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 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.
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.
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.
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).