerant Needs,” “Radnor,” “Gold Gas,” “SteelMIX,” “StainMIX,” “AluMIX,” “OUTLOOK,” “Ny-Trous+,” “Red-D-Arc,” “RED-D-ARC WELDERENTALS,” “Gaspro,” “GAIN,” “MasterCut,” “Walk- O2 -Bout,” “Airgas Puritan Medical,” “Penguin Brand Dry Ice,” “Kangaroo Kart,” “National Farm and Shop,” “National/HEF,” “UNAMIX,” “UNAMIG Xtra,” “UNAMIG Six,” “FreezeRight,” “Reklaim,” “Refrigatron,” “RelEye,” “Safe-T-Cyl,” “StatusChecker,” “Smart-Logic,” “When You’re Ready To Weld,” “WelderHelper,” “Your Total Ammonia Solution,” “You’ll find it with us,” “Worry-Free Carbonation,” “Refreshingly Easy,” “QuartzSight,” “Saffire,” and “Panzer.” Additionally, the Company has registered U.S. Pat. No. 5,622,644.
The Company believes that its businesses as a whole are not materially dependent upon any single patent, trademark or license.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name
Age
Position
Peter McCausland
66
Executive Chairman of the Board
Michael L. Molinini
65
President, Chief Executive Officer and Director
Robert M. McLaughlin
59
Senior Vice President and Chief Financial Officer
Andrew R. Cichocki
53
Senior Vice President - Airgas, Inc. and President - Airgas USA, LLC
Robert A. Dougherty
58
Senior Vice President and Chief Information Officer
Leslie J. Graff
55
Senior Vice President - Corporate Development
Ronald J. Stark
52
Senior Vice President - Sales and Marketing
Nicole L. Kahny
44
Senior Vice President - Human Resources
Robert H. Young, Jr.
65
Senior Vice President and General Counsel
R. Jay Worley
47
Senior Vice President - Distribution Operations
Thomas S. Thoman
53
Senior Vice President - Gases
Douglas L. Jones
60
Division President - West
Terry L. Lodge
59
Division President - Central
Pamela J. Claypool
62
Division President - North
John F. Sheehan
57
Division President - South
Martin J. Wehner
57
Division President - Process Gases
Thomas M. Smyth (1)
62
Vice President and Controller
 
____________________
(1)     Mr. Smyth serves as the Company’s Principal Accounting Officer, but he is not an executive officer.
Mr. McCausland has been Executive Chairman of the Board since August 2012. He previously served as Chairman of the Board from 1987 to September 2010 and from August 2011 to August 2012. Mr. McCausland also served as the Chief Executive Officer of Airgas from May 1987 to August 2012 and President of Airgas from June 1986 to August 1988, from April 1993 to November 1995, from April 1997 to January 1999 and from January 2005 to August 2012. Mr. McCausland serves as a director of the Independence Seaport Museum. Mr. McCausland also serves on the Board of Visitors of the Boston University School of Law and the College of Arts and Sciences of the University of South Carolina.
Mr. Molinini has been President, Chief Executive Officer and Director since August 2012. Prior to that time, Mr. Molinini served as Executive Vice President and Chief Operating Officer from January 2005 to August 2012, Senior Vice President - Hardgoods Operations from August 1999 to January 2005 and as Vice President - Airgas Direct Industrial from April 1997 to July 1999. Prior to joining Airgas, Mr. Molinini served as Vice President of Marketing of National Welders Supply Company, Inc. (“National Welders”) from 1991 to 1997.

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Mr. McLaughlin has been Senior Vice President and Chief Financial Officer since October 2006 and served as Vice President and Controller from the time he joined Airgas in June 2001 to September 2006. Prior to joining Airgas, Mr. McLaughlin served as Vice President Finance for Asbury Automotive Group from 1999 to 2001, and was a Vice President and held various senior financial positions at Unisource Worldwide, Inc. from 1992 to 1999. Mr. McLaughlin also serves on the Board of Directors of Axalta Coating Systems Ltd.
Mr. Cichocki was named Senior Vice President - Airgas, Inc. effective August 2014 and President - Airgas USA, LLC effective April 2014. Airgas USA, LLC accounts for the majority of the Company’s consolidated net sales. Mr. Cichocki previously served as Senior Vice President - Distribution Operations and Business Process Improvement from August 2011 through March 2014. From July 2008 to July 2011, he was Division President - Process Gases and Chemicals. Prior to that time, Mr. Cichocki served as President of Airgas National Welders and Airgas’ joint venture, National Welders, from 2003. Prior to that, Mr. Cichocki served in key corporate roles for Airgas, including Senior Vice President of Human Resources, Senior Vice President of Business Operations and Planning, and for ten years as Vice President of Corporate Development.
Mr. Dougherty has been Senior Vice President and Chief Information Officer since joining Airgas in January 2001. Prior to joining Airgas, Mr. Dougherty served as Vice President and Chief Information Officer from 1998 to 2000 and as Director of Information Systems from 1993 to 1998 at Subaru of America, Inc.
Mr. Graff has been Senior Vice President - Corporate Development since August 2006. Prior to that, Mr. Graff held various management positions since joining the Company in 1989, including Director of Corporate Finance, Director of Corporate Development, Assistant Vice President - Corporate Development and Vice President - Corporate Development. He has directed the in-house acquisition department since 2001. Prior to joining Airgas, Mr. Graff worked for KPMG LLP from 1983 to 1989.
Mr. Stark was named Senior Vice President - Sales and Marketing in July 2009 and previously served as President, Airgas North Central, since joining Airgas in 2003. Mr. Stark began his career at Union Carbide - Linde Division (now Praxair) in 1985 and advanced through a series of positions in applications engineering and key account management. In 1992, he joined MVE, a Minnesota-based supplier of cryogenic storage and distribution technology, and advanced to vice president and general manager of the industrial gases market. After Chart Industries acquired MVE in 1999, Mr. Stark became president of Chart’s Distribution and Storage Group and held that post until joining Airgas.
Ms. Kahny was named Senior Vice President - Human Resources in August 2015. Previously, Ms. Kahny served as Vice President - Talent Management since joining Airgas in February 2014. Prior to joining Airgas, Ms. Kahny served as Vice President of Global Talent, Leadership & Organizational Development for Viacom from December 2012 to February 2014. Prior to that time, she served as Vice President, Global Talent & Organizational Capability at Pfizer from October 2009 until December 2011. Ms. Kahny has more than 20 years of experience in the human resources field, serving in various cross-functional and cross-industry roles.
Mr. Young has been Senior Vice President and General Counsel since October 2007. Prior to joining Airgas, Mr. Young was a shareholder of McCausland Keen & Buckman, which he joined in 1985, and served as outside counsel for the Company on many acquisitions and other corporate legal matters. At McCausland Keen & Buckman, Mr. Young focused his practice on general corporate law for both public and private corporations, mergers and acquisitions, and venture capital financing. Mr. Young began his legal career as an attorney at Drinker Biddle & Reath in Philadelphia.
Mr. Worley has served as Senior Vice President - Distribution Operations since February 2015. Prior to that, Mr. Worley served as Vice President - Strategic Pricing since the inception of Airgas’ strategic pricing program in January 2012, and as President of Airgas National Carbonation since October 2013. Previously, Mr. Worley held the position of Vice President - Communications and Investor Relations for Airgas from July 2008 to December 2011, as Director - Investor Relations from 2006 until July 2008 and as Chief Financial Officer of Airgas Southwest from 2001 until 2006.  Mr. Worley began his career at Airgas in 1993 as Assistant Controller with what is now Airgas Intermountain and held a variety of roles in that organization, including in sales and human resources.
Mr. Thoman was named Senior Vice President - Gases in August 2015. Previously, Mr. Thoman served as Division President - Gases Production from July 2011 to August 2015 and from 2007 to 2011 he served as Senior Vice President - Tonnage and Merchant Gases and President - Airgas Merchant Gases. Prior to that time, Mr. Thoman served in key corporate roles including Vice President - Gases, which focused on the Company’s gases supply chains, product sourcing, marketing, product management and business development. He has been with Airgas nearly 15 years and in the industrial gas industry for 27 years.
Mr. Jones has been Division President - West since April 2013. Prior to this role, Mr. Jones was President of Airgas Intermountain from 2006 to April 2013, Vice President of Sales and Marketing from 2001 to 2006 and Director of Marketing from 1998 to 2001. Mr. Jones has served the Company in various other roles since joining Airgas in 1989 through the acquisition of Utah Welders Supply.

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Mr. Lodge has been Division President - Central since July 2011. Prior to that time, Mr. Lodge was President of Airgas Mid South from November 2007, Vice President - Western Division from January 2005 to November 2007 and CFO for Airgas Mid South from August 1994 to January 2005. Prior to joining Airgas, Mr. Lodge was the CFO for The Jimmie Jones Company, an independent distributor acquired by Airgas in 1994 where he originally started his career in the industrial gas industry in 1979.
Ms. Claypool was named Division President - North in August 2015. From December 2013 to August 2015, Ms. Claypool served as Senior Vice President - Human Resources and from January 2013 to December 2013, as Vice President - Talent Management for Airgas. Prior to that time, she served as Vice President - Human Resources for Airgas’ North Division from November 2011 to January 2013. She joined Airgas in 2007 with the acquisition of Linde’s U.S. packaged gas business, serving as Vice President of Finance until May 2009, then Chief Financial Officer until November 2011 for Airgas Great Lakes, Inc. Prior to joining Airgas, Ms. Claypool spent three years in Linde’s U.S. group where she was responsible for business and financial analysis and sales compensation, and fourteen years with Commercial Intertech in multiple finance and management roles.
Mr. Sheehan was named Division President - South in October 2015. Previously, Mr. Sheehan served as an Area Vice President in the Airgas South Region, after selling his former business, TriTech, to Airgas in 2009, after nearly 15 years as President and Managing General Partner. Prior to that, Mr. Sheehan led AirTech Incorporated as President from 1991 to 1996 and launched the company’s packaged gas business. From 1981 to 1990, Mr. Sheehan served as Vice President and Chief Operational Officer of Bishop’s Welding Supply and was responsible for all facets of the business from accounting and sales to human resources and plant operations.
Mr. Wehner was named Division President - Process Gases in August 2015. Previously, Mr. Wehner served as Vice President - Process Gases and Chemicals from March 2015 to August 2015 and prior that served as President - Airgas Specialty Products since 2011. Mr. Wehner joined Airgas in 2005 as Vice President of Sales for Airgas Specialty Products when Airgas acquired LaRoche Industries. Prior to joining Airgas, Mr. Wehner spent six years as Business Manager of the Zeolite Division at UOP, a Honeywell company, and thirteen years at LaRoche Industries, where he held a number of sales, sales management, technical service and distribution management positions.
Mr. Smyth has been Vice President and Controller since November 2006. Prior to that, Mr. Smyth served as Director of Internal Audit since joining Airgas in February 2001 and became Vice President in August 2004. Prior to joining Airgas, Mr. Smyth served in internal audit, controller and chief accounting roles at Philadelphia Gas Works from 1997 to 2001. Prior to that, Mr. Smyth spent 12 years with Bell Atlantic, now Verizon, in a variety of internal audit and general management roles and in similar positions during eight years at Amtrak.
COMPANY INFORMATION
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed with or furnished to the Securities and Exchange Commission (“SEC”) are available free of charge on the Company’s website (www.airgas.com) under the “Financial Information” link in the “Investor Relations” section. The Company makes these documents available as soon as reasonably practicable after they are filed with or furnished to the SEC, but no later than the end of the day that they are filed with or furnished to the SEC.
Code of Ethics and Business Conduct
The Company has adopted a Code of Ethics and Business Conduct applicable to its employees, officers and directors. The Code of Ethics and Business Conduct is available on the Company’s website, under the “Corporate Governance” link in the “Investor Relations” section. Amendments to and waivers from the Code of Ethics and Business Conduct will also be disclosed promptly on the website. In addition, stockholders may request a printed copy of the Code of Ethics and Business Conduct, free of charge, by contacting the Company’s Investor Relations department at:
Airgas, Inc.
Attention: Investor Relations
259 N. Radnor-Chester Rd.
Radnor, PA 19087-5283
Telephone: (866) 816-4618
Email: investors@airgas.com
Corporate Governance Guidelines
The Company has Corporate Governance Guidelines as well as charters for its Audit Committee, Finance Committee and Governance & Compensation Committee. These documents are available on the Company’s website, noted above. Stockholders may also request a copy of these documents, free of charge, by contacting the Company’s Investor Relations department at the address and phone number noted above.

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Certifications
The Company has filed certifications of its Executive Chairman of the Board, President and Chief Executive Officer, and Senior Vice President and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as exhibits to its Annual Report on Form 10-K for each of the years ended March 31, 2016, 2015 and 2014.
ITEM 1A.
RISK FACTORS.
In addition to risk factors discussed in MD&A under “Critical Accounting Estimates” and elsewhere in this report, we believe the following, which have not been sequenced in any particular order, are the most significant risks related to our business that could cause actual results to differ materially from those contained in any forward-looking statements.
Risk Factors Related to Our Business
We face risks related to general economic conditions, which may impact the demand for and supply of our products and our results of operations.
Demand for our products depends in part on the general economic conditions affecting the United States and, to a lesser extent, the rest of the world. Although our diverse product offering and customer base help provide some stability to our business in difficult times, a broad decline in general economic conditions or changes in other external factors including the price of commodities, such as crude oil, could result in customers postponing capital projects and could negatively impact the demand for our products and services as well as our customers’ ability to fulfill their obligations to us. The impact of a strong U.S. dollar could give rise to higher imports and reduce production activity for domestic customers that export, thereby reducing demand for our products. In addition, falling demand could lead to lower sales volumes, lower pricing and/or lower profit margins. It could also impact our ability to fulfill our volume purchase obligations under take-or-pay supply agreements, resulting in lower profit margins. A protracted period of lower product demand and profitability could result in diminished values for both tangible and intangible assets, increasing the possibility of future impairment charges. Further, suppliers could be impacted by an economic downturn, which could impact their ability to fulfill their obligations to us. If economic conditions deteriorate, our operating profit, financial condition and cash flows could be adversely affected.
Our financial results may be adversely affected by gas supply disruptions and supply/demand imbalances.
We are one of the nation’s leading suppliers of industrial, medical and specialty gases and have supply contracts with the major gas producers. Additionally, we operate 17 air separation units, 11 acetylene plants and eight liquid carbon dioxide production facilities, which provide us with substantial production capacity. Our supply contracts and our own production capacity mitigate supply disruptions to various degrees. However, natural disasters, plant shut-downs, labor strikes and other supply disruptions may occur within our industry. Regional supply disruptions may create shortages of raw materials and certain products. Consequently, we may not be able to obtain the products required to meet our customers’ demands or may incur significant costs to ship product from other regions of the country to meet customer requirements. Such additional costs may adversely impact operating results until product sourcing can be restored. When we experience supply shortages, we work to meet customer demand by arranging for alternative supplies and transporting product into an affected region, but we cannot guarantee that we will be successful in arranging alternative product supplies or passing the additional transportation or other costs on to customers in the event of future supply disruptions, which could negatively impact our operations, financial results or liquidity.
Interruptions in the proper functioning of our information systems could disrupt business and operational activities.
We rely on information systems for business and operational activities, including the processing and storage of proprietary and sensitive information. These systems are susceptible to disruptions as a result of events such as fires, natural disasters, hardware and software failures, network outages, power disruptions, and other problems. Although we maintain data center and network resiliency and recovery capabilities for our critical systems, interruptions in the proper functioning of these systems could adversely impact our ability to process orders, shipments, inventory receipts, vendor payments, and accounts receivable collections - any of which could negatively impact our operations or financial results.
Breaches of our information systems and e-Business platform could adversely impact our reputation, disrupt operations, and result in increased costs and loss of revenue.
Information security risks and threats have increased in recent years as a result of the interconnectedness of the systems, networks, and e-Business platform used to conduct business with our customers, suppliers and other third parties. Our business is also subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Despite maintaining and continuously improving our technologies and processes to mitigate these risks and comply with laws and regulations, sophisticated cyberattacks and security breaches could compromise our systems and data. Such events could expose us to reputational damage, business disruptions, regulatory and legal actions, and claims from customers,

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suppliers, financial institutions, and employees - any of which could have a material adverse impact to our financial condition and results of operations.
Catastrophic events and operating failures may disrupt our business and adversely affect our operating results.
Although our operations are widely distributed across the U.S., and safety is a primary focus in all we do, we manage and distribute hazardous materials and a catastrophic event could result in significant property losses, injuries and third-party claims. Examples of such events include, but are not limited to, the following: a fire, explosion or release of hazardous materials at one of our facilities, a supplier’s facility or a customer’s facility; a natural disaster, such as a hurricane, tornado or earthquake; and an operating failure at one of our facilities or in connection with the delivery of our products. Additionally, such events may severely impact our regional customer base and supply sources resulting in lost revenues, higher product costs and increased bad debts.
Operational and execution risks may adversely impact our financial results.
Our operating results are reliant on the continued operation of our production and distribution facilities and delivery fleet, as well as our ability to meet customer requirements. Inherent in our operations are risks that require continuous oversight and control, such as risks related to mechanical failure, fire, explosion, toxic releases and vehicle accidents. We have policies, procedures and safety protocols in place requiring continuous training, oversight and control in order to address these risks to our operations. However, significant operating failures at our production, distribution or storage facilities, or vehicle transportation accidents, could result in loss of life, loss of production or distribution capabilities, and/or damage to the environment, thereby adversely impacting our operations and financial results. These factors could subject us to lost sales, litigation contingencies and reputational risk.
U.S. credit markets may impact our ability to obtain financing or increase the cost of future financing.
As of March 31, 2016, we had total consolidated debt of approximately $2.6 billion, which had an average length to maturity of approximately four years and includes $250 million of long-term debt obligations maturing during the year ending March 31, 2017. During periods of volatility and disruption in the U.S. credit markets, obtaining additional or replacement financing may be more difficult and costly. Higher cost of new debt may limit our ability to finance future acquisitions on terms that are acceptable to us. Additionally, although we actively manage our interest rate risk through the use of diversified debt obligations and occasional derivative instruments, approximately 30% of our debt has a variable interest rate. If interest rates increase, our interest expense could increase, affecting earnings and reducing cash flows available for working capital, capital expenditures and acquisitions. Based on our outstanding borrowings at March 31, 2016, for every 25 basis point increase in our average variable borrowing rates, we estimate that our annual interest expense would increase by approximately $2.0 million.
Finally, our cost of borrowing can be affected by debt ratings assigned by independent rating agencies which are based in large part on our performance as measured by certain liquidity metrics. An adverse change in these debt ratings could increase the cost of borrowing and make it more difficult to obtain financing on favorable terms.
We operate in a highly competitive environment and such competition could negatively impact us.
The U.S. industrial gas industry operates in a highly competitive environment. Competition is generally based on price, reliable product delivery, product availability, technical support, quality and service. If we are unable to compete effectively with our competitors, we may suffer lower revenue and/or a loss of customers, which could result in lower profits and adversely affect our financial condition and cash flows.
Volatility in product and energy costs could reduce our profitability.
The cost of industrial gases represents a significant percentage of our operating costs. The production of industrial gases requires significant amounts of electricity. Therefore, industrial gas prices have historically increased as the cost of electricity increases. Unforeseen increases in power fuel costs, namely natural gas prices and to a degree oil, can result in unanticipated higher electric prices and operating costs. Severe weather conditions can adversely impact both our sales and expenses, causing an impediment to fully and timely recoup such unanticipated costs from our customers. In addition, a significant portion of our product distribution expenses consists of fuel costs. Energy prices can be volatile and may rise in the future, resulting in an increase in the distribution costs of industrial gases. While we have historically been able to pass increases in operating expenses on to our customers, we cannot guarantee our ability to do so in the future, which could negatively impact our operations, financial results or liquidity.
We may not be successful in integrating acquisitions and achieving intended benefits and synergies.
We have successfully integrated approximately 480 acquisitions in our history and consider the acquisition and integration of businesses to be a core competency. However, the process of integrating acquired businesses into our operations may result in unexpected operating difficulties and may require significant financial and other resources. Unexpected

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difficulties may impair our ability to achieve targeted synergies or planned operating results, which could diminish the value of acquired tangible and intangible assets resulting in future impairment charges. Acquisitions involve numerous risks, including:
acquired companies may not have internal control structures appropriate for a larger public company, resulting in a need for significant revisions;
acquired operations, information systems and products may be difficult to integrate;
acquired operations may not achieve targeted synergies;
we may not be able to retain key employees, customers and business relationships of acquired companies; and
our management team may have its attention and resources diverted from ongoing operations.
We depend on our key personnel to manage our business effectively and they may be difficult to replace.
Our performance substantially depends on the efforts and abilities of our senior management team and key employees. Furthermore, much of our competitive advantage is based on the expertise, experience and know-how of our key personnel regarding our distribution infrastructure, systems and products. The loss of key employees could have a negative effect on our business, revenues, results of operations and financial condition.
We are subject to litigation and reputational risk as a result of the nature of our business, which may have a material adverse effect on our business.
From time-to-time, we are involved in lawsuits that arise from our business. Litigation may, for example, relate to product liability claims, personal injury, property damage, vehicle accidents, regulatory issues, contract disputes or employment matters. The occurrence of any of these matters could also create possible damage to our reputation and our operations. The defense and ultimate outcome of lawsuits against us may result in higher operating expenses. Higher operating expenses or reputational damage could have a material adverse effect on our business, including to our liquidity, results of operations or financial condition.
We have established insurance programs with significant deductibles and maximum coverage limits which could result in the recognition of significant losses.
We maintain insurance coverage for workers’ compensation, business automobile and general liability claims with significant per occurrence deductibles. In the past, we have incurred significant workers’ compensation, business automobile and general liability losses. Such losses could impact our profitability. Additionally, claims in excess of our insurance limits could have a material adverse effect on our financial condition, results of operations or liquidity.
We are subject to extensive government regulation relating to health, safety and environmental matters, as well as anti-corruption laws that generate ongoing compliance costs and could subject us to liability.
We are subject to laws and regulations relating to health, safety and the protection of the environment and natural resources, as well as regulations related to social policy. These include, among other things, reporting on chemical inventories and risk management plans, and management of hazardous substances and wastes, air emissions and water discharges. More recently, we have examined our supply chain with respect to certain products we manufacture or contract to manufacture as a result of new regulations around the use of conflict minerals. Violations of existing laws and enactment of future legislation and regulations could result in substantial penalties, temporary or permanent plant closures, restrictions on our operations caused by the temporary or permanent loss of our licenses and other legal consequences, as well as reputational and other risks. Moreover, the nature of our existing and historical operations exposes us to the risk of liabilities to third parties. These potential claims include property damage, personal injuries and cleanup obligations.
The issue of greenhouse gas emissions has been subject to increased scrutiny and public awareness, and may result in legislation, both internationally and in the U.S., to reduce its effects. Increased regulation of greenhouse gas emissions could impose additional costs on us, both directly through new compliance and reporting requirements as well as indirectly through increased industrial gas and energy costs. Until such time as any new legislation is passed, it will remain unclear as to what industries would be impacted, the period of time within which compliance would be required, the significance of the greenhouse gas emissions reductions and the costs of compliance. Although we do not believe that increased greenhouse gas emissions regulation will have a material adverse effect on our financial condition, results of operations or liquidity, we cannot provide assurance that such costs will not increase in the future or will not become material.
Although our operations are predominantly in the United States, we conduct operations internationally in Canada, Mexico, Russia, Dubai and several European countries. Our international operations are subject to U.S. and foreign anti-corruption laws and regulations, including the U.S. Foreign Corrupt Practices Act and anti-corruption laws of the various jurisdictions in which we operate. We maintain policies and procedures designed to comply with anti-corruption laws.

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However, there can be no guarantee that these policies and procedures will effectively prevent violations by our employees or representatives in the future.
Risk Factors Related to the Merger
The proposed Merger may not be completed on a timely basis, or at all, and the failure to complete the Merger could adversely affect our business and the market price of our common stock.
On November 17, 2015, we entered into the Merger Agreement with Air Liquide and the Merger Sub. Completion of the Merger is subject to various conditions, including the receipt of necessary antitrust and regulatory approvals. Failure to complete the Merger could adversely affect our business and the market price of our common stock in a number of ways, including the following:
If the Merger is not completed, and there are no other parties willing and able to acquire the Company for consideration that is equivalent or more attractive than that in the Merger Agreement, on terms acceptable to us, our stock price may decline.
We have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, for which we will have received little or no benefit if the Merger is not completed. Many of these fees and costs will be payable by us even if the Merger is not completed and may relate to activities that we would not have undertaken other than to complete the Merger.
The prospective Merger could adversely affect our business, financial condition and results of operations.
The prospective Merger could cause disruptions in and create uncertainty surrounding our ongoing business operations, which could have an adverse effect on our financial condition and results of operations, regardless of whether the Merger is completed. These risks to our business include the following, all of which could be exacerbated by a delay in the completion of the Merger:
the diversion of significant management time and resources towards the completion of the Merger;
the impairment of our ability to retain and hire key personnel, including our senior management;
difficulties maintaining relationships with customers, suppliers and others with whom we conduct business;
the impairment of our ability to execute on our strategy of growth through acquisitions; and
potential litigation relating to the Merger and the costs related thereto.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
PROPERTIES.
The Company operates in all 50 U.S. states and in Canada, Mexico, Russia, Dubai and several European countries. The principal executive offices of the Company are located in leased space in Radnor, Pennsylvania.
The Company’s Distribution business segment operates a network of multiple use facilities consisting of approximately 900 branches, approximately 300 cylinder fill plants, 70 regional specialty gas laboratories, 11 national specialty gas laboratories, one research and development center, two specialty gas equipment centers, 11 acetylene plants and 17 air separation units, as well as six national hardgoods distribution centers, various customer call centers, buying centers and administrative offices. The Distribution business segment conducts business in all 50 states and internationally in Canada, Mexico, Russia, Dubai and several European countries. The Company owns approximately 47% of these facilities. The remaining facilities are primarily leased from unrelated third parties. A limited number of facilities are leased from employees, generally former owners of acquired businesses, and are on terms consistent with commercial rental rates prevailing in the surrounding rental markets.
The Company’s network of 17 air separation units that it owns and operates supports the Company’s full range of gas supply modes for its customers, making Airgas the fifth-largest producer of atmospheric gases in the U.S. During fiscal 2016, capacity utilization at the Company’s air separation units was approximately 80%, with additional capacity available upon demand. The Company is currently in the planning or construction phases for an additional two air separation units as well as a liquid hydrogen plant, all of which are expected to be on-stream at various points through calendar year 2018.
The Company’s All Other Operations business segment consists of businesses located throughout the U.S., which operate multiple use facilities consisting of approximately 90 branch/distribution locations, eight liquid carbon dioxide and 14 dry ice

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production facilities, and three nitrous oxide production facilities. The Company owns approximately 32% of these facilities. The remaining facilities are leased from unrelated third parties.
The Company believes that its facilities are adequate for its present needs and that its properties are generally in good condition, well-maintained and suitable for their intended use.
ITEM 3.
LEGAL PROCEEDINGS.
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. See Note 18, “Commitments and Contingencies,” to the Company’s consolidated financial statements under Part II, Item 8, “Financial Statements and Supplementary Data,” for additional information regarding the Company’s legal proceedings.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.


PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information, Dividends and Holders
The Company’s common stock is listed on the New York Stock Exchange (ticker symbol: ARG). The following table sets forth, for each quarter during the last two fiscal years, the high and low closing price per share for the common stock as reported by the New York Stock Exchange and cash dividends per share for the period from April 1, 2014 to March 31, 2016:
 
High
 
Low
 
Dividends Per Share
Fiscal 2016
 
 
 
 
 
First Quarter
$
107.97

 
$
100.29

 
$
0.60

Second Quarter
106.94

 
88.10

 
0.60

Third Quarter
138.93

 
87.97

 
0.60

Fourth Quarter
141.87

 
137.80

 
0.60

 
 
 
 
 
 
Fiscal 2015
 
 
 
 
 
First Quarter
$
109.95

 
$
102.35

 
$
0.55

Second Quarter
113.19

 
106.78

 
0.55

Third Quarter
117.98

 
103.55

 
0.55

Fourth Quarter
118.90

 
103.89

 
0.55

The closing sale price of the Company’s common stock on May 6, 2016, as reported by the New York Stock Exchange, was $142.60 per share. As of May 6, 2016, there were 271 stockholders of record, a number that by definition does not count those who hold the Company’s stock in street name including the many employee owners under the Amended and Restated Airgas, Inc. 2003 Employee Stock Purchase Plan (“Employee Stock Purchase Plan” or “ESPP”).
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.

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Stockholder Return Performance Presentation
Below is a graph comparing the yearly change in the cumulative total stockholder return on the Company’s common stock against the cumulative total return of the S&P 500 Index and the S&P 500 Chemicals Index for the five-year period that began April 1, 2011 and ended March 31, 2016.
The Company believes the use of the S&P 500 Index and the S&P 500 Chemicals Index for purposes of this performance comparison is appropriate because Airgas is a component of the indices and they include companies of similar size to Airgas.


 
March 31,
2011
2012
2013
2014
2015
2016
l
Airgas, Inc.
100.00
136.22

154.58

169.11

171.86

234.26

n
S&P 500 Index
100.00
108.54

123.69

150.73

169.92

172.95

Å
S&P 500 Chemicals
100.00
106.03

121.01

157.35

168.56

160.42

The graph above assumes that $100 was invested on April 1, 2011 in Airgas, Inc. common stock, the S&P 500 Index and the S&P 500 Chemicals Index and that all dividends have been reinvested.

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Issuer Purchases of Equity Securities
During the three months ended March 31, 2016, the Company acquired the following shares of its common stock:
Period
 
(a)


Total Number of Shares Purchased (1)
 
(b)


Average Price Paid per Share (1)
 
(c)
Total Number of Shares Purchased as Part of Publicly Announced Program (2)
 
(d)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (2)
1/1/16 - 1/31/16
 

 
$

 

 
$
125,294,139

2/1/16 - 2/29/16
 
7,248

 
$
141.81

 

 
$
125,294,139

3/1/16 - 3/31/16
 

 
$

 

 
$
125,294,139

Total
 
7,248

 
$
141.81

 

 
 
____________________
(1)
Consists of shares that were attested to upon the exercise of stock options by participants of the Company’s Second Amended and Restated 2006 Equity Incentive Plan (“Equity Incentive Plan”) in satisfaction of the payment of the exercise of stock options under the plan. During the three months ended March 31, 2016, the Company acquired 7,248 shares of its common stock with an average fair market value per share of $141.81 for the exercise of 12,000 stock options.
(2)
On May 28, 2015, the Company announced plans to purchase up to $500 million of Airgas, Inc. common stock under a stock repurchase program approved by the Company’s Board of Directors. Airgas may repurchase shares from time to time for cash in open market transactions or in privately-negotiated transactions in accordance with applicable federal securities laws. The Company will determine the timing and the amount of any repurchases based on its evaluation of market conditions, share price, and other factors. The stock repurchase program has no pre-established closing date. However, stock repurchases are currently suspended in accordance with the Merger Agreement.


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ITEM 6.
SELECTED FINANCIAL DATA.
Selected financial data for the Company is presented in the following table and should be read in conjunction with MD&A included in Item 7 and the Company’s consolidated financial statements and accompanying notes included in Item 8.
 
Years Ended March 31,
(In thousands, except per share amounts):
2016 (1)
 
2015
 
2014 (2)
 
2013 (3)
 
2012 (4)
Operating Results:
 
 
 
 
 
 
 
 
 
Net sales
$
5,313,777

 
$
5,304,885

 
$
5,072,537

 
$
4,957,497

 
$
4,746,283

Depreciation and amortization
$
352,747

 
$
329,058

 
$
305,306

 
$
288,900

 
$
270,285

Operating income
$
580,711

 
$
641,278

 
$
630,534

 
$
596,417

 
$
556,221

Interest expense, net
60,071

 
62,232

 
73,698

 
67,494

 
66,337

Losses on the extinguishment of debt

 

 
9,150

 

 

Other income, net
9,077

 
5,075

 
4,219

 
14,494

 
2,282

Income taxes
192,217

 
216,035

 
201,121

 
202,543

 
178,792

Net earnings
$
337,500

 
$
368,086

 
$
350,784

 
$
340,874

 
$
313,374

Net Earnings Per Common Share:
 

 
 

 
 

 
 

 
 

Basic earnings per share
$
4.60

 
$
4.93

 
$
4.76

 
$
4.45

 
$
4.09

Diluted earnings per share
$
4.54

 
$
4.85

 
$
4.68

 
$
4.35

 
$
4.00

Dividends per common share declared and paid (5)
$
2.40

 
$
2.20

 
$
1.92

 
$
1.60

 
$
1.25

Balance Sheet and Other Data at March 31:
 

 
 

 
 

 
 

 
 

Working capital
$
236,364

 
$
286,637

 
$
68,312

 
$
602,116

 
$
344,157

Total assets
6,134,956

 
5,973,610

 
5,793,314

 
5,618,225

 
5,320,585

Short-term debt
383,258

 
325,871

 
387,866

 

 
388,452

Current portion of long-term debt
250,107

 
250,110

 
400,322

 
303,573

 
10,385

Long-term debt, excluding current portion
1,954,820

 
1,748,662

 
1,706,774

 
2,304,245

 
1,761,902

Non-current deferred income tax liability, net
894,344

 
854,574

 
825,897

 
825,612

 
793,957

Other non-current liabilities
92,660

 
89,741

 
89,219

 
89,671

 
84,419

Stockholders’ equity
2,045,298

 
2,151,586

 
1,840,649

 
1,536,983

 
1,750,258

Capital expenditures for years ended March 31,
456,899

 
468,789

 
354,587

 
325,465

 
356,514

____________________
(1) 
The results for fiscal 2016 include the following: $29.0 million ($18.0 million after tax) or $0.24 per diluted share for costs associated with the Air Liquide merger and $7.0 million (non-tax-deductible) or $0.09 per diluted share for costs accrued related to a Plea Agreement by Airgas Doral, Inc. (“Airgas Doral”), a wholly-owned subsidiary of Airgas, Inc., with the U.S. Attorney’s Office for the Southern District of Florida. See Note 18, “Commitments and Contingencies,” to the Company’s consolidated financial statements under Item 8, “Financial Statements and Supplementary Data” for additional information. During the fiscal year, long term debt increased primarily related to the issuance of the $400 million 3.05% senior notes maturing on August 1, 2020, partially offset by the repayment of the $250 million 3.25% senior notes on September 14, 2015 which were originally due to mature on October 1, 2015.
(2) 
The results for fiscal 2014 include the following: $9.1 million ($5.6 million after tax) or $0.08 per diluted share recorded for a loss on the early extinguishment of the Company’s $215 million of 7.125% senior subordinated notes, which were originally due to mature in October 2018 but were redeemed in full on October 2, 2013, as well as $3.3 million or $0.04 per diluted share of state income tax benefits recognized for changes to enacted state income tax rates and a change in a state income tax law. The proceeds from the Company’s commercial paper program were used in part for the early redemption of the senior subordinated notes and repayment of the Company’s $300 million 2.85% senior notes upon their maturity in October 2013, causing the $388 million increase to short-term debt. In addition, the Company reclassified its $400 million 4.5% senior notes maturing in September 2014 to the “Current portion of long-term debt” line item of the Company’s consolidated balance sheet based on the maturity date.

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(3) 
The results for fiscal 2013 include the following: $8.1 million ($5.1 million after tax) or $0.07 per diluted share of net restructuring and other special charges and $6.8 million ($5.5 million after tax) or a benefit of $0.07 per diluted share of a gain on the sale of five branch locations in western Canada. The $6.8 million gain on sale of businesses was recorded in the “Other income, net” line item of the Company’s consolidated statement of earnings. Also during fiscal 2013, the Company’s $300 million 2.85% senior notes were reclassified to the “Current portion of long-term debt” line item of the Company’s consolidated balance sheet based on the maturity date. Additionally, during the three months ended March 31, 2013, proceeds from the issuance of an aggregate $600 million of senior notes in February 2013 were used to pay down the balance on the commercial paper program and, as a result, there were no outstanding borrowings under the program at March 31, 2013, resulting in a decrease to short-term debt and an increase in working capital in the table above.
(4) 
The results for fiscal 2012 include the following: $24.4 million ($15.6 million after tax) or $0.19 per diluted share of net restructuring and other special charges, $7.9 million ($5.0 million after tax) or $0.06 per diluted share in benefits from lower than previously estimated net costs related to a prior year unsolicited takeover attempt, $4.3 million ($2.7 million after tax) or $0.04 per diluted share in multi-employer pension plan withdrawal charges, and $4.9 million or $0.06 per diluted share of income tax benefits related to the LLC reorganization as well as a true-up of the Company’s foreign tax liabilities. Additionally, during fiscal 2012, the Company commenced a $750 million commercial paper program supported by its revolving credit facility. The Company has used proceeds under the commercial paper program to pay down amounts outstanding under its revolving credit facility and for general corporate purposes. Borrowings under the commercial paper program are classified as short-term debt on the Company’s consolidated balance sheet, which led to a $388 million decrease in both working capital and long-term debt in the table above.
(5)  
The Company’s quarterly cash dividends declared and paid to stockholders for the years presented above are disclosed in the following table:
 
Years Ended March 31,
 
2016
 
2015
 
2014
 
2013
 
2012
First Quarter
$
0.60

 
$
0.55

 
$
0.48

 
$
0.40

 
$
0.29

Second Quarter
0.60

 
0.55

 
0.48

 
0.40

 
0.32

Third Quarter
0.60

 
0.55

 
0.48

 
0.40

 
0.32

Fourth Quarter
0.60

 
0.55

 
0.48

 
0.40

 
0.32

Fiscal Year
$
2.40

 
$
2.20

 
$
1.92

 
$
1.60

 
$
1.25


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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS: 2016 COMPARED TO 2015
OVERVIEW
Airgas, Inc. and its subsidiaries (“Airgas” or the “Company”) had net sales for the year ended March 31, 2016 (“fiscal 2016” or “current year”) of $5.3 billion, essentially flat compared to the year ended March 31, 2015 (“fiscal 2015” or “prior year”). Organic sales decreased 1% compared to the prior year, with gas and rent up 2% and hardgoods down 7%. Current and prior year acquisitions contributed sales growth of 1% in the current year. The Company’s organic sales continue to reflect the challenging industrial economy and in particular the pressure on sales to customers engaged in the energy and chemical and the manufacturing and metal fabrication sectors. The sluggish U.S. industrial economy, slowing global economy and strong dollar continue to challenge the Company’s customers across these and other sectors. Continued strength in certain sectors, such as non-residential construction, helped to mitigate these sales declines.
The consolidated gross profit margin (excluding depreciation) in the current year was 56.7%, an increase of 110 basis points from the prior year, primarily reflecting a sales mix shift toward higher margin gas and rent, and higher margins in the Company’s All Other Operations business segment.
The Company’s operating income margin in the current year was 10.9%, a decrease of 120 basis points from the prior year. The current year's operating income margin was burdened by 70 basis points of costs related to the Agreement and Plan of Merger with Air Liquide (see below for additional information) and other special charges. Excluding the merger-related costs and other special charges, the operating income margin was down 50 basis points, primarily reflecting challenging economic conditions and the impact of rising operating costs (including depreciation and amortization expenses) in the current negative organic sales growth environment, in the Company’s Distribution business segment.
Net earnings per diluted share was $4.54 in the current year versus $4.85 in the prior year. Net earnings per diluted share in the current year included a $0.24 per diluted share charge related to merger costs associated with the Air Liquide Merger and a non-tax-deductible $0.09 per diluted share charge related to a Plea Agreement by Airgas Doral, Inc. (“Airgas Doral”) with the U.S. Attorney’s Office for the Southern District of Florida.
Air Liquide Merger Agreement
On November 17, 2015, the Company announced that it had entered into a definitive agreement for the acquisition of the Company by L’Air Liquide, S.A. (“Air Liquide”) in a merger pursuant to an Agreement and Plan of Merger, dated as of November 17, 2015, by and among the Company, Air Liquide and AL Acquisition Corporation (“Merger Sub”), an indirect wholly owned subsidiary of Air Liquide (the “Merger Agreement”). The Merger Agreement provides that, among other things and subject to the terms and conditions thereof, Merger Sub will be merged with and into the Company (the “Merger”) with the Company continuing as the surviving corporation in the Merger as an indirect wholly owned subsidiary of Air Liquide. See Note 2, “Merger Agreement,” to the Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for more information on the Merger Agreement.
In connection with the Merger, the Company has incurred $29 million of merger-related costs during the year ended March 31, 2016, primarily consisting of legal, advisory and other professional fees in connection with the Merger. These costs are included in the “Merger costs and other special charges” line item of the Company’s consolidated statement of earnings.
Stock Repurchase Program
On May 28, 2015, the Company announced plans to repurchase up to $500 million of Airgas, Inc. common stock under a stock repurchase program approved by the Company’s Board of Directors. Airgas may repurchase shares from time to time for cash in open market transactions or in privately-negotiated transactions in accordance with applicable federal securities laws. The Company will determine the timing and the amount of any repurchases based on its evaluation of market conditions, share price, and other factors. The stock repurchase program has no pre-established closing date; however, stock repurchases are currently suspended in accordance with the Merger Agreement. See Note 2, “Merger Agreement,” to the Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for more information on the Merger Agreement.
From the announcement date of the program through September 30, 2015, the Company repurchased 3.8 million shares on the open market at an average price of $99.54. The Company did not repurchase any shares during the six-month period ended March 31, 2016. At March 31, 2016, $125 million was available for additional share repurchases under the program.

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STATEMENT OF EARNINGS COMMENTARY - FISCAL YEAR ENDED MARCH 31, 2016 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2015
Net Sales
Net sales of $5.3 billion for the current year were essentially flat compared to the prior year, with a decrease in organic sales of 1% offset by sales growth from current and prior year acquisitions of 1%. Gas and rent organic sales increased 2% in the current year, and hardgoods organic sales decreased 7%. Organic sales growth in the current year was driven by price increases of 1% and volume decreases of 2%.
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 is 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 year, sales of strategic products in aggregate increased 1% on an organic basis as compared to the prior year.
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 year increased 1% compared to the prior year.
In the following table, the intercompany eliminations represent sales from the All Other Operations business segment to the Distribution business segment.
 
Years Ended
 
 
 
 
Net Sales
March 31,
 
Increase/(Decrease)
 
 
(In thousands)
2016
 
2015
 
 
 
Distribution
$
4,716,228

 
$
4,773,489

 
$
(57,261
)
 
(1
)%
All Other Operations
635,769

 
560,622

 
75,147

 
13
 %
Intercompany eliminations
(38,220
)
 
(29,226
)
 
(8,994
)
 
 
 
$
5,313,777

 
$
5,304,885

 
$
8,892

 
 %
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 decreased 1% compared to the prior year, with a decrease in organic sales of 2%. Incremental sales from current and prior year acquisitions contributed sales growth of 1% in the current year. Higher pricing of 1% and volume decreases of 3% resulted in the 2% decrease in organic sales in the Distribution business segment. Gas and rent organic sales in the Distribution business segment increased 1%, with pricing up 1% and volumes flat. Hardgoods organic sales within the Distribution business segment decreased 7%, with pricing flat and volumes down 7%.
Within the Distribution business segment, organic sales of gas related strategic products and associated rent increased 4% over the prior year, comprised of the following: bulk gas and rent up 5%, on higher pricing and volumes; specialty gas, rent, and related equipment up 6%, on moderate growth in core specialty gas volumes; and medical gas and rent up 2%, as increases to 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 decreased 1% over the prior year, driven by weakness in generator rentals to oilfield services customers in the second half of the year.
Within the Distribution business segment’s hardgoods sales, sales of safety products decreased by 6% compared to the prior year on broad based moderation in core industrial activity. Sales of the Company’s Radnor® private-label product line, which includes certain safety products, consumables, and other hardgoods, decreased 4% in the current year, compared to the 7% decrease in total hardgoods organic sales in the Distribution business segment.
The All Other Operations business segment consists of six business units. The primary products manufactured and/or distributed are CO2, dry ice, nitrous oxide, ammonia and refrigerant gases, along with a nitrogen services business.
The All Other Operations business segment sales increased 13% compared to the prior year, with an increase in organic sales of 7%. Incremental sales from current and prior year acquisitions contributed sales growth of 6% in the current year. The strong organic growth in the All Other Operations business segment was driven by sales increases primarily in the Company’s

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refrigerants, as well as dry ice businesses. Organic sales of CO2 and dry ice, the vast majority of which is sold to end customers through the All Other Operations business segment, increased 7% over the prior year on higher pricing and volumes.
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 2% in the current year compared to the prior year, reflecting margin expansion on favorable sales mix. The consolidated gross profit margin (excluding depreciation) in the current year increased 110 basis points to 56.7% compared to 55.6% in the prior year. The increase in consolidated gross profit margin (excluding depreciation) primarily reflects the sales mix shift toward higher margin gas and rent and higher margins in the Company’s All Other Operations business segment, partially offset by a sales mix shift within gas toward lower margin refrigerants. Gas and rent represented 65.1% of the Company’s sales mix in the current year, up from 63.2% in the prior year.
 
Years Ended
 
 
 
 
Gross Profits (ex. Depr.)
March 31,
 
Increase/(Decrease)
 
 
(In thousands)
2016
 
2015
 
 
 
Distribution
$
2,678,736

 
$
2,681,023

 
$
(2,287
)
 
 %
All Other Operations
333,443

 
267,987

 
65,456

 
24
 %
 
$
3,012,179

 
$
2,949,010

 
$
63,169

 
2
 %
The Distribution business segment’s gross profits (excluding depreciation) were down modestly compared to the prior year, primarily driven by the decline in the Distribution business segment’s sales, partially offset by higher margins. The Distribution business segment’s gross profit margin (excluding depreciation) increased 60 basis points to 56.8% in the current year from 56.2% in the prior year. The increase in the Distribution business segment’s gross profit margin (excluding depreciation) reflects a sales mix shift toward higher margin gas and rent, partially offset by margin pressure within gas and rent on higher helium costs and a sales mix shift toward lower margin bulk gas. Gas and rent represented 60.8% of the Distribution business segment’s sales in the current year, up from 59.1% in the prior year.
The All Other Operations business segment’s gross profits (excluding depreciation) increased 24% compared to the prior year, primarily driven by the increase in refrigerants and dry ice sales, margin expansion in the Company’s ammonia and refrigerants businesses, and the inclusion of the Priority Nitrogen acquisition. The All Other Operations business segment’s gross profit margin (excluding depreciation) increased 460 basis points to 52.4% in the current year from 47.8% in the prior year. The increase in the All Other Operations business segment’s gross profit margin (excluding depreciation) was primarily driven by margin expansion in the Company’s ammonia and refrigerants businesses plus the addition of the higher-margin Priority Nitrogen business.
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. Additionally, the Company’s merger costs and other special charges are not allocated to the Company’s business segments. These costs are captured in a separate line item on the Company’s Consolidated Statements of Earnings and are reflected in the “Merger costs and other special charges” line item in the operating income table below.
Consolidated SD&A expenses increased $64 million, or 3%, in the current year as compared to the prior year. Contributing to the increase in SD&A expenses were approximately $28 million of incremental operating costs associated with acquired businesses, representing approximately 1.4% of the total increase in SD&A. The remaining increase is primarily related to normal inflation, as well as the incremental costs to support strong organic sales growth in the All Other Operations segment. As a percentage of consolidated gross profit, consolidated SD&A expenses increased 70 basis points to 67.8% in the current year, compared to 67.1% in the prior year.

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Years Ended
 
 
 
 
SD&A Expenses
March 31,
 
Increase/(Decrease)
 
 
(In thousands)
2016
 
2015
 
 
Distribution
$
1,828,814

 
$
1,792,116

 
$
36,698

 
2
%
All Other Operations
213,940

 
186,558

 
27,382

 
15
%
 
$
2,042,754

 
$
1,978,674

 
$
64,080

 
3
%
SD&A expenses in the Distribution business segment increased 2% compared to the prior year. 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 1% of the increase in SD&A. As a percentage of Distribution business segment gross profit, SD&A expenses in the Distribution business segment increased 150 basis points to 68.3% compared to 66.8% in the prior year.
SD&A expenses in the All Other Operations business segment increased 15% compared to the prior year. Contributing to the increase in SD&A expenses in the All Other Operations business segment were approximately $11 million of incremental operating costs associated with acquired businesses, representing approximately 6% of the increase in SD&A. Incremental costs to support strong organic sales growth in the All Other Operations business segment, also contributed to the increase. As a percentage of All Other Operations business segment gross profit, SD&A expenses in the All Other Operations business segment decreased 540 basis points to 64.2% compared to 69.6% in the prior year, primarily driven by strong sales and margin growth within the business segment.
Merger Costs and Other Special Charges
During the current year, the Company incurred $29 million of merger-related costs, primarily consisting of legal, advisory and other professional fees in connection with the Merger Agreement with Air Liquide. Additionally, during the current year, the Company accrued costs of $7 million related to a Plea Agreement by Airgas Doral with the U.S. Attorney’s Office for the Southern District of Florida, concerning past violations in connection with the handling, labeling and transportation of certain hazardous materials shipments from the Company’s Miami facilities to consignees located in South America. The Company’s merger costs and other special charges are captured in a separate line item on the Company’s Consolidated Statements of Earnings and not allocated to the Company’s business segments.
Depreciation and Amortization
Depreciation expense increased $21 million, or 7%, to $319 million in the current year as compared to the prior year. 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), investments in the Company’s eBusiness platform and other system enhancements, and $2 million of additional depreciation expense on capital assets included in acquisitions. Amortization expense of $34 million in the current year increased by $3 million compared to the prior year, driven by acquisitions.
Operating Income
Consolidated operating income of $581 million decreased $61 million, 9%, in the current year compared to the prior year, with merger costs and other special charges of $36 million accounting for over half of the decline. The remaining decrease is primarily attributable to lower operating income in the Company’s Distribution business segment, partially offset by higher operating income in the Company’s All Other Operations business segment, as noted below. The consolidated operating income margin decreased 120 basis points to 10.9% from 12.1% in the prior year, of which 70 basis points of decline is due to merger-related costs and other special charges.
 
Years Ended
 
 
 
 
Operating Income
March 31,
 
Increase/(Decrease)
 
 
(In thousands)
2016
 
2015
 
 
 
Distribution
$
531,815

 
$
589,334

 
$
(57,519
)
 
(10
)%
All Other Operations
84,863

 
51,944

 
32,919

 
63
 %
Merger costs and other special charges
(35,967
)
 

 
(35,967
)
 
 
 
$
580,711

 
$
641,278

 
$
(60,567
)
 
(9
)%
Operating income in the Distribution business segment decreased 10% compared to the prior year. The Distribution business segment’s operating income margin of 11.3% decreased by 100 basis points compared to the operating income margin of 12.3% in the prior year. The decline in the Distribution business segment’s operating income margin primarily reflects the

23

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impact of rising operating costs (including depreciation and amortization expenses) in the current negative organic sales growth environment.
Operating income in the All Other Operations business segment increased 63% compared to the prior year, primarily driven by the increase in refrigerants and dry ice sales, margin expansion as described below, and the inclusion of the Priority Nitrogen acquisition. The All Other Operations business segment’s operating income margin of 13.3% increased by 400 basis points compared to the operating income margin of 9.3% in the prior year. The increase in the All Other Operations business segment’s operating income margin was primarily driven by margin expansion in the Company’s ammonia and refrigerants businesses.
Interest Expense, Net
Interest expense, net, was $60 million in the current year, representing a decrease of $2 million, or 3%, compared to the prior year. The overall decrease in interest expense, net resulted primarily from lower average borrowing rates, partially offset by higher average debt balances, in the current year as compared to the prior year.
Income Tax Expense
The effective income tax rate was 36.3% of pre-tax earnings in the current year compared to 37.0% in the prior year.
Net Earnings
Net earnings per diluted share decreased 6% to $4.54 in the current year compared to $4.85 per diluted share in the prior year. Net earnings were $338 million in the current year compared to $368 million in the prior year. Net earnings in the current year included costs of $18 million (net of tax) or a $0.24 per diluted share charge related to merger costs associated with the Merger and $7 million (non-tax-deductible) or a $0.09 per diluted share charge related to a Plea Agreement by Airgas Doral with the U.S. Attorney’s Office for the Southern District of Florida. Net earnings in the prior year were not impacted by special items.

RESULTS OF OPERATIONS: 2015 COMPARED TO 2014
OVERVIEW
Airgas had net sales for fiscal 2015 of $5.3 billion compared to $5.1 billion for the year ended March 31, 2014 (“fiscal 2014”), an increase of 5%. Organic sales increased 3% compared to fiscal 2014, with gas and rent up 3% and hardgoods up 4%. Acquisitions contributed sales growth of 2% in fiscal 2015. Through the first nine months of fiscal 2015, organic sales growth was 3%, with the third quarter showing the strongest year over year growth rate of 6%. The Company’s fiscal 2015 fourth quarter year over year organic growth rate fell to 2% as the energy & chemicals and manufacturing customer segments were negatively impacted by the significant and rapid decline in oil prices and the strong U.S. dollar.
The consolidated gross profit margin (excluding depreciation) in fiscal 2015 was 55.6%, a decrease of 10 basis points from fiscal 2014.
The Company’s operating income margin in fiscal 2015 was 12.1%, a decrease of 30 basis points from fiscal 2014, primarily reflecting the sales mix shift toward lower margin hardgoods, the impact of rising operating costs and the Company’s continued investments in strategic long-term growth initiatives in a low organic sales growth environment.
Net earnings per diluted share increased to $4.85 in fiscal 2015 versus $4.68 in fiscal 2014. Net earnings per diluted share in fiscal 2014 included $0.04 per diluted share in benefits related to changes in state income tax rates and law, and an $0.08 loss on the early extinguishment of debt.
STATEMENT OF EARNINGS COMMENTARY - FISCAL YEAR ENDED MARCH 31, 2015 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2014
Net Sales
Net sales increased 5% to $5.3 billion for fiscal 2015 compared to fiscal 2014, driven by organic sales growth of 3% and sales growth from acquisitions of 2%. Gas and rent organic sales increased 3% and hardgoods organic sales increased 4%. Organic sales growth in fiscal 2015 was driven by price increases of 2% and volume increases of 1%.
For fiscal 2015, sales of strategic products increased 4% on an organic basis as compared to fiscal 2014. Sales to strategic accounts in fiscal 2015 grew 5% compared to fiscal 2014.
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

 
Years Ended
 
 
 
 
Net Sales
March 31,
 
Increase/(Decrease)
 
 
(In thousands)
2015
 
2014
 
 
 
Distribution
$
4,773,489

 
$
4,558,790

 
$
214,699

 
5
%
All Other Operations
560,622

 
544,154

 
16,468

 
3
%
Intercompany eliminations
(29,226
)
 
(30,407
)
 
1,181

 
 

 
$
5,304,885

 
$
5,072,537

 
$
232,348

 
5
%
Distribution business segment sales increased 5% compared to fiscal 2014, with an increase in organic sales of 3% and incremental sales of 2% contributed by acquisitions. 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 2%, with pricing up 3% 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% in fiscal 2015, comprised of the following: bulk gas and rent up 5% on higher pricing and volumes; specialty gas, rent, and related equipment up 3%, primarily driven by increases in core specialty gas prices and volumes; and medical gas and rent up 2%, as increases to 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 14% in fiscal 2015, driven by increases in both welder and generator rentals in the non-residential construction and energy customer segments.
Within the Distribution business segment’s hardgoods sales, organic sales of equipment were up 8% year-over-year. Sales of Safety products increased 4% in fiscal 2015 driven by volume gains. Sales of the Company’s Radnor® private-label product line, which includes certain safety products, consumables, and other hardgoods, increased 4% in fiscal 2015, consistent with the 4% increase in total hardgoods organic sales in the Distribution business segment.
The All Other Operations business segment sales increased 3% in total and on an organic basis compared to fiscal 2014. Sales increases in the Company’s CO2, dry ice and ammonia businesses were partially offset by the decline in sales in its refrigerants business during fiscal 2015. Organic sales of CO2 and dry ice increased 3% over fiscal 2014.
Gross Profits (Excluding Depreciation)
Consolidated gross profits (excluding depreciation) increased 4% in fiscal 2015 compared to fiscal 2014, reflecting the overall growth in sales, margin expansion on price increases and surcharges related to power cost spikes in the fiscal 2014 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 fiscal 2015 decreased 10 basis points to 55.6% compared to 55.7% in fiscal 2014. The decrease in consolidated gross profit margin (excluding depreciation) reflects margin expansion on price increases offset by a sales mix shift toward lower margin hardgoods. Gas and rent represented 63.2% of the Company’s sales mix in fiscal 2015, down from 63.6% in fiscal 2014.
 
Years Ended
 
 
 
 
Gross Profits (ex. Depr.)
March 31,
 
Increase/(Decrease)
 
 
(In thousands)
2015
 
2014
 
 
 
Distribution
$
2,681,023

 
$
2,562,725

 
$
118,298

 
5
%
All Other Operations
267,987

 
262,238

 
5,749

 
2
%
 
$
2,949,010

 
$
2,824,963

 
$
124,047

 
4
%
The Distribution business segment’s gross profits (excluding depreciation) increased 5% compared to fiscal 2014. The Distribution business segment’s gross profit margin (excluding depreciation) remained consistent at 56.2% in fiscal 2015 and fiscal 2014. The Distribution business segment’s flat gross profit margin (excluding depreciation) reflects margin expansion on price increases and surcharges related to power cost spikes in the fiscal 2014 fourth quarter, offset by a sales mix shift toward lower margin hardgoods. Gas and rent represented 59.1% of the Distribution business segment’s sales in fiscal 2015, down from 59.6% in fiscal 2014.
The All Other Operations business segment’s gross profits (excluding depreciation) increased 2% compared to fiscal 2014. The All Other Operations business segment’s gross profit margin (excluding depreciation) decreased 40 basis points to 47.8% in fiscal 2015 from 48.2% in fiscal 2014. The decrease in the All Other Operations business segment’s gross profit margin (excluding depreciation) was primarily driven by a sales mix shift toward lower margin ammonia and slight margin pressure in the Company’s CO2, refrigerants and ammonia businesses, partially offset by a sales mix shift away from lower margin refrigerants.

25

Table of Contents

Operating Expenses
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.
Consolidated SD&A expenses increased $90 million, or 5%, in fiscal 2015 as compared to fiscal 2014. Contributing to the increase in SD&A expenses were approximately $27 million of incremental operating costs associated with acquired businesses, representing approximately 1.4% 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 20 basis points to 67.1% in fiscal 2015, compared to 66.9% in fiscal 2014.
 
Years Ended
 
 
 
 
SD&A Expenses
March 31,
 
Increase/(Decrease)
 
 
(In thousands)
2015
 
2014
 
 
 
Distribution
$
1,792,116

 
$
1,705,408

 
$
86,708

 
5
%
All Other Operations
186,558

 
176,289

 
10,269

 
6
%
Other

 
7,426

 
(7,426
)
 
 
 
$
1,978,674

 
$
1,889,123

 
$
89,551

 
5
%
SD&A expenses in the Distribution business segment increased 5%, while SD&A expenses in the All Other Operations business segment increased 6%, compared to fiscal 2014. Contributing to the increase in SD&A expenses in the Distribution business segment were approximately $27 million of incremental operating costs associated with acquired businesses, representing approximately 1.5% 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 66.8% compared to 66.5% in fiscal 2014. As a percentage of All Other Operations business segment gross profit, SD&A expenses in the All Other Operations business segment increased 240 basis points to 69.6% compared to 67.2% in fiscal 2014, primarily driven by margin pressure as noted above.
SD&A Expenses – Other
Enterprise Information System
As of March 31, 2013, the Company had 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 2014. SAP-related integration costs were $7.4 million in fiscal 2014, and were recorded as SD&A expenses and not allocated to the Company’s business segments.
Depreciation and Amortization
Depreciation expense increased $22 million, or 8%, to $298 million in fiscal 2015 as compared to fiscal 2014. 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 $3 million of additional depreciation expense on capital assets included in acquisitions. Amortization expense of $31 million in fiscal 2015 increased by $2 million compared to fiscal 2014, driven by acquisitions.
Operating Income
Consolidated operating income of $641 million increased 2% in fiscal 2015 compared to fiscal 2014, primarily driven by organic sales growth. The consolidated operating income margin increased 30 basis points to 12.1% compared to 12.4% in fiscal 2014, primarily reflecting a sales mix shift toward hardgoods.

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Table of Contents

 
Years Ended
 
 
 
 
Operating Income
March 31,
 
Increase/(Decrease)
 
 
(In thousands)
2015
 
2014
 
 
 
Distribution
$
589,334

 
$
579,476

 
$
9,858

 
2
 %
All Other Operations
51,944

 
58,484

 
(6,540
)
 
(11
)%
Other

 
(7,426
)
 
7,426

 
 

 
$
641,278

 
$
630,534

 
$
10,744

 
2
 %
Operating income in the Distribution business segment increased 2% in fiscal 2015. The Distribution business segment’s operating income margin decreased 40 basis points to 12.3% from 12.7% in fiscal 2014. The decline in the Distribution business segment’s operating income margin primarily reflects the sales mix shift toward lower margin hardgoods and the impact of rising operating costs and the Company’s continued investments in strategic long-term growth initiatives in a low organic sales growth environment.
Operating income in the All Other Operations business segment decreased 11% compared to fiscal 2014, primarily driven by the decline in refrigerants sales. The All Other Operations business segment’s operating income margin of 9.3% decreased by 140 basis points compared to the operating income margin of 10.7% in fiscal 2014. The decrease in the All Other Operations business segment’s operating income margin was primarily driven by margin pressure in the Company’s refrigerants, CO2 and ammonia businesses.
Interest Expense, Net and Loss on the Extinguishment of Debt
Interest expense, net, was $62 million in fiscal 2015, representing a decrease of $11 million, or 16%, compared to fiscal 2014. The overall decrease in interest expense, net resulted primarily from lower average borrowing rates and, to a lesser extent, lower average debt balances in fiscal 2015 as compared to fiscal 2014.
On October 2, 2013, the Company redeemed all $215 million of its 7.125% senior subordinated notes originally due to mature on October 1, 2018 (the “2018 Senior Subordinated Notes”). A loss on the early extinguishment of debt of $9.1 million related to the redemption premium and write-off of unamortized debt issuance costs was recognized in fiscal 2014.
Income Tax Expense
The effective income tax rate was 37.0% of pre-tax earnings in fiscal 2015 compared to 36.4% in fiscal 2014. An aggregate $3.3 million in favorable state income tax items was recognized in fiscal 2014. During the three months ended September 30, 2013, the Company recognized a $1.5 million tax benefit related to a change in a state income tax law, allowing the Company to utilize additional net operating loss carryforwards. During the three months ended March 31, 2014, the Company recognized an additional $1.8 million of tax benefits related to enacted changes in state income tax rates.
Net Earnings
Net earnings per diluted share increased by 4% to $4.85 in fiscal 2015 compared to $4.68 per diluted share in fiscal 2014. Net earnings were $368 million in fiscal 2015 compared to $351 million in fiscal 2014. Fiscal 2015’s earnings were not impacted by special items, while net earnings per diluted share in fiscal 2014 included $0.04 per diluted share in benefits related to changes in state income tax rates and law, and an $0.08 loss on the early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash provided by operating activities was $744 million in fiscal 2016 compared to $718 million in fiscal 2015 and $745 million in fiscal 2014.
The following table provides a summary of the major items affecting the Company’s cash flows from operating activities for the years presented:
 
Years Ended March 31,
(In thousands)
2016
 
2015
 
2014
Net earnings
$
337,500

 
$
368,086

 
$
350,784

Non-cash and non-operating activities (1)
402,661

 
388,789

 
335,284

Changes in working capital
6,655

 
(26,192
)
 
63,998

Other operating activities
(2,881
)
 
(12,646
)
 
(5,206
)
Net cash provided by operating activities
$
743,935

 
$
718,037

 
$
744,860


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____________________
(1)
Includes depreciation, amortization, deferred income taxes, gains on sales of plant and equipment, stock-based compensation expense, and losses on the extinguishment of debt.
The cash inflow related to working capital in the current year was primarily driven by a lower required investment in working capital and a reduction in trade receivables, reflecting the overall negative organic sales growth environment as well as the timing and receipt of vendor rebate payments, partially offset by the increase in estimated income tax payments and timing of payments to vendors. The cash outflow related to working capital in fiscal 2015 was primarily driven by the timing of income tax payments due to changes in tax laws. The cash inflow related to working capital in fiscal 2014 was primarily driven by a lower required investment in working capital, reflecting a low organic sales growth environment, improved accounts receivable management following the Company’s SAP conversions and the timing of income tax payments.
Net earnings plus non-cash and non-operating activities provided cash of $740 million in fiscal 2016 versus $757 million in fiscal 2015 and $686 million in fiscal 2014.
As of March 31, 2016, $21 million of the Company’s $56 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 years presented:
 
Years Ended March 31,
(In thousands)
2016
 
2015
 
2014
Capital expenditures
$
(456,899
)
 
$
(468,789
)
 
$
(354,587
)
Proceeds from sales of plant and equipment
25,521

 
23,083

 
15,483

Business acquisitions and holdback settlements
(101,704
)
 
(51,382
)
 
(203,529
)
Other investing activities
2,556

 
325

 
(951
)
Net cash used in investing activities
$
(530,526
)
 
$
(496,763
)
 
$
(543,584
)
Capital expenditures as a percent of sales were 8.6%, 8.8% and 7.0%, respectively, for fiscal years 2016, 2015 and 2014. The capital expenditures in the current year compared to the prior year period reflects the Company’s continued higher investments in revenue generating assets, such as rental welding and generator equipment, cylinders and bulk tanks; the construction of new air separation units in Illinois, Kentucky and Alabama; and the purchase of various facilities previously operated under lease agreements related to the acquired Encompass Gas Group. Lease buyouts in fiscal 2016 were $45 million as compared to $3 million in fiscal 2015 and $4 million in fiscal 2014. The increase in capital expenditures in fiscal 2015 compared to fiscal 2014 reflects the Company’s 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.
In fiscal 2016, the company paid $102 million to acquire eighteen businesses and to settle holdback liabilities, which excludes cash paid related to certain contingent consideration arrangements that are reflected as financing activities. In fiscal 2015, the company paid $51 million to acquire fourteen businesses and to settle holdback liabilities, which excludes cash paid related to certain contingent consideration arrangements that are reflected as financing activities. In fiscal 2014, the company paid $204 million to acquire eleven businesses and to settle holdback liabilities, which excludes cash paid related to certain contingent consideration arrangements that are reflected as financing activities.
Free cash flow* in fiscal 2016 was $403 million, compared to $309 million in fiscal 2015 and $441 million in fiscal 2014.
* 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 years presented:

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Years Ended March 31,
(In thousands)
2016
 
2015
 
2014
Net cash borrowings (repayments)
$
262,001

 
$
(161,260
)
 
$
(113,374
)
Purchase of treasury stock
(374,706
)
 

 
(8,127
)
Dividends paid to stockholders
(175,384
)
 
(164,517
)
 
(141,461
)
Other financing activities
79,765

 
85,666

 
44,861

Net cash used in financing activities
$
(208,324
)
 
$
(240,111
)
 
$
(218,101
)
In fiscal 2016, net financing activities used cash of $208 million. Net cash repayments on debt obligations were $262 million, primarily related to the issuance of $400 million of 3.05% senior notes maturing on August 1, 2020, borrowings of $56 million under the commercial paper program, $21 million of net revolving credit borrowings and increased borrowings of $35 million under the Securitization Agreement, partially offset by the repayment of $250 million of 3.25% senior notes that would have matured on October 1, 2015. On May 28, 2015, the Company announced a $500 million stock repurchase program and during fiscal 2016, the Company repurchased 3.8 million shares in the open market for $375 million. The Company did not repurchase any shares during the six months ended March 31, 2016 as the program was suspended in accordance with the Merger Agreement. At March 31, 2016, $125 million was available for additional share repurchases under the 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, and the change in cash overdrafts, generated cash of $80 million during the current year.
In fiscal 2015, net financing activities used cash of $240 million. Net cash repayments on debt obligations were $161 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 repayment of $63 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 $86 million during the current year.
In fiscal 2014, net financing activities used cash of $218 million. Net cash repayments on debt obligations were $113 million, primarily related to the early redemption of the Company’s 2018 Senior Subordinated Notes and repayment of its 2013 Notes upon their maturity in October 2013. The note repayments were financed with proceeds from the Company’s commercial paper program, excess cash and borrowings under its trade receivables securitization facility. 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, and the change in cash overdrafts, generated cash of $45 million during the current year.
Dividends
In fiscal 2016, the Company paid its stockholders $175 million in dividends or $0.60 per share in all four quarters. During fiscal 2015, the Company paid dividends of $165 million or $0.55 per share in all four quarters. During fiscal 2014, the Company paid its stockholders $141 million in dividends or $0.48 per share in all four quarters. 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. Any future dividend increases would be subject to certain limitations as described in the Merger Agreement.
Financial Instruments and Sources of Liquidity
In addition to utilizing cash from operations, the Company has various liquidity resources available to meet its future cash requirements for working capital, capital expenditures and other financial commitments. See Note 10, “Indebtedness,” to the Company’s consolidated financial statements under Item 8, “Financial Statements and Supplementary Data” for additional information on the Company’s debt instruments.
Money Market Loans
The Company has two separate money market loan agreements with financial institutions to provide access to short-term advances not to exceed $35 million for each respective agreement. At March 31, 2016, there were no advances outstanding under the agreements.
Commercial Paper
The Company participates in a $1 billion commercial paper program supported by its 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

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proceeds from commercial paper issuances for general corporate purposes. At March 31, 2016, $383 million of borrowings were outstanding under the commercial paper program.
Trade Receivables Securitization
The Company participates in a securitization agreement with four commercial bank conduits to which it sells qualifying trade receivables on a revolving basis (the “Securitization Agreement”), up to a maximum amount of $330 millionThe 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. The maturity date of the Securitization Agreement is December 5, 2018. At March 31, 2016, the amount of outstanding borrowing under the Securitization Agreement was $330 million.
Senior Credit Facility
The Company participates in a $1 billion Amended and Restated Credit Facility (the “Credit Facility”). The Credit Facility consists of an $875 million U.S. dollar revolving credit line, with a $100 million letter of credit sublimit and a $75 million swingline sublimit, and a $125 million (U.S. dollar equivalent) multi-currency revolving credit line. The maturity date of the Credit Facility is November 18, 2019. Under circumstances described in the Credit Facility, the revolving credit line may be increased by an additional $500 million, provided that the multi-currency revolving credit line may not be increased by more than an additional $50 million.
At March 31, 2016, the financial covenant of the Credit Facility did not restrict the Company’s ability to borrow on the unused portion of the Credit Facility. The Credit Facility contains customary events of default including, without limitation, failure to make payments, a cross-default to certain other debt, breaches of covenants, breaches of representations and warranties, certain monetary judgments and bankruptcy and ERISA events. In the event of default, repayment of borrowings under the Credit Facility may be accelerated.
Senior Notes
In August 2015, the Company issued $400 million of 3.05% senior notes maturing on August 1, 2020 (the “2020 Notes”), which were principally used for general corporate purposes, including to fund acquisitions, to repay indebtedness and to repurchase shares pursuant to the Company’s stock repurchase program.
In September 2015, the Company redeemed in full its $250 million 3.25% senior notes originally due to mature on October 1, 2015 (the “2015 Notes”) at 100% of the principal amount of the notes plus accrued interest.
At March 31, 2016, the Company’s $250 million 2.95% senior notes maturing on June 15, 2016 (the “2016 Notes”) were included in the “Current portion of long-term debt” line item on the Company’s consolidated balance sheet. In April 2016, the Company announced it has elected to redeem the 2016 Notes maturing in June 2016. The 2016 Notes will be redeemed in full on May 15, 2016, at a price of 100%.
Total Borrowing Capacity
The Company believes that it has sufficient liquidity to meet its working capital, capital expenditure and other financial commitments, including its $250 million of 2.95% senior notes maturing on June 15, 2016. The sources of that liquidity include cash from operations, availability under the Company’s commercial paper program, Securitization Agreement and revolving credit facilities, and potential capital markets transactions. The financial covenant under the Company’s Credit Facility requires the Company to maintain a leverage ratio not higher than 3.5x Debt to EBITDA. The leverage ratio is a contractually defined amount principally reflecting debt and, historically, the amounts outstanding under the Securitization Agreement (“Debt”), divided by a contractually defined Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) financial measure for the trailing twelve-month period with pro forma adjustments for acquisitions. The financial covenant calculations of the Credit Facility include the pro forma results of acquired businesses. Therefore, total borrowing capacity is not reduced dollar-for-dollar with acquisition financing. The leverage ratio measures the Company’s ability to meet current and future obligations. At March 31, 2016, the Company’s leverage ratio was 2.6x and $495 million remained available under the Company’s Credit Facility, after giving effect to the commercial paper program backstopped by the Credit Facility, the outstanding U.S. letters of credit and the borrowings under the multi-currency revolver.
The Company continually evaluates alternative financing arrangements and believes that it can obtain financing on reasonable terms. The terms of any future financing arrangements depend on market conditions and the Company’s financial position at that time. At March 31, 2016, the Company was in compliance with all covenants under all of its debt agreements.
Interest Rate Derivatives
The Company manages its exposure to changes in market interest rates through the occasional use of interest rate derivative instruments, when deemed appropriate. At March 31, 2016, the Company had no derivative instruments outstanding.

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Interest Expense
Based on the Company’s fixed-to-variable interest rate ratio as of March 31, 2016, for every 25 basis point increase in the Company’s average variable borrowing rates, the Company estimates that its annual interest expense would increase by approximately $2.0 million.
Non-GAAP Reconciliations
Adjusted Cash from Operations, Adjusted Capital Expenditures, and Free Cash Flow
 
Years Ended March 31,
(In thousands)
2016
2015
2014
Net cash provided by operating activities
$
743,935

$
718,037

$
744,860

Adjustments to net cash provided by operating activities:
 
 
 
Stock issued for the Employee Stock Purchase Plan
19,615

17,940

17,313

Excess tax benefit realized from the exercise of stock options
13,522

16,045

13,668

Cash expenditures related to merger
12,467



Adjusted cash from operations
789,539

752,022

775,841

Capital expenditures
(456,899
)
(468,789
)
(354,587
)
Adjustments to capital expenditures:
 
 
 
Proceeds from sales of plant and equipment
25,521

23,083

15,483

Operating lease buyouts
45,327

3,159

4,420

Adjusted capital expenditures
(386,051
)
(442,547
)
(334,684
)
Free cash flow
$
403,488

$
309,475

$
441,157

 
 
 
 
Net cash used in investing activities
$
(530,526
)
$
(496,763
)
$
(543,584
)
Net cash used in financing activities
$
(208,324
)
$
(240,111
)
$
(218,101
)
The Company believes its free cash flow financial measure provides investors meaningful insight into its ability to generate cash from operations, excluding the impact of cash expenditures related to the Air Liquide merger, which is available for servicing debt obligations and for the execution of its business strategies, including acquisitions, the prepayment of debt, the payment of dividends, or to support other investing and financing activities. The Company’s free cash flow financial measure has limitations and does not represent the residual cash flow available for discretionary expenditures. Certain non-discretionary expenditures such as payments on maturing debt obligations are excluded from the Company’s computation of its free cash flow financial measure. Non-GAAP financial measures should be read in conjunction with GAAP financial measures, as non-GAAP financial measures are merely a supplement to, and not a replacement for, GAAP financial measures. It should also be noted that the Company’s free cash flow financial measure may be different from free cash flow financial measures provided by other companies.
OTHER
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the consolidated financial statements included under Item 8, “Financial Statements and Supplementary Data,” describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Estimates are used for, but not limited to, determining the net carrying value of trade receivables, inventories, goodwill, business insurance reserves and deferred income tax assets. Uncertainties about future events make these estimates susceptible to change. Management evaluates these estimates regularly and believes they are the best estimates, appropriately made, given the known facts and circumstances. For the three years ended March 31, 2016, there were no material changes in the valuation methods or assumptions used by management. However, actual results could differ from these estimates under different assumptions and circumstances. The Company believes the following accounting estimates are critical due to the subjectivity and judgment necessary to account for these matters, their susceptibility to change and the potential impact that different assumptions could have on operating performance or financial position.

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Trade Receivables
The Company maintains an allowance for doubtful accounts, which includes sales returns, sales allowances and bad debts. The allowance adjusts the carrying value of trade receivables for the estimate of accounts that will ultimately not be collected. An allowance for doubtful accounts is generally established as trade receivables age beyond their due dates, whether as bad debts or as sales returns and allowances. As past due balances age, higher valuation allowances are established, thereby lowering the net carrying value of receivables. The amount of valuation allowance established for each past-due period reflects the Company’s historical collections experience, including that related to sales returns and allowances, as well as current economic conditions and trends. The Company also qualitatively establishes valuation allowances for specific problem accounts and bankruptcies, and other accounts that the Company deems relevant for specifically identified allowances. The amounts ultimately collected on past due trade receivables are subject to numerous factors including general economic conditions, the condition of the receivable portfolios assumed in acquisitions, the financial condition of individual customers and the terms of reorganization for accounts exiting bankruptcy. Changes in these conditions impact the Company’s collection experience and may result in the recognition of higher or lower valuation allowances. Management evaluates the allowance for doubtful accounts monthly. Historically, bad debt expense reflected in the Company’s financial results has generally been in the range of 0.3% to 0.5% of net sales. The Company has a low concentration of credit risk due to its broad and diversified customer base across multiple industries and geographic locations, and its relatively low average order size. The Company’s largest customer accounts for less than 1% of total net sales.
Inventories
The Company’s inventories are stated at the lower of cost or market. The majority of the products the Company carries in inventory have long shelf lives and are not subject to technological obsolescence. The Company writes its inventory down to its estimated market value when it believes the market value is below cost. The Company estimates its ability to recover the costs of items in inventory by product type based on factors including the age of the products, the rate at which the product line is turning in inventory, the products’ physical condition and assumptions about future demand and market conditions. The ability of the Company to recover the cost of products in inventory can be affected by factors such as future customer demand, general market conditions and the Company’s relationships with significant suppliers. Management evaluates the recoverability of its inventory at least quarterly. In aggregate, inventory turns four-to-five times per year on average.
Goodwill
The Company is required to test goodwill associated with each of its reporting units for impairment at least annually and whenever events or circumstances indicate that it is more likely than not that goodwill may be impaired. The Company performs its annual goodwill impairment test as of October 31 of each year.
Goodwill is tested for impairment at the reporting unit level. The Company has determined that its reporting units for goodwill impairment testing purposes are equivalent to the operating segments used in the Company’s segment reporting (see Note 22 to the consolidated financial statements). In performing tests for goodwill impairment, the Company is permitted to first perform a qualitative assessment about the likelihood of the carrying value of a reporting unit exceeding its fair value. If an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount based on the qualitative assessment, it is required to perform the two-step goodwill impairment test described below to identify the potential goodwill impairment and measure the amount of the goodwill impairment loss, if any, to be recognized for that reporting unit. However, if an entity concludes otherwise based on the qualitative assessment, the two-step goodwill impairment test is not required. The option to perform the qualitative assessment can be utilized at the Company’s discretion, and the qualitative assessment need not be applied to all reporting units in a given goodwill impairment test. For an individual reporting unit, if the Company elects not to perform the qualitative assessment, or if the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company must perform the two-step goodwill impairment test for the reporting unit.
In applying the two-step process, the first step used to identify potential impairment involves comparing the reporting unit’s estimated fair value to its carrying value, including goodwill. For this purpose, the Company uses a discounted cash flow approach to develop the estimated fair value of each reporting unit. Management judgment is required in developing the assumptions for the discounted cash flow model. These assumptions include revenue growth rates, profit margins, future capital expenditures, working capital needs, discount rates and perpetual growth rates. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds the estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment, if any.
The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated potential impairment. The implied fair value of goodwill is determined in a manner similar to how goodwill is calculated in a business combination. That is, the estimated fair value of the reporting unit, as calculated in step one, is allocated to the individual assets and liabilities as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge

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is recorded to write down the carrying value. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit and the loss establishes a new basis in the goodwill. Subsequent reversal of an impairment loss is not permitted.
The discount rate, sales growth and profitability assumptions, and perpetual growth rate are the material assumptions utilized in the discounted cash flow model used to estimate the fair value of each reporting unit. The Company’s discount rate reflects a weighted average cost of capital (“WACC”) for a peer group of companies in the chemical manufacturing industry with an equity size premium added, as applicable, for each reporting unit. The WACC is calculated based on observable market data. Some of this data (such as the risk-free or Treasury rate and the pre-tax cost of debt) are based on market data at a point in time. Other data (such as beta and the equity risk premium) are based upon market data over time.
The discounted cash flow analysis requires estimates, assumptions and judgments about future events. The Company’s analysis uses internally generated budgets and long-range forecasts. The Company’s discounted cash flow analysis uses the assumptions in these budgets and forecasts about sales trends, inflation, working capital needs and forecasted capital expenditures along with an estimate of the reporting unit’s terminal value (the value of the reporting unit at the end of the forecast period) to determine the fair value of each reporting unit. The Company’s assumptions about working capital needs and capital expenditures are based on historical experience. The perpetual growth rate assumed in the discounted cash flow model is consistent with the long-term growth rate as measured by the U.S. Gross Domestic Product and the industry’s long-term rate of growth.
The Company believes the assumptions used in its discounted cash flow analysis are appropriate and result in reasonable estimates of the fair value of each reporting unit. However, the Company may not meet its sales growth and profitability targets, working capital needs and capital expenditures may be higher than forecast, changes in credit markets may result in changes to the Company’s discount rate and general business conditions may result in changes to the Company’s terminal value assumptions for its reporting units.
In performing the October 31, 2015 annual goodwill impairment test, the Company elected to bypass the qualitative assessment for all of its reporting units as a periodic refresh of its reporting units’ fair values from the application of the qualitative Step 0 assessment in prior years. The determination to proceed to the first step of the two-step goodwill impairment test at October 31, 2015 was based on an evaluation of relevant events and circumstances, including the length of time since the Company’s most recent calculation of the fair value of its reporting units. The assessment for all reporting units indicated that the fair values of all of its reporting units substantially exceeded their respective carrying amounts. See Note 8, “Goodwill and Other Intangible Assets,” to the Company’s consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data,” for details of the annual goodwill impairment test.
Business Insurance Reserves
The Company has established insurance programs to cover workers’ compensation, business automobile and general liability claims. During fiscal years 2016, 2015 and 2014, these programs had deductible limits of $1 million per occurrence. For fiscal 2017, the deductible limits are expected to remain at $1 million per occurrence. The Company reserves for its deductible based on individual claim evaluations, establishing loss estimates for known claims based on the current facts and circumstances. These known claims are then “developed” through actuarial computations to reflect the expected ultimate loss for the known claims as well as incurred but not reported claims. Actuarial computations use the Company’s specific loss history, payment patterns and insurance coverage, plus industry trends and other factors to estimate the required reserve for all open claims by policy year and loss type. Reserves for the Company’s deductible are evaluated monthly. Semi-annually, the Company obtains a third-party actuarial report to validate that the computations and assumptions used are consistent with actuarial standards. Certain assumptions used in the actuarial computations are susceptible to change. Loss development factors are influenced by items such as medical inflation, changes in workers’ compensation laws and changes in the Company’s loss payment patterns, all of which can have a significant influence on the estimated ultimate loss related to the Company’s deductible. Accordingly, the ultimate resolution of open claims may be for amounts that differ from the reserve balances. The Company’s operations are spread across a significant number of locations, which helps to mitigate the potential impact of any given event that could give rise to an insurance-related loss. Over the last three years, business insurance expense has been approximately 0.5% of net sales.
Income Taxes
At March 31, 2016, the Company had deferred tax assets of $149 million (net of an immaterial valuation allowance), deferred tax liabilities of $973 million and $21 million of unrecognized income tax benefits associated with uncertain tax positions (see Note 6 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data”).
The Company estimates income taxes based on diverse legislative and regulatory structures that exist in various jurisdictions where the Company conducts business. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and operating loss carryforwards. The Company evaluates deferred tax assets each period to ensure that

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estimated future taxable income will be sufficient in character (e.g., capital gain versus ordinary income treatment), amount and timing to result in their recovery. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Considerable judgments are required in establishing deferred tax valuation allowances and in assessing exposures related to tax matters. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences and carryforward deferred tax assets become deductible or utilized. Management considers the reversal of taxable temporary differences and projected future taxable income in making this assessment. As events and circumstances change, related reserves and valuation allowances are adjusted to income at that time. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets reverse, at March 31, 2016, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances.
Unrecognized income tax benefits represent income tax positions taken on income tax returns that have not been recognized in the consolidated financial statements. The Company recognizes the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Additionally, the Company accrues interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. Interest and penalties are classified as income tax expense in the consolidated statements of earnings. The Company does not anticipate significant changes in the amount of unrecognized income tax benefits over the next year.
Contractual Obligations
The following table presents the Company’s contractual obligations as of March 31, 2016:
(In thousands)
 
 
Payments Due or Commitment Expiration by Period
Contractual Obligations (b)
Total
 
Less Than 1 Year (a)
 
1 to 3 Years (a)
 
4 to 5 Years (a)
 
More than 5
Years (a)
Long-term debt (1)
$
2,206,645

 
$
250,118

 
$
655,179

 
$
751,348

 
$
550,000

Estimated interest payments on long-term debt (2)
244,327

 
49,202

 
88,020

 
59,280

 
47,825

Non-compete agreements (3)
14,571

 
6,794

 
6,752

 
625

 
400

Letters of credit (4)
50,847

 
50,847

 

 

 

Operating leases (5)
412,502

 
112,059

 
166,941

 
88,851

 
44,651

Purchase obligations:
 
 
 
 
 
 
 
 
 
Liquid bulk gas supply agreements (6)
739,033

 
191,871

 
288,707

 
124,918

 
133,537

Liquid carbon dioxide supply agreements (7)
121,772

 
20,341

 
24,146

 
12,753

 
64,532

Construction commitments (8)
48,112

 
45,900

 
2,212

 

 

Other purchase commitments (9)
2,676

 
2,676

 

 

 

Total Contractual Obligations
$
3,840,485

 
$
729,808

 
$
1,231,957

 
$
1,037,775

 
$
840,945

____________________
(a) 
The “Less Than 1 Year” column relates to obligations due in the fiscal year ending March 31, 2017. The “1 to 3 Years” column relates to obligations due in fiscal years ending March 31, 2018 and 2019. The “4 to 5 Years” column relates to obligations due in fiscal years ending March 31, 2020 and 2021. The “More than 5 Years” column relates to obligations due beyond March 31, 2021.
(b) 
At March 31, 2016, the Company had $24 million related to unrecognized income tax benefits, including accrued interest and penalties. These liabilities are not included in the above table, as the Company cannot make reasonable estimates with respect to the timing of their ultimate resolution. See Note 6 to the Company’s consolidated financial statements under Item 8, “Financial Statements and Supplementary Data,” for further information on the Company’s unrecognized income tax benefits.
(1) 
Aggregate long-term debt instruments are reflected in the consolidated balance sheet as of March 31, 2016. The Senior Notes are presented at their maturity values rather than their carrying values, which are net of aggregate discounts of $1.7 million at March 31, 2016. Long-term debt includes capital lease obligations, which were not material and therefore, did not warrant separate disclosure.
(2) 
The future interest payments on the Company’s long-term debt obligations were estimated based on the current outstanding principal reduced by scheduled maturities in each period presented and interest rates as of March 31, 2016.

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The actual interest payments may differ materially from those presented above based on actual amounts of long-term debt outstanding and actual interest rates in future periods.
(3) 
Non-compete agreements are obligations of the Company to make scheduled future payments, generally to former owners of acquired businesses, contingent upon their compliance with the covenants of the non-compete agreements.
(4) 
Letters of credit are guarantees of payment to third parties. The Company’s letters of credit principally back obligations associated with the Company’s deductible on workers’ compensation, business automobile and general liability claims. The letters of credit are supported by the Company’s Credit Facility.
(5) 
The Company’s operating leases at March 31, 2016 include approximately $330 million in fleet vehicles under long-term operating leases. The Company guarantees a residual value of $32 million related to its leased vehicles.
(6) 
In addition to the gas volumes produced internally, the Company purchases industrial, medical and specialty gases pursuant to requirements under contracts from national and regional producers of industrial gases. The Company is a party to take-or-pay supply agreements under which Air Products will supply the Company with bulk nitrogen, oxygen, argon, hydrogen and helium. The Company is committed to purchase a minimum of approximately $61 million in bulk gases within the next fiscal year under the Air Products supply agreements. The agreements expire at various dates through 2020. The Company also has take-or-pay supply agreements with Linde to purchase oxygen, nitrogen, argon and helium. The agreements expire at various dates through 2025 and represent approximately $95 million in minimum bulk gas purchases for the next fiscal year. Additionally, the Company has take-or-pay supply agreements to purchase oxygen, nitrogen, argon, helium and ammonia from other major producers. Minimum purchases under these contracts for the next fiscal year are approximately $36 million and they expire at various dates through 2026. The level of annual purchase commitments under the Company’s supply agreements beyond the next fiscal year vary based on the expiration of agreements at different dates in the future, among other factors.
The Company’s annual purchase commitments under all of its supply agreements reflect estimates based on fiscal 2016 purchases. The Company’s supply agreements contain periodic pricing adjustments, most of which are based on certain economic indices and market analyses. The Company believes the minimum product purchases under the agreements are within the Company’s normal product purchases. Actual purchases in future periods under the supply agreements could differ materially from those presented due to fluctuations in demand requirements related to varying sales levels as well as changes in economic conditions.
(7) 
The Company is a party to take-or-pay supply agreements for the purchase of liquid carbon dioxide with twelve suppliers that expire at various dates through 2044 and represent minimum purchases of approximately $20 million for the next fiscal year. The purchase commitments for future periods contained in the table above reflect estimates based on fiscal 2016 purchases. The Company believes the minimum product purchases under the agreements are within the Company’s normal product purchases. Actual purchases in future periods under the liquid carbon dioxide supply agreements could differ materially from those presented in the table due to fluctuations in demand requirements related to varying sales levels as well as changes in economic conditions. Certain of the liquid carbon dioxide supply agreements contain market pricing subject to certain economic indices.
(8) 
Construction commitments represent long-term agreements with two customers to construct on-site air separation units. The units are located in Calvert City, KY and Tuscaloosa, AL.
(9) 
Other purchase commitments represent agreements to purchase property, plant and equipment.
Accounting Pronouncements Issued But Not Yet Adopted
See Note 3 to the Company’s consolidated financial statements under Item 8, “Financial Statements and Supplementary Data,” for information concerning new accounting guidance and the potential impact on the Company’s financial statements.
Forward-looking Statements
This report contains statements that are forward looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the Company’s expectations regarding the completion of the Merger with Air Liquide and statements regarding the future operations of Airgas' business; the Company’s belief that it will not be necessary to repatriate cash held outside of the U.S. by its foreign subsidiaries; the Company’s belief that it has sufficient liquidity from cash from operations and under its revolving credit facilities to meet its working capital, capital expenditure and other financial commitments; the Company’s belief that it can obtain financing on reasonable terms; the Company’s future dividend declarations; the Company’s estimate that for every 25 basis point increase in the Company’s average variable borrowing rates, the Company estimates that its annual interest expense would increase by approximately $2.0 million; the estimate of future interest payments on the Company’s long-term debt obligations; and the Company’s exposure to foreign currency exchange fluctuations.

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Forward-looking statements also include any statement that is not based on historical fact, including statements containing the words “believes,” “may,” “plans,” “will,” “could,” “should,” “estimates,” “continues,” “anticipates,” “intends,” “expects,” and similar expressions. The Company intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors and should not be regarded as a representation by the Company or any other person that the results expressed therein will be achieved. Airgas assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. Important factors that could cause actual results to differ materially from those contained in any forward-looking statement include: the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement with Air Liquide, including a termination of the Merger Agreement under circumstances that could require Airgas to pay a termination fee; the failure to obtain required regulatory clearances, or the failure to satisfy any of the other closing conditions to the Merger, and any delay in connection with the foregoing; risks related to disruption of management’s attention from the Company’s ongoing business operations due to the pendency of the Merger; the effect of the pendency of the Merger on the ability of the Company to retain and hire key personnel, maintain relationships with its customers and suppliers, and maintain its operating results and business generally; the outcome of any legal proceedings that have been or may be instituted against the Company and others relating to the Merger Agreement; the possible adverse effect on Airgas’ business and the price of Airgas common stock if the Merger is not completed in a timely manner or at all; the parties’ ability to complete the transactions contemplated by the Merger Agreement in a timely manner or at all; limitations placed on Airgas’ ability to operate its business under the Merger Agreement; the impact from the decline in oil prices on our customers; adverse changes in customer buying patterns or weakening in the operating and financial performance of the Company’s customers, any of which could negatively impact the Company’s sales and ability to collect its accounts receivable; postponement of projects due to economic conditions and uncertainty in the energy sector; the impact of the strong dollar on the Company’s manufacturer customers that export; customer acceptance of price increases; increases in energy costs and other operating expenses at a faster rate than the Company’s ability to increase prices; changes in customer demand resulting in the Company’s inability to meet minimum product purchase requirements under long-term supply agreements and the inability to negotiate alternative supply arrangements; supply cost pressures, including cost pressure related to the Company’s helium diversification and supply initiatives; shortages and/or disruptions in the supply chain of certain gases; the ability of the Company to pass on to its customers its increased costs of selling helium; EPA rulings and the impact in the marketplace of U.S. compliance with the Montreal Protocol as related to the production and import of Refrigerant-22 (also known as HCFC-22 or R-22); the Company’s ability to successfully build, complete in a timely manner and operate its new facilities; higher than expected expenses associated with the expansion of the Company’s telesales business, e-Business platform, the adjustment of its regional management structures, its strategic pricing initiatives and other strategic growth initiatives; increased industry competition; the Company’s ability to successfully identify, consummate, and integrate acquisitions; the Company’s ability to achieve anticipated acquisition synergies; operating costs associated with acquired businesses; the Company’s continued ability to access credit markets on satisfactory terms; significant fluctuations in interest rates; the impact of changes in credit market conditions on the Company’s customers; the Company’s ability to effectively leverage its SAP system to improve the operating and financial performance of its business; changes in tax and fiscal policies and laws, including the increase in interest rates; increased expenditures relating to compliance with environmental and other regulatory initiatives; the impact of new environmental, healthcare, tax, accounting, and other regulations; the overall U.S. industrial economy; catastrophic events and/or severe weather conditions; and political and economic uncertainties associated with current world events.

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Table of Contents

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
The Company manages its exposure to changes in market interest rates through the occasional use of interest rate derivative instruments, when deemed appropriate. The interest rate exposure arises primarily from the interest payment terms of the Company’s borrowing agreements. Interest rate derivatives are used to adjust the interest rate risk exposures that are inherent in its portfolio of funding sources. The Company has not established, and will not establish, any interest rate risk positions for purposes other than managing the risk associated with its portfolio of funding sources or anticipated funding sources. The counterparties to interest rate derivatives are major financial institutions. The Company has established counterparty credit guidelines and only enters into transactions with financial institutions with long-term credit ratings of at least a single ‘A’ rating by one of the major credit rating agencies. In addition, the Company monitors its position and the credit ratings of its counterparties, thereby minimizing the risk of non-performance by the counterparties. The Company had no interest rate derivative instruments outstanding at March 31, 2016.
The following table summarizes the Company’s market risks associated with debt obligations at March 31, 2016. The table presents cash flows related to payments of principal and interest by fiscal year of maturity. Fair values were computed using market quotes, if available, or based on discounted cash flows using market interest rates as of the end of the period.
(In millions)
3/31/2017
 
3/31/2018
 
3/31/2019
 
3/31/2020
 
3/31/2021
 
Thereafter
 
Total
 
Fair Value
Fixed Rate Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes due 6/15/2016
$
250.0

 
$

 
$

 
$

 
$

 
$

 
$
250.0

 
$
250.5

Interest expense
1.5

 

 

 

 

 

 
1.5

 
 
Interest rate
2.95
%
 

 

 

 

 

 
 
 
 
Senior notes due 2/15/2018
$

 
$
325.0

 
$

 
$

 
$

 
$

 
$
325.0

 
$
324.9

Interest expense
5.4

 
4.7

 

 

 

 

 
10.1

 
 
Interest rate
1.65
%
 
1.65
%
 

 

 

 

 
 
 
 
Senior notes due 2/15/2020
$

 
$

 
$

 
$
275.0

 
$

 
$

 
$
275.0

 
$
276.9

Interest expense
6.5

 
6.5

 
6.5

 
5.7

 

 

 
25.2

 
 
Interest rate
2.38
%
 
2.38
%
 
2.38
%
 
2.38
%
 

 

 
 
 
 
Senior notes due 8/1/2020
$

 
$

 
$

 
$

 
$
400.0

 
$

 
$
400.0

 
$
410.4

Interest expense
12.2

 
12.2

 
12.2

 
12.2

 
4.1

 

 
52.9

 
 
Interest rate
3.05
%
 
3.05
%
 
3.05
%
 
3.05
%
 
3.05
%
 

 
 
 
 
Senior notes due 11/15/2022
$

 
$

 
$

 
$

 
$

 
$
250.0

 
$
250.0

 
$
250.6

Interest expense
7.3

 
7.3

 
7.3

 
7.3

 
7.3

 
11.8

 
48.3

 
 
Interest rate
2.90
%
 
2.90
%
 
2.90
%
 
2.90
%
 
2.90
%
 
2.90
%
 
 
 
 
Senior notes due 7/15/2024
$

 
$

 
$

 
$

 
$

 
$
300.0

 
$
300.0

 
$
308.1

Interest expense
11.0

 
11.0

 
11.0

 
11.0

 
11.0

 
36.0

 
91.0

 
 
Interest rate
3.65
%
 
3.65
%
 
3.65
%
 
3.65
%
 
3.65
%
 
3.65
%
 
 
 
 


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(In millions)
3/31/2017
 
3/31/2018
 
3/31/2019
 
3/31/2020
 
3/31/2021
 
Thereafter
 
Total
 
Fair Value
Variable Rate Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
383.3

 
$

 
$

 
$

 
$

 
$

 
$
383.3

 
$
383.3

Interest expense
0.3

 

 

 

 

 

 
0.3

 
 
Interest rate
0.79
%
 

 

 

 

 

 
 
 
 
Revolving credit borrowings - Multi-currency
$

 
$

 
$

 
$
70.3

 
$

 
$

 
$
70.3

 
$
70.3

Interest expense
1.4

 
1.4

 
1.4

 
0.9

 

 

 
5.1

 
 
Interest rate (a)
1.90
%
 
1.90
%
 
1.90
%
 
1.90
%
 

 

 
 
 
 
Revolving credit borrowings - France
$

 
$

 
$

 
$
6.1

 
$

 
$

 
$
6.1

 
$
6.1

Interest expense
0.1

 
0.1

 
0.1

 

 

 

 
0.3

 
 
Interest rate (b)
1.25
%
 
1.25
%
 
1.25
%
 
1.25
%