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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended: December 31, 2003

Commission file number: 1-9344

AIRGAS, INC.

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 [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934). Yes [X] No [  ]

Common Stock outstanding at February 9, 2004: 73,270,664 shares

AIRGAS, INC.

FORM 10-Q
December 31, 2003

INDEX

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

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

See accompanying notes to consolidated financial statements.

3

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

See accompanying notes to consolidated financial statements.

4

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

See accompanying notes to consolidated financial statements.

5

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”). Intercompany accounts and transactions 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, 2003.

     The consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature except for the special charges, which are discussed in these notes to the consolidated financial statements. The interim operating results are not necessarily indicative of the results to be expected for an entire year.

     Certain reclassifications have been made to prior period financial statements to conform to the current presentation.

(2) NEW ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES

FASB Financial Interpretation No. 46

     In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation of Accounting Research Bulletin No. 51 (“ARB 51”) entitled, Consolidation of Variable Interest Entities (“FIN 46”). The interpretation was effective for the first interim period beginning after June 15, 2003. However, as a result of implementation issues, in December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (“FIN 46R”), which is effective as of the end of the first reporting period ending after March 15, 2004, with early adoption permitted.

     FIN 46R addresses consolidation by a business enterprise of variable interest entities. Variable interest entities are defined as corporations, partnerships, trusts, or any other legal structure used for business purposes, and by design, the holders of equity instruments in those entities lack one of the characteristics of a financial controlling interest. FIN 46R changes previous accounting practice by introducing the concept of a “Primary Beneficiary” and requiring variable interest entities to be consolidated by the party deemed to be the Primary Beneficiary (i.e., the party that is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both). Under previous accounting practice, entities generally were not consolidated unless the entity was controlled through voting interests.

     Since October 1999, the Company has leased certain real estate and equipment, under a sale-leaseback arrangement from a grantor trust (the “Trust”) established by a commercial bank. The rental payments are based on LIBOR plus an applicable margin and the amount of proceeds received by the Company from the real estate and equipment sold to the Trust. The non-cancelable lease obligation of the real estate and equipment leases totaled $41 million at December 31, 2003 and $42 million at March 31, 2003. The leases expire in October 2004 and the Company has guaranteed a residual value of the real estate and equipment at the end of the lease terms of approximately $30 million. Prior to July 1, 2003, the Trust was not consolidated for financial reporting purposes.

6

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

(2) NEW ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES – (continued)

     The Company determined the Trust to be a variable interest entity as defined by FIN 46. In addition, the Company is the Primary Beneficiary of the sale-leaseback arrangement. Therefore, effective July 1, 2003, the Company elected to early adopt FIN 46 with respect to the Trust, which required the Trust to be consolidated. As permitted by FIN 46, the Company has applied the interpretation prospectively from the date of adoption. The consolidation of the Trust resulted in the Company recording assets of $29 million and debt of $42 million, while eliminating a deferred gain of $13 million that was previously carried on the balance sheet as a long-term liability. The consolidation of the Trust resulted in the Company recognizing an additional $600 thousand in interest expense and $600 thousand in depreciation expense in the six months ended December 31, 2003, which had previously been recognized as rent expense to the Trust. The cumulative effect of the accounting change was not material.

     Since June 1996, the Company has participated in a joint venture with National Welders Supply Company, Inc. (“NWS”), a producer and distributor of industrial gases based in Charlotte, North Carolina. NWS owns and operates 46 branch stores, two acetylene plants, a specialty gas lab, and three air separation plants that produce all of the joint venture’s oxygen and nitrogen and approximately 50% of its argon requirements. The joint venture also distributes medical and specialty gases, processed chemicals and welding equipment and supplies.

     Ownership interests in NWS consist of voting common stock and voting redeemable preferred stock with a 5% annual dividend. The Company owns 100% of the joint venture’s common stock, which represents a 50% voting interest. A family holds approximately 3.2 million shares of redeemable preferred stock and controls the balance of the voting interest. Between June 30, 2006 and June 30, 2009, the preferred stockholders have the option to redeem their preferred shares for cash at a price of $17.78 per share or to tender them to the joint venture in exchange for approximately 2.3 million shares of Airgas common stock. If Airgas’ common stock has a market value of $24.45 per share, the common stock and cash redemption options are equivalent. If the preferred stockholders elect to exchange their shares for Airgas common stock, the Company is obligated to provide the necessary shares to the joint venture by capital contribution or other means the Company reasonably deems appropriate. The Company may purchase shares on the open market or may issue new or treasury shares to meet its exchange obligation. Following such redemption or exchange, the Company would be the sole owner of National Welders and the net earnings available to the Company (i.e., the common stockholder) would be expected to increase by the amount of the annual preferred dividend, or $2.9 million per year. Following a cash redemption, the additional income related to the preferred dividend savings would be partially offset by higher interest expense on the additional debt incurred to finance the redemption. The preferred stockholders may also elect to retain their interest in the preferred stock beyond June 30, 2009. The Company does not hold a majority voting interest in the joint venture and, therefore, historically has used the equity method to account for its interest in the joint venture.

     The Company has determined that NWS meets the definition of a “Variable Interest Entity” under FIN 46R and that the Company is the Primary Beneficiary of the joint venture. Therefore, effective December 31, 2003, the Company elected to adopt FIN 46R, as it applies to the joint venture, and consolidated NWS. As permitted by FIN 46R, the Company applied the interpretation prospectively from the date of adoption. Therefore, at December 31, 2003, the consolidation of NWS only affects the balance sheet. There was no cumulative effect adjustment or impact on cash flows as a result of the consolidation. The consolidation had the effect of eliminating the Company’s $62 million investment in NWS and recording the joint venture’s assets, liabilities and a corresponding minority interest liability. The assets and liabilities of NWS included goodwill of $56 million and debt of $62 million, which is non-recourse to the Company. The summarized net impact of the consolidation of NWS at December 31, 2003 is reflected in the table below.

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

(2) NEW ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES – (continued)

          Summarized net impact of the consolidation of NWS at December 31, 2003:

     Beginning January 1, 2004, NWS’ operating results will no longer be reflected as “Equity in Earnings of Unconsolidated Affiliates.” Rather, the operating results will be reflected broadly across the income statement with minority interest expense representing the after-tax portion of the operating results applicable to the preferred stockholders. NWS’ fiscal year-end is March 31^st. In fiscal 2003, NWS had net sales of $142 million, a gross margin of 57%, and operating income of $12 million. The joint venture is structured such that the Company receives the residual net income available to the common stockholder, which is net of the 5% preferred stock dividend (minority interest expense). Since the allocation of the joint venture’s net earnings was unaffected by the adoption of FIN 46R, the consolidation of NWS did not impact the Company’s net earnings. The Company’s share of the joint venture’s net earnings in fiscal 2003 was $2.7 million. In addition, the Company’s share of the joint venture’s net earnings were $2.7 million and $4.4 million in the three and nine month periods ended December 31, 2003, respectively.

SFAS 143

     In July 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations. SFAS 143 requires the recognition of a liability for an asset retirement obligation in the period in which it is incurred. A retirement obligation is defined as one in which a legal obligation exists in the future resulting from existing laws, statutes or contracts. The Company adopted SFAS 143 on April 1, 2003, as required. The adoption of SFAS 143 did not have a material impact on its results of operations, financial position or liquidity.

SFAS 149

     In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 requires, among other things, that contracts with comparable characteristics be accounted for similarly and clarifies the circumstances under which a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. The Company adopted SFAS 149 on July 1, 2003, as required. The adoption of SFAS 149 did not have a material impact on its results of operations, financial position or liquidity.

8

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

(2) NEW ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES – (continued)

SFAS 150

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity in the statement of financial position. SFAS 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those financial instruments were previously classified as equity. The Company adopted SFAS 150 on July 1, 2003, as required. The adoption of SFAS 150 did not have a material impact on its results of operations, financial position or liquidity.

(3) ACQUISITIONS & DIVESTITURES

(a) Acquisitions

     The Company acquired a manufacturer and distributor of dry ice in April 2003, a distributor of safety products in May 2003 and another distributor of safety products in November 2003. The dry ice business generates annual revenues of approximately $2 million and is included in the Gas Operations segment. The dry ice business was acquired to expand the Company’s market reach into certain southern U.S. states. The safety product distributors generate combined annual revenues of approximately $14 million and are included in the Distribution segment. The safety products distributors were acquired to complement the Company’s existing packaged gas distribution operations in the western U.S. The acquired businesses are not expected to materially impact operating income during fiscal 2004.

     During the nine months ended December 31, 2003, the Company paid cash of $6.9 million for businesses acquired and certain acquisition holdback settlements related to prior acquisitions. Costs in excess of net assets acquired (“goodwill”) related to the acquisitions totaled approximately $900 thousand. The final purchase price allocation to net assets, identified intangibles and goodwill acquired has not been completed pending the performance of asset appraisals and intangible valuations. The Company does not expect that the final purchase price allocation will have a material impact on the Company’s financial position.

(b) Divestitures

     In May 2002, the Company completed the sale of Kendeco, Inc. (“Kendeco”) for cash proceeds of $3.2 million. Kendeco’s fiscal 2003 operating results were insignificant. During the quarter ended June 30, 2002, the Company also resolved an indemnity claim related to a prior period divestiture. Other income (expense), net, for the nine months ended December 31, 2002 included a $241 thousand net loss from these first quarter divestiture-related transactions.

(4) SUBSEQUENT EVENT

     On January 27, 2004, the Company announced that it signed a non-binding letter of intent to acquire most of the assets of the U.S. packaged gas business of BOC Group, Inc. in a transaction valued up to $200 million. The transaction is expected to close in mid calendar year 2004, subject to customary closing conditions and applicable regulatory approvals. If the acquisition is consummated, the acquisition would include retail stores, warehouses, fill plants and other operations involved in distributing packaged gases and welding equipment. The business to be acquired generated approximately $240 million in revenues in its most recent fiscal year. Approximately 65% of the revenues have been from gas sales and cylinder rent, with the remainder from welding hardgoods and supplies. In February 2004, the Company obtained an amendment to its credit agreement that, among other things, permits the Company to invest up to $275 million in acquisitions during fiscal 2005.

9

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

(5) SPECIAL CHARGES

     In June 2002, the Company recorded special charges of $2.7 million consisting of a restructuring charge related to the integration of the business acquired from Air Products and Chemicals, Inc. (“Air Products”) during the fourth quarter of fiscal 2002 and costs related to the consolidation of certain hardgoods procurement functions. The special charges include facility exit costs associated with the closure of certain facilities and employee severance. The facilities exited and the affected employees were part of the Company’s existing operations prior to the acquisition of the Air Products business.

(6) 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. 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 warrants.

     The table below reconciles basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three and nine months ended December 31, 2003 and 2002: