UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2008

Commission file number: 1-9344

AIRGAS, INC.

Delaware		56-0732648
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
259 North Radnor-Chester Road, Suite 100
Radnor, PA		19087-5283
(Address of principal executive offices)		(ZIP code)

(610) 687-5253

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a 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 o No þ

Shares of common stock outstanding at February 4, 2009: 81,321,423 shares

 

 

AIRGAS, INC.

FORM 10-Q
December 31, 2008

INDEX

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings for the Three and Nine Months Ended December 31, 2008 and 2007 (Unaudited)			3
Consolidated Balance Sheets as of December 31, 2008 (Unaudited) and March 31, 2008			4
Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2008 and 2007 (Unaudited)			5
Notes to Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
Item 3. Quantitative and Qualitative Disclosures About Market Risk			56
Item 4. Controls and Procedures			58
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			58
Item 1A. Risk Factors			58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			60
Item 6. Exhibits			60
SIGNATURES			61
Ex-31.1
Ex-31.2
Ex-32.1
Ex-32.2

PART I. FINANCIAL INFORMATION

AIRGAS, INC. AND SUBSIDIARIES

(Unaudited)

(In thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Net Sales		$	1,078,733			$	1,008,045			$	3,357,355			$	2,930,427
Costs and Expenses:
Cost of products sold (excluding depreciation)			500,806				480,472				1,597,291				1,405,548
Selling, distribution and administrative expenses			392,665				361,171				1,186,448				1,038,973
Depreciation			49,739				43,235				146,767				129,567
Amortization			5,001				4,837				16,487				11,575
Total costs and expenses			948,211				889,715				2,946,993				2,585,663
Operating Income			130,522				118,330				410,362				344,764
Interest expense, net			(23,267	)			(22,987	)			(64,393	)			(67,786	)
Discount on securitization of trade receivables			(3,191	)			(4,379	)			(9,041	)			(12,736	)
Other income (expense), net			(604	)			258				(471	)			890
Earnings before income taxes and minority interest			103,460				91,222				336,457				265,132
Income taxes			(40,557	)			(34,416	)			(131,850	)			(102,767	)
Minority interest in earnings of consolidated affiliate			—				—				—				(3,230	)
Net Earnings		$	62,903			$	56,806			$	204,607			$	159,135
Net Earnings Per Common Share:
Basic earnings per share		$	0.77			$	0.69			$	2.49			$	1.96
Diluted earnings per share		$	0.76			$	0.67			$	2.43			$	1.90
Weighted Average Shares Outstanding:
Basic			81,207				82,270				82,121				81,145
Diluted			82,706				84,605				84,161				84,209
Comprehensive income		$	50,514			$	51,974			$	198,593			$	158,316

See accompanying notes to consolidated financial statements.

AIRGAS, INC. AND SUBSIDIARIES

(In thousands, except per share amounts)

		(Unaudited)
		December 31,				March 31,
		2008				2008
ASSETS
Current Assets
Cash		$	42,171			$	43,048
Trade receivables, net			158,945				183,569
Inventories, net			428,330				330,732
Deferred income tax asset, net			27,415				22,258
Prepaid expenses and other current assets			76,405				67,110
Total current assets			733,266				646,717
Plant and equipment at cost			3,486,941				3,232,673
Less accumulated depreciation			(1,149,040	)			(1,037,803	)
Plant and equipment, net			2,337,901				2,194,870
Goodwill			1,076,537				969,059
Other intangible assets, net			195,814				148,998
Other non-current assets			31,920				27,620
Total assets		$	4,375,438			$	3,987,264
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable, trade		$	151,240			$	185,111
Accrued expenses and other current liabilities			285,414				288,883
Current portion of long-term debt			10,227				40,400
Total current liabilities			446,881				514,394
Long-term debt, excluding current portion			1,810,181				1,539,648
Deferred income tax liability, net			521,135				439,782
Other non-current liabilities			80,861				80,104
Commitments and contingencies
Stockholders’ Equity
Preferred stock, 20,030 shares authorized, no shares issued or outstanding at December 31, 2008 and March 31, 2008			—				—
Common stock, par value $0.01 per share, 200,000 shares authorized, 85,258 and 84,076 shares issued at December 31, 2008 and March 31, 2008, respectively			853				841
Capital in excess of par value			521,239				468,302
Retained earnings			1,155,378				983,663
Accumulated other comprehensive loss			(10,727	)			(4,713	)
Treasury stock, 4,139 and 1,788 common shares at cost at December 31, 2008 and March 31, 2008, respectively			(150,363	)			(34,757	)
Total stockholders’ equity			1,516,380				1,413,336
Total liabilities and stockholders’ equity		$	4,375,438			$	3,987,264

See accompanying notes to consolidated financial statements.

AIRGAS, INC. AND SUBSIDIARIES

(Unaudited)

		Nine Months Ended				Nine Months Ended
(In thousands)		December 31, 2008				December 31, 2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings		$	204,607			$	159,135
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			146,767				129,567
Amortization			16,487				11,575
Deferred income taxes			67,804				46,162
(Gain) loss on sales of plant and equipment			(418	)			615
Minority interest in earnings			—				3,230
Stock-based compensation expense			16,347				13,165
Changes in assets and liabilities, excluding effects of business acquisitions:
Securitization of trade receivables			—				95,600
Trade receivables, net			50,468				15,700
Inventories, net			(37,773	)			(47,145	)
Prepaid expenses and other current assets			(12,489	)			4,921
Accounts payable, trade			(43,546	)			(2,692	)
Accrued expenses and other current liabilities			2,201				(6,399	)
Other non-current assets			882				(1,037	)
Other non-current liabilities			2,101				(140	)
Net cash provided by operating activities			413,438				422,257
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(282,286	)			(192,537	)
Proceeds from sales of plant and equipment			11,598				6,387
Business acquisitions and holdback settlements			(253,184	)			(394,199	)
Other, net			(577	)			(1,325	)
Net cash used in investing activities			(524,449	)			(581,674	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings			1,235,326				845,456
Repayment of debt			(999,559	)			(683,328	)
Purchase of treasury stock			(120,219	)			—
Financing costs			(5,746	)			—
Minority interest in earnings			—				(711	)
Proceeds from the exercise of stock options			14,182				14,461
Stock issued for the employee stock purchase plan			12,235				10,169
Tax benefit realized from the exercise of stock options			10,530				10,079
Dividends paid to stockholders			(32,892	)			(21,881	)
Change in cash overdraft			(3,723	)			3,773
Net cash provided by financing activities			110,134				178,018
Change in cash		$	(877	)		$	18,601
Cash – Beginning of period			43,048				25,931
Cash – End of period		$	42,171			$	44,532

See accompanying notes to consolidated financial statements.

AIRGAS, INC. AND SUBSIDIARIES

(1) BASIS OF PRESENTATION

     The consolidated financial statements include the accounts of Airgas, Inc. and its subsidiaries (“Airgas” or the “Company”). Intercompany accounts and transactions are eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. These consolidated financial statements do not include all disclosures required for annual financial statements. These consolidated financial statements should be read in conjunction with the more complete disclosures contained in the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2008.

     The preparation of financial statements requires the use of estimates. The consolidated financial statements reflect, in the opinion of management, reasonable estimates and all adjustments necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods presented. The interim operating results are not necessarily indicative of the results to be expected for the entire year.

Prior Period Adjustments

     The Consolidated Balance Sheet as of March 31, 2008 reflects adjustments that increased insurance receivables, reflected in the line item “Prepaid expenses and other current assets,” by $8 million and also increased business insurance reserves, reflected in the line item “Accrued expenses and other current liabilities,” by a corresponding $8 million. The insurance receivable and corresponding increase in the business insurance reserves at March 31, 2008 represent probable claim losses in excess of the Company’s self insured retention for which the Company is fully insured. The adjustments to the March 31, 2008 balances were also reflected in Note 7 — Accrued Expenses and Other Current Liabilities. The Company does not consider these adjustments to be material to its financial position and the adjustments did not affect its results of operations or liquidity.

     The March 31, 2008 balances of goodwill by segment as disclosed in Note 6 were adjusted to reflect a $4.8 million reclassification from the Distribution business segment to the All Other Operations business segment. The consolidated balance of goodwill at March 31, 2008 did not change.

     In the third quarter of fiscal 2009, certain reclassifications were made to the prior period statement of earnings and related notes to conform to the current period presentation. These reclassifications principally resulted in increasing cost of products sold (excluding depreciation) and reducing selling, distribution and administrative expenses. Additionally, some revenue was reclassified between Gas and Rent and Hardgoods. These reclassifications were the result of conforming the accounting policies of National Welders (see Note 11) to the Company’s accounting policies and were not material. Consolidated net sales and net earnings for prior periods were not impacted by the reclassifications.

(2) NEW ACCOUNTING PRONOUNCEMENTS

(a) Accounting pronouncements adopted this fiscal year

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, (“SFAS 157”), effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS 157 did not require any new fair value measurements, but rather replaces multiple existing definitions of fair value with a single definition, establishes a consistent framework for measuring fair value and expands financial statement disclosures regarding fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, Effective Date of FASB Statement No. 157,

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

(2) NEW ACCOUNTING PRONOUNCEMENTS – (Continued)

which delayed the effective date of SFAS 157 until fiscal years beginning after November 15, 2008 for non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The Company adopted SFAS 157 for financial assets and liabilities on April 1, 2008 (see Note 10). The adoption of SFAS 157 for financial assets and liabilities did not have a material impact on the Company’s financial position or results of operations. The Company is currently assessing the impact of SFAS 157, related to non-financial assets and liabilities, on the consolidated financial statements.

     Effective April 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value in an attempt to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The Company did not elect to re-measure any existing financial assets or liabilities under the provisions of this statement.

     In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. The Company adopted SFAS 162 on November 15, 2008. The adoption of SFAS 162 did not have an impact on the Company’s financial position, results of operations or liquidity.

(b) Accounting pronouncements not yet adopted

     In December 2007, the FASB issued SFAS No. 141R, Business Combinations, (“SFAS 141R”), which replaces SFAS No. 141 of the same title (“SFAS 141”). SFAS 141R will significantly change the way the Company accounts for business combinations. The Company has historically pursued new business opportunities through acquisitions and intends to maintain this strategy for the foreseeable future. Accordingly, the Company expects the adoption of SFAS 141R to impact its operating results when significant acquisitions are completed and during the subsequent acquisition measurement periods when the fair values for the individual assets and liabilities acquired are determined. The principles contained in SFAS 141R are, in a number of ways, very different from those applied to business combinations today. Significant differences between SFAS 141R and SFAS 141 that will likely impact the Company’s future acquisitions and operating results are outlined below:

	•		The method of purchase price allocation will be based on individual fair values of assets and liabilities acquired as determined using the fair value principles outlined in the recently adopted SFAS 157.
	•		The acquisition measurement period during which the fair values of the individual assets and liabilities acquired are determined cannot exceed one year. Material changes to the provisional values assigned to those assets and liabilities are to be reflected as of the acquisition date, potentially resulting in the recasting of financial statements for reporting periods falling within the acquisition measurement period.
	•		Direct costs of an acquisition, such as legal fees, appraisal costs, etc., will no longer be considered elements of the purchase price to be allocated to the assets acquired and liabilities assumed. Rather, the direct costs of an acquisition, which can be substantial, will be expensed as incurred.
	•		The cost of restructuring activities associated with the target business and contemplated while negotiating the acquisition purchase price will no longer be considered acquired liabilities. Rather, the cost of restructuring activities will be recognized as post acquisition operating costs.

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

(2) NEW ACCOUNTING PRONOUNCEMENTS – (Continued)

•

Acquired contingencies will be identified as contractual and non-contractual. Contractual contingencies will be recorded at their acquisition date fair values as assessed using the principles of SFAS 157. Non-contractual contingencies will be recognized at their acquisition date fair values if it is more likely than not that the obligations exist as of the acquisition date. For each subsequent reporting period, the fair values of the recognized contingencies will be reassessed. Once fair value is established, subsequent changes to recognized obligations will be reflected as an operating expense in the period of the change. Currently, pre-acquisition contingencies, such as a lawsuit or earn-out provision of the purchase agreement, are recorded at the estimated amount to settle the obligation if it is probable that the obligation exists. During the measurement period, a subsequent change to the estimated cost to settle the obligation is generally reflected as an adjustment to the allocation of the acquisition purchase price.

     The Company will adopt SFAS 141R for its fiscal year beginning April 1, 2009. The provisions of SFAS 141R will only apply to acquisitions completed after the adoption date. Depending on the materiality of future acquisitions, the complexity of the terms in the purchase agreement and the nature of the operations acquired, the application of SFAS 141R may introduce earnings volatility. Earnings volatility may be driven by recognizing the direct costs of an acquisition, which can be substantial, as period costs when incurred, marking acquired contingencies to market through earnings and recasting previously issued financial statements as the provisional values assigned to the assets and liabilities acquired are trued-up to their acquisition date fair values. For many of the Company’s acquisition targets, which tend to be privately held companies, determining the fair value of all the assets and liabilities acquired requires a substantial amount of work that typically extends beyond the acquisition closing date. For certain assets and liabilities, it often takes several months to assemble, verify and evaluate the information necessary to prepare a fair value measurement for the assets and liabilities acquired. The Company continues to assess its policies and procedures related to the acquisition process and will endeavor to refine the provisional values assigned to the assets and liabilities acquired and to shorten the acquisition measurement period, thereby minimizing the number of periods potentially impacted by recasting financial statements.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, (“SFAS 160”), which amends Accounting Research Bulletin No. 51, Consolidated Financial Statements. SFAS 160 establishes accounting and reporting standards that require (1) non-controlling interests held by non-parent parties be clearly identified and presented in the consolidated statement of financial position within equity, separate from the parent’s equity and (2) the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly presented on the face of the consolidated statement of income. SFAS 160 also requires consistent reporting of any changes to the parent’s ownership interest while retaining a controlling financial interest, as well as specific guidelines over how to treat the deconsolidation of controlling interests and any applicable gains or losses. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 with earlier adoption prohibited. The Company is currently assessing the impact of SFAS 160 on the consolidated financial statements and does not believe the guidance will impact its financial results, as all of the Company’s subsidiaries are currently 100% owned subsidiaries.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, (“SFAS 161”), which enhances the requirements under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and how they affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently assessing the impact of SFAS 161 on the consolidated financial statements and believes this pronouncement, which addresses expanded disclosure requirements aimed to improve financial reporting will not have a material impact to its financial results.

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

(2) NEW ACCOUNTING PRONOUNCEMENTS – (Continued)

     In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets,(“FSP 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets, (“SFAS 142”). FSP 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 with earlier adoption prohibited. The Company will adopt FSP 142-3 in conjunction with SFAS 141R to improve consistency between the useful life of intangible assets under SFAS 142 and the period of expected cash flows used to measure fair value at acquisition under SFAS 141R. The Company does not expect adoption of FSP 142-3 to have a material impact on the consolidated financial statements.

(3) ACQUISITIONS

     Acquisitions have been recorded using the purchase method of accounting and, accordingly, results of their operations have been included in the Company’s consolidated financial statements since the effective date of each respective acquisition.

Fiscal 2009

     During the nine months ended December 31, 2008, the Company purchased twelve businesses. The largest of these businesses was the July 31, 2008 acquisition of Refron, Inc., a New York-based distributor of refrigerant gases with historical annual sales of $93 million. Other acquisitions included Oilind Safety, an Arizona-based leading provider of industrial safety services offering a full array of rental equipment, safety supplies and technical support and training with historical annual sales of $23 million; A&N Plant, a European-based supplier of positioning and welding equipment for sale and rent with historical annual sales of $20 million; and Gordon Woods Industrial Welding Supply, an industrial gas and welding supply distributor with ten locations in the northern Los Angeles area with historical annual sales of $25 million. A total of $253 million in cash was paid for the twelve businesses, including the settlement of holdback liabilities related to prior year acquisitions. These businesses had aggregate historical annual revenues of approximately $185 million. The Company acquired the businesses to expand its geographic coverage and strengthen its national network of branch-store locations, as well as strengthen its medical and refrigerant gas and safety product offerings and international presence.

Purchase Price Allocation

     The Company negotiated the respective purchase prices of the businesses based on the expected cash flows to be derived from their operations after integration into the Company’s existing distribution network. The purchase price of each acquired business was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of each respective acquisition. Certain purchase price allocations continue to be based on preliminary estimates of fair value and are subject to revision as the Company finalizes appraisals and other analyses.

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

(3) ACQUISITIONS – (Continued)

     The table below summarizes the allocation of the purchase price of all fiscal 2009 acquisitions by business segment, as well as adjustments related to prior year acquisitions. The credit of $1.3 million in the All Other Operations Segment related to property and equipment is attributable to a reduction of $2.5 million related to adjustments to fiscal 2008 acquisitions, net of $1.2 million of plant and equipment acquired in fiscal 2009 acquisitions.

		Distribution				All Other
(In thousands)		Segment				Operations Segment				Total
Current assets, net		$	18,178			$	71,870			$	90,048
Property and equipment			25,790				(1,314	)			24,476
Goodwill			42,483				68,523				111,006
Other intangible assets			40,096				24,163				64,259
Current liabilities			(12,737	)			(8,082	)			(20,819	)
Long-term liabilities			(12,716	)			(3,070	)			(15,786	)
Total cash consideration		$	101,094			$	152,090			$	253,184

Fiscal 2008

     On June 30, 2007, the Company purchased most of the U.S. packaged gas business (“Packaged Gas Business”) of Linde AG (“Linde”), for $310 million in cash and certain assumed liabilities. The operations acquired included 130 locations in 18 states, with more than 1,400 employees, and generated $346 million in revenues for the year ended December 31, 2006.

     Pursuant to the Company’s plan to integrate the Linde Packaged Gas Business into its regional company structure, the Company recorded accruals primarily associated with one-time severance benefits to acquired employees who are involuntarily terminated, facility exit related costs associated with exiting certain acquired facilities that overlap with the Company’s existing operations and a multi-employer pension plan withdrawal liability associated with exiting certain union contracts. The table below summarizes the liabilities established through purchase accounting, adjustments to these liabilities based on revisions to the Company’s integration plan and the related payments made during fiscal 2008 and during the nine months ended December 31, 2008.

(3) ACQUISITIONS – (Continued)

														Total
		Severance				Facility Exit				Other Integration				Integration
(In thousands)		Accruals				Accruals				Accruals				Accruals
Amounts orginally included in purchase accounting		$	5,265			$	5,700			$	—			$	10,965
Payments			(2,781	)			(873	)			(962	)			(4,616	)
Adjustments			892				369				6,213				7,474
Balance at March 31, 2008		$	3,376			$	5,196			$	5,251			$	13,823
Payments			(2,397	)			(1,447	)			(749	)			(4,593	)
Adjustments			(174	)			82				(72	)			(164	)
Balance at December 31, 2008		$	805			$	3,831			$	4,430			$	9,066

     The following represents unaudited pro forma operating results as if the fiscal 2009 and 2008 acquisitions had occurred on April 1, 2007. The pro forma results were prepared from financial information obtained from the sellers of the businesses as well as information obtained during the due diligence process associated with the acquisitions. Pro forma adjustments to the historic financial information of the businesses acquired were limited to those related to the Company’s stepped-up basis in acquired assets and adjustments to reflect the Company’s borrowing and tax rates. The pro forma operating results do not include benefits associated with anticipated synergies related to combining the businesses or integration costs. The pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of April 1, 2007 or of results that may occur in the future.

		Nine Months Ended
		December 31,
(In thousands, except per share amounts)		2008				2007
Net sales		$	3,421,094			$	3,251,521
Net earnings			206,008				160,699
Diluted earnings per share		$	2.45			$	1.92

(4) TRADE RECEIVABLES SECURITIZATION

      The Company participates in a securitization agreement (the “Agreement”) with three commercial banks to which it sells qualifying trade receivables on a revolving basis. The maximum amount of the facility is $360 million. The Agreement expires in March 2010. The Company expects continued availability under the Agreement until it expires in March 2010 and under similar agreements thereafter. Given the contraction of the securitized asset market in the current credit environment, the Company is evaluating the current arrangement with the banks and will evaluate this and other financing alternatives in fiscal 2010. Based on the characteristics of its receivable pool, the Company believes that trade receivable securitization will continue to be an attractive source of funds. In the event such source of funding was unavailable or reduced, the Company believes that it would be able to secure an alternative source of funds. During the nine month period ended December 31, 2008, the Company sold $3.1 billion of trade receivables and remitted to bank conduits, pursuant to a servicing agreement, $3.1 billion in collections on those receivables. The amount of receivables sold under the Agreement was $360 million at December 31, 2008 and March 31, 2008. The Agreement contains customary events of termination, including standard cross default provisions with respect to outstanding debt.

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

(4) TRADE RECEIVABLES SECURITIZATION – (Continued)

     The transaction has been accounted for as a sale under the provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Under the Agreement, trade receivables are sold to bank conduits through a bankruptcy-remote special purpose entity, which is consolidated for financial reporting purposes. The difference between the proceeds from the sale and the carrying value of the receivables is recognized as “Discount on securitization of trade receivables” in the accompanying Consolidated Statements of Earnings and varies on a monthly basis depending on the amount of receivables sold and market rates. The Company retains a subordinated interest in the receivables sold, which is recorded at the receivables’ previous carrying value. Accordingly, the Company is exposed to credit risk associated with its retained interest in the receivables. The Company is not exposed to interest rate risk due to the short term nature of the receivables and their general collectability.

     Subordinated retained interests of approximately $125 million and $164 million are included in “Trade receivables, net” in the accompanying Consolidated Balance Sheets at December 31, 2008 and March 31, 2008, respectively. At December 31, 2008 and March 31, 2008 approximately 15.7% and 9.3%, respectively, of the accounts included in the retained interest were delinquent as defined under the Agreement. Credit losses for the nine months ended December 31, 2008 and December 31, 2007 were $15 million and $9 million, respectively. On a monthly basis, management calculates the fair value of the retained interest based on management’s best estimate of the undiscounted expected future cash collections on the receivables. Changes in the fair value are recognized as bad debt expense. Actual cash collections may differ from these estimates and would directly affect the fair value of the retained interest. In accordance with the servicing agreement, the Company continues to service, administer and collect the trade receivables on behalf of the bank conduits. The servicing fees charged to the bank conduits approximate the costs of collections. Accordingly, the net servicing asset is immaterial. The Company does not provide any financial guaranties of the bank conduits’ obligations.

(5) INVENTORIES, NET

     Inventories, net, consist of:

		December 31,				March 31,
(In thousands)		2008				2008
Hardgoods		$	283,802			$	275,611
Gases			144,528				55,121
		$	428,330			$	330,732

     Hardgoods inventories determined using the LIFO inventory method totaled $51 million at December 31, 2008 and $50 million at March 31, 2008. The balance of the hardgoods inventories is valued using the FIFO inventory method. If the FIFO inventory method had been used for all of the Company’s hardgoods inventories, the carrying value of the inventory would have been $10.5 million higher at December 31, 2008 and $8.5 million higher at March 31, 2008. Substantially all of the inventories are finished goods. The increase in gas inventories was primarily due to the acquisition of Refron, Inc. (see Note 3).

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

(6) GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a purchase business combination. The valuations of other intangible assets from recent acquisitions are based on preliminary estimates of fair value and are subject to revision as the Company finalizes appraisals and other analyses. Changes in the carrying amount of goodwill for the nine months ended December 31, 2008 were as follows:

						All Other
		Distribution				Operations
		Business				Business
(In thousands)		Segment				Segment				Total
Balance at March 31, 2008		$	733,792			$	235,267			$	969,059
Acquisitions			42,483				68,523				111,006
Other adjustments			(3,241	)			(287	)			(3,528	)
Balance at December 31, 2008		$	773,034			$	303,503			$	1,076,537

     Other intangible assets that are not fully amortized amounted to $196 million and $149 million, net of accumulated amortization of $34 million and $28 million at December 31, 2008 and March 31, 2008, respectively. These intangible assets primarily consist of customer relationships which are amortized over the estimated benefit periods which range from 7 to 17 years and non-competition agreements which are amortized over the term of the agreements. The determination of the estimated benefit period associated with customer relationships is based on an analysis of historical customer sales attrition information and other customer-related factors at the date of acquisition. There are no expected residual values related to these intangible assets. Airgas evaluates the estimated benefit periods and recoverability of its intangible assets that are subject to amortization when facts and circumstances indicate that the lives may not be appropriate and/or the carrying value of the asset may not be recoverable. If the carrying value is not recoverable, impairment is measured as the amount by which the carrying value exceeds its estimated fair value. Fair value is generally estimated based on either appraised value or other valuation techniques. Intangible assets also include trade names with indefinite useful lives valued at $1.3 million. Estimated future amortization expense by fiscal year is as follows: remainder of 2009 - $6.0 million; 2010 - $20.6 million; 2011 - $19.9 million; 2012 - $18.8 million; 2013 - $17.6 million and $111.6 million thereafter.

Test for Goodwill Impairment

     SFAS No. 142, Goodwill and Other Intangible Assets, requires the Company to perform an assessment, at least annually, of the carrying value of goodwill associated with each of its reporting units. The Company assigns goodwill to the reporting units into which an acquisition is integrated and assesses goodwill for impairment at the reporting unit level. Accordingly, the Company’s reporting units consist of the Distribution business segment and each of the nine operating companies reflected in the All Other Operations business segment.

     The goodwill impairment analysis is a two-step process. The first step used to identify potential impairment involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. The Company uses a discounted cash flow approach to estimate the fair value of its reporting units. 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, perpetual growth rates, etc. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

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

(6) GOODWILL AND OTHER INTANGIBLE ASSETS – (Continued)

     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 by allocating the estimated fair value of the reporting unit as calculated in step one, 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 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 Company has elected to perform its annual assessment of the carrying value of goodwill as of October 31 of each year. As of October 31, 2008, the Company determined the estimated fair value of each of its reporting units using a discounted cash flow model and compared those values to the carrying value of each of the respective reporting units. This annual assessment indicated that the Company’s carrying value of goodwill was not impaired.

     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 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. WACC is calculated based on observable market data. Some of this data (such as the risk free or treasury rate and the pretax cost of debt) are based on the market data at a point in time. Other data (such as beta and the equity risk premium) are based upon market data over time.

     Against the backdrop of the global financial crisis at our October 31, 2008 valuation date, these inputs drove the WACC higher than the WACC used to develop our discounted cash flows in prior years. The higher WACC, resulted in a lower estimated fair value of each reporting unit. At October 31, 2008, the WACC used to discount the cash flows of the distribution reporting unit was 10.5%. The WACC used for the smaller reporting units in the All Other Operations business segment was 12.5%, which was 80 basis points higher than the discount rate used in the fiscal 2008 analysis. Additionally, the Company lowered its near term sales growth forecasts while keeping its perpetual growth rate consistent with the long term rate of growth as measured by U.S. Gross Domestic Product. Despite these adverse market conditions, the estimated fair value of most the reporting units exceeded their carrying value by a substantial margin. The Company believes its forecast discounted cash flows are reasonable as the sum of the individual reporting unit valuations is only 82% of the Company’s enterprise value.

     In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, the Company applied a hypothetical 5% decrease to the fair value of each reporting unit. In most cases, the estimated fair value of the reporting units exceeded the carrying value of the reporting units by a substantial amount. However, this hypothetical 5% decrease in fair value would have triggered the need to perform additional step 2 analyses for three of the Company’s reporting units in the All Other Operations business segment. Of these three reporting units, two were acquired within twenty four months of the valuation date. The amount of goodwill associated with these reporting units was $205 million at October 31, 2008.

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

(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities include:

		December 31,				March 31,
(In thousands)		2008				2008
Accrued payroll and employee benefits		$	83,504			$	86,490
Business insurance reserves			42,595				37,433
Taxes other than income taxes			17,597				22,628
Cash overdraft			53,016				56,739
Deferred rental revenue			24,135				22,641
Other accrued expenses and current liabilities			64,567				62,952
		$	285,414			$	288,883

     With respect to the business insurance reserves above, the Company had corresponding insurance receivables of $8.5 million at December 31, 2008 and $8 million at March 31, 2008. The insurance receivables represent the balance of probable claim losses in excess of the Company’s self insured retention for which the Company is fully insured.

(8) INDEBTEDNESS

     Long-term debt consists of:

		December 31,				March 31,
(In thousands)		2008				2008
Revolving credit borrowings — U.S.		$	787,000			$	859,500
Revolving credit borrowings — Multi-currency			21,020				—
Revolving credit borrowings — Canadian			17,580				23,791
Term loans			420,000				487,500
Money market loan			—				30,000
Senior subordinated notes			550,000				150,000
Acquisition and other notes			24,808				29,257
Total long-term debt			1,820,408				1,580,048
Less current portion of long-term debt			(10,227	)			(40,400	)
Long-term debt, excluding current portion		$	1,810,181			$	1,539,648

Senior Credit Facility

     The Company maintains a senior credit facility (the “Credit Facility”) with a syndicate of lenders. In July 2008, the Company amended its Credit Facility to, among other things, create a multi-currency borrowing facility. Under this multi-currency revolver, the Company and certain of the Company’s foreign subsidiaries may borrow any foreign currency that is readily available and freely transferable and convertible into U.S. dollars, including Euros, pounds sterling and Mexican pesos. The Company may borrow up to $75 million (U.S. dollar equivalent) in U.S. dollars or any permitted foreign currency or multiple currencies in the aggregate. To accommodate the size of the multi-currency revolver, the Company’s U.S. dollar revolving credit line was reduced by $75 million so that the total size of the Company’s Credit Facility was not changed.

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

(8) INDEBTEDNESS – (Continued)

     At December 31, 2008, the Credit Facility permitted the Company to borrow up to $991 million under a U.S. dollar revolving credit line, up to $75 million (U.S. dollar equivalent) under the multi-currency revolving credit line, and up to C$40 million (U.S. $33 million) under a Canadian dollar revolving credit line. The Credit Facility also contains a term loan provision through which the Company borrowed $600 million with scheduled repayment terms. The term loans are repayable in quarterly installments of $22.5 million through June 30, 2010. The quarterly installments then increase to $71.2 million from September 30, 2010 to June 30, 2011. Principal payments due over the next twelve months on the term loans are classified as “Long-term debt” in the Company’s Consolidated Balance Sheets based on the Company’s ability and intention to refinance the payments with borrowings under its long-term revolving credit facilities. As principal amounts under the term loans are repaid, no additional borrowing capacity is created under the term loan provision. The Credit Facility will mature on July 25, 2011.

     As of December 31, 2008, the Company had approximately $1,246 million of borrowings under the Credit Facility: $787 million under the U.S. dollar revolver, $21 million (in U.S. dollars) under the multi-currency revolver, C$21.5 million (U.S. $18 million) under the Canadian dollar revolver and $420 million under the term loans. The Company also had outstanding letters of credit of $42 million issued under the Credit Facility. The U.S. dollar borrowings and the term loans bear interest at the London Interbank Offered Rate (“LIBOR”) plus 62.5 basis points. The multi-currency revolver bears interest based on a spread of 62.5 basis points over the Euro currency rate applicable to each foreign currency borrowing. The Canadian dollar borrowings bear interest at the Canadian Bankers’ Acceptance Rate plus 62.5 basis points. As of December 31, 2008, the average effective interest rates on the U.S. dollar revolver, the term loans, the multi-currency revolver and the Canadian dollar revolver were 2.28%, 2.08%, 3.97% and 2.48%, respectively.

     As of December 31, 2008, approximately $231 million remained unused under the Company’s revolving Credit Facility, which matures in July 2011. The Company’s margins of compliance with the financial covenants of the Credit Facility result in no restrictions on the Company’s ability to borrow on the unused portion of the credit facility. The Credit Facility contains customary events of default, including nonpayment and breach covenants. In the event of default, repayment of borrowings under the Credit Facility may be accelerated.

     The Company’s domestic subsidiaries, exclusive of the bankruptcy-remote special purpose entity (the “domestic subsidiaries”), guarantee the U.S. dollar revolver, multi-currency revolver and Canadian dollar revolver. The multi-currency revolver and Canadian dollar revolver are also guaranteed by the Company and the Company’s foreign subsidiaries. The guarantees are full and unconditional and are made on a joint and several basis. The Company has pledged 100% of the stock of its domestic subsidiaries and 65% of the stock of its foreign subsidiaries as surety for its obligations under the Credit Facility. The Credit Facility provides for the release of the guarantees and collateral if the Company attains an investment grade credit rating and a similar release on certain other debt.

Money Market Loans

     The Company has an agreement with a financial institution that provides access to short-term advances not to exceed $30 million for a maximum term of three months. The agreement expires on June 30, 2009, but may be extended subject to renewal provisions contained in the agreement. The amount, term and interest rate of an advance are established through mutual agreement with the financial institution when the Company requests such an advance. At December 31, 2008, the Company had no outstanding advances under the agreement.

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

(8) INDEBTEDNESS – (Continued)

     The Company also has an agreement with another financial institution that provides access to short-term advances not to exceed $35 million. The agreement expires on December 1, 2009, but may be extended subject to renewal provisions contained in the agreement. The advances are generally overnight or for up to seven days. The amount, term and interest rate of an advance are established through mutual agreement with the financial institution when the Company requests such an advance. At December 31, 2008, there were no advances outstanding under the agreement.

Senior Subordinated Notes

     At December 31, 2008, the Company had $150 million of senior subordinated notes (the “2004 Notes”) outstanding with a maturity date of July 15, 2014. The 2004 Notes bear interest at a fixed annual rate of 6.25%, payable semi-annually on January 15 and July 15 of each year. The 2004 Notes have an optional redemption provision, which permits the Company, at its option, to call the 2004 Notes at scheduled dates and prices. The first scheduled optional redemption date is July 15, 2009 at a price of 103.125% of the principal amount.

     On June 5, 2008, the Company issued $400 million of senior subordinated notes (the “2008 Notes”) at par with a maturity date of October 1, 2018. The net proceeds from the sale of the 2008 Notes were used to reduce borrowings under the Company’s revolving credit line under the Credit Facility. The 2008 Notes bear interest at a fixed annual rate of 7.125%, payable semi-annually on October 1 and April 1 of each year, commencing October 1, 2008. The 2008 Notes have an optional redemption provision, which permits the Company, at its option, to call the 2008 Notes at scheduled dates and prices. The first scheduled optional redemption date is October 1, 2013 at a price of 103.563% of the principal amount.

     The 2004 and 2008 Notes contain covenants that could restrict the payment of dividends, the repurchase of common stock, the issuance of preferred stock, and the incurrence of additional indebtedness and liens. The 2004 and 2008 Notes are fully and unconditionally guaranteed jointly and severally, on a subordinated basis, by each of the 100% owned domestic guarantors under the Credit Facility.

Acquisition and Other Notes

     The Company’s long-term debt also included acquisition and other notes, principally consisting of notes issued to sellers of businesses acquired, which are repayable in periodic installments. At December 31, 2008, acquisition and other notes totaled $24.8 million with an average interest rate of approximately 6% and an average maturity of approximately two years.

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

(8) INDEBTEDNESS – (Continued)

Aggregate Long-term Debt Maturities

     The aggregate maturities of long-term debt at December 31, 2008 are as follows:

(In thousands)		Debt Maturities
December 31, 2009 (1)		$	10,227
March 31, 2010			26,232
March 31, 2011			241,572
March 31, 2012			990,413
March 31, 2013			718
Thereafter			551,246
		$	1,820,408

(9) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     The Company manages its exposure to changes in market interest rates. The Company’s involvement with derivative instruments is limited to highly effective fixed interest rate swap agreements used to manage well-defined interest rate risk exposures. The Company monitors its positions and credit ratings of its counterparties and does not anticipate non-performance by the counterparties. Interest rate swap agreements are not entered into for trading purposes.

     At December 31, 2008, the Company had 18 fixed interest rate swap agreements with a notional amount of $627 million. These swaps effectively convert $627 million of variable interest rate debt associated with the Company’s Credit Facility to fixed rate debt. At December 31, 2008, these swap agreements required the Company to make fixed interest payments based on a weighted average effective rate of 4.21% and receive variable interest payments from the counterparties based on a weighted average variable rate of 1.84%. The remaining terms of these swap agreements range from 4 to 24 months. During the nine months ended December 31, 2008, the fair value of the fixed interest rate swap agreements increased, and the Company recorded a corresponding decrease to “Accumulated Other Comprehensive Loss” of $5.4 million, or $3.5 million after tax. The Company’s interest rate swap agreements were reflected at their fair value in the Consolidated Balance Sheets as a $15.5 million liability and a $20.8 million liability at December 31, 2008 and March 31, 2008, respectively, with corresponding deferred tax assets of $5.4 million and $7.3 million, respectively, and $10.1 million and $13.5 million, respectively, recorded in “Accumulated Other Comprehensive Loss.”

(10) FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

     Effective April 1, 2008, the Company adopted SFAS 157. SFAS 157 does not require any new fair value measurements, but rather replaces multiple existing definitions of fair value with a single definition, establishes a consistent framework for measuring fair value and expands financial statement disclosures regarding fair value measurements.

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

(10) FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES – (Continued)

     SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value in accordance with SFAS 157 are classified based upon the level of judgment associated with the inputs used to measure their fair value. The hierarchical levels related to the subjectivity of the valuation inputs are defined by SFAS 157 as follows.

	•		Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities at the measurement date.
	•		Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable, directly or indirectly through corroboration with observable market data at the measurement date.
	•		Level 3 inputs are unobservable inputs that reflect management’s best estimate of the assumptions (including assumptions about risk) that market participants would use in pricing the asset or liability at the measurement date.

     The carrying value of cash, trade receivables exclusive of the subordinated retained interest, other current receivables, trade payables, other current liabilities (e.g., deposit liabilities, cash overdrafts, etc.), short-term borrowings and variable rate debt approximate fair value and such items have not been impacted by the adoption of SFAS 157.

     Assets and liabilities measured at fair value on a recurring basis at December 31, 2008 are categorized in the table below based on the lowest level of significant input to the valuation.

						Quoted prices in				Significant other				Significant
		Carrying value at				active markets				observable inputs				unobservable inputs
(In thousands)		December 31, 2008				Level 1				Level 2				Level 3
Assets:
Subordinated retained interest in trade receivables sold under the Company’s trade receivable securitization		$	124,851			$	—			$	—			$	124,851
Deferred compensation plan assets			4,779				4,779				—				—
Total assets measured at fair value on a recurring basis		$	129,630			$	4,779			$	—			$	124,851
Liabilities:
Deferred compensation plan liabilities		$	4,779			$	4,779			$	—			$	—
Derivative liabilities – interest rate swap agreements			15,498				—				15,498				—
Total liabilities measured at fair value on a recurring basis		$	20,277			$	4,779			$	15,498			$	—

The following is a general description of the valuation methodologies used for financial assets and liabilities measured at fair value:

Subordinated retained interest – The Company’s subordinated retained interest in trade receivables sold under its trade receivable securitization agreement are classified as trade receivables on the consolidated balance sheets. The fair value of the subordinated retained interest reflects management’s best estimate of the undiscounted expected future cash flows adjusted for unobservable inputs (Level 3), which management believes a market participant would use to assess the risk of credit losses. Those inputs reflect the diversified customer base, the short-term nature of the securitized asset, aging trends and historic collections experience. Adjustments to the fair value of the Company’s retained interest are recorded through the consolidated statement of earnings as bad debt expense. The Company believes that the fair value of the subordinated retained interest in trade receivables reflects the amounts expected to be realized when they are ultimately settled.

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

(10) FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES – (Continued)

Deferred compensation plan assets and corresponding liabilities – The Company’s deferred compensation plan assets consist of exchange traded open ended mutual funds with quoted prices in active markets (Level 1). The Company’s deferred compensation plan liabilities are equal to the plan’s assets. Gains or losses on the deferred compensation plan assets are recognized as other income (expense), net, while gains or losses on the deferred compensation plan liabilities are recognized as compensation expense.

Derivative liabilities – interest rate swap agreements – The Company’s interest rate swap agreements are with highly rated counterparties and effectively convert variable rate debt to fixed rate debt. The swap agreements are valued using pricing models that rely on observable market inputs such as interest rate yield curves and treasury spreads (Level 2). Changes to the fair value measurement of the Company’s interest rate swap agreements are reported on the consolidated balance sheet through “Accumulated Other Comprehensive Loss.”

The following table presents the changes in financial assets for which Level 3 inputs were significant to their valuation for the nine months ended December 31, 2008:

		Subordinated
(In thousands)		retained interest
Balance at April 1, 2008		$	163,561
Net realized losses included in earnings (bad debt expense)			(15,335	)
Reduction in retained interest, net			(23,375	)
Balance at December 31, 2008		$	124,851

     The carrying value of fixed rate debt generally reflects the cash proceeds received upon its issuance. The fair value of the fixed rate instruments disclosed below have been determined based on quoted prices from the broker/dealer market (Level 1), observable market inputs for similarly termed treasury notes adjusted for the Company’s credit spread (Level 2) and unobservable inputs management believes a market participant would use in determining imputed interest for obligations without a stated interest rate (Level 3).

		Carrying Value at				Fair Value at				Fair Value at				Fair Value at
(In thousands)		December 31, 2008				December 31, 2008				December 31, 2008				December 31, 2008
2004 Notes		$	150,000			$	126,000			$	—			$	—
2008 Notes			400,000				336,000				—				—
Acquisition and other notes			24,808				—				6,372				16,698
Total fixed rate debt		$	574,808			$	462,000			$	6,372			$	16,698

(11) NATIONAL WELDERS EXCHANGE TRANSACTION

     Since the December 2003 adoption of Interpretation No. 46R, Consolidation of Variable Interest Entities, the Company’s National Welders joint venture was consolidated with the operations of the Company. As a consolidated entity, the assets and liabilities of the joint venture were included with the Company’s assets and liabilities and the preferred stockholders’ interest in those assets and liabilities was reflected as “Minority interest in affiliate” on the Company’s Consolidated Balance Sheet. Likewise, the operating results of the joint venture were reflected broadly across the consolidated statement of earnings with the preferred stockholders’ proportionate share of the joint venture’s operating results reflected, net of tax, as “Minority interest in earnings of consolidated affiliate.”

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

(11) NATIONAL WELDERS EXCHANGE TRANSACTION — (Continued)

     On July 3, 2007, the preferred stockholders of the National Welders joint venture exchanged their preferred stock for common stock of Airgas (the “NWS Exchange Transaction”). The Company issued 2.471 million shares of Airgas common stock to the preferred stockholders in exchange for all 3.2 million preferred shares of National Welders. As part of the negotiated exchange, the Company issued an additional 144 thousand shares (included in the 2.471 million shares) of Airgas common stock to the preferred shareholders, which resulted in a one-time net after-tax charge of $2.5 million, or $0.03 per diluted share. The net after-tax charge was reflected in the consolidated statement of earnings as “Minority interest in earnings of consolidated affiliate” and consisted of $7 million related to the additional shares issued net of the reversal of a deferred tax liability related to the undistributed earnings of the National Welders joint venture of $4.5 million. Upon the exchange, National Welders became a 100% owned subsidiary of Airgas.

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

(12) STOCKHOLDERS’ EQUITY

     Changes in stockholders’ equity were as follows:

		Shares of
		Common				Shares of
		Stock $ 0.01				Treasury
(In thousands of shares)		Par Value				Stock
Balance at March 31, 2008			84,076				1,788
Common stock issuance (d)			1,182				—
Purchase of treasury stock (f)			—				2,351
Balance at December 31, 2008			85,258				4,139

														Accumulated
						Capital in								Other								Total
		Common				Excess of				Retained				Comprehensive				Treasury				Stockholders’
(In thousands)		Stock				Par Value				Earnings				Loss				Stock				Equity
Balance at March 31, 2008		$	841			$	468,302			$	983,663			$	(4,713	)		$	(34,757	)		$	1,413,336
Comprehensive income:
Net earnings											204,607												204,607
Foreign currency translation adjustment															(9,493	)							(9,493)	(a)
Net change in fair value of interest rate swap agreements															5,352								5,352	(b)
Net tax expense of comprehensive income items															(1,873	)							(1,873)	(c)
Total comprehensive income																							198,593
Common stock issuance — employee benefit plans (d)			12				26,405																26,417
Tax benefit from stock option exercises							10,530																10,530
Dividends paid on common stock ($0.40 per share)											(32,892	)											(32,892	)
Stock-based compensation (e)							16,002																16,002
Purchase of treasury stock (f)																			(115,606	)			(115,606	)
Balance at December 31, 2008		$	853			$	521,239			$	1,155,378			$	(10,727	)		$	(150,363	)		$	1,516,380

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

(13) STOCK-BASED COMPENSATION

     In accordance with SFAS No. 123R, Share-Based Payment, (“SFAS 123R”), the Company recognizes stock-based compensation expense for its stock option plans and employee stock purchase plan. The following table summarizes stock-based compensation expense recognized by the Company in the three and nine months ended December 31, 2008 and 2007.

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
(In thousands)		December 31, 2008				December 31, 2007				December 31, 2008				December 31, 2007
Stock-based compensation expense related to:
Stock option plans		$	2,479			$	2,119			$	12,378			$	10,245
Employee stock purchase plan - options to purchase stock			1,117				1,017				3,969				2,920
			3,596				3,136				16,347				13,165
Tax benefit			(1,109	)			(967	)			(5,393	)			(4,207	)
Stock-based compensation expense, net of tax		$	2,487			$	2,169			$	10,954			$	8,958

     The Company utilizes the Black-Scholes option pricing model to determine the fair value of stock options under SFAS 123R. The weighted-average grant date fair value of stock options granted during the nine months ended December 31, 2008 and 2007 was $18.42 and $15.27, respectively.

Summary of Stock Option Activity

     The following table summarizes the stock option activity during the nine months ended December 31, 2008:

		Number of
		Stock Options				Weighted-Average
		(In thousands)				Exercise Price
Outstanding at March 31, 2008			6,633			$	23.52
Granted			1,075			$	60.51
Exercised			(867	)		$	16.37
Forfeited			(64	)		$	37.10
Outstanding at December 31, 2008			6,777			$	30.17
Vested or expected to vest at December 31, 2008			6,194			$	30.17
Exercisable at December 31, 2008			4,394			$	20.85

     A total of 11.8 million shares of common stock were authorized under the 2006 Equity Incentive Plan and predecessor plans, of which 2.5 million shares were available for issuance at December 31, 2008.

     As of December 31, 2008, $27.5 million of unrecognized compensation expense related to non-vested stock options is expected to be recognized over a weighted-average vesting period of 1.8 years.

Employee Stock Purchase Plan

     The Company’s Employee Stock Purchase Plan (the “ESPP”) encourages and assists employees in acquiring an equity interest in the Company. The ESPP is authorized to issue up to 3.5 million shares of Company common stock, of which 1.1 million shares were available for issuance at December 31, 2008. During the nine months ended December 31, 2008 and 2007, the Company granted 441 thousand and 404 thousand options to purchase common stock under the ESPP, respectively.

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

(13) STOCK-BASED COMPENSATION — (Continued)

     Compensation expense under SFAS 123R is measured based on the fair value of the employees’ option to purchase shares of common stock at the grant date and is recognized over the future periods in which the related employee service is rendered. The fair value per share of employee options to purchase shares under the ESPP was $12.37 and $9.61 for the nine months ended December 31, 2008 and 2007, respectively. The fair value of the employees’ option to purchase shares of common stock was estimated using the Black-Scholes model.

The following table summarizes the activity of the ESPP during the nine months ended December 31, 2008:

ESPP — Purchase Option Activity

		Number of
		Purchase Options				Weighted-Average
		(In thousands)				Exercise Price
Outstanding at March 31, 2008			109			$	36.21
Granted			441			$	37.16
Exercised			(316	)		$	38.75
Outstanding at December 31, 2008			234			$	34.57

(14) EARNINGS PER SHARE

     Basic earnings per share is calculated by dividing net earnings by the weighted average number of shares of the Company’s common stock outstanding during the period. Outstanding shares consist of issued shares less treasury stock. Diluted earnings per share is calculated by dividing net earnings by the weighted average common shares outstanding adjusted for the dilutive effect of common stock equivalents related to stock options and the Company’s ESPP. For the nine months ended December 31, 2007, the calculation of diluted earnings per share also assumed the conversion of National Welders’ preferred stock to Airgas common stock (see Note (a) to the table below).

     Outstanding stock options that are anti-dilutive are excluded from the Company’s diluted earnings per share computation. There were approximately 2.5 million and 794 thousand outstanding stock options that were not dilutive for the three months ended December 31, 2008 and 2007, respectively. For the nine months ended December 31, 2008 and 2007, there were approximately 1.8 million and 1.3 million outstanding stock options that were not dilutive, respectively.

     The table below presents the computation of basic and diluted earnings per share for the three and nine months ended December 31, 2008 and 2007:

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

(14) EARNINGS PER SHARE — (Continued)

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
(In thousands, except per share amounts)		2008				2007				2008				2007
Basic Earnings per Share Computation
Numerator
Net earnings		$	62,903			$	56,806			$	204,607			$	159,135
Denominator
Basic shares outstanding			81,207				82,270				82,121				81,145
Basic earnings per share		$	0.77			$	0.69			$	2.49			$	1.96
Diluted Earnings per Share Computation
Numerator
Net earnings		$	62,903			$	56,806			$	204,607			$	159,135
Plus: Preferred stock dividends (a)			—				—				—				711
Plus: Income taxes on earnings of National Welders (a)			—				—				—				245
Net earnings assuming preferred stock conversion		$	62,903			$	56,806			$	204,607			$	160,091
Denominator
Basic shares outstanding			81,207				82,270				82,121				81,145
Incremental shares from assumed exercises and conversions:
Stock options and options under the employee stock purchase plan			1,499				2,335				2,040				2,277
Preferred stock of National Welders (a)			—				—				—				787
Diluted shares outstanding			82,706				84,605				84,161				84,209
Diluted earnings per share		$	0.76			$	0.67			$	2.43			$	1.90

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

(15) COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES

Litigation

     The Company is involved in various legal and regulatory proceedings that have arisen in the ordinary course of its 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 financial position, results of operations or liquidity.

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

(16) SUMMARY BY BUSINESS SEGMENT

     Information related to the Company’s business segments for the three and nine months ended December 31, 2008 and 2007 is as follows:

		Three Months Ended																Three Months Ended
		December 31, 2008																December 31, 2007
						All																All
						Other																Other
(In thousands)		Distribution				Ops.				Elimination				Combined				Distribution				Ops.				Elimination				Combined
Gas and rent		$	502,142			$	220,151			$	(49,830	)		$	672,463			$	458,081			$	178,688			$	(42,128	)		$	594,641
Hardgoods			379,439				29,256				(2,425	)			406,270				384,659				30,855				(2,110	)			413,404
Total net sales			881,581				249,407				(52,255	)			1,078,733				842,740				209,543				(44,238	)			1,008,045
Cost of products sold, excluding deprec. expense			424,886				128,175				(52,255	)			500,806				421,305				103,405				(44,238	)			480,472
Selling, distribution and administrative expenses			309,805				82,860				—				392,665				288,420				72,751				—				361,171
Depreciation			37,983				11,756				—				49,739				34,431				8,804				—				43,235
Amortization			3,350				1,651				—				5,001				3,960				877				—				4,837
Operating income		$	105,557			$	24,965			$	—			$	130,522			$	94,624			$	23,706			$	—			$	118,330

		Nine Months Ended																Nine Months Ended
		December 31, 2008																December 31, 2007
						All																All
						Other																Other
(In thousands)		Distribution				Ops.				Elimination				Combined				Distribution				Ops.				Elimination				Combined
Gas and rent		$	1,514,844			$	674,717			$	(155,872	)		$	2,033,689			$	1,316,798			$	523,491			$	(113,096	)		$	1,727,193
Hardgoods			1,236,144				95,039				(7,517	)			1,323,666				1,123,345				85,032				(5,143	)			1,203,234
Total net sales			2,750,988				769,756				(163,389	)			3,357,355				2,440,143				608,523				(118,239	)			2,930,427
Cost of products sold, excluding deprec. expense			1,353,130				407,550				(163,389	)			1,597,291				1,222,831				300,956				(118,239	)			1,405,548
Selling, distribution and administrative expenses			937,314				249,134				—				1,186,448				834,194				204,779				—				1,038,973
Depreciation			112,342				34,425				—				146,767				98,448				31,119				—				129,567
Amortization			12,207				4,280				—				16,487				9,079				2,496				—				11,575
Operating income		$	335,995			$	74,367			$	—			$	410,362			$	275,591			$	69,173			$	—			$	344,764

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

(17) SUPPLEMENTAL CASH FLOW INFORMATION

Cash Paid for Interest and Taxes

     Cash paid for interest and income taxes was as follows:

		Nine Months Ended
		December 31,
(In thousands)		2008				2007
Interest paid		$	58,602			$	68,318
Discount on securitization			9,041				12,736
Income taxes (net of refunds)			54,519				35,211

Significant Non-cash Investing and Financing Transactions

     During the nine months ended December 31, 2008 and 2007, the Company purchased $6 million and $12 million, respectively of rental welders, which were financed directly by a vendor. The vendor financing was reflected as debt on the respective Consolidated Balance Sheets. Future cash payments in settlement of the debt will be reflected in the Consolidated Statement of Cash Flows when paid.

     During the nine months ended December 31, 2008 and 2007, the Company recorded capitalized interest for construction in progress of $2.6 million and $882 thousand, respectively.

     During the nine months ended December 31, 2007, a seller of a business provided direct financing in the form of a $5 million note payable by the Company. Payment of the note will be reflected in the Consolidated Statement of Cash Flows when the cash is paid. In addition, the Company assumed capital lease obligations of $1.8 million in connection with an acquisition, during the nine months ended December 31, 2007.

     In connection with the NWS Exchange Transaction, the Company issued 2.471 million shares of common stock in a July 2007 non-cash transaction in exchange for the preferred stock of National Welders. See Note 11 for further details surrounding this transaction.

(18) SUBSEQUENT EVENTS

Dividend Declaration

     On February 5, 2009, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.16 per share payable March 31, 2009 to stockholders of record as of March 13, 2009.

Acquisition Agreements

     On January 5, 2009 the Company announced that it acquired Great Lakes Oxygen located in Cleveland, Painesville and Brook Park, Ohio. Great Lakes Oxygen is a distributor of industrial gas and welding supplies, which had sales of approximately $15 million for the twelve month period ended August 31, 2008.

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

(19) SUPPLEMENTARY CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF SUBSIDIARY GUARANTORS

     The obligations of the Company under its registered securities, the 2004 Notes, are guaranteed by the Company’s domestic subsidiaries (the “Guarantors”). The guarantees are made fully and unconditionally on a joint and several basis. The Company’s foreign holdings and bankruptcy-remote special purpose entity (the “Non-guarantors”) are not guarantors of the 2004 Notes. The claims of creditors of the Non-guarantor subsidiaries have priority over the rights of the Company to receive dividends or distributions from such subsidiaries. Presented below is supplementary condensed consolidating financial information for the Company, the Guarantors and the Non-guarantors as of December 31, 2008 and March 31, 2008, and for the nine months ended December 31, 2008 and 2007.

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

Condensed Consolidating Balance Sheet
December 31, 2008

										Non-				Elimination
(In thousands)		Parent				Guarantors				Guarantors				Entries				Consolidated
ASSETS
Current Assets
Cash		$	—			$	36,839			$	5,332			$	—			$	42,171
Trade receivables, net			—				22,185				136,760				—				158,945
Intercompany receivable (payable)			—				337				(337	)			—				—
Inventories, net			—				418,683				9,647				—				428,330
Deferred income tax asset, net			16,555				12,996				(2,136	)			—				27,415
Prepaid expenses and other current assets			28,244				44,991				3,170				—				76,405
Total current assets			44,799				536,031				152,436				—				733,266
Plant and equipment, net			27,589				2,263,998				46,314				—				2,337,901
Goodwill			—				1,058,011				18,526				—				1,076,537
Other intangible assets, net			—				187,865				7,949				—				195,814
Investments in subsidiaries			3,267,886				—				—				(3,267,886	)			—
Other non-current assets			21,112				8,694				2,114				—				31,920
Total assets		$	3,361,386			$	4,054,599			$	227,339			$	(3,267,886	)		$	4,375,438
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable, trade		$	1,548			$	141,817			$	7,875			$	—			$	151,240
Accrued expenses and other current liabilities			82,707				198,416				4,291				—				285,414
Current portion of long-term debt			—				9,103				1,124				—				10,227
Total current liabilities			84,255				349,336				13,290				—				446,881
Long-term debt, excluding current portion			1,757,000				12,833				40,348				—				1,810,181
Deferred income tax liability, net			(28,149	)			539,481				9,803				—				521,135
Intercompany (receivable) payable			—				188,654				(188,654	)			—				—
Other non-current liabilities			31,900				44,291				4,670				—				80,861
Commitments and contingencies
Stockholders’ Equity
Preferred stock			—				—				—				—				—
Common stock, par value $0.01 per share			853				—				—				—				853
Capital in excess of par value			521,240				1,536,304				8,225				(1,544,529	)			521,240
Retained earnings			1,155,377				1,385,321				338,979				(1,724,300	)			1,155,377
Accumulated other comprehensive income			(10,727	)			(1,251	)			678				573				(10,727	)
Treasury stock			(150,363	)			(370	)			—				370				(150,363	)
Total stockholders’ equity			1,516,380				2,920,004				347,882				(3,267,886	)			1,516,380
Total liabilities and stockholders’ equity		$	3,361,386			$	4,054,599			$	227,339			$	(3,267,886	)		$	4,375,438