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: September 30, 2006

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)

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o

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 November 3, 2006: 78,006,766 shares

 

 

AIRGAS, INC.

FORM 10-Q
September 30, 2006

INDEX

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings for the Three and Six Months Ended September 30, 2006 and 2005 (Unaudited)			3
Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and March 31, 2006			4
Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2006 and 2005 (Unaudited)			5
Notes to Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosures About Market Risk			52
Item 4. Controls and Procedures			54
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			55
Item 1A. Risk Factors			55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			55
Item 4. Submission of Matters to a Vote of Security Holders			55
Item 6. Exhibit Listing			56
SIGNATURES			57
Twelfth Amended and Restated Credit Agreement
Certification of Peter McCausland, pursuant to Section 302
Certification of Robert M. McLaughlin, pursuant to Section 302
Certification of Peter McCausland, pursuant to Section 906
Certification of Robert M. McLaughlin, pursuant to Section 906

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Net Sales		$	790,747			$	702,182			$	1,563,783			$	1,380,307
Costs and Expenses:
Cost of products sold (excluding depreciation)			386,377				347,857				769,596				682,720
Selling, distribution and administrative expenses			283,924				259,809				559,901				509,658
Depreciation			34,152				30,185				67,314				59,295
Amortization			2,031				1,308				3,803				2,607
Total costs and expenses			706,484				639,159				1,400,614				1,254,280
Operating Income			84,263				63,023				163,169				126,027
Interest expense, net			(14,654	)			(13,253	)			(28,330	)			(27,197	)
Discount on securitization of trade receivables			(3,546	)			(2,247	)			(6,882	)			(4,095	)
Other income, net			551				581				764				1,493
Earnings before income taxes and minority interest			66,614				48,104				128,721				96,228
Income taxes			(26,356	)			(18,043	)			(49,100	)			(36,178	)
Minority interest in earnings of consolidated affiliate			(711	)			(712	)			(1,422	)			(1,234	)
Income from continuing operations			39,547				29,349				78,199				58,816
Income from discontinued operations, net of tax			—				273				—				453
Net Earnings		$	39,547			$	29,622			$	78,199			$	59,269
Net Earnings Per Common Share
Basic
Earnings from continuing operations		$	0.51			$	0.38			$	1.01			$	0.77
Earnings from discontinued operations			—				0.01				—				0.01
Net earnings per share		$	0.51			$	0.39			$	1.01			$	0.78
Diluted
Earnings from continuing operations		$	0.49			$	0.37			$	0.97			$	0.75
Earnings from discontinued operations			—				0.01				—				0.01
Net earnings per share		$	0.49			$	0.38			$	0.97			$	0.76
Weighted average shares outstanding:
Basic			77,811				76,637				77,685				76,446
Diluted			82,629				81,055				82,553				80,679
Comprehensive income		$	38,626			$	31,492			$	78,844			$	60,960

See accompanying notes to consolidated financial statements.

AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

		(Unaudited)
		September 30,				March 31,
		2006				2006
ASSETS
Current Assets
Cash		$	31,779			$	34,985
Trade receivables, less allowances for doubtful accounts of $16,154 at September 30, 2006 and $14,782 at March 31, 2006			162,714				132,245
Inventories, net			242,919				229,523
Deferred income tax asset, net			24,290				30,141
Prepaid expenses and other current assets			34,629				31,622
Total current assets			496,331				458,516
Plant and equipment at cost			2,333,081				2,191,673
Less accumulated depreciation			(837,440	)			(792,916	)
Plant and equipment, net			1,495,641				1,398,757
Goodwill			611,546				566,074
Other intangible assets, net			32,406				26,248
Other non-current assets			28,489				24,817
Total assets		$	2,664,413			$	2,474,412
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable, trade		$	138,108			$	143,752
Accrued expenses and other current liabilities			197,853				200,001
Current portion of long-term debt			257,096				131,901
Total current liabilities			593,057				475,654
Long-term debt, excluding current portion			597,550				635,726
Deferred income tax liability, net			344,609				327,818
Other non-current liabilities			35,266				30,864
Minority interest in affiliate			57,191				57,191
Commitments and contingencies
Stockholders’ Equity
Preferred stock, no par value, 20,000 shares authorized, no shares issued or outstanding at September 30, 2006 and March 31, 2006			—				—
Common stock, par value $0.01 per share, 200,000 shares authorized, 79,156 and 78,569 shares issued at September 30, 2006 and March 31, 2006, respectively			792				786
Capital in excess of par value			311,213				289,598
Retained earnings			732,473				665,158
Accumulated other comprehensive income			5,396				4,751
Treasury stock, 1,292 common shares at cost at both September 30, 2006 and March 31, 2006			(13,134	)			(13,134	)
Total stockholders’ equity			1,036,740				947,159
Total liabilities and stockholders’ equity		$	2,664,413			$	2,474,412

See accompanying notes to consolidated financial statements.

AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six Months Ended				Six Months Ended
(In thousands)		September 30, 2006				September 30, 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings		$	78,199			$	59,269
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			67,314				59,295
Amortization			3,803				2,607
Deferred income taxes			22,211				22,163
Gain on sales of plant and equipment			(213	)			(458	)
Minority interest in earnings			1,422				1,234
Stock-based compensation expense			6,532				—
Stock issued for employee stock purchase plan			5,846				5,040
Changes in assets and liabilities, excluding effects of business acquisitions:
Securitization of trade receivables			2,900				19,700
Trade receivables, net			(23,256	)			(15,668	)
Inventories, net			(7,703	)			(14,723	)
Prepaid expenses and other current assets			(4,031	)			4,796
Accounts payable, trade			(13,359	)			(14,081	)
Accrued expenses and other current liabilities			(14,971	)			2,959
Other long-term assets			(1,184	)			4,440
Other long-term liabilities			4,740				1,520
Net cash provided by operating activities			128,250				138,093
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(121,548	)			(105,881	)
Proceeds from sales of plant and equipment			3,487				2,646
Business acquisitions and holdback settlements			(99,166	)			(75,602	)
Other, net			157				319
Net cash used in investing activities			(217,070	)			(178,518	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings			525,650				279,324
Repayment of debt			(438,517	)			(284,059	)
Financing costs			(5,103	)			—
Minority interest in earnings			(1,422	)			(1,234	)
Exercise of stock options			6,517				11,210
Tax benefit realized from the exercise of stock options			2,726				—
Minority stockholder note prepayment			—				21,000
Dividends paid to stockholders			(10,884	)			(9,290	)
Cash overdraft			6,647				23,863
Net cash provided by financing activities			85,614				40,814
Change in cash		$	(3,206	)		$	389
Cash — Beginning of period			34,985				32,640
Cash — End of period		$	31,779			$	33,029

See accompanying notes to consolidated financial statements.

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

(1) BASIS OF PRESENTATION

     The consolidated financial statements include the accounts of Airgas, Inc. and its subsidiaries (the “Company”), as well as the Company’s consolidated affiliate, National Welders. Intercompany accounts and transactions, including those between the Company and National Welders, are eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These statements do not include all disclosures required for annual financial statements. These 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, 2006.

     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 financial position, results of operations and cash flows for the periods presented. The interim operating results are not necessarily indicative of the results to be expected for an entire year.

     As described in Note 3, the Company divested its subsidiary, Rutland Tool & Supply Co. (“Rutland Tool”), in December 2005. As a result, Rutland Tool has been reclassified in the Consolidated Statement of Earnings for the three months and six months ended September 30, 2005 as discontinued operations. The Consolidated Statement of Cash Flows for the six months ended September 30, 2005 was not reclassified because the cash flows of Rutland Tool were not significant.

(2) NEW ACCOUNTING PRONOUNCEMENTS

     In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory Costs, as an amendment to the guidance provided on Inventory Pricing in FASB Accounting Research Bulletin 43. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires that if the costs associated with the actual level of spoilage or production defects are greater than the normal range of spoilage or defects, the excess costs should be charged to current period expense. The Company adopted SFAS 151 effective April 1, 2006, as required. Since the Company performs limited manufacturing, the adoption of SFAS 151 did not have a material impact on its results of operations, financial position or liquidity.

     In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, as an amendment to APB Opinion 29, Accounting for Nonmonetary Transactions. SFAS 153 requires nonmonetary exchanges to be accounted for at fair value, recognizing any gains or losses, if the fair value is determinable within reasonable limits and the transaction has commercial substance. The Company adopted SFAS 153 effective April 1, 2006, as required. The adoption of SFAS 153 did not have a material impact on its results of operations, financial position or liquidity.

     On September 1, 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, which requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principle, unless it is impractical to do so. The Company adopted SFAS 154 effective April 1, 2006, as required.

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

(2) NEW ACCOUNTING PRONOUNCEMENTS — (Continued)

     Effective April 1, 2006, the Company adopted SFAS 123 (revised 2004), Share-Based Payment, (“SFAS 123R”), which superseded Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25). SFAS 123R requires that grants of employee stock options, including options to purchase shares under employee stock purchase plans, be recognized as compensation expense based on their fair values. The Company adopted SFAS 123R using the “modified prospective” method in which compensation cost is recognized from the date of adoption forward for both new awards and the portion of any previously granted awards that vest after the date of adoption. Prior periods are not restated under the modified prospective method of adoption. Prior to April 1, 2006, the Company accounted for its stock-based compensation using the intrinsic value method outlined in APB 25, which provides that compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Accordingly, since the Company does not grant options with exercise prices lower than the market price on the date of grant, no stock-based employee compensation expense was reflected in net earnings prior to the date of adoption. See Note 13 for additional disclosures associated with the adoption of SFAS 123R.

     In November 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP provides an elective alternative simplified (“shortcut”) method for calculating the pool of excess tax benefits (the “APIC pool”) available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R and reported in the Consolidated Statements of Cash Flows. The shortcut method includes simplified procedures to establish the beginning balance of the APIC pool and to determine the subsequent effect on the APIC pool and Cash Flow Statements of the tax effects of employee stock-based compensation awards that were outstanding upon adoption of SFAS 123R. The Company has elected to adopt the shortcut method provided in the FSP.

(3) ACQUISITIONS AND DIVESTITURE

(a) 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.

     During fiscal 2007, the Company purchased four businesses associated with the distribution of packaged gases and related hardgoods products. The largest of the acquisitions included Airtec, Inc., purchased April 1, 2006, and Aeriform Corporation, purchased September 1, 2006. All acquisitions together generated aggregate annual revenues of approximately $80 million and are included in the Distribution segment. The Company acquired the businesses to expand its geographic coverage and strengthen its national network of branch-store locations.

Purchase Price Allocation

     The aggregate cash paid for the fiscal 2007 acquisitions and the settlement of holdback liabilities associated with certain acquisitions was $99 million. 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 dates of each respective acquisition. The purchase price allocations were 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 AND DIVESTITURE — (Continued)

The Company does not expect the final allocation of the purchase price to differ materially from the amounts included in the accompanying consolidated financial statements. The table below summarizes the allocation of purchase price of all fiscal 2007 acquisitions as well as adjustments related to prior year acquisitions.

(In thousands)
Current assets, net		$	15,820
Property and equipment			44,450
Goodwill			44,967
Other intangible assets			9,333
Current liabilities			(13,892	)
Long-term liabilities			(1,512	)
Total cash consideration		$	99,166

Pro Forma Operating Results

     The following presents unaudited pro forma operating results as if fiscal 2007 and fiscal 2006 acquisitions had occurred on April 1, 2005. The pro forma results were prepared from financial information obtained during the due diligence process associated with the acquisitions. Pro forma adjustments to the historic financial information of 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 results have been 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, 2005 or of results that may occur in the future.

		Six Months Ended
		September 30,
(In thousands, except per share amounts)		2006				2005
Net sales		$	1,592,413			$	1,455,522
Net earnings			78,400				58,713
Diluted earnings per share		$	0.97			$	0.75

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

(3) ACQUISITIONS AND DIVESTITURE — (Continued)

(b) Divestiture

     On December 1, 2005, the Company sold its Rutland Tool & Supply Co. (“Rutland Tool”) subsidiary. Rutland Tool distributed metalworking tools, machine tools and MRO supplies from seven locations and had approximately 180 employees. The results of Rutland Tool for the three and six months ended September 30, 2005 have been reclassified in the Consolidated Statement of Earnings as “discontinued operations.” The Consolidated Statement of Cash Flows was not reclassified to reflect discontinued operations because the cash flows of Rutland Tool were not significant.

     The net sales and earnings before income taxes for the three months ended September 30, 2005, which were segregated and reported as discontinued operations, were $12 million and $457 thousand, respectively. For the six months ended September 30, 2005, net sales and earnings before income taxes were $25 million and $759 thousand, respectively.

(4) 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 and common stock held by the Employee Benefits Trust (the Trust was terminated during fiscal 2006). 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 Employee Stock Purchase Plan. The calculation of diluted earnings per share also assumes the conversion of National Welders’ preferred stock to Airgas common stock.

     The table below presents the computation of basic and diluted earnings per share for the three and six months ended September 30, 2006 and 2005:

		September 30,								September 30,
(In thousands, except per share amounts)		2006				2005				2006				2005
Basic Earnings per Share Computation
Numerator
Income from continuing operations		$	39,547			$	29,349			$	78,199			$	58,816
Income from discontinued operations			—				273				—				453
Net earnings		$	39,547			$	29,622			$	78,199			$	59,269
Denominator
Basic shares outstanding			77,811				76,637				77,685				76,446
Basic earnings per share from continuing operations		$	0.51			$	0.38			$	1.01			$	0.77
Basic earnings per share from discontinued operations			—				0.01				—				0.01
Basic net earnings per share		$	0.51			$	0.39			$	1.01			$	0.78

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

(4) EARNINGS PER SHARE — (Continued)

		Three Months Ended								Six Months Ended
		September 30,								September 30,
(In thousands, except per share amounts)		2006				2005				2006				2005
Diluted Earnings per Share Computation
Numerator
Income from continuing operations		$	39,547			$	29,349			$	78,199			$	58,816
Plus: Preferred stock dividends (1)(2)			711				712				1,422				1,424
Plus: Income taxes on earnings of National Welders (3)			262				161				476				324
Income from continuing operations assuming preferred stock conversion			40,520				30,222				80,097				60,564
Income from discontinued operations			—				273				—				453
Net earnings assuming preferred stock conversion		$	40,520			$	30,495			$	80,097			$	61,017
Denominator
Basic shares outstanding			77,811				76,637				77,685				76,446
Incremental shares from assumed conversions:
Stock options and options under the Employee Stock Purchase plan			2,491				2,091				2,541				1,906
Preferred stock of National Welders (1)			2,327				2,327				2,327				2,327
Diluted shares outstanding			82,629				81,055				82,553				80,679
Diluted earnings per share from continuing operations		$	0.49			$	0.37			$	0.97			$	0.75
Diluted earnings per share from discontinued operations			—				0.01				—				0.01
Diluted net earnings per share		$	0.49			$	0.38			$	0.97			$	0.76

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

(5) TRADE RECEIVABLES SECURITIZATION

     The Company participates in a securitization agreement with two commercial banks to sell up to $250 million of qualifying trade receivables. The agreement will expire in May 2009, but may be renewed subject to renewal provisions contained in the agreement. During the six months ended September 30, 2006, the Company sold, net of its retained interest, $1,273 million of trade receivables and remitted to bank conduits, pursuant to a servicing agreement, $1,270 million in collections on those receivables. The amount of outstanding receivables under the agreement was $247 million at September 30, 2006 and $244 million at March 31, 2006. Effective October 31, 2006, the Company increased the maximum size of the securitization agreement to $270 million of qualifying trade receivables.

     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 securitization agreement, eligible 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. Subordinated retained interests of approximately $74 million and $63 million are included in “Trade receivables” in the accompanying Consolidated Balance Sheets at September 30, 2006 and March 31, 2006, respectively. The Company’s retained interest is generally collected within 60 days. On a monthly basis, management measures the fair value of the retained interest at management’s best estimate of the undiscounted expected future cash collections on the transferred 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 a 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.

(6) INVENTORIES, NET

     Inventories, net, consist of:

		September 30,				March 31,
(In thousands)		2006				2006
Hardgoods		$	216,074			$	202,894
Gases			26,845				26,629
		$	242,919			$	229,523

     Net inventories determined by the LIFO inventory method totaled $35 million at September 30, 2006 and $37 million at March 31, 2006. If the FIFO inventory method had been used for these inventories, the carrying value would have been approximately $7 million higher at September 30, 2006 and approximately $6 million higher at March 31, 2006. Substantially all of the inventories are finished goods.

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

(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

     Accrued expenses and other current liabilities include:

		September 30,				March 31,
(In thousands)		2006				2006
Accrued payroll and employee benefits		$	54,718			$	57,555
Business insurance reserves			24,152				20,930
Health insurance reserves			10,593				9,734
Accrued interest expense			14,112				14,910
Taxes other than income taxes			13,613				13,590
Cash overdraft			46,831				40,155
Other accrued expenses and current liabilities			33,834				43,127
		$	197,853			$	200,001

(8) 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 September 30, 2006, the Company had six fixed interest rate swap agreements with a notional amount of $150 million. These swaps effectively convert $150 million of variable interest rate debt associated with the Company’s credit facilities to fixed rate debt. At September 30, 2006, these swap agreements required the Company to make fixed interest payments based on a weighted average effective rate of 4.98% and receive variable interest payments from its counterparties based on a weighted average variable rate of 5.37%. The remaining terms of each of these swap agreements are between 21 months to 32 months.

     National Welders was a party to one interest rate swap agreement with a notional principal amount of $27 million. The counter party to the swap agreement is a major financial institution. National Welders is required to make fixed interest payments of 5.36% and receive variable interest payments from its counterparty based on one month LIBOR, which was 5.33% at September 30, 2006. The remaining term of the swap agreement is 32 months.

     During the six months ended September 30, 2006, the Company and National Welders recorded a net decrease in the fair value of the fixed interest rate swap agreements and a corresponding decrease to “Accumulated Other Comprehensive Income” of approximately $1.3 million. Including the effect of the interest rate swap agreements, the debt of National Welders, and the trade receivables securitization, the Company’s ratio of fixed to variable rate debt at September 30, 2006 was 51% fixed to 49% variable. The redemption of $225 million of the 9.125% senior subordinated notes on October 27, 2006 with proceeds from the Company’s revolving credit line changed the Company’s ratio of fixed to variable rate debt to 30% fixed to 70% variable (See subsequent events note 17).

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

(9) GOODWILL AND OTHER INTANGIBLE ASSETS

     The valuations of goodwill and other intangible assets of 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 net carrying amount of goodwill for the six months ended September 30, 2006 were as follows:

						All Other
		Distribution				Operations
(In thousands)		Segment				Segment				Total
Balance at March 31, 2006		$	402,582			$	163,492			$	566,074
Acquisitions			42,125				2,842				44,967
Other adjustments			716				(211	)			505
Balance at September 30, 2006		$	445,423			$	166,123			$	611,546

     Other intangible assets amounted to $32.4 million and $26.2 million, net of accumulated amortization of $47.4 million and $43.8 million at September 30, 2006 and March 31, 2006, respectively. These intangible assets primarily consist of acquired customer lists which are amortized principally over 5 to 11 years and non-compete agreements entered into in connection with business combinations amortized over the term of the agreements. There are no expected residual values related to these intangible assets. Intangible assets also include a trade name with an indefinite useful life valued at $1 million. Estimated remaining fiscal year amortization expense in millions is as follows: remainder of 2007 — $3.6 million; 2008 — $6.3 million; 2009 — $5.1 million; 2010 — $4.4 million; 2011 - $4.0 million; and $8.0 million thereafter.

(10) INDEBTEDNESS

     Long-term debt consists of:

		September 30,				March 31,
(In thousands)		2006				2006
Revolving credit borrowings		$	288,381			$	112,009
Term loan			100,000				81,250
Money market loans			25,000				25,000
Medium-term notes			—				100,751
Senior subordinated notes			376,419				376,532
Acquisition and other notes			2,702				3,025
National Welders debt			62,144				69,060
Total Long-term debt			854,646				767,627
Less current portion of long-term debt			(257,096	)			(131,901	)
Long-term debt, excluding current portion		$	597,550			$	635,726

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

(10) INDEBTEDNESS — (Continued)

Debt Refinancing

     Effective July 25, 2006, the Company amended and restated its senior credit facility with a syndicate of lenders. Subject to compliance with certain covenants, the $1.6 billion senior unsecured credit facility (the “Credit Agreement”) permits the Company to borrow up to $966 million under a U.S. dollar revolving credit line, up to C$40 million (U.S. $34 million) under a Canadian dollar revolving credit line and up to $600 million under two or more term loans. Use of the terms loans is restricted to finance the maturity of certain debt and to finance certain contemplated acquisitions. The Company’s ability to draw on the term loans under the Credit Agreement expires on May 31, 2007. The Credit Agreement will mature on July 25, 2011.

     The Company used borrowings under the term loan provision of the Credit Agreement to finance the $100 million maturity of its 7.75% medium-term notes on September 15, 2006. As of September 30, 2006, the Company had approximately $389 million of borrowings under the credit agreement: $269 million under the U.S. dollar revolver, C$23 million (U.S. $20 million) under the Canadian dollar revolver and a $100 million under a term loan. The term loan is repayable in quarterly installments of $3.75 million between March 31, 2007 and September 30, 2010. The quarterly installments then increase to $11.875 million from September 30, 2010 to maturity on July 25, 2011. The Company also had commitments of $34 million under letters of credit with a financial institution. The U.S. dollar borrowings bear interest at LIBOR plus 75 basis points and the Canadian dollar borrowings bear interest at the Canadian Bankers’ Acceptance Rate plus 75 basis points. As of September 30, 2006, the effective interest rate on the U.S. dollar borrowings and Canadian dollar borrowings were 6.14% and 5.19%, respectively.

     As of September 30, 2006, the financial covenants in the credit agreement permitted the Company to incur $612 million of additional debt. At September 30, 2006, approximately $697 million remained unused under the U.S. dollar revolving credit line, approximately C$17 million (U.S. $14 million) remained unused under the Canadian dollar revolving credit line and $500 million remained unused under the term loans. The Credit Agreement also contains customary events of default, including nonpayment and breach of covenants. In the event of default, repayment of borrowings under the Credit Agreement may be accelerated.

     The Company’s domestic subsidiaries, exclusive of a bankruptcy remote special purpose entity (the “domestic guarantors”), guarantee the U.S. and Canadian borrowings. The Canadian borrowings are also guaranteed by 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 Agreement. The Credit Agreement provides for the release of the guarantees and collateral if the Company attains an investment grade credit rating and a similar release on all other debt.

Money Market Loan

     The Company has an agreement with a financial institution that provides access to short term advances not to exceed $25 million for a maximum term of three months. The agreement expires on April 30, 2007, 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 September 30, 2006, the Company had an outstanding advance under the agreement of $25 million for a term of 91 days bearing interest at 5.89%.

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

(10) INDEBTEDNESS — (Continued)

Senior Subordinated Notes

     At September 30, 2006, 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.

     In addition to the 2004 Notes, at September 30, 2006, the Company had $225 million of senior subordinated notes (the “2001 Notes”) outstanding with a maturity date of October 1, 2011. The 2001 Notes bear interest at a fixed annual rate of 9.125%, payable semi-annually on April 1 and October 1 of each year. Under the terms of an optional redemption provision, on October 27, 2006, the Company redeemed the $225 million notes in full at a premium of 104.563% of the principal amount (see Note 17 — Subsequent Event). In conjunction with the redemption of the Notes, the Company recognized a charge on the early extinguishment of debt of approximately $12 million ($8 million after tax) in October 2006. The charge relates to the redemption premium and the write-off of unamortized debt issuance costs. Based on current interest rates under the revolving credit facility, interest savings are estimated to be $500 thousand per month.

     The 2004 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 Notes are fully and unconditionally guaranteed jointly and severally, on a subordinated basis, by each of the wholly owned domestic guarantors under the revolving credit facilities. The stock of the Company’s domestic subsidiaries is also pledged to the note holders on a subordinated basis.

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 and are repayable in periodic installments. At September 30, 2006, acquisition and other notes totaled approximately $3 million with interest rates ranging from 5% to 8.5%.

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

(10) INDEBTEDNESS — (Continued)

Debt of the National Welders Joint Venture

     Pursuant to the requirements of FIN 46R, the Company’s Consolidated Balance Sheets at September 30, 2006 and March 31, 2006 include the financial obligations of National Welders. National Welders’ financial obligations are non-recourse to the Company, meaning that the creditors of National Welders do not have a claim on the assets of Airgas, Inc. in settlement of the joint venture’s financial obligations. The debt of National Welders consists of:

		September 30,				March 31,
(In thousands)		2006				2006
Revolving credit borrowings		$	47,875			$	51,393
Term loan A			13,517				15,042
Term loan C			—				1,622
Acquisition and other debt obligations			752				1,003
Total Long-term debt			62,144				69,060
Less current portion of long-term debt			(4,325	)			(5,589	)
Long-term debt, excluding current portion		$	57,819			$	63,471

     The National Welders Credit Agreement (the “NWS Credit Agreement”) provides for a revolving credit line of $74 million, a Term Loan A of $26 million, a Term Loan B of $21 million, and a Term Loan C of $9 million. At September 30, 2006, National Welders had borrowings under its revolving credit line of $48 million and under Term Loan A of $14 million. There were no amounts outstanding under Term loans B or C at September 30, 2006. National Welders also had $752 thousand in acquisition notes and other debt obligations.

     The revolving credit agreement matures in August 2008. Term Loan A is repayable in monthly amounts of $254 thousand with a lump-sum payment of the outstanding balance at maturity in August 2008. The variable interest rate on the revolving credit line and Term Loan A ranges from LIBOR plus 70 to 145 basis points varying with National Welders’ leverage ratio. At September 30, 2006, the effective interest rate for the revolving credit line and Term Loan A was 6.28%. The NWS Credit Agreement also contains certain covenants which, among other things, limit the ability of National Welders to incur and guarantee new indebtedness, and limit its capital expenditures, ownership changes, merger and acquisition activity, and the payment of dividends. National Welders had additional borrowing capacity under the NWS Credit Agreement of approximately $26 million at September 30, 2006.

     As of September 30, 2006, the revolving credit line and Term Loan A are secured by certain current assets, principally trade receivables and inventory, totaling $36 million, non-current assets, principally equipment, totaling $103 million, and Airgas common stock with a market value of $33 million classified as treasury stock and carried at cost of $370 thousand.

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

(10) INDEBTEDNESS — (Continued)

Aggregate Long-term Debt Maturities

     The aggregate maturities of long-term debt as of September 30, 2006 are as follows:

						National
(In thousands)		Airgas, Inc.				Welders				Total
September 30, 2007		$	252,772			$	4,325			$	257,097
March 31, 2008			15,120				—				15,120
March 31, 2009			15,000				57,819				72,819
March 31, 2010			16,230				—				16,230
March 31, 2011			31,250				—				31,250
March 31, 2012			312,130				—				312,130
Thereafter			150,000				—				150,000
		$	792,502			$	62,144			$	854,646

(11) MINORITY STOCKHOLDER NOTE PREPAYMENT

     In September 2005, National Welders entered into an agreement with its preferred stockholders under which the preferred stockholders prepaid their $21 million note receivable owed to National Welders. National Welders used the proceeds from the prepayment of the preferred stockholders’ note to repay its $21 million Term Loan B, which had been collateralized by the preferred stockholders’ note.

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

(12) STOCKHOLDERS’ EQUITY

     Changes in stockholders’ equity were as follows:

		Shares of
		Common
		Stock $0.01				Treasury
(In thousands of shares)		Par Value				Stock
Balance—March 31, 2006			78,569				1,292
Common stock issuance (a)			587				—
Balance—September 30, 2006			79,156				1,292

														Accumulated
						Capital in								Other
		Common				Excess of				Retained				Comprehensive				Treasury				Comprehensive
(In thousands)		Stock				Par Value				Earnings				Income (Loss)				Stock				Income
Balance — March 31, 2006		$	786			$	289,598			$	665,158			$	4,751			$	(13,134	)
Net earnings.											78,199												78,199
Common stock issuance (a)			6				12,357
Tax benefit from stock option exercises							2,726
Foreign currency translation adjustment															1,455								1,455
Dividends paid on common stock ($0.14 per share)											(10,884	)
Stock-based compensation (b)							6,532
Net change in fair value of interest rate swap agreements															(1,270	)							(1,270	)
Net tax expense of comprehensive income items															460								460
Balance — September 30, 2006		$	792			$	311,213			$	732,473			$	5,396			$	(13,134	)		$	78,844

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

(13) STOCK-BASED COMPENSATION

     The Company adopted SFAS 123R effective April 1, 2006 using the modified prospective method. Under the modified prospective method, stock-based compensation recognized since the date of adoption includes: (a) any share-based payments granted subsequent to the date of adoption; and (b) any portion of share-based payments granted prior to the date of adoption that vests subsequent to the date of adoption. Prior periods have not been restated.

     The Company recorded stock-based compensation in the three months ended September 30, 2006 of $3.8 million ($2.6 million after tax), or $0.03 per diluted share, and $6.5 million ($4.6 million after tax), or $0.05 per diluted share, for the six months ended September 30, 2006. The pre-tax compensation expense was included in Selling, Distribution and Administrative expenses in the Consolidated Statement of Earnings. The stock-based compensation expense related to stock options and options to purchase common stock under the Employee Stock Purchase Plan.

Prior Period Pro Forma Earnings

     The following table presents the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123R in the prior year:

		Three Months Ended				Six Months Ended
(In thousands, except per share amounts)		September 30, 2005				September 30, 2005
Net earnings, as reported		$	29,622			$	59,269
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects			(2,291	)			(4,429	)
Pro forma net earnings		$	27,331			$	54,840
Earnings per share:
Basic — as reported		$	0.39			$	0.78
Basic — pro forma		$	0.36			$	0.72
Diluted — as reported		$	0.38			$	0.76
Diluted — pro forma		$	0.35			$	0.70

2006 Equity Incentive Plan

     At the August 2006 Annual Meeting of Stockholders, the stockholders approved the 2006 Equity Incentive Plan (the “2006 Equity Plan”). The 2006 Equity Plan replaced both the Company’s 1997 Stock Option Plan for employees and the 1997 Directors’ Stock Option Plan. Outstanding stock options and stock options available for grant under the prior stock option plans were incorporated into the 2006 Equity Plan. Future grants of stock options to employees and directors will only be issued from the 2006 Equity Plan. A total of 981 thousand options were granted during the six months ended September 30, 2006. A total of 11.8 million shares of common stock are reserved for issuance under the 2006 Equity Plan upon the exercise of stock options, stock appreciation rights, restricted shares or restricted units, of which 4.5 million remained available for grant at September 30, 2006.

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

(13) STOCK-BASED COMPENSATION — (Continued)

Fair Value

     The Company utilizes the Black-Scholes option pricing model to determine the fair value of stock options under SFAS 123R, which is consistent with that used for pro forma disclosures in prior periods. The weighted-average grant date fair value of stock options granted during the six months ended September 30, 2006 and 2005 was $13.74 and $9.45, respectively. In the three and six months ended September 30, 2006, the Company recognized stock-based compensation expense associated with stock options of approximately $3.3 million and $5.2 million, respectively. The following assumptions were used by the Company in valuing the stock option grants issued in the periods presented:

		Six Months Ended
		September 30,
		2006				2005
Expected volatility			36.2	%			35.3	%
Expected dividend yield			0.80	%			0.83	%
Expected term		5.43 years				6.43 years
Risk-free interest rate			5.0	%			3.9	%

     The expected volatility was determined based on anticipated changes in the underlying stock price over the expected term using a weighting of historical and implied volatility. The expected dividend yield was based on the Company’s history and expectation of future dividend payouts. The expected term represents the period of time that the options are expected to be outstanding prior to exercise or forfeiture. The expected term was determined based on historical exercise patterns. The risk-free interest rate was based on U.S. Treasury rates in effect at the time of grant commensurate with the expected term.

Summary of Stock Option Activity

     The following table summarizes the activity of the 2006 Equity Incentive Plan during the six months ended September 30, 2006:

		Number of								Weighted-Average				Aggregate
		Stock Options				Weighted-Average				Remaining Contractual				Intrinsic Value
		(In thousands)				Exercise Price				Term (Years)				(In thousands)
Outstanding at March 31, 2006			6,994			$	16.36
Granted			981			$	36.17
Exercised			(366	)		$	18.71
Forfeited			(103	)		$	26.05
Outstanding at September 30, 2006			7,506			$	18.70				5.67			$	131,130
Exercisable at September 30, 2006			5,193			$	14.71				5.55			$	111,442

     The aggregate intrinsic value represents the difference between the Company’s closing stock price on September 30, 2006 of $36.17 and the weighted-average exercise price multiplied by the number of stock options outstanding as of that date. The total intrinsic value of stock options exercised during the six months ended September 30, 2006 was $6.6 million.

     As of September 30, 2006, $21.6 million of total unrecognized compensation expense related to non-vested stock options is expected to be recognized over a weighted-average vesting period of 2.9 years.

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

(13) STOCK-BASED COMPENSATION — (Continued)

Employee Stock Purchase Plan

     The Company has an Employee Stock Purchase Plan (the “ESPP”) to encourage and assist 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 2 million shares were available for issuance at September 30, 2006.

     Under the terms of the ESPP, eligible employees may elect to have up to 15% of their annual gross earnings withheld to purchase common stock at 85% of the market value. Employee purchases are limited in any calendar year to an aggregate market value of $25,000. Market value under the ESPP is defined as either the closing share price on the New York Stock Exchange as of an employee’s enrollment date or the closing price on the first business day of a fiscal quarter when the shares are purchased, whichever is lower. An employee may lock-in a purchase price for up to 12 months. The ESPP effectively resets at the beginning of each fiscal year at which time employees are re-enrolled in the plan and a new 12-month purchase price is established. The ESPP is designed to comply with the requirements of Sections 421 and 423 of the Internal Revenue Code. During the six months ended September 30, 2006 and 2005, the Company granted 385 thousand and 533 thousand options to purchase common stock under the ESPP, respectively.

     Compensation expense under SFAS 123 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 options granted under the ESPP was $8.31 and $5.57 for the six months ended September 30, 2006 and 2005, respectively. In the three and six months ended September 30, 2006, the Company recognized stock-based compensation expense associated with the ESPP of $542 thousand and $1.3 million, respectively. The fair value of the employees’ option to purchase shares of common stock was estimated using the Black-Scholes model. The following assumptions were used by the Company in valuing the employees’ option to purchase shares of common stock under the ESPP:

		Six Months Ended
		September 30,
		2006				2005
Expected volatility			30.8	%			27.1	%
Expected dividend yield			0.73	%			0.90	%
Expected term			2 to 8 months				3 to 12 months
Risk-free interest rate			5.0	%			3.1	%

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

(13) STOCK-BASED COMPENSATION — (Continued)

The following table summarizes the activity of the ESPP during the six months ended September 30, 2006:

		Number of								Aggregate
		Purchase Options				Weighted Average				Intrinsic Value
		(In thousands)				Exercise Price				(In thousands)
Outstanding at March 31, 2006			138			$	20.14
Granted			385			$	31.06
Exercised			(232	)		$	25.02
Forfeited			—				—
Outstanding at September 30, 2006			291			$	30.75			$	1,577

(14) 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 consolidated financial position, results of operations or liquidity.

Supply Agreements

     In September and October 2006, the Company entered into 10-year take-or-pay supply agreements with The BOC Group, Inc. (“BOC”) to purchase helium. The total annual commitment amount for these agreements is approximately $23 million. These new agreements replace the previous two helium supply agreements that were to expire in February 2007 and July 2019.

     The BOC supply agreements contain market pricing subject to certain economic indices and market analysis. The Company believes the minimum product purchases under the agreements are within the Company’s normal product purchases.

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

(15) SUMMARY BY BUSINESS SEGMENT

     As disclosed in Note (1) Basis of Presentation and Note (3) Acquisitions and Divestiture, the Company sold its subsidiary Rutland Tool in December 2005. The results of Rutland Tool were previously reflected in the Distribution business segment. For the three and six month periods ended September 30, 2005, the operating results of Rutland Tool have been reclassified in the Consolidating Statement of Earnings as discontinued operations. Information related to the Company’s continuing operations by business segment for the three and six months ended September 30, 2006 and 2005 is as follows:

		Three Months Ended																Three Months Ended
		September 30, 2006																September 30, 2005
						All																All
						Other																Other
(In thousands)		Dist.				Ops.				Elim				Combined				Dist.				Ops.				Elim				Combined
Gas and rent		$	342,976			$	124,586			$	(13,505	)		$	454,057			$	300,437			$	113,520			$	(12,979	)		$	400,978
Hardgoods			314,351				23,485				(1,146	)			336,690				284,261				18,565				(1,622	)			301,204
Total net sales			657,327				148,071				(14,651	)			790,747				584,698				132,085				(14,601	)			702,182
Cost of products sold, excluding deprec. expense			329,758				71,270				(14,651	)			386,377				297,171				65,287				(14,601	)			347,857
Selling, distribution and administrative expenses			235,616				48,308				—				283,924				216,593				43,216				—				259,809
Depreciation expense			26,721				7,431				—				34,152				23,519				6,666				—				30,185
Amortization expense			1,569				462				—				2,031				1,150				158				—				1,308
Operating income			63,663				20,600				—				84,263				46,265				16,758				—				63,023

		Six Months Ended																Six Months Ended
		September 30, 2006																September 30, 2005
						All																All
						Other																Other
(In thousands)		Dist.				Ops.				Elim				Combined				Dist.				Ops.				Elim				Combined
Gas and rent		$	674,980			$	241,769			$	(27,991	)		$	888,758			$	600,294			$	206,200			$	(26,596	)		$	779,898
Hardgoods			631,600				46,087				(2,662	)			675,025				565,922				37,376				(2,889	)			600,409
Total net sales			1,306,580				287,856				(30,653	)			1,563,783				1,166,216				243,576				(29,485	)			1,380,307
Cost of products sold, excluding deprec. expense			661,353				138,896				(30,653	)			769,596				594,129				118,076				(29,485	)			682,720
Selling, distribution and administrative expenses			465,499				94,402				—				559,901				428,677				80,981				—				509,658
Depreciation expense			52,546				14,768				—				67,314				46,332				12,963				—				59,295
Amortization expense			2,878				925				—				3,803				2,311				296				—				2,607
Operating income			124,304				38,865				—				163,169				94,767				31,260				—				126,027

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

(16) SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest and income taxes was as follows:

		Six Months Ended
		September 30,
(In thousands)		2006				2005
Interest paid		$	28,785			$	27,275
Discount on securitization			6,788				3,999
Income taxes (net of refunds)			12,953				6,759

     Cash flows, in excess of a management fee, associated with the Company’s consolidated affiliate, National Welders, are not available for the general use of the Company. Rather these cash flows are used by National Welders for operations, capital expenditures, acquisitions, and to satisfy financial obligations, which are non-recourse to the Company. The following reflects the sources and uses of cash associated with National Welders for each period presented:

		Six Months Ended
		September 30,
(In thousands)		2006				2005
Net cash provided by operating activities		$	15,258			$	8,761
Net cash used in investing activities			(7,458	)			(12,265	)
Net cash provided by (used in) financing activities			(7,334	)			3,553
Change in cash			466				49
Management fee paid to the Company, which is eliminated in consolidation		$	693			$	607

(17) SUBSEQUENT EVENT

Redemption of Senior Subordinated Notes

     On September 27, 2006, the Company announced that it elected to redeem its 9.125% senior subordinated notes due October 1, 2011 (the “Notes”). On October 27, 2006, the Company redeemed the $225 million notes in full at a premium of 104.563% of the principal amount with proceeds from the Company’s revolving credit line. In conjunction with the redemption of the Notes, the Company recognized a charge on the early extinguishment of debt of approximately $12 million ($8 million after tax, or $0.10 per diluted share) in October 2006. The charge relates to the redemption premium and the write-off of unamortized debt issuance costs. Under existing covenant restrictions, liquidity will not be significantly affected by the redemption of the notes. Based on current interest rates under the revolving credit facility, interest savings are estimated to be $500 thousand per month.

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

(18) SUPPLEMENTARY CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF SUBSIDIARY GUARANTORS

     The obligations of the Company under its senior subordinated notes (“the 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 consolidated affiliate, foreign holdings and bankruptcy remote special purpose entity (the “Non-guarantors”) are not guarantors of the Notes. The claims of the creditors of the Non-guarantors have priority over the rights of the Company to receive dividends or distributions from the Non-guarantors.

     Presented below is supplementary condensed consolidating financial information for the Company, the Guarantors and the Non-guarantors as of September 30, 2006 and March 31, 2006 and for the six months ended September 30, 2006 and 2005. As disclosed in Note (3) Acquisitions and Divestiture, the Company sold its subsidiary Rutland Tool in December 2005. Accordingly, the operating results of Rutland Tool, which was a guarantor of the Company’s senior subordinated notes, have been reclassified in the Consolidating Statements of Earnings as discontinued operations for the six months ended September 30, 2005. Intercompany receivables and payables as of March 31, 2006 have been reclassified to conform to the current period presentation.

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

Condensed Consolidating Balance Sheet
September 30, 2006

										Non-				Elimination
(In thousands)		Parent				Guarantors				Guarantors				Entries				Consolidated
ASSETS
Current Assets
Cash		$	—			$	29,927			$	1,852			$	—			$	31,779
Trade receivables, net			—				7,716				154,998				—				162,714
Intercompany receivable/(payable)			—				2,184				(2,184	)			—				—
Inventories, net			—				223,779				19,140				—				242,919
Deferred income tax asset, net			20,557				4,781				(1,048	)			—				24,290
Prepaid expenses and other current assets			8,031				23,431				3,167				—				34,629
Total current assets			28,588				291,818				175,925				—				496,331
Plant and equipment, net			16,753				1,289,216				189,672				—				1,495,641
Goodwill			—				532,424				79,122				—				611,546
Other intangible assets, net			—				29,246				3,160				—				32,406
Investments in subsidiaries			2,051,239				—				—				(2,051,239	)			—
Other non-current assets			13,399				12,168				2,922				—				28,489
Total assets		$	2,109,979			$	2,154,872			$	450,801			$	(2,051,239	)		$	2,664,413
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable, trade		$	2,089			$	118,859			$	17,160			$	—			$	138,108
Accrued expenses and other current liabilities			75,167				103,452				19,234				—				197,853
Current portion of long-term debt			251,419				1,353				4,324				—				257,096
Total current liabilities			328,675				223,664				40,718				—				593,057
Long-term debt, excluding current portion			518,400				1,381				77,769				—				597,550
Deferred income tax liability, net			4,107				296,643				43,859				—				344,609
Intercompany (receivable)/payable			217,290				(108,934	)			(108,356	)			—				—
Other non-current liabilities			4,767				22,278				8,221				—				35,266
Minority interest in affiliate			—				—				57,191				—				57,191
Commitments and contingencies
Stockholders’ Equity
Preferred stock, no par value			—				—				—				—				—
Common stock, par value $0.01 per share			792				—				—				—				792
Capital in excess of par value			311,213				898,051				71,956				(970,007	)			311,213
Retained earnings			732,473				820,856				255,578				(1,076,434	)			732,473
Accumulated other comprehensive income			5,396				933				4,235				(5,168	)			5,396
Treasury stock			(13,134	)			—				(370	)			370				(13,134	)
Total stockholders’ equity			1,036,740				1,719,840				331,399				(2,051,239	)			1,036,740
Total liabilities and stockholders’ equity		$	2,109,979			$	2,154,872			$	450,801			$	(2,051,239	)		$	2,664,413