Praxair Inc’s (PX) third quarter 2010 adjusted net income soared 19.0% year over year to $377 million, or $1.21 per share compared with $318 million or $1.02 per share in the third quarter of 2009. Earnings per share surpassed the Zacks Consensus Estimate of $1.20 and the company’s guided range of $1.15-$1.20 by a cent.
Revenue
Third quarter sales were $2,538 million, up 11.0% year over year attributable to solid sales volume growth across most end markets, especially chemicals, metals, electronics and manufacturing. Regionally, South America and Asia were the strongest, driven by solid customer demand and the onset of new plants.
Revenue, however, fell short of the Zacks Consensus Estimate of $2,545 million.
North American revenue increased 10% year over year to $1,282 million and accounted for 50.5% of the total revenue. The increase was due to a 7% volume growth and higher sales in chemicals, metals and manufacturing markets.
Revenue from Europe was $322 million compared with $323 million in the comparable quarter of 2009. It accounted for 12.7% of total revenue. The almost flat results were primarily attributable to negative currency impacts; while with its exclusion European sales grew 10% year over year.
Revenue generated from South America, roughly 19.9% of total revenue, increased 16% to $506 million. Strengthening demand from metals and manufacturing customers and higher pricing drove the results. Revenue from Asia, roughly 11.3% of total revenue, increased 24% to $287 million due to a solid volume growth, new plant start-ups, and growing sales to electronics, chemicals and steel customers.
Revenue from Surface Technologies, 5.6% of total revenue, was $141 million, up 4.4% year over year. Growth in demand for aviation and industrial coatings were partially offset by negative currency impacts.
Gross profit increased roughly 8.2% year over year to $1,094 million, while margin fell by 110 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 60 basis points and research and development (R&D) expense dropped by 20 basis points year over year. Operating margins increased by 100 basis points to 22.0%, attributable to higher revenue due to solid volume growth.
Balance Sheet
Exiting the third quarter, Praxair had cash and cash equivalents of approximately $71 million compared with $48 million in the second quarter of 2010. Long-term debt increased roughly 0.7% sequentially to $4,815 million from $4,783 million in the second quarter of 2010.
Debt to capital ratio in the quarter plummeted 210 basis points sequentially to 44.5%, while return on invested capital was flat at 14.7%. Annualized return on equity was down 1% to 26.4%.
Cash flow from operating activities was approximately $596 million, up 9.0% year over year and 11.2% sequentially. Capital expenditure registered a 3% year over year decline to $324 million and also fell by roughly a million sequentially.
Praxair follows a consistent policy of returning cash to shareholders via dividend payments and share repurchases. During the third quarter 2010, the company paid dividends amounting to $139 million and repurchased shares worth $133 million.
Outlook
For the fourth quarter of fiscal 2010, management provided its EPS guidance range of roughly $1.18-$1.23. The company revised its full year EPS guidance from $4.60-$4.70 to $4.67-$4.72, while reiterating its revenue expectation of approximately $10 billion. Capital expenditure is targeted at $1.4 billion and tax rate is likely to be roughly 28%.
The full year EPS guidance excludes $0.08 per share, a one-time charge related to devaluation in the currency of Venezuela in the first quarter of 2010.
Management expects continued volume growth in South America and Asia. Recent developments in the Middle East and Russia are also expected to boost growth, going forward.
We believe that Praxair remains well positioned to deliver solid quarter results yet again based on solid end market demand, strong backlog, and intense focus on expansion and cost controls.
We currently maintain our Neutral recommendation on the stock.
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