Airgas Reports Strong Second Quarter EPS of $0.60 after $0.03 National Welders Charge and $0.04 Acquisition Integration Expense
October 24, 2007 at 16:05 PM EDT
Airgas, Inc. (NYSE:ARG), the largest U.S. distributor of industrial, medical, and specialty gases, and welding, safety, and related products, today reported strong growth in sales, operating income, and earnings for its second quarter ended September 30, 2007.
Quarterly net earnings increased 28% to $51 million, or $0.60 per diluted share, compared to $40 million, or $0.49 per diluted share, in the prior year. The current year quarter includes a one-time non-cash charge of $0.03 per diluted share related to the previously announced conversion of National Welders Supply Company from a joint venture to a wholly owned subsidiary, and $0.04 per diluted share of integration expense primarily associated with the acquisition of Linde’s U.S. packaged gas business. These charges reduced the year-over-year quarterly net earnings growth by $5 million, or 12%.
Second quarter sales grew 27% over the prior year to $1 billion. Acquisitions contributed 21% to the sales growth, with a full quarter of the Linde packaged gas acquisition accounting for approximately half of that increase. Total same-store sales increased 6%, with hardgoods up 7% and gas and rent up 5% from the prior year quarter.
“This was another excellent quarter for Airgas with solid internal growth, plus the Linde and other acquisitions contributing to our top line. Our integration of the Linde packaged gas business is progressing well and on schedule. Non-residential construction and energy markets have sustained their strong performance, as have our strategic products,” said Airgas Chairman and Chief Executive Officer Peter McCausland. “These revenue gains and our continued focus on operating efficiencies have helped us expand operating margins by 80 basis points over last year, to 11.5%, and Return on Capital* was up 40 basis points, to 13.2%, even with the acquisition integration expense. Our strong cash flow is also encouraging.”
Airgas expects to earn $0.63 to $0.65 per diluted share in the third quarter, including $0.01 per share of integration expense from the Linde packaged gas acquisition. The Company increased its full-year guidance to $2.55 to $2.60 per diluted share, including integration expenses from the Linde packaged gas acquisition, and the $0.03 one-time non-cash charge from the National Welders transaction. The previously communicated guidance was $2.49 to $2.57 per diluted share for the full year.
The Company will conduct an earnings teleconference at 11:00 a.m. Eastern Time on Thursday, October 25. The teleconference will be available by calling (800) 565-5442. 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 Information” section under the “Company Information” heading on the Company’s Internet site at www.airgas.com. A webcast of the teleconference will be available live and on demand through November 23 at http://www.shareholder.com/arg/medialist.cfm. A replay of the teleconference will be available through November 1. To listen, call (888) 203-1112 and enter passcode 9116664.
* See attached reconciliation of Return on Capital non-GAAP financial measure.
About Airgas, Inc.
Airgas, Inc. (NYSE:ARG), through its subsidiaries, is the largest U.S. distributor of industrial, medical, and specialty gases, and hardgoods, such as welding equipment and supplies. Airgas is also one of the largest U.S. distributors of safety products, the largest U.S. producer of nitrous oxide and dry ice, the largest liquid carbon dioxide producer in the Southeast, and a leading distributor of process chemicals, refrigerants, and ammonia products. More than 14,000 employees work in over 1,100 locations, including branches, retail stores, gas fill plants, specialty gas labs, production facilities and distribution centers. Airgas also distributes its products and services through eBusiness, 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 may contain statements that are forward looking, as that term is defined by the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules, regulations and releases. These statements include, but are not limited to, statements regarding: our integration of the Linde packaged gas business; expectations for third quarter earnings per diluted share of $0.63 to $0.65, including $0.01 per share of integration expense related to the Linde packaged gas acquisition; and expectations for fiscal 2008 earnings per diluted share of $2.55 to $2.60, including integration expenses associated with the Linde packaged gas acquisition and the $0.03 per share charge from the National Welders transaction. 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. Important factors that could cause actual results to differ materially from those contained in any forward-looking statement include: our ability to continue to successfully integrate the former Linde U.S. packaged gas business, including retention of both customers and employees; supply availability and cost pressures; increased industry competition; customer acceptance of price increases; a disruption to our business from integration issues associated with acquisitions; an economic downturn; adverse changes in customer buying patterns; significant fluctuations in interest rates; increases in energy costs and other operating expenses; the effect of hurricanes and other catastrophic events; political and economic uncertainties associated with current world events; and other factors described in the Company’s reports, including its Form 10-K dated March 31, 2007, Form 10-Q dated June 30, 2007, and other reports filed by the Company with the Securities and Exchange Commission.
Consolidated statements of earnings, condensed consolidated balance sheets, consolidated statements of cash flows, and a reconciliation of non-GAAP financial measures follow.
(a) On June 30, 2007, Airgas (the “Company”) completed the acquisition of most of the U.S. packaged gas business of Linde A.G. for $310 million in cash. The acquisition involved 130 locations in 18 states, including branches, warehouses, packaged gas fill plants, and other operations involved in distributing packaged industrial and specialty gases and related equipment. For the calendar year ended December 2006, the business generated $346 million in revenue.
(b) The Company participates in a securitization agreement with three commercial banks to sell up to $285 million of qualified trade receivables. Net proceeds from the securitization were used to reduce borrowings under the Company’s revolving credit facilities. The amount of outstanding receivables sold under the agreement was $285 million and $264 million at September 30, 2007 and March 31, 2007, respectively.
(c) Pursuant to a definitive agreement reached by the Company with the preferred stockholders of the National Welders joint venture on July 3, 2007, the Company issued 2.471 million shares of Airgas common stock to the preferred stockholders in exchange for all 3.2 million preferred shares of National Welders (the “NWS Exchange Transaction”). Upon the exchange, National Welders, a consolidated joint venture, became a wholly owned subsidiary of Airgas. In the quarter ended September 30, 2007, the Company recognized a one-time after-tax charge of $2.5 million, or $0.03 per diluted share, as a result of the NWS Exchange Transaction. The net after-tax charge was reflected in the Consolidated Statement of Earnings as “Minority interest in earnings of consolidated affiliate.”
(d) The tables below present the computation of basic and diluted earnings per share:
(1) Prior to the July 3, 2007 NWS Exchange Transaction (see Note (c)), the preferred stockholders of National Welders had the option to exchange their 3.2 million preferred shares of National Welders either for cash at a price of $17.78 per share or for approximately 2.3 million shares of Airgas common stock. If Airgas common stock had a market value of $24.45 per share or greater, conversion of the preferred stock was assumed because it provided greater value to the preferred stockholders. Based on the assumed conversion of the preferred stock to Airgas common stock, the 2.3 million shares were included in the diluted shares outstanding.
The National Welders preferred stockholders earned a 5% dividend, recognized as “Minority interest in earnings of consolidated affiliate.” Upon the conversion of the preferred stock to Airgas common stock, the dividend would no longer be paid to the preferred stockholders, resulting in additional net earnings for Airgas. For the periods in which the conversion was assumed, the 5% preferred stock dividend was added back to net earnings in the diluted earnings per share computation.
For periods prior to the NWS Exchange Transaction, the earnings of National Welders for tax purposes were treated as a deemed dividend to Airgas, net of an 80% dividend exclusion. Upon the conversion of National Welders preferred stock to Airgas common stock, National Welders would become a wholly owned subsidiary of Airgas. As a wholly owned subsidiary, the net earnings of National Welders would not be subject to additional tax at the Airgas level. For the periods in which the conversion was assumed, the additional tax was added back to net earnings in the diluted earnings per share computation.
(2) Upon the July 3, 2007 conversion of National Welders preferred stock, the issued shares of Airgas common stock were reflected as outstanding shares for the basic and diluted earnings per share computation for the three month period ended September 30, 2007. The diluted earnings per share computation for the six month period ended September 30, 2007 includes the effect of the items described in note (1) above, of which the conversion shares have been weighted to reflect the impact of the exchange transaction.
(e) Unaudited business segment information for the Company’s Distribution and All Other Operations segments is shown below:
Reconciliation of Non-GAAP Financial Measure (Unaudited)
Return on Capital:
Reconciliation and computation of return on capital:
The Company believes this return on capital computation helps investors assess how effectively the Company uses the capital invested in its operations. Our management uses return on capital as a metric for determining employee compensation. Non-GAAP numbers should be read in conjunction with the GAAP financial measures, as non-GAAP metrics are merely a supplement to, and not a replacement for, GAAP financial measures. It should be noted as well that our non-GAAP information may be different from the non-GAAP information provided by other companies.