Airgas Reports Fiscal 2015 Second Quarter Earnings
October 23, 2014 at 07:30 AM EDT
Airgas, Inc. (NYSE: ARG), one of the nation’s leading suppliers of industrial, medical, and specialty gases, and related products, today reported earnings per diluted share of $1.30 for its second quarter ended September 30, 2014, up 4% over the prior year adjusted diluted EPS* and consistent with the Company’s expectations.
Second quarter sales increased 6% over the prior year to $1.36 billion. Organic sales were up 4% over the prior year, with gas and rent up 3% and hardgoods up 6%. Acquisitions contributed sales growth of 2% in the quarter.
“Organic sales during the quarter came in slightly above our expectations with hardgoods leading the growth, and our earnings were solidly in the middle of our guidance range,” said Airgas President and Chief Executive Officer Michael L. Molinini. “Although sluggishness persists in some sectors, activity this quarter reaffirmed our prior belief that sectors such as mining and heavy equipment that were significant headwinds in the prior year are now stabilizing. In addition, continued strong growth in our Red-D-Arc business and consistent requests for staging of materials for energy-related construction projects indicate to us that non-residential construction activity should continue to increase as the year progresses, providing a lift to our construction and other key end markets as reflected in our guidance.”
Selling, distribution, and administrative expenses increased 5% over the prior year, with operating costs associated with acquired businesses representing approximately 2% of the increase. The balance of the increase reflects normal expense inflation, as well as expenses associated with the Company’s investments in long-term strategic growth initiatives, including its e-Business platform and continued expansion of its telesales business through Airgas Total Access.
Operating margin was 12.9%, down 30 basis points compared to the prior year and primarily reflecting a sales mix shift towards hardgoods.
Year-to-date free cash flow* was $147 million, compared to $238 million in the prior year, and adjusted cash from operations* was $356 million, compared to $397 million in the prior year. The reduction in operating cash flow represents current year increases in working capital in support of sales growth in addition to the comparison of a particularly strong prior year which benefitted from improvements in accounts receivable following SAP conversions. Free cash flow in the current year is further impacted by a year over year increase in capital expenditures reflecting investment in revenue-generating assets including two air separation plants, our e-Business platform and a new distribution center.
Return on capital* was 12.1% for the twelve months ended September 30, 2014, down 30 basis points compared to the prior year.
Since the beginning of its fiscal year, the Company has acquired 12 businesses with aggregate annual sales of more than $43 million.
“We’re squarely focused on executing on the fundamentals of our business,” said Airgas Executive Chairman Peter McCausland. “We continue to develop our sales channels through Total Access and our robust new e-Business platform, as well as strengthening our sales organization through enhancements like the new District Manager role, training, and sales force effectiveness initiatives. We’re leveraging SAP to improve the productivity of our business, and expense control is a high priority. As imbalances in supply and demand for certain products, particularly argon, have pressured our product costs and distribution expenses, we are working hard to try to recover those costs through our pricing actions.”
“Ninety-eight percent of our business is based right here in the world’s largest economy, and we believe the fundamentals for long-term growth in the U.S. economy, particularly in the manufacturing, construction and energy industries, will be favorable for years to come,” McCausland added. “Overall, we are seeing modestly strengthening business conditions and expect near-term continued improvement, despite softness in some sectors. Our guidance continues to assume acceleration in sales growth rates during the second half of the year, with the reduction in the high end of our range primarily reflecting mix pressure from outperformance in hardgoods, cost pressures related to supply disruptions, and a lower than previously expected year-over-year contribution from refrigerants.”
For the third quarter of fiscal year 2015, the Company expects earnings per diluted share in the range of $1.20 to $1.25, representing an increase of 9% to 14% over prior year earnings per diluted share of $1.10 and an increase of 2% to 6% over prior year adjusted earnings per diluted share* of $1.18. Third quarter guidance assumes a year-over-year organic sales growth rate in the mid single digits. For the full fiscal year 2015, the Company expects earnings per diluted share in the range of $5.00 to $5.10, representing an increase of 7% to 9% over prior year earnings per diluted share of $4.68 and an increase of 6% to 8% over prior year adjusted earnings per diluted share* of $4.72. Full year guidance includes a negative $0.09 to $0.11 per diluted share year-over-year impact from variable compensation reset following a below-budget year in fiscal 2014.
The Company’s previous fiscal 2015 guidance range for earnings per diluted share was $5.00 to $5.20, an increase of 6% to 10% over fiscal 2014 adjusted earnings per diluted share*.
The Company will conduct an earnings teleconference at 10:00 a.m. Eastern Time on Thursday, October 23. The teleconference will be available by calling 800-310-8725 (U.S./Canada) or 719-325-4788 (International). The presentation materials (this press release, slides to be presented during the Company’s teleconference and information about how to access a live and on demand webcast of the teleconference) are available in the “Investor Relations” section of the Company’s website at www.airgas.com. A webcast of the teleconference will be available live and on demand through November 20 at http://investor.shareholder.com/arg/events.cfm. A replay of the teleconference will be available through October 30. To listen, call 888-203-1112 (U.S./Canada) or 719-457-0820 (International) and enter passcode 1602977.
* See attached reconciliations and computations of non-GAAP adjusted earnings per diluted share, adjusted effective tax rate, adjusted cash from operations, free cash flow, and return on capital financial measures.
About Airgas, Inc.
Airgas, Inc. (NYSE: ARG), through its subsidiaries, is one of the nation’s leading suppliers of industrial, medical and specialty gases, and hardgoods, such as welding equipment and related products. Airgas is a leading U.S. producer of atmospheric gases with 16 air separation plants, a leading producer of carbon dioxide, dry ice, and nitrous oxide, one of the largest U.S. suppliers of safety products, and a leading U.S. supplier of refrigerants, ammonia products, and process chemicals. More than 16,000 associates work in approximately 1,100 locations, including branches, retail stores, gas fill plants, specialty gas labs, production facilities and distribution centers. Airgas also markets its products and services through e-Business, catalog and telesales channels. Its national scale and strong local presence offer a competitive edge to its diversified customer base. For more information, please visit www.airgas.com.
This press release contains statements that are forward looking, as that term is defined by the Private Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations and releases. These statements include, but are not limited to: the Company’s expectations regarding its fiscal 2015 third quarter and full fiscal year 2015 organic sales growth and earnings per diluted share, and the Company’s intent to continue to invest in its strategic initiatives to promote long-term growth. Forward-looking statements also include any statement that is not based on historical fact, including statements containing the words "believes," "may," "plans," "will," "could," "should," "estimates," "continues," "anticipates," "intends," "expects," and similar expressions. We intend that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors and should not be regarded as a representation by us or any other person that the results expressed therein will be achieved. Airgas assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. Important factors that could cause actual results to differ materially from those contained in any forward-looking statement include: adverse changes in customer buying patterns or weakening in the operating and financial performance of our customers, any of which could negatively impact our sales and our ability to collect our accounts receivable; postponement of projects due to economic conditions; customer acceptance of price increases; increases in energy costs and other operating expenses at a faster rate than our ability to increase prices; changes in customer demand resulting in our inability to meet minimum product purchase requirements under long-term supply agreements and the inability to negotiate alternative supply arrangements; supply cost pressures; shortages and/or disruptions in the supply chain of certain gases; EPA rulings and the pace and manner of U.S. compliance with the Montreal Protocol as they relate to the production and import of Refrigerant-22 (also known as HCFC-22 or R-22); higher than expected expenses associated with the expansion of our telesales business, e-Business platform, the adjustment of our regional management structures, our strategic pricing initiatives and other strategic growth initiatives; increased industry competition; our ability to successfully identify, consummate, and integrate acquisitions; our ability to achieve anticipated acquisition synergies; operating costs associated with acquired businesses; our continued ability to access credit markets on satisfactory terms; significant fluctuations in interest rates; the impact of changes in credit market conditions on our customers; our ability to effectively leverage our new SAP system to improve the operating and financial performance of our business; changes in tax and fiscal policies and laws; increased expenditures relating to compliance with environmental and other regulatory initiatives; the impact of new environmental, healthcare, tax, accounting, and other regulations; the extent and duration of sluggish conditions in the U.S. economy, including in particular, the U.S. industrial economy; the economic recovery in the U.S.; catastrophic events and/or severe weather conditions; political and economic uncertainties associated with current world events; and other factors described in the Company's reports, including its March 31, 2014 Form 10-K, subsequent Form 10-Q, and other forms filed by the Company with the SEC.
Consolidated statements of earnings, condensed consolidated balance sheets, consolidated statements of cash flows, and reconciliations and computations of non-GAAP financial measures follow below.
Reconciliations of Non-GAAP Financial Measures (Unaudited)
Adjusted Earnings per Diluted Share and Earnings Guidance
Reconciliations of adjusted earnings per diluted share and earnings guidance:
The Company believes its adjusted earnings per diluted share financial measure provides investors meaningful insight into its earnings performance without the impact of benefits from the changes in state income tax rates and law, and the loss on the extinguishment of debt. Non-GAAP financial measures should be read in conjunction with GAAP financial measures, as non-GAAP financial measures are merely a supplement to, and not a replacement for, GAAP financial measures. It should also be noted that the Company’s adjusted earnings per diluted share financial measure may be different from the adjusted earnings per diluted share financial measures provided by other companies.
Adjusted Effective Tax Rate
Reconciliations of adjusted effective tax rate:
The Company believes its adjusted effective tax rate financial measure helps investors assess its effective tax rate without the impact of a benefit related to a change in a state income tax law. Non-GAAP financial measures should be read in conjunction with GAAP financial measures, as non-GAAP financial measures are merely a supplement to, and not a replacement for, GAAP financial measures. It should also be noted that the Company’s adjusted effective tax rate financial measure may be different from the adjusted effective tax rate financial measures provided by other companies.
Return on Capital
Reconciliations and computations of return on capital:
The Company believes its return on capital financial measure helps investors assess how effectively it uses the capital invested in its operations. Non-GAAP financial measures should be read in conjunction with GAAP financial measures, as non-GAAP financial measures are merely a supplement to, and not a replacement for, GAAP financial measures. It should be noted as well that the Company’s return on capital financial measure may be different from the return on capital financial measures provided by other companies.
Adjusted Cash from Operations, Adjusted Capital Expenditures, and Free Cash Flow
Reconciliations and computations of adjusted cash from operations, adjusted capital expenditures, and free cash flow:
The Company believes its adjusted cash from operations, adjusted capital expenditures, and free cash flow financial measures provide investors meaningful insight into its ability to generate cash from operations, which is available for servicing debt obligations and for the execution of its business strategies, including acquisitions, the prepayment of debt, the payment of dividends, or to support other investing and financing activities. The Company’s free cash flow financial measure has limitations and does not represent the residual cash flow available for discretionary expenditures. Certain non-discretionary expenditures such as payments on maturing debt obligations are excluded from the Company’s computation of its free cash flow financial measure. Non-GAAP financial measures should be read in conjunction with GAAP financial measures, as non-GAAP financial measures are merely a supplement to, and not a replacement for, GAAP financial measures. It should also be noted that the Company’s adjusted cash from operations, adjusted capital expenditures, and free cash flow financial measures may be different from the adjusted cash from operations, adjusted capital expenditures, and free cash flow financial measures provided by other companies.