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ARG > SEC Filings for ARG > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for AIRGAS INC

Form 10-Q for AIRGAS INC


6-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW
Airgas, Inc. and its subsidiaries ("Airgas" or the "Company") had net sales for the quarter ended June 30, 2014 ("current quarter") of $1.31 billion compared to $1.28 billion for the quarter ended June 30, 2013 ("prior year quarter"), an increase of 3%. Organic sales increased 1% compared to the prior year quarter, with gas and rent flat and hardgoods up 2%. Current and prior year acquisitions contributed sales growth of 2% in the current quarter. The Company's organic sales growth reflected strength in certain sectors, such as upstream energy, transportation, and retail, as well as strength in its rental welder and generator business, but on balance, underlying business conditions remained sluggish during the current quarter, as anticipated. Sectors such as mining and heavy manufacturing that were significant headwinds in the prior year appeared to be stabilizing during the current quarter, though were still down compared to the prior year quarter.
The consolidated gross profit margin (excluding depreciation) in the current quarter was 55.6%, an increase of 60 basis points from the prior year quarter, reflecting margin expansion on price increases and surcharges related to power costs spikes in the fourth quarter, partially offset by supplier price and internal production cost increases and a sales mix shift toward lower margin hardgoods.
The Company's operating income margin in the current quarter was 11.8%, a decrease of 40 basis points from the prior year quarter, reflecting the impact of an increase in SD&A expenses, including the Company's investments in long-term strategic growth initiatives, relative to low organic sales growth. Net earnings per diluted share increased to $1.18 in the current quarter versus $1.14 in the prior year quarter.
During the current quarter, the Company purchased three businesses with aggregate historical annual sales of approximately $30 million. The Company also issued $300 million of 3.65% senior notes in the current quarter that mature on July 15, 2024.
Fiscal Second Quarter and Full Fiscal Year Outlook Strong growth in the Company's rental welder business during the first quarter, as well as increasing requests for staging of materials for energy-related construction projects suggest that non-residential construction activity should increase as the Company's fiscal year progresses, providing a lift to its construction and other key end markets. In addition, sectors such as mining and heavy manufacturing that were significant headwinds in the prior year appeared to be stabilizing during the first quarter. As such, the Company's guidance range for the full fiscal year reflects the expectation for stronger sales growth in the second half of the fiscal year, while also reflecting that some uncertainty still exists.
The Company expects earnings per diluted share for the second fiscal quarter ending September 30, 2014 to be in the range of $1.27 to $1.32, an increase of 0% to 4% over earnings per diluted share of $1.27 in the second fiscal quarter ended September 30, 2013. Earnings per diluted share in the quarter ended September 30, 2013 included a $0.02 per diluted share benefit related to a change in a state income tax law. The Company expects its organic sales growth rate for the quarter ending September 30, 2014 to be in the low single digits. The Company expects earnings per diluted share for the full fiscal year ending March 31, 2015 to be in the range of $5.00 to $5.20, an increase of 7% to 11% over earnings per diluted share of $4.68 in the fiscal year ended March 31, 2014. Earnings per diluted share in the year ended March 31, 2014 included $0.04 per diluted share in benefits related to changes in state income tax laws and a $0.08 loss on the extinguishment of debt. The Company expects its organic sales growth for the year ending March 31, 2015 to be in the range of 4% to 6%.


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RESULTS OF OPERATIONS: THREE MONTHS ENDED JUNE 30, 2014 COMPARED TO THREE MONTHS ENDED JUNE 30, 2013

STATEMENT OF EARNINGS COMMENTARY
Net Sales
Net sales increased 3% to $1.31 billion for the current quarter compared to the prior year quarter, driven by organic sales growth of 1% and sales growth from current and prior year acquisitions of 2% in the current quarter. As outlined in the Overview section, the Company's organic sales growth reflected strength in certain sectors, but on balance, underlying business conditions remained sluggish during the current quarter. Gas and rent organic sales were flat in the current quarter, with hardgoods organic sales up 2%. Organic sales growth in the current quarter was driven by pricing increases of 2%, offset by volume declines of 1%.
Strategic products represent approximately 40% of net sales and are comprised of safety products and bulk, medical and specialty gases and associated rent, which are sold to end customers through the Distribution business segment, and carbon dioxide ("CO2") and dry ice, the vast majority of which are sold to end customers through the All Other Operations business segment. The Company has identified these products as strategic because it believes they have good long-term growth profiles relative to the Company's core industrial gas and welding products due to favorable end customer markets, application development, increasing environmental regulation, strong cross-selling opportunities or a combination thereof. During the current quarter, sales of strategic products in aggregate grew a net 2% on an organic basis over the prior year quarter. The Company's strategic accounts program, which represents approximately 25% of net sales, is designed to deliver superior product and service offerings to larger, multi-location customers, and presents the Company with strong cross-selling and greater penetration opportunities. Sales to strategic accounts in the current quarter were flat compared to the prior year quarter, with strength in upstream energy, transportation, and retail, including beverage carbonation, along with rental welders for construction and maintenance, offset by continued softness in manufacturing and general construction, as well as the impact of difficult year-over-year comparisons in downstream energy. In the table below, the intercompany eliminations represent sales from the All Other Operations business segment to the Distribution business segment.

                               Three Months Ended
Net Sales                           June 30,
(In thousands)                2014            2013         Increase/(Decrease)
Distribution              $ 1,183,612     $ 1,141,084     $            42,528      4  %
All Other Operations          137,043         147,270                 (10,227 )   (7 )%
Intercompany eliminations      (7,068 )        (8,463 )                 1,395
                          $ 1,313,587     $ 1,279,891     $            33,696      3  %

The Distribution business segment's principal products and services include industrial, medical and specialty gases, and process chemicals; cylinder and equipment rental; and hardgoods. Industrial, medical and specialty gases are distributed in cylinders and bulk containers. Rental fees are generally charged on cylinders, dewars (cryogenic liquid cylinders), bulk and micro-bulk tanks, tube trailers and certain welding equipment. Hardgoods generally consist of welding consumables and equipment, safety products, construction supplies, and maintenance, repair and operating supplies.
Distribution business segment sales increased 4% over the prior year quarter, with an increase in organic sales of 2%. Incremental sales from current and prior year acquisitions contributed sales growth of 2% in the current quarter. Higher pricing contributed 3% to organic sales growth in the Distribution business segment, more than offsetting the negative 1% impact from volume declines. Gas and rent organic sales in the Distribution business segment increased 2%, with pricing up 4% and volumes down 2%. Hardgoods organic sales within the Distribution business segment increased 2%, with pricing and volumes each up 1%.
Within the Distribution segment, organic sales of gas related strategic products and associated rent increased 2% over the prior year quarter, comprised of the following: bulk gas and rent up 5%, as higher pricing, volumes and new account implementations were partially offset by continued broad-based moderation in industrial activity; specialty gas, rent, and related equipment up 5%, primarily driven by increases in core specialty gas volume and price; and medical gas and rent up 1%, as increases in physician and dental practices, as well as hospitals and surgery centers, were partially offset by weakness in wholesale sales to homecare distributors. In addition, organic sales in the Company's Red-D-Arc business increased 10% over


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the prior year quarter, driven by increases in both welder and generator rentals in the non-residential construction and upstream energy customer segments. Within the Distribution segment's hardgoods sales, organic sales volumes for equipment were up modestly year-over-year for the second consecutive quarter. Sales of safety products declined by 1% compared to the prior year quarter on broad-based weakness in core industrial activity. Sales of the Company's Radnor® private-label product line, which includes certain safety products, consumables, and other hardgoods, increased 2% in the current quarter over the prior year quarter, consistent with the 2% increase in total hardgoods organic sales in the Distribution business segment.
The All Other Operations business segment consists of six business units. The primary products manufactured and/or distributed are CO2, dry ice, nitrous oxide, ammonia and refrigerant gases.
The All Other Operations business segment sales decreased 7% in total and on an organic basis compared to the prior year quarter. Both the total and organic sales decreased as sales increases in the Company's CO2, dry ice, and ammonia businesses were more than offset by the decline in sales in its refrigerants business. Organic sales of CO2 and dry ice, which represent one of the Company's strategic product categories, increased 1% over the prior year quarter. Gross Profits (Excluding Depreciation)
Gross profits (excluding depreciation) do not reflect deductions related to depreciation expense and distribution costs. The Company reflects distribution costs as an element of the line item "Selling, distribution and administrative expenses" and recognizes depreciation on all of its property, plant and equipment in the line item "Depreciation" in its consolidated statements of earnings. Other companies may report certain or all of these costs as elements of their cost of products sold and, as such, the Company's gross profits (excluding depreciation) discussed below may not be comparable to those of other companies.
Consolidated gross profits (excluding depreciation) increased 4% compared to the prior year quarter, reflecting the overall growth in sales, margin expansion on price increases and surcharges related to power cost spikes in the fourth quarter, partially offset by supplier price and internal production cost increases and a sales mix shift toward lower margin hardgoods. The consolidated gross profit margin (excluding depreciation) in the current quarter increased 60 basis points to 55.6% compared to 55.0% in the prior year quarter. The increase in consolidated gross profit margin (excluding depreciation) reflects the items described above. Gas and rent represented 62.9% of the Company's sales mix in the current quarter, down from 63.3% in the prior year quarter.

                             Three Months Ended
Gross Profits (ex. Depr.)         June 30,
(In thousands)               2014          2013       Increase/(Decrease)
Distribution              $  662,679    $ 635,957    $            26,722      4  %
All Other Operations          67,502       68,391                   (889 )   (1 )%
                          $  730,181    $ 704,348    $            25,833      4  %

The Distribution business segment's gross profits (excluding depreciation) increased 4% compared to the prior year quarter. The Distribution business segment's gross profit margin (excluding depreciation) was 56.0% versus 55.7% in the prior year quarter, an increase of 30 basis points. The increase in the Distribution business segment's gross profit margin (excluding depreciation) reflects margin expansion on price increases and surcharges related to power cost spikes in the fourth quarter, partially offset by supplier price and internal production cost increases. Gas and rent represented 58.9% of the Distribution business segment's sales in the current quarter, consistent with the prior year quarter.
The All Other Operations business segment's gross profits (excluding depreciation) decreased 1% compared to the prior year quarter. The All Other Operations business segment's gross profit margin (excluding depreciation) increased 290 basis points to 49.3% in the current quarter from 46.4% in the prior year quarter. The increase in the All Other Operations business segment's gross profit margin (excluding depreciation) was primarily driven by a sales mix shift away from lower margin refrigerants and improvement in the Company's ammonia and dry ice businesses.
Operating Expenses
Selling, Distribution and Administrative ("SD&A") Expenses SD&A expenses consist of labor and overhead associated with the purchasing, marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as legal, treasury, accounting, tax and facility-related expenses. Although corporate operating expenses are generally allocated to each business segment


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based on sales dollars, the Company reported expenses (excluding depreciation) related to the implementation of its SAP system as part of SD&A expenses in the "Other" line item in the SD&A expenses and operating income tables below. Consolidated SD&A expenses increased $21 million, or 4.5%, in the current quarter as compared to the prior year quarter. Contributing to the increase in SD&A expenses were approximately $7 million of incremental operating costs associated with acquired businesses, representing approximately 1.5% of the total increase in SD&A. Normal inflation, as well as expenses associated with the Company's investments in long-term strategic growth initiatives, including its e-Business platform, continued expansion of its telesales business through Airgas Total Access™, and regional management structure changes, also contributed to the increase. As a percentage of consolidated gross profit, consolidated SD&A expenses increased 60 basis points to 67.8% compared to 67.2% in the prior year quarter.

Three Months Ended

SD&A Expenses                June 30,
(In thousands)          2014          2013       Increase/(Decrease)
Distribution         $  449,639    $ 427,231    $            22,408     5 %
All Other Operations     45,074       43,540                  1,534     4 %
Other                         -        2,704                 (2,704 )
                     $  494,713    $ 473,475    $            21,238     4 %

SD&A expenses in the Distribution business segment increased 5%, while SD&A expenses in the All Other Operations business segment increased 4%, compared to the prior year quarter. Contributing to the increase in SD&A expenses in the Distribution business segment were approximately $7 million of incremental operating costs associated with acquired businesses, representing approximately one-third of the increase in SD&A. Normal inflation, as well as expenses associated with the Company's investments in long-term strategic growth initiatives, including its e-Business platform, continued expansion of its telesales business through Airgas Total Access™, and regional management structure changes, also contributed to the increase. As a percentage of Distribution business segment gross profit, SD&A expenses in the Distribution business segment increased 70 basis points to 67.9% compared to 67.2% in the prior year quarter, primarily driven by moderating sales growth relative to the increase in expenses. As a percentage of All Other Operations business segment gross profit, SD&A expenses in the All Other Operations business segment increased 310 basis points to 66.8% compared to 63.7% in the prior year quarter, primarily driven by significant sales declines in the Company's refrigerants business.
SD&A Expenses - Other
Enterprise Information System
While the Company has successfully converted its Safety telesales and hardgoods infrastructure businesses, as well as all of its regional distribution businesses, to the SAP platform, the Company continued to incur some post-conversion support and training expenses related to the implementation of the new system through the end of fiscal year 2014. SAP-related costs were $2.7 million in the prior year quarter, and were recorded as SD&A expenses and not allocated to the Company's business segments. Depreciation and Amortization
Depreciation expense increased $6 million, or 8%, to $73 million in the current quarter as compared to $67 million in the prior year quarter. The increase primarily reflects the additional depreciation expense on capital investments in revenue generating assets to support customer demand (such as cylinders / bulk tanks and rental welders / generators) and $1 million of additional depreciation expense on capital assets included in acquisitions. Amortization expense of $8 million in the current quarter increased by $1 million from the prior year quarter, driven by acquisitions.
Operating Income
Consolidated operating income of $155 million decreased 1% in the current quarter, driven by the increase in SD&A expenses, including the Company's investments in long-term strategic growth initiatives, in the current low organic sales growth environment. The consolidated operating income margin decreased 40 basis points to 11.8% from 12.2% in the prior year quarter.


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Three Months Ended
Operating Income             June 30,
(In thousands)          2014         2013        Increase/(Decrease)
Distribution         $ 139,854    $ 141,000     $            (1,146 )    (1 )%
All Other Operations    15,227       18,318                  (3,091 )   (17 )%
Other                        -       (2,704 )                 2,704
                     $ 155,081    $ 156,614     $            (1,533 )    (1 )%

Operating income in the Distribution business segment decreased 1% in the current quarter compared to the prior year quarter. The Distribution business segment's operating income margin decreased 60 basis points to 11.8% from 12.4% in the prior year quarter. The modest decline in the Distribution business segment's operating income margin reflects margin pressure from low organic sales growth in the current quarter relative to the fixed cost base and normal expense inflation, as well as expenses associated with the Company's investments in long-term strategic growth initiatives, including its e-Business platform, continued expansion of its telesales business through Airgas Total Access™, and regional management structural changes.
Operating income in the All Other Operations business segment decreased 17% compared to the prior year quarter primarily driven by the decline in refrigerants sales. The All Other Operations business segment's operating income margin of 11.1% decreased by 130 basis points compared to the operating income margin of 12.4% in the prior year quarter. The decrease in the All Other Operations business segment's operating income margin was primarily driven by margin pressure in the Company's refrigerants business. Interest Expense, Net
Interest expense, net, was $16 million in the current quarter, representing a decrease of $5 million, or 22%, compared to the prior year quarter. The decrease in interest expense during the current quarter related to the retirement of the Company's $300 million of 2.85% senior notes and $215 million of 7.125% senior subordinated notes during the third quarter of the prior year. Income Tax Expense
The effective income tax rate was 36.9% of pre-tax earnings in the current quarter compared to 37.7% in the prior year quarter. Net Earnings
Net earnings per diluted share increased 4% to $1.18 in the current quarter compared to $1.14 in the prior year quarter. Net earnings were $89 million compared to $85 million in the prior year quarter.


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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash provided by operating activities was $197 million in the current
quarter compared to $171 million in the prior year quarter.
The following table provides a summary of the major items affecting the
Company's cash flows from operating activities for the periods presented:
                                             Three Months Ended
                                                  June 30,
(In thousands)                               2014         2013
Net earnings                              $  88,852    $  84,686
Non-cash and non-operating activities (1)    89,704       91,648
Changes in working capital                   16,500       (2,416 )
Other operating activities                    1,916       (3,219 )
Net cash provided by operating activities $ 196,972    $ 170,699


____________________


(1) Includes depreciation, amortization, deferred income taxes, gain on sales of plant and equipment, and stock-based compensation expense.

The cash inflow related to working capital in the current quarter was primarily driven by a lower required investment in working capital, reflecting improved accounts receivable and inventory metrics and the timing of income tax payments. The prior year cash outflow for working capital reflected an increased year-over-year investment in inventory related to the Company's expanded telesales program and the higher cost of refrigerants inventory. Net earnings plus non-cash and non-operating activities provided cash of $179 million in the current quarter and $176 million in the prior year quarter.
As of June 30, 2014, $18 million of the Company's $77 million cash balance was held by foreign subsidiaries. The Company does not believe it will be necessary to repatriate cash held outside of the U.S. and anticipates its domestic liquidity needs will be met through other funding sources such as cash flows generated from operating activities and external financing arrangements. Accordingly, the Company intends to permanently reinvest the cash in its foreign operations to support working capital needs, investing and financing activities, and future business development. Were the Company's intention to change, the amounts held within its foreign operations could be repatriated to the U.S., although any repatriations under current U.S. tax laws would be subject to income taxes, net of applicable foreign tax credits.
The following table provides a summary of the major items affecting the Company's cash flows from investing activities for the periods presented:

                                                   Three Months Ended
                                                        June 30,
(In thousands)                                     2014          2013
Capital expenditures                           $ (108,580 )   $ (81,998 )
Proceeds from sales of plant and equipment          5,452         3,998
Business acquisitions and holdback settlements    (23,463 )      (5,143 )
Other investing activities                         (1,113 )      (1,007 )
Net cash used in investing activities          $ (127,704 )   $ (84,150 )

Capital expenditures as a percentage of sales were 8.3% and 6.4% for the current and prior year quarters, respectively. The increase in capital expenditures in the current quarter compared to the prior year quarter reflects higher investments in revenue generating assets, such as rental welding and generator equipment, cylinders and bulk tanks to support sales growth, and the construction of new air separation units in Kentucky and Illinois and a new hardgoods distribution center in Wisconsin. During the current quarter, the Company used cash of $23 million for the purchase of three businesses and the settlement of holdback liabilities associated with prior year acquisitions. The businesses acquired during the current quarter had historical annual sales of approximately $30 million.
Free cash flow* in the current quarter was $104 million compared to $100 million in the prior year quarter. The increase in free cash flow from the prior year quarter was primarily driven by adjusted cash from operations*, which was $206 million


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in the current quarter compared to $178 million in the prior year quarter, partially offset by higher capital expenditures in the current quarter.
* Free cash flow is a financial measure calculated as net cash provided by operating activities minus capital expenditures, adjusted for the impacts of certain items. See Non-GAAP reconciliation and components of free cash flow at the end of this section. The following table provides a summary of the major items affecting the Company's cash flows from financing activities for the periods presented:

                                          Three Months Ended
                                               June 30,
(In thousands)                           2014           2013
Net cash (repayments) borrowings      $ (35,040 )   $  (67,039 )
Purchase of treasury stock                    -         (8,127 )
Dividends paid to stockholders          (40,914 )      (35,202 )
Other financing activities               14,437          8,409
Net cash used in financing activities $ (61,517 )   $ (101,959 )

During the current quarter, net financing activities used cash of $62 million. Net cash repayments on debt obligations in the current quarter were $35 million, primarily related to the pay down of $335 million of commercial paper, partially offset by the issuance of $300 million of 3.65% senior notes maturing on July 15, 2024. Other financing activities, primarily comprised of proceeds and excess tax benefits related to the exercise of stock options and stock issued for the employee stock purchase plan, generated cash of $14 million during the current quarter.
In the prior year quarter, net financing activities used cash of $102 million. Net cash repayments used cash of $67 million, primarily related to the pay down of $118 million on the trade receivables securitization agreement, partially offset by borrowing of $49 million under the commercial paper program. On October 23, 2012, the Company announced a $600 million share repurchase program. During the six months ended March 31, 2013, the Company completed the program, repurchasing 6.29 million shares on the open market at an average price of $95.37. The final repurchase under the program, however, settled subsequent to the fiscal 2013 year end, resulting in a cash outflow of $8 million related to . . .

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