Airgas Inc. (ARG) posted adjusted earnings of $1.14 a share in first-quarter fiscal 2014 (ended Jun 30, 2013), up 1% from $1.13 earned in the year-ago quarter. The results however missed the Zacks Consensus Estimate by a penny.
The results came in at the lower end of management's guidance of $1.14–$1.20 a share, due to the negative impact on the refrigerants business from the Environmental Protection Agency (EPA) ruling. Including restructuring charges and gain on sale of businesses, earnings per share in the quarter were $1.14 compared with $1.15 in the year-ago quarter. The decline was due to sluggish business conditions and overall economic uncertainty, partly compensated by the realization of SAP-related benefits.
Revenues
Revenues in the reported quarter grew 2% year over year to $1,279.9 million, beating the Zacks Consensus Estimate of $1,271 million. Acquisitions aided sales growth by 2% while organic growth was flat. Gas and rent increased 2%, offset by a 3% decline in hardgoods.
Cost and Margins
Costs of goods sold increased marginally year over year to $575 million in the quarter. Gross profit increased 3% to $704 million from $684 million in the year-ago quarter. Consequently, gross margin expanded 60 basis points (bps) to 55%.
Selling, distribution and administrative expenses amounted to $473 million, up 4% year over year. Adjusted operating income was $156.6 million in the quarter versus $157 million in the year-ago quarter. Operating margin contracted 30 bps year over year to 12.2% due to a significant decline in operating margins in the refrigerants business as well as overall margin pressure from low organic sales growth, partly offset by benefits from SAP.
Segment Performance
Distribution: Sales increased 2.5% to $1,141 million in the reported quarter compared with $1,112.6 million in the prior year quarter. Sales of gases and rent increased 5% year over year to $672 million; while hardgoods sales decreased 1% to $468.5 million.
All Other Operations: Total sales declined 4% to $147 million from $153 million in the prior-year quarter. Sales of gases and rent decreased 4% year over year to $145.8 million. Sales of hardgoods fell 17.9% to $1.4 million.
Financial Position
Cash, as of Jun 30, 2013, decreased to $71 million from $86.4 million as of Mar 31, 2013. Free cash flow during the quarter went up 31% year over year to $99.7 million from $76 million. Cash flow from operations for the first quarter was $170.6 million versus $147 million in the prior year.
Long-term debt decreased to $2.5 billion at Jun 30, 2013 from $2.6 billion at Mar 31, 2013. Debt-to-capitalization ratio contracted 400 bps to 60% at the same date, from 64% at Mar 31, 2013.
Outlook
Management expects adjusted earnings per share (excluding one-time items) for the second quarter of fiscal 2014 to increase 17–21% year over year to $1.23–$1.27. For fiscal 2014, Airgas revised earnings in the new range of $5.00 to $5.15 from its previous band of $5.00 to $5.35, reflecting 15% to 18% annual growth.
Airgas’ fiscal 2014 guidance is based on modest sequential improvement in daily sales volumes and low-to-mid single-digit year-over-year organic sales growth rates. Strong cash flow continues to be a benchmark for Airgas’ business model.
Airgas is well positioned for growth on its strategic initiatives such as sales and marketing alignment with customers, SAP and the associated benefits, total access and eBusiness; as well as renewed focus on day-to-day selling and customer service.
Airgas is also optimistic on the long-term prospects for the U.S. manufacturing and energy industries, as well as nonresidential construction and unique value proposition and a less challenging platform.
Pa.-based Airgas, through its subsidiaries, distributes industrial, medical and specialty gases as a well as hardgoods in the U.S. The company also markets its products and services through e-business, catalog and telesales channels.
Airgas currently retains a Zacks Rank #4 (Sell). Other stocks with favorable Zacks Rank in the diversified chemical industry are Northern Technologies International Corp. (NTIC), Cabot Corporation (CBT) and Cytec Industries Inc. (CYT). While Northern Technologies holds a Zacks Rank #1 (Strong Buy), Cabot Corporation and Cytec Industries carry a Zacks Rank #2 (Buy).
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