OVERVIEW

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

                                                             Three Months Ended
                                                                December 31,
Effect on Diluted EPS                                         2012           2011
Restructuring and other related (costs) benefits, net    $    0.01         $ (0.02 )
(Costs) benefits related to unsolicited takeover attempt         -            0.01
Multi-employer pension plan withdrawal charges                   -           (0.03 )
Special items, net                                       $    0.01         $ (0.04 )

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

Company continues to expect some level of supply chain disruption at least through the end of fiscal 2013 and most likely into fiscal 2014 and anticipates that the time frame for regaining lost customers and recovering lost sales may be longer.
Enterprise Information System
The Company continued its phased, multi-year rollout of its highly-customized SAP enterprise information system during the current quarter. At this stage in the Company's phased implementation, each of its four BSCs, into which the regional company accounting and administrative functions are being consolidated upon converting to SAP, are firmly in place. Through December 2012, the Company had successfully converted its Safety telesales and hardgoods infrastructure businesses and eleven of its twelve regional distribution companies to the SAP platform. The Company expects that its remaining regional distribution company will be converted in the Company's fiscal fourth quarter ending March 31, 2013. As with the implementation of any new enterprise information system, the Company has experienced distractions and disruptions as its associates learn the new system and processes. These have not had a material impact to date on the Company's financial results, and the Company will continue to monitor these items carefully going forward.
With eleven out of twelve of its regional distribution companies operating successfully on SAP, the Company believes the implementation risk associated with the remaining business units has been significantly diminished and is now focusing more on attaining benefits. The current quarter marked an important inflection point in the Company's execution of its SAP initiative, in that it was the first quarter in which the Company realized meaningful economic benefits, including more effective management of pricing and discounting practices, as well as expansion of its telesales platform, each enabled by SAP. SAP implementation costs and depreciation expense, net of benefits realized, were $0.03 per diluted share for the current quarter, as compared to $0.10 per diluted share in the prior year quarter. SAP implementation costs and depreciation expense, net of expected benefits, are estimated to be in the range of $0.16 to $0.18 per diluted share for the year ending March 31, 2013. Fiscal 2012 included $0.34 per diluted share of SAP implementation costs and depreciation expense.
The Company previously quantified the economic benefits expected to be achieved through its implementation of SAP in three key areas: accelerated sales growth through expansion of the telesales platform, price management, and administrative and operating efficiencies. By December 2013, the Company expects these areas alone to have yielded a minimum of $75 million in annual run-rate operating income benefits. Further economic benefits are expected to be identified as the implementation progresses. New Divisional Alignment and LLC Formation In May 2011, the Company announced the alignment of its twelve regional distribution companies into four new divisions, and the consolidation of its regional company accounting and certain administrative functions into four newly created BSCs. Additionally, the Company initiated a related change in its legal entity structure on January 1, 2012 whereby the majority of Airgas' distribution businesses have merged or will merge into a single limited liability company ("LLC") of which Airgas, Inc. is the sole member. Each of the Company's twelve regional distribution companies operated (prior to conversion to SAP) or operates its own accounting and administrative functions. Enabled by the Company's conversion to a single information platform across all of its regional companies as part of the SAP implementation, the restructuring will allow Airgas to more effectively utilize its resources across regional company boundaries and form an operating structure that will help Airgas leverage the full benefits of its new SAP platform.
During the current quarter, the Company recorded a net benefit of $1.7 million related to lower than previously expected restructuring costs. As a result of the restructuring plan described above, the Company recorded a restructuring charge of $13.3 million during the three months ended June 30, 2011 for severance benefits expected to be paid under the Airgas, Inc. Severance Pay Plan to employees whose jobs were eliminated as a result of the realignment. During the three months ended December 31, 2012, the Company re-evaluated its remaining severance liability related to the realignment and, as a result of this analysis, reduced its severance liability by $3.7 million. The reduction in the severance liability was driven by fewer than expected individuals meeting the requirements to receive severance benefits. This reduction was due to both the retention of employees through relocation or acceptance of new positions, as well as former associates who chose not to remain with the Company through their designated separation dates. Offsetting the benefit from the reduction to the severance liability were additional restructuring and other related costs of $2.0 million for the three months ended December 31, 2012, primarily related to transition staffing, legal and other costs associated with the realignment and LLC formation.
The realignment is expected to be completed by the end of fiscal 2013. The Company expects to incur additional restructuring and other related costs, primarily related to transition staffing, legal and relocation costs, of approximately $2 million for the three months ending March 31, 2013. Stock Repurchase Program

On October 23, 2012, the Company announced a program to repurchase up to $600 million of its outstanding shares of common stock on the open market, with the timing and amount of any repurchases subject to the Company's evaluation of market conditions, share price and other factors. The stock repurchase program has no pre-established closing date and may be suspended or discontinued at any time.
During the three months ended December 31, 2012, the Company repurchased 2.47 million shares on the open market at an average price of $89.93. At December 31, 2012, $378 million was available for additional share repurchases under the program. The impact of share repurchases on weighted average diluted shares outstanding was largely offset by stock option exercises in the current quarter. The impact from potential repurchases under the October 2012 stock repurchase program is not reflected in the Company's forward-looking guidance for its fourth fiscal quarter ending March 31, 2013. Acquisitions and Divestitures
During the nine months ended December 31, 2012, the Company purchased fifteen businesses with aggregate historical annual sales of approximately $94 million. During the prior year period, the Company purchased six businesses with aggregate historical annual sales of approximately $73 million.
On June 1, 2012, the Company divested the assets and operations of five branch locations in western Canada. The Company realized a gain on the sale of $6.8 million ($5.5 million after tax) recorded in "Other income (expense), net" in its Consolidated Statement of Earnings. The operations were included in the Distribution business segment and contributed net sales that were deemed to be immaterial to the Company's consolidated earnings.

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

RESULTS OF OPERATIONS: THREE MONTHS ENDED DECEMBER 31, 2012 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2011

STATEMENT OF EARNINGS COMMENTARY
Results for the prior year quarter and year-to-date periods were adjusted for the retrospective application of a change implemented in the fourth quarter of the prior year in the Company's method of accounting for the small portion of its hardgoods inventory valued using the last-in, first-out ("LIFO") method to the average-cost method. The impact of this change was immaterial to the operating results for the prior year quarter and year-to-date periods. Business segment information and statement of earnings commentary related to the prior year quarter and year-to-date periods have been recast to reflect the change in accounting principle.
Although corporate operating expenses are generally allocated to each business segment based on sales dollars, the Company reports expenses (excluding depreciation) related to the implementation of its SAP system and the Company's withdrawal from various multi-employer pension plans ("MEPPs") under selling, distribution and administrative expenses in the "Other" line item in the tables below. Additionally, the Company's net restructuring and other special charges (benefits) and the legal, professional and other costs (benefits) incurred as a result of the Air Products and Chemicals, Inc. ("Air Products") unsolicited takeover attempt are not allocated to the Company's business segments. These costs (benefits) are also reflected in the "Other" line item in the tables below.
Net Sales
Net sales increased 5% to $1.21 billion for the current quarter compared to the prior year quarter, driven by organic sales growth of 4%. Acquisitions, net of a divestiture, contributed sales growth of 1% in the current quarter. Gas and rent organic sales increased 6%, while hardgoods declined 1%. Higher pricing contributed 5% to organic sales growth, more than offsetting the negative 1% impact from volume declines.
Strategic products account for approximately 40% of net sales and include safety products, bulk, medical and specialty gases, as well as carbon dioxide ("CO2") and dry ice. The Company has identified these products as strategic because it believes they have good long-term growth profiles relative to the Company's core industrial gas and welding products due to favorable end customer markets, application development, increasing environmental regulation, strong cross-selling opportunities or a combination thereof. During the current quarter, sales of strategic products grew 5% over the prior year quarter, driven largely by higher pricing in bulk, medical, and specialty gases, and by temporary surcharges and hurricane-related sales in carbon dioxide and dry ice. Strategic accounts also contributed to the increase in net sales for the current quarter. Strategic accounts were up 4% over the prior year quarter, as growth from continued new account signings and cross-selling to existing customers was tempered by broad-based slowing in general activity across most customer segments. The Company's large metal fabrication customers continued to post the strongest growth on a relative basis, though showing modest deceleration from second quarter growth rates. The strategic accounts program, which now represents more than 20% of net sales, was designed to deliver superior product and service offerings to larger, multi-location customers, and presents the Company with strong cross-selling opportunities.
In the table below, the intercompany eliminations represent sales from the All Other Operations business segment to the Distribution business segment.

                               Three Months Ended
Net Sales                         December 31,
(In thousands)                2012            2011         Increase
Distribution              $ 1,076,102     $ 1,041,729     $  34,373     3 %
All Other Operations          139,670         120,987        18,683    15 %
Intercompany eliminations      (8,064 )        (8,965 )         901
                          $ 1,207,708     $ 1,153,751     $  53,957     5 %

The Distribution business segment's principal products include industrial, medical and specialty gases, and process chemicals; cylinder and equipment rental; and hardgoods. Industrial, medical and specialty gases are distributed in cylinders and bulk containers. Rental fees are generally charged on cylinders, dewars (cryogenic liquid cylinders), bulk and micro-bulk

tanks, tube trailers and certain welding equipment. Hardgoods generally consist of welding consumables and equipment, safety products, construction supplies and maintenance, repair and operating supplies.
Distribution business segment sales increased 3% over the prior year quarter with an increase in organic sales of 2%. Incremental sales growth from acquisitions, net of a divestiture, contributed sales growth of 1% in the current quarter. Higher pricing contributed 5% to organic sales growth in the Distribution business segment, more than offsetting the negative 3% impact from volume declines. Gas and rent organic sales in the Distribution business segment increased 5%, with pricing up 6% and volumes down 1%. Hardgoods organic sales within the Distribution business segment declined 1%, with pricing up 3% and volumes down 4%. The reduction in volumes was broad-based, reflecting an overall slower pace of activity in the industrial economy. The increase in pricing was primarily driven by the broad-based price increase on gases and hardgoods effective October 1, 2012.
Contributing to the decline in the Distribution business segment's hardgoods organic sales were moderating sales growth rates in both safety products and the Company's RadnorŪ private-label brand product line. Safety product sales increased just 1% in the current quarter compared to the prior year quarter. Although this compared favorably to the 1% decline in total hardgoods organic sales for the Distribution business segment, it represented a sharp deceleration from the double digit year-over-year growth seen in fiscal 2012 and as recently as the first quarter of fiscal 2013. Sales of the Company's RadnorŪ private-label line were also up 1% for the current quarter, comparing favorably to the total hardgoods organic sales for the Distribution business segment, but also down sharply from the double digit year-over-year growth seen in fiscal 2012 and as recently as the first quarter of fiscal 2013. Deceleration of sales growth for both safety and RadnorŪ brand products was driven by general slowing in activity levels in the Company's core industrial customer base.
Revenues from the Company's rental welder business experienced a 17% increase in organic sales during the current quarter as compared to the prior year quarter due to increased rental demand, reflecting strength in outage work in the oil, gas and chemicals industry, including refineries, and in the power industry. The All Other Operations business segment consists of six business units. The primary products manufactured and/or distributed are carbon dioxide, dry ice, nitrous oxide, ammonia and refrigerant gases.
The All Other Operations business segment sales increased 15% in total and 14% on an organic basis compared to the prior year quarter, with incremental sales related to current and prior year acquisitions contributing sales growth of 1% in the current quarter. The organic sales increase was largely driven by R-22 pricing increases in the Company's refrigerants business, by both price and volume increases in its ammonia business and by temporary surcharges and hurricane-related sales in its CO2 and dry ice businesses. The Company's refrigerant gas sales have continued to benefit from increased demand ahead of a potential EPA ruling which would accelerate the phase-out of new production of R-22, the most commonly used refrigerant gas in HVAC systems. Gross Profits (Excluding Depreciation)

Gross profits (excluding depreciation) do not reflect deductions related to depreciation expense and distribution costs. The Company reflects distribution costs as an element of the line item "Selling, distribution and administrative expenses" and recognizes depreciation on all of its property, plant and equipment in the line item "Depreciation" in its Consolidated Statement of Earnings. Other companies may report certain or all of these costs as elements of their cost of products sold and, as such, the Company's gross profits (excluding depreciation) discussed below may not be comparable to those of other companies.
Consolidated gross profits (excluding depreciation) increased 7% compared to the prior year quarter, principally due to the sales mix shift to higher margin gas and rent and by margin expansion on gases and hardgoods during the current quarter. The consolidated gross profit margin (excluding depreciation) in the current quarter increased 140 basis points to 56.3% compared to 54.9% in the prior year quarter. The increase in consolidated gross profit margin (excluding depreciation) reflects margin expansion in gases and hardgoods, as well as a sales mix shift toward higher-margin gas and rent, as compared to the prior year quarter. Gas and rent represented 64.0% of the Company's sales mix in the current quarter, up from 62.5% in the prior year quarter.

                             Three Months Ended
Gross Profits (ex. Depr.)       December 31,
(In thousands)               2012          2011       Increase
Distribution              $  614,185    $ 574,137    $  40,048     7 %
All Other Operations          66,071       59,205        6,866    12 %
                          $  680,256    $ 633,342    $  46,914     7 %

The Distribution business segment's gross profits (excluding depreciation) increased 7% compared to the prior year quarter. The Distribution business segment's gross profit margin (excluding depreciation) was 57.1% versus 55.1% in the prior year quarter, an increase of 200 basis points. The increase in the Distribution business segment's gross profit margin (excluding depreciation) reflects margin expansion on gases and hardgoods, reflecting in part more effective management of pricing and discounting practices, as enabled by SAP and a sales mix shift away from lower-margin hardgoods towards higher-margin gas and rent during the current quarter. As a percentage of the Distribution business segment's sales, gas and rent increased 100 basis points to 59.7% in the current quarter, up from 58.7% in the prior year quarter.
The All Other Operations business segment's gross profits (excluding depreciation) increased 12% compared to the prior year quarter. The All Other Operations business segment's gross profit margin (excluding depreciation) decreased 160 basis points to 47.3% in the current quarter from 48.9% in the prior year quarter. The decrease in the All Other Operations business segment's gross profit margin rate (excluding depreciation) was primarily driven by rising feedstock costs in the Company's ammonia business and a sales mix shift toward its lower margin refrigerants and ammonia businesses. Operating Expenses
Selling, Distribution and Administrative ("SD&A") Expenses SD&A expenses consist of labor and overhead associated with the purchasing, marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as legal, treasury, accounting, tax and facility-related expenses. Consolidated SD&A expenses increased $29 million, or 7%, in the current quarter as compared to the prior year quarter. Contributing to the increase in SD&A expenses were $25 million of normal inflationary increases plus higher variable costs associated with growing sales, such as sales commissions, salaries, production overtime and distribution costs and approximately $4 million of incremental operating costs associated with acquired businesses, net of a divestiture. Also contributing to the increase in the Distribution business segment's SD&A expenses were staffing, training, and other setup costs associated with the expansion of the Company's Total Access telesales program and costs associated with the analysis and execution of the Company's strategic pricing initiative. As a percentage of net sales, SD&A expenses increased to 38.3% in the current quarter from 37.5% in the prior year quarter.

Three Months Ended

SD&A Expenses              December 31,
(In thousands)          2012          2011       Increase
Distribution         $  408,704    $ 379,894    $ 28,810      8 %
All Other Operations     44,866       40,002       4,864     12 %
Other                     8,718       13,154      (4,436 )
                     $  462,288    $ 433,050    $ 29,238      7 %

SD&A expenses in the Distribution and All Other Operations business segments increased 8% and 12%, respectively, compared to the prior year quarter. For both business segments, the increases in SD&A costs were driven by normal inflationary increases plus higher variable costs on sales growth, including sales commissions, salaries, production overtime and distribution costs, and incremental operating costs associated with acquired businesses of $3 million for the Distribution business segment, net of a divestiture and $1 million for the All Other Operations business segment. As a percentage of Distribution business segment net sales, SD&A expenses in the Distribution business segment increased 150 basis points to 38.0% compared to 36.5% in the prior year quarter, primarily driven by the higher variable costs of sales growth noted above, the sales mix shift toward gas and rent which carry higher operating costs than hardgoods and by moderating sales growth relative to the increase in expenses. As a percentage of All Other Operations business segment net sales, SD&A expenses in the All Other Operations business were 32.1% compared to 33.1% in the prior year quarter.
SD&A Expenses - Other
Enterprise Information System
The Company continues its phased, multi-year rollout of its highly-customized SAP enterprise information system, whereby business units implement the new system in succession. Through December 2012, the Company had successfully converted its Safety telesales and hardgoods infrastructure businesses and eleven regional distribution companies to SAP. The Company continues to prepare for the implementation of SAP at its final regional distribution company in the fiscal fourth quarter ending March 31, 2013. SAP costs incurred by the Company include pre-implementation data conversion and training costs as well as post-implementation monitoring, training and operating activities related to the . . .