Airgas today reported earnings per diluted share of $1.23 for its third quarter ended 31st December 2014, up 12% over prior year diluted EPS of $1.10 and up 4% over prior year adjusted diluted EPS of $1.18.
Third quarter sales increased 7% over the prior year to $1.33bn. Organic sales were up 6% over the prior year, with gas and rent up 5% and hardgoods up 6%. Acquisitions contributed sales growth of 1% in the quarter.
“Organic growth in both hardgoods and gases were in line with our expectations, and earnings were in the middle of our guidance range,” said Airgas President and Chief Executive Officer Michael L. Molinini. “Although softness persists in some sectors, our welder and generator rental business and sales to transportation equipment manufacturers remained strong, and we saw an uptick in our downstream energy and non-residential construction segments.”
Selling, distribution, and administrative expenses increased 5% over the prior year, with operating costs associated with acquired businesses representing approximately 1% of the increase. The balance of the increase reflects normal expense inflation, as well as expenses associated with the company’s investments in long-term strategic growth initiatives, including its e-Business platform and continued expansion of its telesales business through Airgas Total Access.
Operating margin was 12.2%, down 30 basis points compared to the prior year. Distribution segment operating margin was 12.7% for the quarter, consistent with the prior year.
Year-to-date free cash flow was $218m, compared to $333m in the prior year, and adjusted cash from operation was $538m, compared to $576m in the prior year.
The reduction in operating cash flow reflected current year increases in working capital to support sales growth, in addition to the comparison to a particularly strong prior year that benefitted from the improvement in accounts receivable management following SAP conversions a year earlier. Free cash flow in the current year was further impacted by a year-over-year increase in capital expenditures, which reflected the company’s investment in revenue-generating assets, including two air separation plants, an e-Business platform and a new hardgoods distribution centre.
Return on capital was 12.1% for the twelve months ended 31st December, 2014, down 30 basis points compared to the prior year.
Since the beginning of its fiscal year, the company has acquired 13 businesses with aggregate annual sales of more than $48m.
“While our performance met expectations in the third quarter, the rapid and dramatic drop in oil prices, coupled with the recent strengthening of the US dollar, has created uncertainty in the market. In the near-term, we expect some level of capital deferment in certain sub-segments of our customer base and the positive impact of low oil prices on manufacturing may be muted by the impact of the strong dollar on manufacturers that export,” added Molinini. “Accordingly, we have modestly reduced our sales growth rate assumptions, but still expect strong year-over-year organic sales growth of 6% to 7% in the fourth quarter.”
“Notwithstanding the near-term uncertainty in the energy sector, we still believe the fundamentals for long-term economic growth in the US, where 98% of our revenue is derived, will be favourable for years to come,” said Airgas Executive Chairman Peter McCausland. “We believe that any drag experienced from lower oil prices, either direct or indirect, will ultimately be mitigated by the positive effect on other industries and increases in consumer spending. Given our large and diverse customer base, on balance, we expect lower oil prices will be beneficial to Airgas over time.”