Airgas Reports Fiscal 2014 First Quarter Earnings

Airgas Reports Fiscal 2014 First Quarter Earnings

  • Diluted EPS of $1.14, down 1% compared to prior year diluted EPS and up 1% over prior year adjusted diluted EPS*
  • Challenging refrigerants market following EPA ruling reduced earnings by $0.07 per diluted share compared to prior year
  • Organic sales flat compared to prior year; Distribution segment organic sales up 1% compared to prior year
  • Free cash flow* of $100 million, up 31% over prior year
  • Updated fiscal year 2014 diluted EPS guidance of $5.00 to $5.15, representing 15% to 18% year-over-year growth

RADNOR, Pa.--(BUSINESS WIRE)-- Airgas, Inc. (NYS: ARG) , one of the nation's leading suppliers of industrial, medical, and specialty gases, and related products, today reported sales and earnings results for its first quarter ended June 30, 2013, which reflected the impact of continued economic uncertainty and sluggish business conditions on its diversified customer base, as well as a greater than expected negative impact on its refrigerants business from the recent Environmental Protection Agency (EPA) ruling on R-22 production allowances. Results for the quarter also reflected the realization of SAP-related benefits, net of implementation costs incurred, as planned.

"The EPA's unexpected ruling in late March to allow for an increase in the production of R-22 this year challenged our refrigerants business to a greater extent than we had estimated, with the unusually cool spring weather across much of the country exacerbating its impact on our results. Both volumes and pricing of R-22 were pressured following the EPA ruling, and the year-over-year negative impact on our earnings this quarter was $0.07 per diluted share compared to the estimated year-over-year negative impact of $0.04 per diluted share we had assumed in our guidance," said Airgas President and Chief Executive Officer Michael L. Molinini. "Absent the incremental refrigerants impact, our results for the quarter were in-line with the mid-point of our earnings per share guidance range, with Distribution segment organic sales up 1% in what continues to be a very challenging economic environment."

    
First Quarter
FY2014  FY2013% Change
Earnings per diluted share (GAAP)$1.14$1.15-1%
Restructuring and other special charges, net-0.05
Gain on sale of businesses - (0.07)
Adjusted earnings per diluted share (non-GAAP)$1.14$1.13 1%
 

First quarter earnings per diluted share were $1.14, down 1% compared to prior year earnings per diluted share of $1.15 and up 1% over prior year adjusted earnings per diluted share* of $1.13. Results included SAP-related benefits, net of implementation costs and depreciation expense, of $0.06 per diluted share in the current year quarter compared to $0.10 of expense in the prior year quarter, as well as the year-over-year decline in earnings per diluted share related to our refrigerants business.

First quarter sales were $1.28 billion, an increase of 2% over the prior year. Organic sales in the quarter were flat compared to the prior year, with gas and rent up 2% and hardgoods down 3%. Acquisitions contributed sales growth of 2% in the quarter.

"Selling, distribution, and administrative expenses increased 4% over the prior year, with operating costs associated with acquired businesses representing more than 1% of the increase. The favorable impact of the reduction in SAP implementation costs compared to prior year was substantially offset by expenses associated with the expansion of our telesales business through Total Access, our strategic pricing initiative, and other strategic growth initiatives," said Molinini. "We're focused on effective management of expenses and have already taken additional steps to help alleviate the impact of rising costs in the second quarter. We will evaluate the need for further action on a quarterly basis, cognizant of the balance between the needs for short-term cost-containment and investing to continue to position Airgas for long-term growth."

Operating margin was 12.2%, up 10 basis points over prior year operating margin of 12.1% and down 30 basis points compared to prior year adjusted operating margin* of 12.5%, which excluded prior year net restructuring and other special charges.

"The decrease in adjusted operating margin* reflects a significant decline in operating margins in our refrigerants business as well as overall margin pressure from low organic sales growth, partially offset by the favorable impact of the increase in SAP-related benefits, net of costs," Molinini added.

Free cash flow* for the quarter was $100 million, up 31% over the prior year, and adjusted cash from operations* was $178 million, up 15% over the prior year. The increase in cash flows was driven by the lower required investment in working capital in the current quarter compared to the prior year quarter.

Return on capital* was 12.1% for the twelve months ended June 30, 2013, a decrease of 50 basis points from the prior year.

Updated Guidance

"Airgas is well-positioned for growth. We continue to be optimistic about the long-term prospects for the U.S. manufacturing and energy industries, as well as non-residential construction, and our ability to leverage our unique value proposition and unrivaled platform to capitalize on the opportunities that lie ahead," said Airgas Executive Chairman Peter McCausland. "Near-term uncertainty persists for our customers, however, and accordingly the mid-point of our fiscal 2014 guidance assumes only slight sequential improvement in daily sales volumes as the year progresses and low to mid single digit year-over-year organic sales growth rates for the remainder of the year, in part due to easing year-over-year comparisons. Given the challenging and unpredictable nature of the refrigerants market, including its impact on our first quarter results, our guidance also assumes an estimated $0.12 to $0.15 year-over-year negative impact related to R-22 pricing and volume following the EPA's ruling. Consistent with our long-standing target, we expect to achieve a minimum of $75 million in run-rate operating income benefits related to the SAP initiative by the end of calendar year 2013. Our EPS guidance assumes a contribution from SAP benefits, net of expenses, of approximately $0.47 per diluted share in fiscal 2014."

For the second quarter of fiscal year 2014, the Company expects earnings per diluted share to increase 17% to 21% from adjusted earnings per diluted share* of $1.05 in the prior year to a range of $1.23 to $1.27, which includes an estimated year-over-year increase of approximately $0.20 related to the SAP initiative, reflecting an estimated $0.11 of net benefit in the fiscal 2014 second quarter compared to $0.09 of expense in the fiscal 2013 second quarter. Guidance also reflects year-over-year negative impacts to earnings per diluted share related to variable compensation reset following a below-budget year and a challenging and unpredictable refrigerants market; and year-over-year benefits to earnings per diluted share related to the Company's fiscal 2013 share repurchase program and one additional selling day in the fiscal 2014 second quarter.

For the full fiscal year 2014, the Company expects earnings per diluted share to increase 15% to 18% from $4.35 in fiscal 2013 to a range of $5.00 to $5.15, which includes an estimated year-over-year increase of approximately $0.65 related to the SAP initiative, reflecting an estimated $0.47 of net benefit in fiscal 2014 compared to $0.18 of net expense in fiscal 2013. Guidance also reflects year-over-year negative impacts to earnings per diluted share related to variable compensation reset following a below-budget year and a challenging and unpredictable refrigerants market, and year-over-year benefits to earnings per diluted share related to the Company's fiscal 2013 share repurchase program, one additional selling day in fiscal 2014, and the incremental contribution from acquisitions closed during fiscal 2013.

The Company will conduct an earnings teleconference at 10:00 a.m. Eastern Time on Thursday, July 25. The teleconference will be available by calling (888) 857-6932 (U.S./Canada) or (719) 325-2320 (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 August 23 at http://investor.shareholder.com/arg/events.cfm. A replay of the teleconference will be available through August 1. To listen, call (888) 203-1112 (U.S./Canada) or (719) 457-0820 (International) and enter passcode 6370852.

Note that the Company has changed its reference to sales adjusted for the impact of acquisitions and divestitures from "same-store sales" to "organic sales." Growth rates presented in prior periods and the underlying calculation have not been materially affected by this change.

* See attached reconciliations and computations of non-GAAP adjusted earnings per diluted share, adjusted operating margin, adjusted cash from operations, free cash flow, and return on capital.

About Airgas, Inc.

Airgas, Inc. (NYS: 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 15,000 employees 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: our expectations as to future growth; our focus on effective management of expenses and our intent to evaluate costs on a quarterly basis; the magnitude and duration of the impact on our refrigerants business of the EPA's ruling regarding the production of R-22; our continued expectations of a minimum of $75 million in run-rate SAP-related operating income benefits by the end of calendar year 2013; our expectations of fiscal 2014 second quarter earnings per diluted share in the range of $1.23 to $1.27, reflecting an estimated $0.11 of net benefits related to SAP, and the impacts from variable compensation reset, refrigerants, and completion of the fiscal 2013 share repurchase program, and one additional selling day in the fiscal 2014 second quarter; our expectations of fiscal 2014 full year earnings per diluted share in the range of $5.00 to $5.15, reflecting an estimated $0.47 of net benefits related to SAP, and the impacts from variable compensation reset, refrigerants, completion of the share repurchase program, an additional selling day in 2014, and acquisitions closed in fiscal 2013; and expectations of long-term contribution to earnings power from the SAP initiative. 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: supply shortages of certain gases including the continued or increased disruption in our helium supply chain; impacts of the EPA ruling related to the production of R-22; the pace and manner of U.S. compliance with the Montreal Protocol; adverse changes in customer buying patterns resulting from adverse economic conditions; weakening in the operating and financial performance of our customers, which could negatively impact our sales and our ability to collect our accounts receivable; postponement of projects due to economic developments; customer acceptance of price increases; our ability to achieve anticipated acquisition synergies; the impact of operating costs associated with acquired businesses; higher than expected expenses associated with the expansion of our telesales business, our strategic pricing initiatives and other strategic growth initiatives; supply cost pressures; increased industry competition; our ability to successfully identify, consummate, and integrate acquisitions; our continued ability to access credit markets on satisfactory terms; significant fluctuations in interest rates; increases in energy costs and other operating expenses at a faster rate than our ability to increase price eroding planned cost savings; changes in customer demand resulting in the inability to meet minimum product purchases under long-term supply agreements and the inability to negotiate alternative supply arrangements; costs associated with the construction of a new CO2 plant in the Houston area; higher than expected implementation costs of the SAP system; conversion or implementation problems related to the SAP system that disrupt our business and negatively impact customer relationships; our ability to achieve anticipated benefits enabled by our conversion to the SAP system; higher than expected costs related to our Business Support Center transition; the impact of tightened credit markets on our customers; the impact of changes in tax and fiscal policies and laws; the potential for increased expenditures relating to compliance with environmental regulatory initiatives; the impact of new environmental, healthcare, tax, accounting, and other regulation; the extent and duration of current economic trends in the U.S.; the economic recovery in the U.S.; the effect of catastrophic events; political and economic uncertainties associated with current world events; and other factors described in the Company's reports, including its March 31, 2013 Form 10-K 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.

 
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except per share data)
(Unaudited)
 
 
  Three Months Ended
June 30,
2013  2012
 
Net sales$1,279,891 $1,257,256 
 
Costs and expenses:

Cost of products sold (excluding depreciation) (a)

575,543573,361

Selling, distribution and administrative expenses (a) (b)

473,475455,508

Restructuring and other special charges, net (c)

-5,712
Depreciation67,03064,367
Amortization 7,229  6,618 
Total costs and expenses 1,123,277  1,105,566 
 
Operating income156,614151,690
 
Interest expense, net(20,794)(15,750)
Other income, net (d) 113  8,363 
 
Earnings before income taxes135,933144,303
 
Income taxes (51,247) (53,505)
 
Net earnings$84,686 $90,798 
 
Net earnings per common share:
 
Basic earnings per share$1.16 $1.18 
 
Diluted earnings per share$1.14 $1.15 
 
Weighted average shares outstanding:
Basic73,32176,833
Diluted74,53678,799
 
See attached Notes.
 

 
AIRGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
 
 
    
June 30,March 31,
20132013
 
ASSETS
Cash$70,976$86,386
Trade receivables, net720,494710,740
Inventories, net485,874474,821
Deferred income tax asset, net53,29853,562
Prepaid expenses and other current assets 99,985 138,321
TOTAL CURRENT ASSETS1,430,6271,463,830
 
Plant and equipment, net2,694,4052,686,305
Goodwill1,196,9451,195,613
Other intangible assets, net219,916226,824
Other non-current assets 45,995 45,653
TOTAL ASSETS$5,587,888$5,618,225
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, trade$168,288$183,258
Accrued expenses and other current liabilities347,224374,883
Short-term debt (e)49,000-
Current portion of long-term debt 301,759 303,573
TOTAL CURRENT LIABILITIES866,271861,714
 
Long-term debt, excluding current portion (f)2,188,5722,304,245
Deferred income tax liability, net828,714825,612
Other non-current liabilities88,49789,671
 
Stockholders' equity 1,615,834 1,536,983
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$5,587,888$5,618,225
 
See attached Notes.
 

 
AIRGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
 
  Three Months Ended
June 30,
2013  2012
 
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings$84,686$90,798

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation67,03064,367
Amortization7,2296,618
Impairment (c)-1,729
Deferred income taxes3,9956,464
Gain on sales of plant and equipment(334)(398)
Gain on sale of businesses (d)-(6,822)
Stock-based compensation expense13,72812,749
 
Changes in assets and liabilities, excluding effects of business acquisitions and divestitures:
Trade receivables, net(10,032)(27,250)
Inventories, net(11,006)(24,123)
Prepaid expenses and other current assets15,7457,251
Accounts payable, trade(14,048)2,673
Accrued expenses and other current liabilities16,92514,082
Other, net (3,219) (515)
Net cash provided by operating activities 170,699  147,623 
 
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures(81,998)(82,143)
Proceeds from sales of plant, equipment and businesses3,99817,721
Business acquisitions and holdback settlements(5,143)(2,817)
Other, net (1,007)
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