Radnor, PA- Airgas, Inc. reported sales and earnings results for its third quarter ended December 31, 2013, which reflected sluggish business conditions and the realization of SAP-related benefits as planned. Results for the quarter also reflected a previously announced loss on the early extinguishment of debt.
"Consistent with our expectation for continued sluggish business conditions during the quarter, our earnings results were at the midpoint of our guidance range," said Airgas President and Chief Executive Officer Michael L. Molinini. "We are pleased to have achieved our long-standing target of reaching a run-rate of more than $75 million in SAP-enabled operating income benefits by the end of calendar year 2013. Delivering on that commitment made to shareholders more than three years ago is a remarkable achievement for which all Airgas associates are to be commended. We look forward to continuing to leverage SAP's capabilities and the benefits of having a unified platform across our distribution operations to improve the way we manage our business on both the top and bottom lines for many years to come."
Third quarter earnings per diluted share were $1.10, up 5% over prior year, and adjusted earnings per diluted share* were $1.18, up 13% over prior year. Results included SAP-related benefits, net of implementation costs and depreciation expense, of $0.14 per diluted share in the current year quarter compared to $0.03 of net expense in the prior year quarter. Results also included a previously announced loss of $0.08 per diluted share on the early extinguishment of the Company's 7.125% senior subordinated notes with an original maturity in October 2018, which were redeemed in full on October 2, 2013.
"Our more than 15,000 associates are the best in the business. With most of the distraction of the SAP implementation in the rearview mirror, we are clearly focused on bringing the Airgas value proposition to new and existing customers across the broad array of industries we serve," said Molinini. "There are bright spots within certain sectors, but overall choppiness in the industrial economy continues to frustrate us. As uncertainty persists, we will remain focused on the things that we can control, including leveraging the SAP system, managing expenses, expanding our telesales business, and enhancing our e-Business platform, and are ready to capitalize when sustained growth in the industrial economy resumes."
Third quarter sales were $1.24 billion, an increase of 3% over the prior year. Organic sales in the quarter were up 1% over prior year, with gas and rent up 1% and hardgoods up 1%. Acquisitions contributed sales growth of 2% in the quarter. Distribution segment organic sales in the quarter were up 2% over prior year, with gas and rent up 3% and hardgoods up 1%.
Selling, distribution, and administrative expenses increased 3% over the prior year, with costs associated with acquired businesses representing 2% of the increase. The favorable impact of the reduction in SAP implementation costs compared to the prior year was substantially offset by expenses associated with the Company's expansion of its telesales business through Airgas Total Access, strategic pricing initiative, and enhancement of its e-Business platform, as well as by rising healthcare costs.
Operating margin was 12.5%, up 30 basis points over prior year operating margin of 12.2% and up 40 basis points compared to prior year adjusted operating margin* of 12.1%, which excluded a net benefit related to lower than previously estimated restructuring charges in the prior year.
The combination of a reduction in SAP implementation costs and the achievement of SAP-related benefits contributed favorably to the net increase in operating margin this quarter compared to the prior year. Low organic sales growth challenged the Company's operating margin in the third quarter, as did R-22 pricing in its refrigerants business following the EPA's unexpected ruling in late March 2013 to allow for an increase in the production of R-22 during calendar 2013.
Year-to-date free cash flow* was $333 million, up 52% over the prior year, and adjusted cash from operations* was $576 million, up 28% over the prior year. The increase in cash flows was primarily driven by the lower required investment in working capital in the current year compared to the prior year.
Return on capital* was 12.4% for the twelve months ended December 31, 2013, flat compared to both the prior year and the twelve months ended September 30, 2013.
Since the beginning of its fiscal year, the Company has acquired nine businesses with aggregate annual sales of approximately $70 million, including The Encompass Gas Group, Inc., headquartered in Rockford, IL. With eleven locations and more than 130 employees in Illinois, Wisconsin, and Iowa, Encompass was one of the largest privately-owned suppliers of industrial, medical, and specialty gases and related hardgoods in the U.S., generating approximately $55 million in annual sales in 2012. The transaction closed on October 31, 2013.
Revised Fiscal 2014 Guidance
"While we still expect a sequential seasonal uptick in our fiscal fourth quarter, our sales outlook has softened in light of weaker-than-expected activity levels in January, in part due to the extremely cold weather in large parts of the country," said Airgas Executive Chairman Peter McCausland. "Despite our tempered outlook for the fourth quarter, our resulting revised fiscal year 2014 guidance represents 9% to 10% growth in adjusted earnings per diluted share* and strong execution on strategic initiatives in a challenging environment."
"The U.S. industrial economy has not improved in the past year to the extent that we and many others had expected when we introduced our fiscal 2016 financial goals at our investor day in December 2012. As a result, and combined with the slow pace of acquisitions, it will take longer than expected to reach the goal of $6.5 billion in annual sales. If the long-awaited resurgence in the U.S. industrial economy were to gain real strength in the near-term, however, we could make up some of the lost ground," said McCausland. "At this time, we are optimistic that the 15% low-end of our fiscal 2016 operating margin goal is still within reach."
For the fourth quarter of fiscal year 2014, the Company expects earnings per diluted share in the range of $1.18 to $1.23, reflecting an increase of 4% to 9% over prior year earnings per diluted share of $1.13 and an increase of 4% to 8% over prior year adjusted earnings per diluted share* of $1.14. Guidance for both earnings per diluted share and adjusted earnings per diluted share* includes an estimated year-over-year increase of approximately $0.12 related to the SAP initiative, reflecting an estimated $0.16 of net benefit in the fiscal 2014 fourth quarter compared to $0.04 of net benefit in the fiscal 2013 fourth quarter. Guidance also reflects a year-over-year negative impact to earnings per diluted share related to 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 the incremental contribution from acquisitions closed to-date.
For the full fiscal year 2014, the Company expects earnings per diluted share, including an $0.08 loss on the early extinguishment of debt and a $0.02 benefit from a change in a state income tax law, in the range of $4.69 to $4.74, reflecting an increase of 8% to 9% over the prior year. The Company expects adjusted earnings per diluted share* of $4.75 to $4.80, an increase of 9% to 10% over the prior year. Both earnings per diluted share and adjusted earnings per diluted share* were $4.35 in the prior year. Fiscal 2014 guidance for both earnings per diluted share and adjusted earnings per diluted share* 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 a year-over-year negative impact to earnings per diluted share related to 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 the incremental contribution from acquisitions closed to-date.
The Company's previous fiscal year 2014 guidance range, which the Company provided on October 23, 2013, was for earnings per diluted share of $4.79 to $4.94, an increase of 10% to 14% over the prior year, and for adjusted earnings per diluted share* of $4.85 to $5.00, an increase of 11% to 15% over the prior year. The guidance revision primarily reflects a reduction in the Company's year-over-year organic sales growth rate assumptions.