Praxair Inc. (PX) reported encouraging results for the second quarter of 2010, driven by strengthening global demand and onset of new projects. Net income soared 24.1% year-over-year to $371 million, or $1.19 per share compared with $299 million or 96 cents per share in the second quarter of 2009. Earnings per share surpassed the Zacks Consensus Estimate of $1.14 and the company’s guided range of $1.10-$1.15.
Revenue
In the second quarter, sales came in at $2,527 million, up 18.2% year-over-year from $2,138 million in the comparable quarter of 2009. The increase was attributable to solid sales volume growth across most end markets, especially chemicals, metals and electronics. Regionally, South America and Asia were the strongest.
In the second quarter, North American revenue increased 14.4% year-over-year to $1,281 million and accounted for 50.7% of the total revenue. Revenue from Europe was up 9.5% to $335 million and represented 13.3% of total revenue.
Revenue generated from South America, roughly 19.4% of total revenue, increased 24.1% to $490 million, while from Asia, roughly 11.1% of total revenue, increased 40.7% to $280 million. Finally, revenue from Surface Technologies, 5.6% of total revenue, was $141 million, up 19.5% year over year.
Gross profit increased roughly 15% year-over-year to $1,090 million, while margin fell by 120 basis points to 43.1%, primarily due to higher cost of sales. Selling, general and administrative (SG&A) expense as a percentage of total revenue decreased by 40 basis points and research and development (R&D) expense dropped by 9 basis points year over year. Operating margins increased by 70 basis points to 21.6%, attributable to higher revenue due to solid volume growth.
Balance Sheet
Praxair exited the second quarter with cash and cash equivalents of approximately $48 million compared with $376 million in the first quarter of 2010. Long-term debt increased roughly 1.1% sequentially to $4,783 million from $4,732 million in the first quarter of 2010.
Cash flow from operating activities was approximately $536 million versus $563 million in the second quarter of 2009 and $483 million in the first quarter 2010. Capital expenditure was $325 million, up from $288 million in the first quarter 2010 and down from $370 million in the second quarter 2009.
Praxair follows a consistent policy of returning cash to shareholders via dividend payments and share repurchases. During the second quarter 2010, the company paid dividends amounting to $137 million and repurchased shares worth $50 million.
Praxair announced that its Board of Directors has authorized $1.5 billion share repurchase program on the back of strong balance sheet and free cash flow generation. The prior repurchase program of $1 billion has been successfully completed.
The Board of Directors also declared a quarterly dividend of 45 cents per share, payable on September 15 to shareholders of record on Sep 7, 2010.
Outlook
For the third quarter of fiscal 2010, management provided EPS guidance range of roughly $1.15-$1.20. The company reiterated its full year EPS guidance of $4.60-$4.70, revenue expectation of approximately $10 billion, capital expenditure target of $1.4 billion and tax rate of roughly 28%.
The full year EPS guidance excludes $0.08 per share, one-time charge related to devaluation in the currency of Venezuela in the first quarter of 2010.
Management expects continued volume growth in the second half in North America. Sales in Europe in the third quarter are expected to be lower and 5% negatively influenced by lower Euro/US$ exchange rate. Results in South America are expected to be driven by strengthening Brazilian economy and that in Asia is expected to be strong.
Praxair’s project backlog continues to increase and is expected to reach roughly $2.5 billion in 2010 compared with $2.0 billion in 2009.
We believe that Praxair remains well positioned to deliver yet another solid quarter result based on solid end market demand, strong backlog, and intense focus on expansion and cost controls.
However, Praxair’s large international presence increases risks related to fluctuations in foreign currencies and geopolitical uncertainties. Also, volatility in energy prices increases risks of energy supply in adverse economic conditions. The company faces stiff competition from Air Products and Chemicals Inc. (APD), Airgas Inc. (ARG), Linde AG, Chromalloy Gas Turbine Corp. and Bodycote.
We currently maintain our long-term Neutral recommendation on the stock, supported by the short-term Zacks #3 Rank (Hold) rating.
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