Airgas Inc. (ARG) delivered adjusted earnings per share (EPS) of 83 cents in its second quarter fiscal 2011 ended September 30, 2010, reflecting a growth of 22% from 68 cents in the year-ago quarter and beating the Zacks Consensus Estimate 81 cents. The quarter’s EPS also topped Airgas’s second quarter earnings guidance range of 78 cents to 82 cents on solid revenue growth and effective cost management.

The adjusted EPS for the quarter under review excluded the per share effect of the  following items –– legal and professional fees and other costs of 3 cents related to an unsolicited takeover attempt by Air Products & Chemicals Inc. (APD) as well as both debt extinguishment and multi-employer pension plan withdrawal charges of a penny each.

The prior-year quarter’s adjusted EPS excluded a debt extinguishment charge of 2 cents per share and multi-employer pension plan withdrawal charges of 1 cent. Including these items, GAAP EPS in the quarter stood at 78 cents in the third quarter compared with 65 cents in the year-ago quarter.

Revenue

Total revenue in the quarter increased 10% year-over-year to $1,061.7 million. Same-store sales increased 9% in the quarter, with hard goods as well as gas and rent rising a respective 12% and 7%. Acquisitions contributed 1% to the sales growth.

Operational Update

As a percentage of revenue, cost of products sold increased 80 basis points to 44.9% and selling, general and administrative expenses dipped 120 basis points to 37.4%. Consequently, gross margin dipped 80 basis points to 55.1% and adjusted operating margin improved 40 basis points year over year to 12.0%, driven by operating leverage on sales growth and continued cost discipline.

Financial Update

Airgas had cash and cash equivalents of $53.3 million as of September 30, 2010, down from $57.9 million as of June 30, 2010. Net cash from operating activities was an outflow of $16.5 million in the first half of fiscal 2011 compared with an inflow of $299.8 million in the comparable year-ago period. Free cash flow till date was $179 million compared with $223 million in the comparable year-ago period.

Adjusted debt at the end of the reported quarter stood at $1.68 billion compared with $1.8 billion as of March 31, 2010, reflecting a reduction of more than $127 million year-to-date.

Guidance

Management has guided third quarter fiscal 2011 EPS in the range of 76 cents to 80 cents, reflecting a year-over-year growth in the range of 15% to 21% from the year-ago EPS of 65 cents. The projection includes 1 cent per share of incremental expense associated with its SAP implementation.

For full fiscal 2011, management projects EPS in the range of $3.22 to $3.32, up from the previous expectation of $3.15 to $3.30. The current guidance depicts growth in the range of 20% to 24% over $2.68 in fiscal 2010.  The guidance includes 11 cents per share of expense associated with its SAP implementation.

The third quarter and fiscal 2011 guidance for Airgas, however, do not include the impact of debt extinguishment or multi-employer pension plan withdrawal charges and costs related to the unsolicited takeover attempt.

The company states that it is on track to beat its calendar 2012 earnings goal of at least $4.20 per share.

Update on Air Products’ Offer

In February 2010, Air Products & Chemicals made an unsolicited public proposal to acquire Airgas, which was rejected by Airgas. In conjunction with its strong earnings results, Airgas sent a letter to Air Products stating that the current offer of $65.50 per share is grossly inadequate.

Airgas added that given its outstanding prospects, unique industry position, as well as the enormous financial benefits to Air Products post- acquisition, the current offer price is not close to the right price for its sale. Airgas estimates that its value exceeds $70 per share and is willing to negotiate with Air Products if offered the right price.

Based in Randor, Pennsylvania, Airgas, through its subsidiaries, distributes industrial, medical, and specialty gases, as well as hard goods in the United States. Airgas currently has a Strong Buy recommendation over the short term, supported by the Zacks #1 Rank.

 
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