Airgas Inc. (ARG) posted adjusted earnings of $1.25 a share in second-quarter fiscal 2014 (ended Sep 30, 2013), up 19% from $1.05 earnings in the year-ago quarter. The results marginally surpassed the Zacks Consensus Estimate of $1.23.
The results confirm the center of management's guidance of $1.23–$1.27 per share. Despite sluggish business conditions and continued economic uncertainty, the year-over-year rise in earnings was driven by the realization of SAP-related benefits, a favorable impact from one additional selling day and favorable change in state income tax law.
Including an income tax benefit of 2 cents per share, earnings came in at $1.27 per share in the reported quarter. Earnings per share in the prior-year quarter were $1.03, which included restructuring and other special charges of 2 cents a share.
Revenues
Revenues in the reported quarter grew 4% year over year to $1.28 billion, beating the Zacks Consensus Estimate of $1.27 billion. Acquisitions aided sales growth by 2%, with organic sales up 2% and a 4% increase in gas and rent, but was partially offset by a 2% decline in hardgoods.
Cost and Margins
Costs of goods sold increased 1.2% year over year to $563 million. Gross profit rose 6.8% to $719 million from $673 million in the year-ago quarter. Consequently, gross margin expanded 130 basis points (bps) to 56%.
Selling, distribution and administrative expenses amounted to $474 million, up 4% year over year. Adjusted operating income grew 16.2% to $168.8 million versus $145.2 million in the year-ago quarter.
Operating margin expanded 140 bps year over year to 13.2% due to a reduction in SAP implementation costs, sales mix shift toward gas and rent and the influence of one additional selling day. Margins were also weighed down following the Environmental Protection Agency’s (EPA) unexpected ruling on R-22 production allowances.
Segment Performance
Distribution: Sales increased 5.2% to $1,140 million compared with $1,083 million in the prior-year quarter. Sales of gas and rent increased 7.7% year over year to $681 million. Hardgoods sales also climbed 1.7% year over year to $458.2 million.
All Other Operations: Total sales declined 3.6% to $150 million from $156 million in the year-ago quarter. Sales of gas and rent decreased 3.2% year over year to $149 million. Sales of hardgoods fell 43% year over year to $1 million.
Financial Position
Cash, as of Sep 30, 2013, increased to $111 million from $86.4 million as of Mar 31, 2013. Free cash flow for the six-month period went up 96% year over year to $238 million from $121 million as of Sep 30, 2012. Cash flow from operations for the first half ended Sep 30, 2013 was $381 million versus $264 million in the earlier comparable period.
Long-term debt decreased to $1.6 billion at Sep 30, 2013 from $2.3 billion at Mar 31, 2013. Debt-to-capitalization ratio contracted 300 bps to 60% as of Sep 30, 2013, from 63% at Mar 31, 2013.
Outlook
Management expects adjusted earnings per share (excluding one-time items) for the third quarter of fiscal 2014 to increase 11%–15% year over year to $1.15–$1.20. For fiscal 2014, Airgas lowered its earnings outlook to $4.85-$5.00 from its previous band of $5.00 to $5.15, reflecting 11% to 15% annual growth.
Airgas’ fiscal 2014 guidance is based on a reduction in year-over-year organic sales growth rate assumptions. Strong cash flow continues to be a benchmark for Airgas’ business model. In addition, focus on effective management of expenses and balancing short-term cost containment with investment will drive long term growth.
Airgas is also optimistic of the long-term prospects for the U.S. manufacturing and energy industries, as well as non-residential construction, unique value proposition and a less challenging platform. However, it will continue to face challenges from helium supply constraints and a larger-than-expected R-22 impact.
Radnor, 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 #3 (Hold). Other chemical stocks worth a look include L'Air Liquide SA (AIQUY), Air Products & Chemicals Inc. (APD) and Akzo Nobel NV (AKZOY). All these hold a Zacks Rank #2 (Buy).
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