-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ToSccN24udyMj1ZJMPVR2Zo6vZIfWK9fN4GKhxrk9NlKXSIH4F85yO3vNXOK19jI d4Y6UnO72X+vPnHaCX1G/A== 0000884905-98-000003.txt : 19980319 0000884905-98-000003.hdr.sgml : 19980319 ACCESSION NUMBER: 0000884905-98-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRAXAIR INC CENTRAL INDEX KEY: 0000884905 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 061249050 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11037 FILM NUMBER: 98568408 BUSINESS ADDRESS: STREET 1: 39 OLD RIDGEBURY RD CITY: DANBURY STATE: CT ZIP: 06810-5113 BUSINESS PHONE: 2038372000 MAIL ADDRESS: STREET 1: 39 OLD RIDGEBURY ROAD CITY: DANBURY STATE: CT ZIP: 06810-5113 FORMER COMPANY: FORMER CONFORMED NAME: UNION CARBIDE INDUSTRIAL GASES INC DATE OF NAME CHANGE: 19600201 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1997 Commission file number 1-11037 PRAXAIR, INC. 1997 FORM 10-K Praxair, Inc. Tel. (203) 837-2000 39 Old Ridgebury Road State of incorporation: Delaware Danbury, Connecticut 06810-5113 IRS identification number: 06-124 9050 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS: REGISTERED ON : Common Stock ($.01 per value) New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Security Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] At January 31, 1998, 157,439,209 shares of common stock of Praxair, Inc. were outstanding. The aggregate market value of common stock held by non-affiliates at January 31, 1998 was approximately $6,498 million. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the 1997 Annual Report to Shareholders of the Registrant are incorporated in Parts I, II and IV of this report. Also, portions of the Proxy Statement of Praxair, Inc., dated March 6, 1998, are incorporated in Part III of this report. The Index to Exhibits is located on page 11 of this report. FORWARD-LOOKING STATEMENTS The forward-looking statements contained in this document concerning, among other things, projected capital spending, continuation of acquisition activities in the packaged gases and surface technologies businesses, tax planning initiatives and effective tax rates, impacts in Brazil related to economic conditions and a prospective change in hyperinflationary accounting, impacts from currency and economic developments in Asia, the timing, proceeds and other terms of the disposition of assets held for sale, and market risks and sensitivity analyses disclosures related to financial instruments involve risks and uncertainties, and are subject to change based on various factors, including the impact of changes in worldwide and national economies, pricing fluctuations in foreign currencies, changes in interest rates, the continued timely development and acceptance of new products and processes, the impact of competitive products and pricing, the ability to continue to develop potential acquisition opportunities, and the impact of tax and other legislation and regulation in the jurisdictions in which the Company operates. INDEX PART I PAGE Item 1: Business ..................................................... 2 Item 2: Properties ................................................... 6 Item 3: Legal Proceedings ............................................ 6 Item 4: Submission of Matters to a Vote of Security Holders .......... 6 PART II Item 5: Market for Registrant's Common Equity and Related Shareholder Matters ......................................... 7 Item 6: Selected Financial Data ...................................... 7 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 7 Item 7a: Quantitative and Qualitative Disclosures About Market Risk.... 7 Item 8: Financial Statements and Supplementary Data .................. 7 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 7 PART III Item 10: Directors and Executive Officers of the Registrant .......... 8 Item 11: Executive Compensation ...................................... 8 Item 12: Security Ownership of Certain Beneficial Owners and Management ...................................... 8 Item 13: Certain Relationships and Related Transactions .............. 8 PART IV Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................................... 9 Signatures ............................................................. 10 Index to Exhibits ...................................................... 11 PART I PRAXAIR, INC. AND SUBSIDIARIES ITEM 1. BUSINESS GENERAL - Praxair, Inc. (Praxair or Company) was founded in 1907 and became an independent publicly-traded company on June 30, 1992. Praxair was the first company in the United States to produce oxygen from air using a cryogenic process. Praxair has been, and continues to be, a major technological innovator in the industrial gases industry and has done much to create value for its customers by developing new applications for industrial gases and to open new markets by lowering the cost of supply. Praxair is the largest industrial gases company in North and South America and the third largest worldwide. The Company is the world's largest supplier of carbon dioxide. Praxair's primary products are atmospheric gases (oxygen, nitrogen, argon, rare gases) and process gases (carbon dioxide, helium, hydrogen, electronics gases, acetylene). The Company's coatings services business, operated through Praxair Surface Technologies, supplies wear-resistant and high-temperature corrosion-resistant metallic and ceramic coatings and powders. Sales for Praxair were $4,735, $4,449, and $3,146 million for 1997, 1996 and 1995, respectively, with industrial gases accounting for 90% of sales in 1997, 91% in 1996 and 90% in 1995, and coatings services/other accounting for the balance. During 1996, Praxair acquired the common stock of CBI Industries, Inc. (CBI) (See Note 2 to the Consolidated Financial Statements). The industrial gases segment of CBI has been integrated into Praxair's worldwide industrial gases business. The remainder of CBI was considered not strategic to Praxair, and those businesses have been sold, or actions have been taken to sell them. The remaining businesses to be sold are immaterial at December 31, 1997. Gases produced by the Company find wide use in the aerospace, beverage, chemicals, electronics, environmental remediation, food processing and preservation, glass, healthcare, metal fabrication, oil and gas, primary metals, pulp and paper, and various other industries. By using the gases that Praxair produces and, in many cases, the proprietary processes that it invents, customer value is created through improved product quality, increased productivity, conservation of energy, and the attainment of environmental improvement objectives. The Company has been and continues to be a major technological innovator in the industrial gases industry and, working with customers, has done much to increase the use of its industrial gases to support the manufacture of other products and for many other uses. Historically, consumption of industrial gases has increased at approximately 1.5 to 2.0 times local GDP growth in countries in which the Company does business. INDUSTRIAL GASES PRODUCTS AND MANUFACTURING PROCESSES Atmospheric gases are the highest volume products produced by Praxair. Using air as its raw material, Praxair produces oxygen, nitrogen and argon through several air separation processes. As a pioneer in the industrial gases industry, Praxair has been a leader in developing a wide range of proprietary and patented applications and supply systems technology. In recent years, Praxair has developed and commercialized new air separation technologies for the production of industrial gases and is a recognized leader in this rapidly growing market segment. These technologies open important new markets and optimize production capacity for the Company by lowering the cost of supply of industrial gases. These new technologies include proprietary vacuum pressure swing adsorption ("VPSA") and membrane separation to produce gaseous oxygen and nitrogen, respectively. During 1997, Praxair introduced a new product offering of small cryogenic nitrogen plants. PART I (CONT.) PRAXAIR, INC. AND SUBSIDIARIES Process gases, including carbon dioxide, carbon monoxide, hydrogen, helium and acetylene, are produced by different methods than air separation. Most carbon dioxide is purchased from by-product sources, including chemical plants, refineries and industrial processes, or from carbon dioxide wells, and is processed in Praxair's own plants to produce commercial carbon dioxide. Most of the helium sold by Praxair is derived from certain helium-rich natural gas streams in the United States, with additional supplies being acquired from outside the United States. Hydrogen and carbon monoxide are produced by purifying hydrocarbon sources or by purifying by-product sources obtained from the chemical and petrochemical industries. Acetylene is typically produced from calcium carbide and water. INDUSTRIAL GASES DISTRIBUTION There are three basic distribution methods for industrial gases: (i) on-site or tonnage; (ii) merchant liquid; and (iii) packaged or cylinder gases. These distribution methods are often integrated, with products from all three supply modes coming from the same plant. The method of supply is generally determined by the lowest cost means of meeting the customer's needs, depending upon factors such as volume requirements, purity, pattern of usage, and the form in which the product is used (as a gas or as a cryogenic liquid). ON-SITE. Customers that require the largest volumes of product (typically oxygen, nitrogen and hydrogen) and that have a relatively constant demand pattern are supplied by cryogenic on-site plants. Praxair constructs plants on or adjacent to these customers' sites and supplies the product directly to customers. Because these are usually dedicated plants, the product supply contracts generally are total requirement contracts, typically having 10-20 year terms and containing minimum purchase requirements and price escalation provisions. Many of the cryogenic on-site plants also produce liquid products for the merchant market. New advanced air separation processes allow on-site delivery to customers with smaller volume requirements. Customers using these systems usually enter into requirement contracts with terms typically ranging from 5-15 years. MERCHANT. The merchant business is generally associated with distributable liquid oxygen, nitrogen, argon, carbon dioxide, hydrogen and helium. Atmospheric gases for the merchant business are produced by cryogenic processes, whereas carbon dioxide, hydrogen and helium are produced by other processes as discussed earlier. The deliveries generally are made from Praxair's plants by tanker truck to storage containers owned and maintained by Praxair at the customer's site. Although merchant oxygen and nitrogen generally have a relatively small distribution radius from the plants at which they are produced, merchant argon, hydrogen and helium can be shipped much longer distances. The agreements used in the merchant business are usually three to five year requirement contracts except for carbon dioxide which typically has one year requirement contracts. PACKAGED GASES. Customers requiring small volumes are supplied products in metal containers called cylinders, usually at medium to high pressure. These so-called packaged gases include the atmospheric gases, carbon dioxide, hydrogen, helium and acetylene. Praxair also produces and distributes in cylinders a wide range of specialty gases and mixtures. Cylinders may be delivered to the customer's site or picked up by the customer at a packaging facility or retail store. Packaged gases are generally sold by purchase orders. In the United States, most cylinder products are sold along with welding equipment (hardgoods) by distributors that buy the merchant product from industrial gases producers and package the product at their own facilities. Praxair has a large network of independent distributors and owns equity interests in distributor operations in 30 states in the U.S. and Puerto Rico. Praxair has acquired independent distributors in various locations in the United States. PART I (CONT.) PRAXAIR, INC. AND SUBSIDIARIES SURFACE TECHNOLOGIES Praxair's surface technologies business provides metallic and ceramic coatings services for parts and equipment provided by customers. It also provides aircraft engine and airframe component overhaul services and sells a variety of specialty powders. Praxair Surface Technologies also manufactures a complete line of electric arc, plasma, and high velocity oxygen fuel spray equipment as well as arc and flame wire equipment. This equipment is used for the application of thermal barrier wear resistant coating. The coatings extend wear life at high temperatures and under corrosive conditions. These coatings are applied at Praxair's facilities using a variety of thermal spray coatings processes. The coated parts are finished to the customer's precise specifications before shipment. Customers for Praxair's surface technologies products and services include the aircraft, automotive, electronics, metal finishing, paper, petrochemical, printing and textile industries. INVENTORIES - Praxair carries inventories of merchant and cylinder gases and coatings materials to supply products to its customers on a reasonable delivery schedule. On-site plants and pipeline complexes have limited inventory. Inventories, inventory obsolescence and backlogs are not material to Praxair's business. CUSTOMERS - Praxair is not dependent, to a significant extent, upon a single customer or a few customers. INTERNATIONAL - Praxair is a global enterprise with 49% of its 1997 sales outside of the United States. It conducts industrial gases business through subsidiary and affiliated companies in Argentina, Australia, Belgium, Belize, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Ecuador, France, Germany, Indonesia, India, Israel, Italy, Japan, Korea, Mexico, the Netherlands, the People's Republic of China, Paraguay, Peru, Poland, Portugal, Spain, Thailand, Turkey, Uruguay and Venezuela. S.I.A.D. (Societa Italiana Acetilene & Derivati S.p.A.), an Italian company carried at equity, also has established positions in Austria, Bulgaria, Croatia, the Czech Republic, Hungary, Romania and Slovenia. Praxair's surface technologies business has operations in Brazil, Denmark, France, Germany, Italy, Japan, Singapore, Spain, Switzerland and the United Kingdom. Praxair's international business is subject to risks customarily encountered in foreign operations, including fluctuations in foreign currency exchange rates and controls, import and export controls, and other economic, political and regulatory policies of local governments. Also, see Note 1 of the section captioned "Notes to Consolidated Financial Statements", and the section captioned "Management's Discussion and Analysis - Market Risk and Sensitivity Analyses" in Praxair's 1997 Annual Report to Shareholders. SEASONALITY - Praxair's business is generally not subject to seasonal fluctuations to any significant extent. RESEARCH AND DEVELOPMENT - Praxair's research and development is directed toward developing new and improved methods for the production and distribution of industrial gases and the development of new markets and applications for these gases. This results in the frequent introduction of new industrial gas applications. It has also led to the development of new advanced air separation process technologies. Research and development for industrial gases is principally conducted at Tonawanda and Tarrytown, New York; Burr Ridge, Illinois; Rio de Janeiro, Brazil; Mississauga, Canada and Norwood, Massachusetts. Praxair conducts research and development for its surface technologies to improve the quality and durability of coatings and the use of specialty powders for new applications and industries. Surface technologies research is conducted at Indianapolis, Indiana. PATENTS AND TRADEMARKS - Praxair owns or licenses a large number of United States and foreign patents that relate to a wide variety of products and processes. Praxair's patents expire at various times over the next 20 years. While these patents and licenses are considered important, Praxair does not consider its business as a whole to be materially dependent upon any one particular patent or patent license. Praxair also owns a large number of trademarks. PART I (CONT.) PRAXAIR, INC. AND SUBSIDIARIES RAW MATERIALS AND ENERGY - Energy is the largest single cost item in the production and distribution of industrial gases. Principal risks to Praxair's business and financial performance include shortage of electric power and natural gas, interruption of supply or increases in price which cannot be passed through to customers. Praxair has not, historically, experienced significant difficulties of this nature. Also, Praxair operates a large fleet of trucks, and any fuel shortage may adversely affect its distribution system. For carbon dioxide, carbon monoxide, helium, hydrogen, specialty gases and surface technologies, raw materials are largely purchased from outside sources. Praxair has contracts or commitments for, or readily available sources of, most of these raw materials; however, their long term availability and prices are subject to market conditions. COMPETITION - Praxair operates within a highly competitive environment. Some of its competitors are larger in size and capital base than Praxair. Competition is based on price, product quality, delivery, reliability, technology and service to customers. Major competitors in the industrial gases industry both in the United States and worldwide include The BOC Group p.l.c., L'Air Liquide S.A., Air Products and Chemicals, Inc., and AGA Aktiebolag. At a worldwide level, there are no congruent competitors for the surface technologies business. However, principal domestic competitors are Sermatech International, Inc., a subsidiary of Teleflex, Inc., and Chemtronics, Inc., a subsidiary of Interlake, Inc. International competitors in surface technologies vary from country to country. EMPLOYEES AND LABOR RELATIONS - As of December 31, 1997, Praxair had 25,388 employees worldwide, excluding employees related to assets held for sale. Of this number, 8,797 are employed in the United States. Praxair has collective bargaining agreements with unions at numerous locations throughout the world which expire at various dates. Praxair considers relations with its employees to be good. ENVIRONMENT - Information required by this item is incorporated herein by reference to the section captioned "Management's Discussion and Analysis - Costs Relating to the Protection of the Environment" in Praxair's 1997 Annual Report to Shareholders. PART I (CONT.) PRAXAIR, INC. AND SUBSIDIARIES ITEM 2. PROPERTIES Praxair's worldwide headquarters is located in leased office space in Danbury, Connecticut. Other principal administrative offices are owned in Tonawanda, New York and Rio de Janeiro, Brazil. Praxair designs, engineers, manufactures and operates facilities that produce and distribute industrial gases. These industrial gas production facilities and certain components are designed and/or manufactured at its facilities in Tonawanda, New York; Norwood, Massachusetts; Burr Ridge, Illinois and Rio de Janeiro, Brazil. Praxair's Italian equity affiliate, Societa Italiana Acetilene & Derivati S.p.A. (S.I.A.D.) also has such capacity. Praxair owns 301 cryogenic air separation plants (164 in the United States); 89 by-product carbon dioxide plants (22 in the United States); 291 non-cryogenic plants, and 30 hydrogen plants. No single production facility is material except for the following complexes: Number of SUPPLY SYSTEM CONNECTED PLANTS PRODUCTS PRODUCED Northern Indiana 11 Air Separation/Hydrogen Houston 8 Air Separation Gulf Coast * 11 Hydrogen/ Carbon Monoxide Detroit 6 Air Separation/Hydrogen Southern Brazil * 2 Air Separation Northern Spain 3 Air Separation/Hydrogen * partially owned and partially leased. The surface technologies business operates 33 plants located near customers in Brazil, Denmark, France, Germany, Italy, Japan, Singapore, Spain, Switzerland, the United Kingdom and the United States. Generally, these facilities are fully utilized and sufficient to meet customer needs. ITEM 3. LEGAL PROCEEDINGS Information required by this item is incorporated herein by reference to the section captioned "Notes to Consolidated Financial Statements - Note 14 Commitments and Contingencies" in Praxair's 1997 Annual Report to Shareholders. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Praxair did not submit any matters to a shareholder vote during the fourth quarter of 1997. PART II PRAXAIR, INC. AND SUBSIDIARIES ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Market, trading, shareholder and dividend information for Praxair's common stock is incorporated herein by reference to the section captioned "Information for Investors" in Praxair's 1997 Annual Report to Shareholders. Praxair's annual dividend on its common stock for 1997 was $0.44 per share. In January 1998, Praxair's Board of Directors declared a dividend of $0.125 per share for the first quarter of 1998, or $0.50 per share annualized, which may be changed as Praxair's earnings and business prospects warrant. The declaration of dividends is a business decision made by the Board of Directors based on Praxair's earnings and financial condition and other factors the Board of Directors considers relevant. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1997 is incorporated herein by reference to the section captioned "Five-year Financial Summary" in Praxair's 1997 Annual Report to Shareholders. This summary should be read in conjunction with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this item is incorporated herein by reference to the section captioned "Management's Discussion and Analysis" in Praxair's 1997 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this item is incorporated herein by reference to the section captioned "Management's Discussion and Analysis" in Praxair's 1997 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is incorporated herein by reference to the sections captioned "Consolidated Statement of Income," "Consolidated Balance Sheet," "Consolidated Statement of Cash Flows," "Consolidated Statement of Shareholders' Equity" and "Notes to Consolidated Financial Statements" in Praxair's 1997 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants reportable under this item. PART III PRAXAIR, INC. AND SUBSIDIARIES ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item is incorporated herein by reference to the section captioned "Directors and Executive Officers" in Praxair's Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 1998. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated herein by reference to the section captioned "Executive Compensation" in Praxair's Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Principal Holders" in Praxair's Proxy Statement for the Annual Meeting of Shareholders to be held April 28, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There have been no transactions or relationships since the beginning of 1997 which are reportable under this item. PART IV PRAXAIR, INC. AND SUBSIDIARIES ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules PAGE NO. IN PRAXAIR'S 1997 ANNUAL REPORT (AR)* FINANCIAL STATEMENTS Consolidated Statement of Income for the Years Ended December 31, 1997, 1996 and 1995 ......................... AR-34 Consolidated Balance Sheet at December 31, 1997 and 1996 .. AR-35 Consolidated Statement of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 ......................... AR-36 Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 ............. AR-37 Notes to Consolidated Financial Statements ................ AR-38 Report of Independent Accountants ......................... AR-53 * Incorporated by reference from the indicated pages of the 1997 Annual Report to Shareholders. FINANCIAL STATEMENT SCHEDULES All financial statement schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (b) Reports on Form 8-K Non-applicable. (c) Exhibits Exhibits filed as a part of this Annual Report on Form 10-K are listed in the Index to Exhibits located on page 11 of this Report. SIGNATURES PRAXAIR, INC. AND SUBSIDIARIES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRAXAIR, INC. (Registrant) Date: March 18, 1998 /s/J. Robert Vipond J. Robert Vipond VICE PRESIDENT AND CONTROLLER (ON BEHALF OF THE REGISTRANT AND AS CHIEF ACCOUNTING OFFICER) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 24, 1998. /s/John A. Clerico /s/Alejandro Achaval /s/Ronald L. Kuehn, Jr. John A. Clerico Alejandro Achaval Ronald L. Kuehn, Jr. EXECUTIVE VICE PRESIDENT DIRECTOR DIRECTOR & CHIEF FINANCIAL OFFICER AND DIRECTOR /s/Edgar G. Hotard /s/Raymond W. LeBoeuf /s/Benjamin F. Payton Edgar G. Hotard Raymond W. LeBoeuf Benjamin F. Payton PRESIDENT AND CHIEF DIRECTOR DIRECTOR OPERATING OFFICER AND DIRECTOR /s/H. William Lichtenberger /s/C. Fred Fetterolf /s/G. Jackson Ratcliffe, Jr. H. William Lichtenberger C. Fred Fetterolf G. Jackson Ratcliffe, Jr. CHAIRMAN AND CHIEF DIRECTOR DIRECTOR EXECUTIVE OFFICER /s/Dale F. Frey /s/H. Mitchell Watson, Jr. Dale F. Frey H. Mitchell Watson, Jr. DIRECTOR DIRECTOR /s/Claire W. Gargalli Claire W. Gargalli DIRECTOR INDEX TO EXHIBITS PRAXAIR, INC. AND SUBSIDIARIES EXHIBIT NO. DESCRIPTION 2.01 Agreement and Plan of Merger dated as of December 22, 1995 among Praxair, Inc., PX Acquisition Corp. and CBI Industries, Inc. (Filed as Exhibit 2 to the Company's Current Report on Form 8-K dated December 22, 1995, Filing No. 1-11037, and incorporated herein by reference). 3.01 Restated Certificate of Incorporation (Filed as Exhibit 3.01 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 3.02 Amended By Laws of Praxair, Inc. (Filed as Exhibit 3.02 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 3.03 Certificate of Designations for the 7.48% Cumulative Preferred Stock, Series A. (Filed on February 7, 1997 as Exhibit 3.3 to Amendment #1 to the Company's Registration Statement on Form S-3, Registration No. 333-18141). 3.04 Certificate of Designations for the 6.75% Cumulative Preferred Stock, Series B. (Filed on February 7, 1997 as Exhibit 3.4 to Amendment #1 to the Company's Registration Statement on Form S-3, Registration No. 333-18141). 4.01 Common Stock Certificate (Filed as Exhibit 4.01 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 4.02 Rights Agreement between the registrant and The Bank of New York as Rights Agent. (Filed as Exhibit 4.02 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 4.03 Indenture, dated as of July 15, 1992, between Praxair, Inc. and State Street Bank and Trust Company, successor trustee to Fleet Bank of Connecticut and the ultimate successor trustee to Bank of America Illinois (formerly Continental Bank, National Association) (Filed as Exhibit 4 to the Company's Form 10-Q for the quarter ended June 30, 1992, Filing No. 1-11307, and incorporated herein by reference). 4.04 Copies of the agreements relating to long-term debt which are not required to be filed as exhibits to this Annual Report on Form 10-K will be furnished to the Securities and Exchange Commission upon request. 4.05 Series A Preferred Stock Certificate. (Filed on February 7, 1997 as Exhibit 4.3 to Amendment #1 to the Company's Registration Statement on Form S-3, Registration No. 333-18141). 4.06 Series B Preferred Stock Certificate. (Filed on February 7, 1997 as Exhibit 4.4 to Amendment #1 to the Company's Registration Statement on Form S-3, Registration No. 333-18141). *10.01 1992 Long-Term Incentive Plan (Filed as Exhibit 10.01 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). *10.01a First Amendment to the 1992 Long-Term Incentive Plan (Filed as Exhibit 10.01a to the Company's 1993 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). INDEX TO EXHIBITS (CONT.) PRAXAIR, INC. AND SUBSIDIARIES EXHIBIT NO. DESCRIPTION *10.01b Second Amendment to the 1992 Long-Term Incentive Plan (Filed as Exhibit 10.01b to the Company's 1995 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). *10.01c Third Amendment to the 1992 Long-Term Incentive Plan (Filed as Exhibit 10.01c to the Company's 1995 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). *10.01d Fourth Amendment to the 1992 Long-Term Incentive Plan (Filed as Exhibit 10.01d to the Company's 1996 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). *10.02 Form of Severance Compensation Agreement *10.03 1992 Variable Compensation Plan (Filed as Exhibit 10.03 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). *10.03a First Amendment to the 1992 Variable Compensation Plan (Filed as Exhibit 10.03a to the Company's 1993 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). *10.04 1995 Stock Option Plan for Non-Employee Directors (Filed as Exhibit 10.04 to the Company's Form 10-Q for the Quarter ended March 31, 1995, Filing No. 1-11037, and incorporated herein by reference). *10.05 Special Severance Protection Program (Filed as Exhibit 10.05 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). *10.06 Restated Praxair, Inc. Directors' Fees Deferral Plan (Filed as Exhibit 10.06 to the Company's 1996 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). *10.07 Amended and Restated 1993 Praxair Compensation Deferral Program (Filed as Exhibit 10.07 to the Company's 1996 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). 10.08 Transfer Agreement dated January 1, 1989, between Union Carbide Corporation and the registrant. (Filed as Exhibit 10.06 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.08a Amendment No. 1 dated as of December 31, 1989, to the Transfer Agreement (Filed as Exhibit 10.07 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.08b Amendment No. 2 dated as of July 2, 1990, to the Transfer Agreement (Filed as Exhibit 10.08 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.08c Amendment No. 3 dated as of January 2, 1991, to the Transfer Agreement (Filed as Exhibit 10.09 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.09 Transfer Agreement dated January 1, 1989, between Union Carbide Corporation and Union Carbide Coatings Service Corporation (Filed as Exhibit 10.14 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). INDEX TO EXHIBITS (CONT.) PRAXAIR, INC. AND SUBSIDIARIES EXHIBIT NO. DESCRIPTION 10.09a Amendment No. 1 dated as of December 31, 1989, to the Transfer Agreement (Filed as Exhibit 10.15 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.09b Amendment No. 2 dated as of July 2, 1990, to the Transfer Agreement (Filed as Exhibit 10.16 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.10 Additional Provisions Agreement dated as of June 4, 1992, (Filed as Exhibit 10.21 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.11 Amended and Restated Realignment Indemnification Agreement dated as of June 4, 1992 (Filed as Exhibit 10.23 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.12 Environmental Management, Services and Liabilities Allocation Agreement dated as of January 1, 1990 (Filed as Exhibit 10.13 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.12a Amendment No. 1 to the Environmental Management, Services and Liabilities Allocation Agreement dated as of June 4, 1992 (Filed as Exhibit 10.22 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.13 Danbury Lease-Related Services Agreement dated as of June 4, 1992 (Filed as Exhibit 10.24 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.13a First Amendment to Danbury Lease-Related Services Agreement (Filed as Exhibit 10.13a to the Company's 1994 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). 10.14 Danbury Lease Agreements, as amended (Filed as Exhibit 10.26 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.14a Second Amendment to Linde Data Center Lease (Danbury) (Filed as Exhibit 10.14a to the Company's 1993 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). 10.14b Fourth Amendment to Carbide Center Lease (Filed as Exhibit 10.14b to the Company's 1993 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). 10.14c Third Amendment to Linde Data Center Lease (Filed as Exhibit 10.14c to the Company's 1994 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). 10.14d Fifth Amendment to Carbide Center Lease (Filed as Exhibit 10.14d to the Company's 1994 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). 10.15 Employee Benefits Agreement dated as of June 4, 1992 (Filed as Exhibit 10.25 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.15a First Amendatory Agreement to the Employee Benefits Agreement (Filed as Exhibit 10.15a to the Company's 1994 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). INDEX TO EXHIBITS (CONT.) PRAXAIR, INC. AND SUBSIDIARIES EXHIBIT NO. DESCRIPTION 10.16 Tax Disaffiliation Agreement dated as of June 4, 1992 (Filed as Exhibit 10.20 to the Company's Registration Statement on Form 10, Filing No. 1-11037, and incorporated herein by reference). 10.17 Credit Agreement dated as of December 7, 1995, among Praxair, Inc., The Banks Party Thereto, Morgan Guaranty Trust Company of New York as Documentation Agent and The Chase Manhattan Bank (formerly known as Chemical Bank), as Administrative Agent (Filed as Exhibit 10.17 to the Company's 1995 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). 10.17a Amendment No. 1 to Credit Agreement, dated as of December 22, 1997. *10.18 1996 Praxair, Inc. Senior Executive Performance Award Plan (Filed as Exhibit 10.19 to the Company's Report on Form 10-Q for the Quarter ended March 31, 1996, Filing No. 1-11037, and incorporated herein by reference). 10.19 Form of Underwriting Agreement related to the sale of shares of Chicago Bridge & Iron Company N.V. (Filed as Exhibit 1 to the Registration Statement on Form S-1 of Chicago Bridge & Iron Company N.V., Registration No. 333-18065, and incorporated herein by reference). 12.01 Computation of Ratio of Earnings to Fixed Charges. 13.01 Praxair's 1996 Annual Report to Shareholders (such report, except for those portions which are expressly referred to in this Form 10-K, is furnished for the information of the Commission and is not deemed "filed" as part of this Form 10-K). 21.01 Subsidiaries of Praxair, Inc. 23.01 Consent of Independent Accountants. Copies of exhibits incorporated by reference can be obtained from the SEC and are located in SEC File No. 1-11037. * Indicates a management contract or compensatory plan or arrangement. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1997 Commission file number 1-11037 EXHIBITS Praxair, Inc. 1997 Form 10-K Praxair, Inc. Tel. (203) 837-2000 39 Old Ridgebury Road State of incorporation: Delaware Danbury, Connecticut 06810-5113 IRS identification number: 06-124 9050 EX-10.02 2 Exhibit 10.02 Praxair, Inc. Severance Compensation Agreement February 28, 1997 NAME ADDRESS Dear Mr. : The Board of Directors (the "Board") of Praxair, Inc. ("Praxair") recognizes that the possibility of a Change in Control of Praxair exists, and the uncertainty and questions which it may raise among management may result in the departure or distraction of management personnel to the detriment of Praxair or its majority-owned subsidiaries incorporated in the United States (hereinafter to be referred to collectively as the "Company"). The Board of Praxair has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from a possible Change in Control of Praxair. In order to induce you to remain in the employ of the Company and in consideration of your continued service to the Company, Praxair agrees that you shall receive the severance benefits set forth in this Severance Compensation Agreement ("Agreement") in the event your employment with the Company is terminated subsequent to a Change in Control under the circumstances described below. 1. DEFINITIONS. a. "CHANGE IN CONTROL" of Praxair means the occurrence of any one of the following events: (i) individuals who, on January 1, 1997, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 1, 1997, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be an Incumbent Director; PROVIDED, HOWEVER, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies [or consents] by or on behalf of any person other than the Board shall be deemed an Incumbent Director; (ii) any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); PROVIDED, HOWEVER, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary, (B) by any employee benefit plan sponsored or maintained by the Company or Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, or (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)); (iii) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or (iv) The stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale or disposition of all or substantially all of the Company's assets. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; PROVIDED, THAT if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur. b. "DATE OF TERMINATION" shall mean (i) in case employment is terminated for Total Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), and (ii) in all other cases, the date specified in the Notice of Termination (which shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). c. "TOTAL DISABILITY" shall mean total physical or mental disability rendering you unable to perform the duties of your employment for a continuous period of six (6) months. Any question as to the existence of your Total Disability upon which you and the Company cannot agree shall be determined by a qualified physician not employed by the Company and selected by you (or, if you are unable to make such selection, it shall be made by any adult member of your immediate family), and approved by the Company. The determination of such physician made in writing to the Company and to you shall be final and conclusive for all purposes of this Agreement. d. "GOOD REASON FOR RESIGNATION" shall mean, without your express written consent, any of the following: (i) a change in your status or position with the Company which in your reasonable judgment does not represent a promotion from your status or position immediately prior to the Change in Control, or the assignment to you of any duties or responsibilities or diminution of duties or responsibilities which in your reasonable judgment are inconsistent with your status or position with the Company in effect immediately prior to the Change in Control, it being understood that any of the foregoing in connection with termination of your employment for Cause, Retirement, or Total Disability shall not constitute Good Reason for Resignation; (ii) a reduction by the Company in the annual rate of your base salary as in effect immediately prior to the date of a Change in Control or as the same may be increased from time to time thereafter, or the Company's failure to increase the annual rate of your base salary for a calendar year in an amount at least equal to the percentage increase in base salary for all domestic employees of the Company with Severance Compensation Agreements in the preceding calendar year. Within three (3) days after your request, the Company shall notify you of the average percentage increase in base salary for all such employees of the Company in the calendar year preceding your request; (iii) the Company's requiring you to be based outside of a fifteen (15) mile radius from where your office is located immediately prior to a Change in Control except for required travel on the Company's business to an extent substantially consistent with your business travel obligations immediately prior to a Change in Control; (iv) the failure by the Company to continue in effect any compensation plan in which you participate as in effect immediately prior to the Change in Control, including but not limited to the Retirement Program Plan for Employees of Praxair, Inc. and its Participating Subsidiary Companies and any of the Incentive Compensation Plans, compensation deferral plans, or any substitute plans adopted prior to the Change in Control, unless an arrangement satisfactory to you (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue your participation therein on at least as favorable a basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed immediately prior to the Change in Control; (v) the failure by the Company to continue to provide you with benefits at least as favorable as those enjoyed by you (and your dependents, if applicable) under any of the Company's pre-retirement and post-retirement life insurance, medical, health and accident, and disability plans or any other plan, program or policy of the Company intended to benefit employees in which you were participating immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you immediately prior to the Change in Control, or the failure by the Company to provide you with the number of annual paid vacation days to which you were annually entitled immediately prior to the Change in Control; (vi) the failure of the Company to obtain a satisfactory agreement from any Successor (as defined in Paragraph 4a hereof) to assume and agree to perform this Agreement, as contemplated in Paragraph 4a hereof; (vii) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements hereof; for purposes of this Agreement, no such purported termination shall be effective for any purpose except to constitute a Good Reason for Resignation. e. "INCENTIVE COMPENSATION AWARD" shall mean payment or payments under Incentive Compensation Plans. f. "INCENTIVE COMPENSATION PLANS" shall mean any variable compensation or incentive compensation plans maintained by the Company, including, but not limited to: (i) 1992 Praxair, Inc. Long Term Incentive Plan, (ii) 1992 Praxair, Inc. Variable Compensation Plan, (iii) Praxair, Inc. Profit Sharing Plan, (iv) 1996 Praxair, Inc. Senior Executive Performance Award Plan and (v) 1996 Praxair, Inc. Performance Incentive Plan. g. "NOTICE OF TERMINATION" shall mean a written notice as provided in Paragraph 9 hereof. h. "RETIREMENT" shall mean (1) voluntary retirement before your mandatory retirement age, if any, with an immediate, nonactuarially-reduced pension under the Company's Retirement Program (termination of your employment by you before your mandatory retirement age, if any, with Good Reason for Resignation shall not be deemed a Retirement for purposes of this Agreement even though you are eligible for and elect to receive an immediate, nonactuarially-reduced pension under the Company's Retirement Program) or (2) termination in accordance with any retirement arrangement other than under the Company's Retirement Program, which is established with your consent with respect to you or (3) mandatory retirement as set forth under the policy of the Company as it existed prior to the Change in Control or as agreed to by you following a Change in Control. i. "RETIREMENT PROGRAM" shall mean the Retirement Program Plan for Employees of Praxair, Inc. and its Participating Subsidiary Companies plus any excess or supplemental pension plans maintained by the Company. j. "TERMINATION FOR CAUSE" shall mean termination of your employment upon your willfully engaging in conduct demonstrably and materially injurious to the Company, monetarily or otherwise, provided that there shall have been delivered to you a copy of a resolution duly adopted by the unanimous affirmative vote of the entire membership of the Board of the Company at a meeting of the Board of the Company called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board of the Company), finding that in the good faith opinion of the Board of the Company you were guilty of the conduct set forth and specifying the particulars thereof in detail. For purposes of this Paragraph 1j, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Any act or failure to act based upon authority given pursuant to a resolution duly adopted by the Board of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done or omitted to be done by you in good faith and in the best interests of the Company. 2. COMPENSATION UPON TERMINATION OR WHILE DISABLED. Following a Change in Control of Praxair you shall be entitled to the following benefits: a. TERMINATION OTHER THAN FOR CAUSE, RETIREMENT, DEATH OR TOTAL DISABILITY; TERMINATION BY YOUR RESIGNATION WITH GOOD REASON FOR RESIGNATION. If your employment by the Company shall be terminated subsequent to the Change in Control and during the term of this Agreement (a) by the Company other than for Cause, Retirement, Death or Disability or (b) by you for Good Reason for Resignation, then you shall be entitled to the benefits provided below, without regard to any contrary provision of any plan: (i) ACCRUED SALARY. The Company shall pay you, not later than the fifth day following the Date of Termination, your full base salary and vacation pay accrued through the Date of Termination at the rate in effect at the time the Notice of Termination is given (or at the rate in effect immediately prior to a Change in Control, if such amounts were higher). (ii) ACCRUED INCENTIVE COMPENSATION. The Company shall pay you, not later than thirty (30) days following your Date of Termination, the amount of your Accrued Incentive Compensation. If the Date of Termination is after the end of a Variable Compensation Year, but before Incentive Compensation for said Variable Compensation Year has been paid, the Company shall pay you as Incentive Compensation for that Variable Compensation Year the greatest of: (a) an amount that bears the same ratio to your total base salary in said Variable Compensation Year as the Incentive Compensation paid to you during the immediately prior Variable Compensation Year bears to your base salary for said prior Variable Compensation Year, (b) an amount that bears the same ratio to your base salary for such Variable Compensation Year as the Incentive Compensation paid to you during the three (3) immediately prior Variable Compensation Years bears to your base salary for said three (3) prior years, (c) the amount of your target variable compensation payment for such Variable Compensation Year, or (d) the average amount of Incentive Compensation, as a percentage of base compensation, paid to other executives of the Company at the same grade level as yourself. In addition, if the Date of Termination is other than the first day of a Variable Compensation Year, the Company shall pay you, as Incentive Compensation for the Variable Compensation Year in which the Date of Termination occurs, the greatest of: (a) an amount that bears the same ratio to your total base salary earned (up to the Date of Termination) in said Variable Compensation Year as the Incentive Compensation paid to you during the immediately prior Variable Compensation Year bears to your base salary for said prior Variable Compensation Year, (b) an amount that bears the same ratio to your total base salary earned (up to the Date of Termination) for such Variable Compensation Year as the Incentive Compensation paid to you during the three (3) Variable Compensation Years immediately prior to such Variable Compensation Year bears to your base salary for said three (3) prior years, or (c) the amount of your target variable compensation payment for such Variable Compensation Year multiplied by a fraction, the numerator of which is the total number of days which have elapsed in the current Variable Compensation Year to the Date of Termination, and the denominator of which is three hundred sixty-five (365). Such payment shall be made to you not later than thirty (30) days after the Date of Termination. If there is more than one Incentive Compensation Program, your accrued Incentive Compensation under each Program shall be determined individually for that Program. For the purpose of determining the amount of your Accrued Incentive Compensation under this Paragraph 2a(ii), you will be deemed to have been paid the full amount of all prior variable and incentive compensation, whether or not such award was includible in your gross income for Federal Income tax purposes. For the purpose of this Paragraph 2a(ii), "Incentive Compensation Program" means any of the Incentive Compensation Plans defined in Paragraph 1f and any other plan or program for the payment of incentive compensation, variable compensation, bonus, benefits or awards for which you were, or your position was, eligible to participate; "Incentive Compensation" means any compensation, variable compensation, bonus, benefit or award paid or payable under an Incentive Compensation Program; and "Variable Compensation Year" means a calendar or fiscal plan year of an Incentive Compensation Program. (iii) INSURANCE COVERAGE. The Company shall arrange to provide you (and your dependents, if applicable) with life, disability, accident and health insurance benefits substantially equivalent to those which you are receiving or entitled to receive immediately prior to the Change in Control of the Company. Such insurance benefits shall be provided to you for the longer of (x) thirty six (36) months after such Date of Termination or (y) the period during which such insurance benefits would have been provided to you, as a terminated employee, under the applicable life insurance, medical, health and accident and disability insurance plans of the Company in effect immediately prior to the Change in Control of the Company (except that after a period of thirty six (36) months, such insurance benefits shall be provided to you on the same financial terms and conditions as provided for under the respective plans). Should it be determined that any of the medical benefits to be provided to you under this subsection (iii) could be included in your gross income for federal, state or local tax purposes, then the following shall apply: (a) If you are retirement eligible on your Date of Termination, then you shall participate in the Company's medical benefit plans as if you retired from the Company on your Date of Termination, except that the Company shall provide such medical coverage at no cost to you for three (3) years following your Date of Termination and thereafter, you shall participate therein on the same terms as other retired employees; (b) If you are not eligible for retirement upon your Date of Termination, you will no longer continue to participate in the Company's medical benefit plans and (i) the Company shall provide you with a cash payment in an amount equal to the amount required by you to pay for coverage under COBRA for the first eighteen (18) months following your loss of medical coverage, and thereafter, (ii) the Company shall, for the subsequent eighteen (18) months, purchase for you, at its cost, a policy of medical insurance providing benefits substantially similar to the benefits you would have received under the Company's medical benefit plans. (iv) RETIREMENT BENEFITS. The Company shall pay you, at the time you are entitled to be paid a retirement pension under the Retirement Program, a retirement pension equal to the greater of (x) an amount computed in accordance with the terms of the Retirement Program in effect immediately prior to the Change in Control of Praxair and as if those terms were in effect on the Date of Termination, or (y) an amount computed in accordance with the terms of the Retirement Program in effect immediately prior to the Date of Termination, in either case less the amount of retirement pension actually to be paid to you under the Retirement Program. In computing the amounts of your retirement pension under clauses (x) and (y) of this Paragraph 2a(iv), three years shall be added to your actual age and to your actual Company Service Credit under the Retirement Program so that your retirement pension under clauses (x) and (y) will be the amount it would have been if you had been three years older than you actually were, and had three years more Company Service Credit than you actually had, on the Date of Termination. If for any reason, the benefits under this subparagraph (iv) cannot be paid under the tax-qualified portion of the Retirement Program, the Company shall provide such benefits to you through the purchase, and delivery to you, of a non-qualified annuity from an insurance company, or you may elect to receive a lump sum payment for the benefits under this subparagraph (iv), calculated under such one of the following options as would produce the highest lump sum payment: (a) calculated under the same factors (interest rate and mortality) as lump sum payments were made under the Company's Supplemental Retirement Income Plan and Equalization Benefit Plan in effect immediately prior to a Change in Control, (b) calculated under the same factors (interest rate and mortality) as lump sum payments are made under the Company's Supplemental Retirement Income Plan and Equalization Benefit Plan, or other similar plans, as in effect on the Date of Termination, or (c) calculated under the same factors (interest rate and mortality) as lump sum payments would have been calculated under the Company's Supplemental Retirement Income Plan and Equalization Benefit Plan on the Date of Termination, if such factors were determined using the same methodology as such plans used prior to the Change in Control. (v) OUTPLACEMENT COUNSELING. The Company shall make available to you, at the Company's expense, outplacement counseling. You may select the organization that will provide the outplacement counseling, however, the Company's obligation to provide you benefits under this subsection (v) shall be limited to $35,000. (vi) FINANCIAL COUNSELING. The Company shall, within 30 days of the Date of Termination, make available to you three individual financial counseling sessions, of at least two hours each and at times and locations that are convenient to you, with a nationally recognized financial counseling firm. The financial counseling firm may also provide you with tax counseling and tax preparation services. You may select the organization that will provide the financial and tax counseling, however, the Company's obligation to provide you benefits under this subsection (vi) shall be limited to $10,000. At the financial counseling sessions, the financial counseling firm shall provide you with detailed financial advice that is tailored to your particular personal and financial situation. The Company shall specify to you the information regarding your personal and financial situation that you must provide to the financial counseling firm in order for the firm to provide the counseling services required by this Section 2(a)(vi). The Company shall take all reasonable and appropriate measures to assure that the financial counseling firm preserves the confidentiality of all information conveyed by you to the counseling firm. (vii) SEVERANCE PAYMENT. The Company shall pay as severance pay to you, not later than the fifth day following the Date of Termination, a lump sum severance payment (the "Severance Payment") equal to three (3) times the sum of the following: (a) the greater of your annual base compensation which was payable to you by the Company immediately prior to the Date of Termination and your annual base compensation which was payable to you by the Company immediately prior to a Change in Control, whether or not such annual base compensation was includible in your gross income for Federal income tax purposes; plus (b) the greater of: (y) the amount of your most recent Incentive Compensation Award received prior to the Date of Termination, or, if higher, the amount of your most recent Incentive Compensation Awards received prior to the Change in Control, whether or not such bonus or award was includible in your gross income for Federal Income tax purposes, or (z) an amount that bears the same ratio to your annual base salary in effect immediately prior to the Date of Termination, or, if higher, your annual base salary in effect immediately prior to the Change in Control, as the Incentive Compensation paid to you during the three (3) immediately prior Incentive Compensation Years bears to your base salary for said three (3) prior years; plus (c) the greater of the value, as determined by the Company at the time of the grant, attributable to any stock options awarded to you by the Company at the most recent date of grant of stock options prior to the Date of Termination and the value, as determined by the Company at the time of grant, attributable to any stock options awarded to you by the Company at the most recent date of grant of stock options prior to a Change in Control. In determining such value, the number of stock options awarded to you shall be multiplied by the value ascribed to a stock option by the Company using the Black-Scholes method or other similar methodology. If at the time of either of such grants it is specified in writing that the grant covers a period of more than one year, then the value of such grant as determined above shall be annualized by dividing such value by the number of years (or part thereof) the grant is specified to cover; plus (d) the greater of the value, as determined by the Company at the time of the grant, attributable to the grant to you by the Company of performance or restricted stock of the Company at the most recent date of grant prior to the Date of Termination and the value, as determined by the Company at the time of grant, attributable to the grant to you by the Company of performance or restricted stock of the Company at the most recent date of grant prior to a Change in Control. If at the time of either of such grants it is specified in writing that the grant covers a period of more than one year, then the value of such grant as determined above shall be annualized by dividing such value by the number of years (or part thereof) the grant is specified to cover. In determining such annualized value, the number of shares of performance or restricted stock awarded to you shall be multiplied by the closing price of the common stock of the Company on the New York Stock Exchange-Composite Transactions on the date of grant. The Severance Payment shall not be reduced to the extent the Company could not properly deduct amounts paid pursuant to Paragraph 2a(i) through 2a(vii) hereof or otherwise pursuant to section 280G of the Code. (viii) PAYMENT OF TAXES. (a) For purposes of this subparagraph (viii), the following terms shall have the following meanings: (I) PAYMENT shall mean any payment or distribution (or acceleration of benefits) by the Company to or for your benefit (whether paid or payable or distributed or distributable (or accelerated) pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this subsection (viii)). In addition, Payment shall mean the amount of income deemed to be received by you as a result of the acceleration of the exercisability of any of your options to purchase stock of the Company or the acceleration of the lapse of any restrictions on performance stock or restricted stock of the Company held by you. (II) EXCISE TAX shall mean the excise tax imposed by Section 4999 of the Code, or any interest or penalties incurred by you with respect to such excise tax. (III) INCOME TAX shall mean all taxes other than the Excise Tax (including any interest or penalties imposed with respect to such taxes) including, without limitation, any income and employment taxes imposed by any federal (including (i) FICA and medicare taxes, and (ii) the loss of any federal deductions or exemptions which would have been available to you but for receipt of the Payment), state, local, commonwealth or foreign government. (b) In the event it shall be determined that a Payment would be subject to an Excise Tax, then you shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of Income Tax and Excise Tax imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (c) All determinations required to be made under this subsection (viii), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and to you within fifteen (15) business days of the receipt of notice from you that there has been a Payment, or such earlier time as is requested by the Company (collectively, the "Determination"). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group affecting the Change in Control, you may appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this subsection (viii), shall be paid by the Company to you within ten (10) days of your receipt of the Payment. If the Accounting Firm determines that no Excise Tax is payable by you, you may request the Accounting Firm to furnish you with a written opinion that failure to report the Excise Tax on your applicable federal income tax return would not result in the imposition of a negligence or similar penalty. The Determination by the Accounting Firm shall be binding upon the Company and you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section (viii)(d) and you thereafter are required to make payment of any Excise Tax or Income Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for your benefit. (d) You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment or the Underpayment. Such notification shall be given as soon as practicable but no later than ten (10) business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30-day period following the date on which you give such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order effectively to contest such claim, and (4) permit the Company to participate in any proceeding relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or Income Tax imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section (viii)(d), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you on an interest-free basis and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or Income Tax imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (e) If, after the receipt by you of an amount advanced by the Company pursuant to Section (viii)(d), you become entitled to receive, and receive, any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of Section (viii)(d)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by you of an amount advanced by the Company pursuant to Section (viii)(d), a determination is made that you shall not be entitled to any refund with respect to such claims and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid. (ix) NO DUTY TO MITIGATE. You shall not be required to mitigate the amount of any payment provided for in this Paragraph 2 by seeking other employment or otherwise, nor shall the amount of any payment or benefit as provided for be reduced by any compensation earned by you as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise except as specifically provided herein. However, notwithstanding the foregoing, should you become reemployed in a job which (a) offers medical plan benefits which are equal to or greater than the medical plan benefits provided to you under subsection 2(a)(iii), and (b) such medical plan benefits are offered to you at no cost, you shall no longer be eligible to receive medical plan benefits under this Agreement. b. PAYMENTS WHILE DISABLED. During any period prior to the Date of Termination and during the term of this Agreement that you are unable to perform your full-time duties with the Company, whether as a result of your Total Disability or as a result of a physical or mental disability that is not total or is not permanent and therefore is not a Total Disability, you shall continue to receive your base salary at the rate in effect at the commencement of any such period, together with all other compensation and benefits that are payable or provided under the Company's benefit plans, including its disability plans. After the Date of Termination, your benefits shall be determined in accordance with the Company's Retirement Program, insurance and other applicable programs. The compensation and benefits, other than salary, payable or provided pursuant to this Paragraph 2b shall be the greater of (x) the amounts computed under the Retirement Program, disability benefit plans, insurance and other applicable programs in effect immediately prior to a Change in Control of Praxair and (y) the amounts computed under the Retirement Program, disability benefit plans, insurance and other applicable programs in effect at the time the compensation and benefits are paid. c. PAYMENTS IF TERMINATED FOR CAUSE, OR BY YOU EXCEPT WITH GOOD REASON. If your employment shall be terminated by the Company for Cause or by you other than with Good Reason for Resignation, the Company shall pay you your full base salary and accrued vacation pay then in effect through the Date of Termination, at the rate in effect at the time Notice of Termination is given plus any benefits or awards which have been earned or become payable but which have not yet been paid to you. You shall receive any payment due under this subsection c. on your Date of Termination. Thereafter the Company shall have no further obligation to you under this Agreement. d. AFTER RETIREMENT OR DEATH. If your employment shall be terminated by your Retirement, or by reason of your death, your benefits shall be determined in accordance with the Company's retirement and insurance programs then in effect. 3. TERM OF AGREEMENT. This Agreement shall commence on the date hereof and shall continue in effect through December 31, 1998; provided, however, that commencing on January 1, 1999 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or you shall have given notice that it or you do not wish to extend this Agreement. Notwithstanding any such notice by the Company or you not to extend the Agreement, if a Change in Control shall have occurred: (a) during the original or extended term of this Agreement or, (b) after this Agreement has been terminated, but within twelve months after such notice to terminate the Agreement is given by the Company, the attempted termination of the Agreement shall be deemed ineffective and this Agreement shall continue in effect. In any event, the term of this Agreement shall expire on the second (2nd) anniversary of the date of the Change in Control. This Agreement shall terminate if your employment is terminated by you or the Company prior to a Change in Control. 4. SUCCESSORS; BINDING AGREEMENT. a. SUCCESSORS OF THE COMPANY. The Company will require any Successor to all or substantially all of the business and/or assets of the Company to expressly assume and agree, by an agreement in form and substance satisfactory to you, to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assent at least five business days prior to the time a person becomes a Successor (or where the Company does not have at least five business days advance notice that a person may become a Successor, within three business days after having notice that such person may become or has become a Successor) shall constitute Good Reason for Resignation by you and, if a Change in Control of the Company has occurred or thereafter occurs, shall entitle you immediately to the benefits provided in Paragraph 2a hereof upon delivery by you of a Notice of Termination which the Company, by executing this Agreement, hereby assents to. For purposes of this Agreement, "Successor" shall mean any person that purchases all or substantially all of the assets of the Company or the Surviving Corporation (and Parent Corporation, if applicable) or obtains or succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of voting securities of the Company or by acquisition of rights to vote voting securities of the Company or otherwise, including but not limited to any person or group that acquires the beneficial ownership or voting rights described in Paragraph 1a(ii). b. YOUR SUCCESSOR. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If you should die following your Date of Termination while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 5. COVENANT NOT TO COMPETE. In consideration for this Agreement, you agree that at all times within a three (3) year period following your Date of Termination, that you will not, as a principal, agent, employee, employer, consultant, stockholder (other than an owner of less than 5% of the stock of a publicly traded company), investor, director or co-partner of any person, firm, corporation or business entity other than the Company, or in any individual representative capacity whatsoever, directly or indirectly, without the express prior written consent of the Company: (a) engage or participate in any business whose products or services are competitive with the business of the Company as it existed prior to a Change in Control; (b) aid or counsel any other person, firm, corporation or business entity to do any of the above; (c) approach, solicit business from, or otherwise do business or deal with any person, partnership, firm, corporation or other entity that at the time of your Date of Termination is a present client of the Company or which has been a client of the Company during your employment by the Company in connection with any product or service competitive to any provided by the Company as described in section 5(a) above. 6. RELATIONSHIP TO OTHER AGREEMENTS. To the extent that any provision of any other agreement between the Company and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of this Agreement shall control and such provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. 7. NATURE OF PAYMENTS. All payments to you under this Agreement shall be considered either payments in consideration of your continued service to the Company or severance payments in consideration of your past service to the Company. 8. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. NOTICE. Any purported termination of this Agreement by the Company or by you following a Change in Control shall be communicated to the other party by a Notice of Termination. A Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board of Praxair with a copy to the Secretary of Praxair or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11. FEES AND EXPENSES. Praxair shall pay all legal fees and related expenses incurred by you as a result of your termination following a Change in Control or by you in seeking to obtain or enforce any right or benefit provided by this Agreement (including all fees and expenses, if any, incurred in contesting or disputing any such termination or incurred by you in seeking advice in connection therewith). 12. SURVIVAL. The respective obligations of, and benefits afforded to, the Company and you as provided in Paragraphs 2, 4, 5, 6, 10 and 11 of this Agreement shall survive termination of this Agreement. 13. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 14. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Connecticut. 15. AMENDMENT. No amendment to this Agreement shall be effective unless in writing and signed by both you and the Company. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, PRAXAIR, INC. By: Title: Agreed to this day of , 1997 -1- EX-10.17A 3 [CONFORMED COPY] Exhibit 10.17a AMENDMENT NO. 1 TO CREDIT AGREEMENT AMENDMENT dated as of December 22, 1997 to the Credit Agreement dated as of December 7, 1995 (the "CREDIT AGREEMENT") among PRAXAIR, INC. (the "BORROWER"), the BANKS party thereto (the "Banks"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Documentation Agent (the "DOCUMENTATION AGENT"), and THE CHASE MANHATTAN BANK, as Administrative Agent. W I T N E S S E T H : WHEREAS, the parties hereto desire to amend the Credit Agreement to modify the conditions to borrowing; NOW, THEREFORE. the parties hereto agree as follows: SECTION 1. DEFINED TERMS; REFERENCES. Unless otherwise specifically deemed herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall, after this Amendment becomes effective, refer to the Credit Agreement as amended hereby. SECTION 2. MODIFICATION OF CONDITION TO BORROWING. Section 3.02(d) of the Credit Agreement is amended to read in its entirety as follows: (d) if such Borrowing is not a Refunding Borrowing, the fact that the representations and warranties of the Borrower contained in this Agreement (except the representation and warranty set forth in Section 4.04(c) as to any material adverse change which has theretofore been disclosed in writing to the Banks) shall be true on and as of the date of such Borrowing; and SECTION 3. REPRESENTATIONS OF BORROWER. The Borrower represents and warrants that (i) the representations and warranties of the Borrower set forth in Article 4 of the Credit Agreement will be true on and as of the Amendment Effective Date and (ii) no Default will have occurred and be continuing on such date. SECTION 4. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 5. COUNTERPARTS. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 6. EFFECTIVENESS. This Amendment shall become effective as of the date hereof on the date (the "AMENDMENT EFFECTIVE DATE") when the Documentation Agent shall have received from each of the Borrower and the Required Banks a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Documentation Agent) that such party has signed a counterpart hereof IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. PRAXAIR, INC. By: /S/ JAMES S. SAWYER Title: Vice President & Treasurer MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /S/ JAMES S. FINCH Title: Vice President THE CHASE MANHATTAN BANK By: /S/ ROBERT T. SACKS Title: Managing Director BANCA COMMERCIALE ITALIANA, NEW YORK BRANCH By: /S/ CHARLES DOUGHERTY Title: Vice President By: /S/ KAREN PURELIS Title: Vice President - 2 - BANCA NAZIONALE DEL LAVORO SPA, NEW YORK BRANCH By: /S/ LEONARDO VALENTINI Title: First Vice President By: /S/ MIGUEL J. MEDIDA Title: Vice President BANCA POPOLARE DI MILANO By: /S/ FULVIO MONTANARI Title: First Vice President By: /S/ PATRICK DILLON Title: Vice President Chief Credit Officer BANK BRUSSELS LAMBERT, NEW YORK BRANCH By: /S/ JOHN KIPPAX Title: Vice President & Manager By: /S/ DOMINICK VANGAEVER Title: Senior Vice President & Manager BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /S/ DONALD J. CHIN Title: Manager, Director THE BANK OF NEW YORK By: /S/ KENNETH P. SNEIDER. JR. Title: Vice President THE BANK OF NOVA SCOTIA By: /S/ J.R. TRIMBLE Title: Senior Relationship Manager THE BANK OF TOKYO-MITSUBISHI, LTD., NEW YORK BRANCH By: /S/ WILLIAM J. DARBY Title: Vice President BANKBOSTON, N.A. By: /S/ HARVEY H. THAYER. JR. Title: Director BANQUE NATIONALE DE PARIS By: /S/ RICHARD L. STED Title: Senior Vice President By: /S/ SOPHIE REVILLARD KAUFMAN Title: Vice President BARCLAYS BANK PLC By: /S/ RICHARD B. WILLIAMS Title: Director BAYERISCHE VEREINSBANK AG NEW YORK BRANCH By: /S/ MARIANNE WEINZINGER Title: Vice President By: /S/ PAMELA J. GILLONS Title: Assistant Treasurer CIBC INC. By: /S/ JOHN-PAUL MAROTTA Title: Executive Director CIBC Oppenheimer Corp., as agent COMMERZBANK AG, NEW YORK BRANCH By: /S/ ROBERT DONOHUE Title: Vice President By: /S/ PETER DOYLE Title: Assistant Treasurer CREDIT LYONNAIS NEW YORK BRANCH By: /S/ MARV E. COLLIER Title: Vice President CREDIT SUISSE FIRST BOSTON By: /S/ LYNN ALLEGAERT Title: Vice President By: /S/ ROBERT B. POTTER Title: Vice President THE DAI-ICHI KANGYO BANK, LIMITED NEW YORK BRANCH By: /S/ MATTHEW G. MURPHY Title: Vice President DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH By: /S/ SUSAN L. PEARSON Title: Vice President By: /S/ STEPHAN A. WEIDEMANN Title: Director - 2 - FLEET NATIONAL BANK By: /S/ ROBERT C. RUBINO Title: Senior Vice President THE FUJI BANK, LIMITED, NEW YORK BRANCH By: Title: GULF INTERNATIONAL BANK By: ________________________ ___________ Title: THE INDUSTRIAL BANK OF JAPAN, LIMITED, NEW YORK BRANCH By: /S/ JOHN V. VELTRI Title: Joint General Manager ISTITUTO BANCARIO SAN PAOLO DI TORINO, SPA By: /S/ WENDELL JONES Title: Vice President By: /S/ ETTORE VIAZZO Title: Vice President LTCB TRUST COMPANY By: /S/ MASANORI SHOJI Title: Senior Vice President - 2 - MARINE MIDLAND BANK By: /S/ MARK J. RAKOV Title: Vice President MELLON BANK, N.A. By: /S/ GEORGE B. DAVIS NATIONSBANK, N.A. By: /S/ MARGARET K. VANDENBERG Title: Senior Vice President PNC BANK, NATIONAL ASSOCIATION By: /S/ DONALD V. DAVIS Title: Vice President ROYAL BANK OF CANADA By: /S/ DON S. BRYSON Title: Senior Manager THE SAKURA BANK, LIMITED By: /S/ YASUMASA KIKUCHI Title: Senior Vice President THE SANWA BANK, LIMITED By: /S/ STEPHEN C. SMALL Title: Vice President & Area Manager - 2 - THE SUMITOMO BANK OF CALIFORNIA By: /S/ SHUJI ITO Title: Vice President THE SUMITOMO BANK, LIMITED By: /S/ KAZOVOSHI OGAEA Title: Joint General Manager THE TOKAI BANK, LIMITED By: Title: TORONTO DOMINION (NEW YORK), INC. By: /S/ DEBBIE A. GREENE Title: Vice President UNION BANK OF SWITZERLAND By: /S/ HAMILTON W. BULLARD Title: Assistant Treasurer By: /S/ C.C. GLOCKLER Title: Director - 2 - WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH By: /S/ RALPH WHITE Title: Vice President By: /S/ THOMAS LEE Title: Associate THE YASUDA TRUST & BANKING CO., LTD. By: Title: - 2 - EX-12.01 4 PRAXAIR, INC. AND SUBSIDIARIES EXHIBIT 12.01 PRAXAIR, INC. AND SUBSIDIARIES RATIO OF EARNINGS TO FIXED CHARGES (MILLIONS OF DOLLARS, EXCEPT RATIOS) YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993 EARNINGS Income of consolidated companies before provision for income taxes $622 $452 $432 $339 $236 Capitalized interest (32) (25) (9) (4) (3) Depreciation of capitalized interest 7 9 8 8 9 Dividends from less than 50%-owned companies carried at equity 1 1 1 - 2 Praxair share of income (loss) before provision for income taxes of 50%-owned companies carried at equity 3 16 15 8 10 Total earnings, net of fixed charges $601 $453 $447 $351 $254 FIXED CHARGES Interest on long-term and short-term debt $216 $195 $116 $108 $105 Capitalized interest 32 25 9 4 3 Rental expenses representative of an interest factor 23 23 10 11 12 Praxair share of fixed charges of 50%-owned companies carried at equity 1 3 4 2 7 Total fixed charges $272 $246 $139 $125 $127 Total adjusted earnings available for payment of fixed charges $873 $699 $586 $476 $381 Preferred stock dividend requirements $ 8 $ 8 - - - RATIO OF EARNINGS TO FIXED CHARGES 3.2 2.8 4.2 3.8 3.0 RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 3.1 2.7 4.2 3.8 3.0 EX-13.01 5 INDEX TO FINANCIAL STATEMENTS AND INFORMATION Five-Year Financial Summary 26 Management's Discussion and Analysis 27 Consolidated Statement of Income 34 Consolidated Balance Sheet 35 Consolidated Statement of Cash Flows 36 Consolidated Statement of Shareholders' Equity 37 Notes to Consolidated Financial Statements 38 Note 1. Summary of Significant Accounting Policies 38 Note 2. 1996 Acquisition of CBI Industries, Inc. (CBI) 39 Note 3. Special Charges 40 Note 4. Segment Data 41 Note 5. Income Taxes 41 Note 6. Debt and Financial Instruments 42 Note 7. Shareholders' Equity 44 Note 8. Preferred Stock 44 Note 9. Supplementary Income Statement Information 45 Note 10. Incentive Plans and Stock Options 45 Note 11. Supplementary Balance Sheet Information 47 Note 12. Retirement Programs 48 Note 13. Leases 50 Note 14. Commitments and Contingencies 50 Note 15. Quarterly Data (Unaudited) 51 Management's Statement of Responsibility for Financial Statements 52 Report of Independent Accountants 53 Information for Investors 54 25 Five-Year Financial Summary
Year Ended December 31, 1997 1996(a) 1995 1994 1993 From the Income Statement Sales $ 4,735 $ 4,449 $ 3,146 $ 2,711 $ 2,438 Cost of sales 2,764 2,564 1,777 1,507 1,387 Selling, general and administrative 662 688 496 409 392 Depreciation and amortization 444 420 279 273 262 Research and development 79 72 61 58 58 Special charges 10 85 -- -- -- Other income (expenses) - net 62 27 15 (17) 2 - --------------------------------------------------------------------------------------------------------------------------------- Operating profit 838 647 548 447 341 Interest expense 216 195 116 108 105 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 622 452 432 339 236 Income taxes 151 110 122 82 48 - --------------------------------------------------------------------------------------------------------------------------------- Income of consolidated entities 471 342 310 257 188 Minority interests (66) (68) (50) (61) (49) Income from equity investments 11 8 2 7 4 - --------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting changes 416 282 262 203 143 Cumulative effect of accounting changes (b) (11) -- -- -- (25) - --------------------------------------------------------------------------------------------------------------------------------- Net income $ 405 $ 282 $ 262 $ 203 $ 118 Net income excluding special charges and accounting changes $ 422 $ 335 $ 262 $ 203 $ 143 ================================================================================================================================= Per Share Data(c) Basic earnings per share: Income before cumulative effect of accounting changes $ 2.63 $ 1.85 $ 1.89 $ 1.49 $ 1.07 Cumulative effect of accounting changes(b) (.07) -- -- -- (.19) Net income $ 2.56 $ 1.85 $ 1.89 $ 1.49 $ .88 Diluted earnings per share: Income before cumulative effect of accounting changes $ 2.53 $ 1.77 $ 1.82 $ 1.45 $ 1.06 Cumulative effect of accounting changes(b) (.07) -- -- -- (.19) Net income $ 2.46 $ 1.77 $ 1.82 $ 1.45 $ .87 Cash dividends per share $ .44 $ .38 $ .32 $ .28 $ .25 - --------------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding (000's) Basic shares outstanding 158,095 152,654 138,818 136,254 133,084 Diluted shares outstanding 164,053 159,038 144,147 139,991 135,131 ================================================================================================================================= Capital Total debt $ 3,305 $ 3,265 $ 1,318 $ 1,265 $ 1,360 Minority interests 521 493 408 371 345 Preferred stock 75 75 -- -- -- Shareholders' equity 2,122 1,924 1,121 839 635 - --------------------------------------------------------------------------------------------------------------------------------- Total capital $ 6,023 $ 5,757 $ 2,847 $ 2,475 $ 2,340 ================================================================================================================================= Other Information and Ratios Operating profit as a percentage of sales 17.7% 14.5% 17.4% 16.5% 14.0% Return on average shareholders' equity(d) 20.9% 22.0% 26.7% 27.6% 25.0% Capital expenditures and investments $ 1,003 $ 3,333 $ 802 $ 385 $ 350 Total assets $ 7,810 $ 7,538 $ 4,134 $ 3,520 $ 3,255 Shares outstanding at year-end (000's) 157,373 157,489 140,536 137,863 134,450 Debt-to-capital ratio 54.9% 56.7% 46.3% 51.1% 58.1% Number of employees 25,388 25,271 18,222 17,780 16,766 ================================================================================================================================= (Millions of dollars, except per share data) (a) Effective in 1996, results reflect the acquisition of CBI Industries, Inc. (see Note 2 to the consolidated financial statements). Capital expenditures and acquisitions include $2.2 billion associated with the CBI acquisition (including $735 million of debt assumed). Number of employees excludes those at facilities held for sale. (b) Required changes in 1997 related to accounting for previously capitalized business process reengineering costs associated with information technology transformation. Required changes in 1993 related to accounting for postemployment benefits. (c) Includes special charges of $0.04 per share in 1997 and $0.34 per share in 1996 for both basic and diluted calculations (see Note 3 to the consolidated financial statements). (d) 1997 and 1996 exclude special charges (see Note 3 to the consolidated financial statements). 1997 and 1993 are based on income before cumulative effect of accounting changes. The 1993 shareholders' equity and capital have been retroactively adjusted for the cumulative effect of an accounting change.
26 Management's Discussion and Analysis Praxair's 1997 results reflect strong product demand in major customer markets and significant productivity improvements including the successful integration of the Liquid Carbonic business acquired in 1996. During 1996, Praxair acquired CBI Industries, Inc. (CBI) for $2.2 billion, including assumed debt of $735 million. The discussion of Praxair's consolidated and geographic segment results as it relates to the comparison of 1996 to 1995 is based upon the unaudited pro forma consolidated results of operations reflecting the CBI acquisition as though it had occurred at January 1, 1995 (see Note 2 to the consolidated financial statements). Consolidated Results The following provides summary data for 1997, 1996, and 1995 pro forma (unaudited) and actual:
1995 Pro Year Ended December 31, 1997 1996 Forma Actual Sales $ 4,735 $ 4,449 $ 4,109 $ 3,146 Selling, general and administrative $ 662 $ 688 $ 690 $ 496 Depreciation and amortization $ 444 $ 420 $ 395 $ 279 Operating profit $ 838 $ 647 $ 576 $ 548 Interest expense $ 216 $ 195 $ 219 $ 116 Income before cumulative effect of an accounting change $ 416 $ 282 $ 190 $ 262 Number of employees(a) 25,388 25,271 25,562 18,222 - ----------------------------------------------------------------------------------------- Excluding special charges(b): Operating profit $ 848 $ 732 $ 630 $ 548 Effective tax rate 25% 26% 29% 28% Income before cumulative effect of an accounting change $ 422 $ 335 $ 223 $ 262 ========================================================================================= (Millions of dollars, except percentages and employee data)
(a) Excludes employees related to assets held for sale. (b) During 1997, Praxair recorded a $10 million pre-tax special charge ($6 million after tax) related primarily to profit improvement initiatives in the North American packaged gases business. During 1996, Praxair recorded an $85 million pre-tax special charge ($53 million after tax and minority interest) for CBI integration costs (see Note 3 to the consolidated financial statements). 1997 compared with 1996 The sales growth of 6% in 1997 as compared to 1996 was predominately due to increased sales volumes and the effect of newly acquired packaged gases and Surface Technologies subsidiaries. This increase was partly offset by unfavorable currency translation effects. Overall pricing was unchanged for the year. Surface Technologies posted record sales, increasing 23% to $381 million for the year primarily due to volume growth and acquisitions. The operating profit growth of 16% for 1997 as compared to 1996 (both excluding the special charges), was primarily due to the sales growth and productivity gains including the integration of the Liquid Carbonic business, partly offset by cost inflation and unfavorable currency translation effects. Increased depreciation and amortization reflected new projects coming on-stream, as well as packaged gases and Surface Technologies acquisitions. Selling, general and administrative expenses decreased primarily due to productivity improvements and cost synergies, including the integration of the Liquid Carbonic business, partly offset by cost inflation. Interest expense increased due to higher debt levels (after adjustment for the debt associated with the purchase of the assets held for sale) and higher interest rates in certain international countries. The effective tax rate for 1997 was 25%, a 1% decrease from the 1996 effective tax rate (both excluding the special charges). This decrease is due primarily to planned tax initiatives. Net income for 1997 increased 26% over 1996 (both excluding the special charges and accounting changes) due principally to higher operating profit, the lower effective tax rate and improved income from equity investments, partially offset by higher interest expense and negative currency translation effects. In addition, the Company recorded an $11 million charge in the fourth quarter of 1997 related to a required accounting change for capitalized business process reengineering costs associated with information technology transformation. This charge was reflected as a cumulative effect of an accounting change. The number of employees at December 31, 1997 increased 117 as compared to December 31, 1996 due primarily to an increase associated with new acquisitions (678 employees) and the addition of employees to support volume growth partially offset by decreases resulting from profit improvement efforts in South America and the North American packaged gases business, the integration of the Liquid Carbonic business and other cost improvement efforts. 27 Management's Discussion and Analysis 1996 compared with 1995 The 1996 sales growth of 8%, as compared to the 1995 pro forma amount, was primarily due to increased sales volumes and the effect of newly acquired and recently consolidated packaged gases and Surface Technologies subsidiaries. Additionally, merchant, packaged gases and carbon dioxide prices were up in all geographic segments. Surface Technologies posted record sales, increasing 21% to $311 million, primarily due to volume growth and acquisitions. The sales growth along with productivity gains were primarily responsible for the 16% increase in operating profit as compared to the 1995 pro forma amount (both excluding the CBI special charges). Increased depreciation and amortization reflected new projects coming on-stream which contributed to the sales growth, as well as goodwill associated with packaged gases and surface technologies acquisitions. Selling, general and administrative expenses decreased slightly primarily due to productivity improvements and cost synergies associated with the integration of the Liquid Carbonic business, mostly offset by the increases due to the newly acquired subsidiaries. Selling, general and administrative expenses as a percentage of sales, excluding the newly acquired subsidiaries, declined 8% as compared to the 1995 pro forma amount. Interest expense decreased in 1996 versus the 1995 pro forma amount, primarily due to lower interest rates and the issuance of 12.6 million shares of Praxair common stock at the end of the first quarter of 1996, the proceeds of which were used to lower debt levels. The 1996 effective tax rate was 26% (excluding the impact associated with the 1996 special charges), a decrease of 3% from the effective tax rate of the 1995 pro forma period. The decrease is due primarily to tax planning initiatives. Net income, excluding the special charges, increased 50% over the 1995 pro forma amount due principally to higher operating profit, lower interest expense and a lower effective tax rate. The number of employees at December 31, 1996 decreased by 291 as compared to December 31, 1995 due primarily to Praxair's worldwide productivity improvement initiatives and the integration of the Liquid Carbonic business partly offset by new acquistions (955 employees) and the addition of employees to support volume growth. Segment Discussion This summary of sales, operating profit and operating profit excluding the 1997 and 1996 special charges by geographic segment provides a basis for the discussion that follows: 1995 Pro Year Ended December 31, 1997 1996 Forma Actual Sales: United States $ 2,411 $ 2,157 $ 1,929 $ 1,569 South America 996 990 957 667 Europe 603 613 557 494 Canada, Mexico, Asia and Other 725 689 666 416 - ------------------------------------------------------------------------- Total $ 4,735 $ 4,449 $ 4,109 $ 3,146 ========================================================================= Operating profit: United States $ 465 $ 322 $ 239 $ 285 South America 197 190 193 137 Europe 110 113 98 90 Canada, Mexico, Asia and Other 89 52 83 53 Corporate (23) (30) (37) (17) - ------------------------------------------------------------------------- Total $ 838 $ 647 $ 576 $ 548 ========================================================================= Operating profit excluding special charges: United States $ 474 $ 359 $ 288 $ 285 South America 197 203 194 137 Europe 110 117 98 90 Canada, Mexico, Asia and Other 90 80 85 53 Corporate (23) (27) (35) (17) - ------------------------------------------------------------------------- Total $ 848 $ 732 $ 630 $ 548 ========================================================================= (Millions of dollars) United States Volume growth and the effect of newly acquired packaged gases and Surface Technologies subsidiaries accounted for the 12% sales increases both in 1997 and 1996 as compared to the prior period. In 1997, U.S. industrial gases volumes increased 8% while merchant liquid pricing decreased 1% and carbon dioxide pricing increased 1%. Packaged gases sales increased 15% to $508 million as compared to the 1996 period. In 1996, U.S. industrial gases volumes increased 7%, while merchant liquid pricing increased 2% and carbon dioxide pricing increased 8%. Packaged gases 1996 sales increased 76% to $441 million as compared to the 1995 period. Operating profit improved 32% for 1997 as compared to the 1996 period (both excluding the special charges). Operating margin for 1997 increased to 19.7% from 16.6% in 1996. The 28 Management's Discussion and Analysis improvement is due primarily to the increased sales, cost synergies associated with the integration of the Liquid Carbonic business, higher profitability in the Surface Technologies business and other cost improvements. Operating profit improved 25% for 1996 as compared to the 1995 pro forma amounts (both excluding the special charges). The improvement is due primarily to the increased sales and the realization of synergies related to the integration of the Liquid Carbonic business. Operating margin for 1996 versus 1995 pro forma amounts increased to 16.6% from 14.9%. Also affecting the comparisons for both periods was an increase in the U.S. business portfolio of packaged gases businesses which are characterized by lower operating margins and higher capital turnover. During 1997, Praxair's packaged gases business embarked on a profit improvement program focused on increasing its operating performance to levels above those achieved prior to the 1996 Liquid Carbonic acquisition. In support of that program, packaged gases has initiated a 10% headcount reduction in late 1997. The benefits of this program will be derived from the consolidation of administrative processes and facilities, the realignment of its sales force, the implementation of a national industrial hardgoods procurement and warehousing strategy, the optimization of its gas distribution network and improved operational efficiencies through standardized practices. Additionally, at December 31, 1997 the U.S. packaged gases business' equity investment, Gas Tech, Inc., had sales of $90 million. Effective in 1998, Praxair gained operating control of Gas Tech, Inc. by acquiring the remaining shares that it did not already own; therefore, Praxair will consolidate Gas Tech, Inc. in 1998. South America Praxair's South American operations are conducted by its majority-owned subsidiary, S.A. White Martins (White Martins), which is the largest industrial gases company in Brazil. Sales for 1997 increased 1% as compared to 1996, primarily due to sales volume growth of approximately 8%, mostly offset by price declines and unfavorable currency translation effects. The price declines are attributable to the ongoing effects of the Brazilian government economic plan ("Real Plan") which has resulted in industrial commodity pricing deflation across a wide range of industries, and an increased competitive environment in Brazil. Excluding the currency translation effects, sales increased by 6% as compared to the 1996 period. Sales for 1996 as compared to the 1995 pro forma results increased 3% primarily due to sales volume growth. Operating profit for 1997 decreased 3% as compared to 1996 (excluding the 1996 special charges). This was due to unfavorable currency translation effects, price declines, and higher energy and distribution costs partly offset by sales volume growth, productivity improvements and an $11 million benefit due to a favorable judgment related to a dispute with the Rio de Janeiro State public hospitals. Excluding the currency translation effects, operating profit increased 5% (excluding the 1996 special charges). Operating profit for 1996 as compared to the 1995 pro forma results, excluding the special charges, increased slightly. Historically, Brazil has been considered a hyperinflationary economy and, accordingly, Praxair has managed its Brazilian operations with a focus on U.S. dollar results. Since the implementation of the "Real Plan" in mid-1994, Brazil has produced steady economic growth and, for the first time in decades, single-digit inflation. However, during 1997 and especially in the last half of 1997, economic growth slowed and in the fourth quarter the government implemented a new fiscal package aimed at minimizing inflation and maintaining the strength of the Brazilian currency (the "Real"). As a result, economic growth in 1998 is initially expected to be flat or slightly recessionary and then improve later in the year. These recent developments in Brazil have created uncertainty in anticipating 1998 business results. As required by accounting standards, effective January 1, 1998, Praxair will no longer account for Brazil as a hyperinflationary economy and the Brazilian Real will replace the U.S. dollar as Brazil's functional currency. Praxair currently estimates that this change will result in an increase in consolidated operating profit which will be offset by an increase to interest expense. On January 1, 1998, the functional currency change will require Praxair to record additional balance sheet deferred income tax liabilities with a reduction to shareholders' equity (cumulative translation adjustment) of approximately $60 million. In 1998 and beyond, translation losses in Brazil will also be charged directly to shareholders' equity like Praxair's other international operations. At current levels of Real devaluation (approximately 7% per year) and holding the December 31, 1997 balance sheet constant, the translation losses charged to shareholders' equity would be approximately $70 million for 1998. Also, refer to the Market Risks and Sensitivity Analysis section of the Management's Discussion and Analysis for additional information on Praxair's approach to managing currency exchange risks. 29 Management's Discussion and Analysis Europe Sales for 1997 decreased 2% as compared to the 1996 period. The decrease was due primarily to unfavorable currency translation effects in Spain and Italy partly offset by volume increases and increased sales associated with Surface Technologies acquisitions. Excluding the currency translation effects, sales increased by 10%. Sales for 1996 increased 10% as compared to the 1995 pro forma amounts due primarily to volume growth, the effect of newly acquired subsidiaries, improved merchant and packaged gases pricing in Southern Europe and improved Surface Technologies results. Operating profit for 1997 decreased 6% as compared to 1996 (excluding the 1996 special charges). Excluding the currency translation effects, operating profit increased 9%, primarily due to increased volumes and Surface Technologies acquisitions. Operating profit for 1996 (excluding the 1996 special charges) increased 19% as compared to the 1995 pro forma period due primarily to the sales growth and continued productivity improvements. Canada, Mexico, Asia and Other Sales for 1997 increased 5% as compared to 1996, due to volume growth in Mexico and Asia and pricing improvement in Mexico partly offset by unfavorable currency translation effects. Excluding the currency translation effects, sales increased by 10%. Sales increased 3% in 1996 as compared to the 1995 pro forma amounts due to volume growth in Mexico and Asia. Operating profit for 1997 increased 13% as compared to 1996 (both excluding the special charges), primarily due to the sales growth and synergies realized from the integration of the Liquid Carbonic business in Canada. This was partly offset by increased business development costs in Asia and unfavorable currency translation effects. Excluding the currency translation effects, operating profit increased 20%. Operating profit for 1996 compared to the 1995 pro forma amounts (excluding the special charges) decreased $5 million primarily due to higher business development expenses in Asia and an increase in technology costs, which more than offset the sales growth. In the second half of 1997 and continuing into 1998, the U.S. dollar has strengthened considerably against several Asian currencies (including the Korean Won and the Thailand Baht) producing uncertainty about the economic outlook in these countries. Since Asia represents a small percentage of Praxair's sales and operating profit, there should be no material impact on Praxair's 1998 results. Selling, General and Administrative Expenses In 1997, selling, general and administrative expenses were $662 million, a $26 million decrease from the 1996 amount. The decrease is primarily due to cost improvements, including the integration of the Liquid Carbonic business, partly offset by cost inflation. Selling, general and administrative expenses as a percentage of sales declined to 14.0% in 1997 from 15.5% in 1996. In 1996, selling, general and administrative expenses were $688 million, a $2 million decrease from the 1995 pro forma amount. The decrease is primarily due to cost improvements associated with the integration of the Liquid Carbonic business, largely offset by newly acquired and recently consolidated subsidiaries. Selling, general and administrative expenses as a percentage of sales declined to 15.5% in 1996 from 16.8% in 1995 on a pro forma basis. Other income (expenses) - net In 1997, other income (expenses) - net increased $35 million over the 1996 amount of $27 million due primarily to an $11 million benefit due to the favorable judgment related to a dispute with the Rio de Janeiro State public hospitals, higher partnership income and higher non-recurring expenses in 1996 related to the integration of the Liquid Carbonic business. In 1996, other income (expenses) - net increased $5 million over the 1995 pro forma amount of $22 million primarily due to currency and the 1995 productivity improvement charges partly offset by non-recurring credits in 1995. Interest Expense The 1997 interest expense increased $21 million from the 1996 amount due to higher debt levels (after adjustment for the debt associated with the purchase of the assets held for sale) and higher interest rates in certain international countries. As noted in the South American segment discussion, interest expense is expected to increase in 1998 due to the functional currency change in Brazil effective January 1, 1998. The 1996 interest expense decreased $24 million from the 1995 pro forma amounts due primarily to lower interest rates and the issuance of 12.6 million shares of Praxair common stock at the end of the first quarter of 1996, the proceeds of which were used to lower debt levels. Income Taxes The effective tax rate for 1997 was 25%, a 1% decrease from the 1996 effective tax rate (excluding the tax benefits associated with the special charges). 30 Management's Discussion and Analysis The 1996 effective tax rate was 26% (excluding the tax benefit associated with the 1996 special charges), a decrease of 3% from the effective tax rate of the 1995 pro forma period. The decreases in both periods are due primarily to tax planning initiatives. Minority Interests On December 31, 1997, minority interests consisted primarily of minority shareholders' investments in three affiliates: S.A. White Martins (Brazil), Rivoira S.p.A. (Italy) and Praxair Korea. Additionally, Praxair records the dividends on preferred stock in minority interests. Minority shareholders' share of income for 1997 was $66 million, a decrease of $2 million as compared to the 1996 amount of $68 million. This decrease was primarily due to the lower income in South America. Minority shareholders' share of income for 1996 was $68 million, an increase of $3 million as compared to the 1995 pro forma amount of $65 million. This increase was primarily due to the recording of $6 million of preferred stock dividends and the increased income in South America mostly offset by the decreased minority position in White Martins. Income from Equity Investments Praxair's more significant equity investments are in the United States, Belgium, India, Italy, Spain, Turkey and China. Praxair's share of net income from corporate equity investments improved to $11 million from $8 million in the 1996 results primarily due to improved equity company results in the United States. In 1996, Praxair's share of net income from corporate equity investments improved to $8 million from $5 million in the 1995 pro forma results primarily due to improved equity company results in the United States and Europe. Costs Relating to the Protection of the Environment Praxair's principal operations relate to the production and distribution of atmospheric and other industrial gases which historically have not had a significant impact on the environment. However, worldwide costs relating to environmental protection may continue to grow due both to increasingly stringent laws and regulations and to Praxair's ongoing commitment to rigorous internal standards. Environmental protection costs for Praxair in 1997 were approximately $5 million of capital expenditures and $13 million of expenses. Included in the expenses were approximately $2 million for remedial projects. Praxair anticipates that future environmental protection expenditures will approximate the level of those in 1997 and will not have a material adverse effect on the consolidated financial position of Praxair or on the consolidated results of operations or cash flows in a given year. Commitments and Contingencies See Note 14 to the consolidated financial statements for information concerning commitments and contingencies. Liquidity, Capital Resources and Financial Data Cash Flow from Operations Cash flow from operations increased to $752 million in 1997 from $606 million in 1996. The increase reflects cash inflows from higher net income, depreciation and amortization expense, deferred taxes, and lower working capital requirements partly offset by payments related to prior years' incentive compensation programs and the special charges. Working capital needs decreased as compared to the 1996 period primarily due to lower growth in outstanding accounts receivables and higher payments in 1996 related to the CBI acquisition partially offset by higher scheduled payments on accounts payable and other current liabilities, higher prepaid expenses and higher inventory required to support the sales growth. Cash flow from operations decreased slightly in 1996 versus 1995 from $611 million to $606 million. The decrease reflects one-time after-tax cash payments made in 1996 related to the acquisition of CBI for integration charges, antitrust litigation settlements and other non-recurring payments totaling $75 million. Excluding these charges, operating cash flow increased $70 million due to increased net income, depreciation and amortization expense, deferred taxes and other non-cash charges partly offset by cash outflows from long-term assets and liabilities, and working capital. Investing Cash flow used for investing in 1997 totaled $703 million versus $2,334 million in 1996. This decrease was due primarily to the 1996 acquisition of CBI. Excluding the CBI acquisition in 1996, investing cash flow needs decreased $186 million reflecting the lower level of acquisitions and increased proceeds from asset sales. Construction expenditures for 1997 totaled $902 million, up slightly from 1996, largely due to the timing of cash payments. Acquisition expenditures for 1997 totaled $101 million primarily relating to investments in India, Surface Technologies acquisitions in Brazil and the United Kingdom, minority share purchases in South America, and the continuation of packaged gases acquisitions in North America. Acquisition expenditures in 1996 were $1,705 million ($260 million excluding the CBI acquisition). 31 Management's Discussion and Analysis Proceeds on divestitures and asset sales increased $36 million to $300 million in 1997 as compared to 1996 primarily due to the sale of substantially all of Praxair's investment in Chicago Bridge & Iron Company, N.V. in an initial public offering transaction (see Note 2 to the consolidated financial statements). Substantially all of the assets held for sale were sold as of December 31, 1997. On a worldwide basis, construction and investment expenditures for the full year 1998 are expected to continue at approximately $1 billion primarily from industrial gases growth opportunities worldwide and the continuation of Praxair's packaged gases and Surface Technologies acquisition strategies. Financing At December 31, 1997, Praxair's total debt outstanding was $3,305 million, an increase of $40 million over 1996. Praxair's debt-to-capital ratio decreased from 56.7% at December 31, 1996 to 54.9% as of December 31, 1997. At December 31, 1997, there were no borrowings under Praxair's $1.5 billion U.S. bank credit facility and Praxair's investment grade credit rating for long-term debt was maintained at A3/BBB+. During October 1997, Praxair issued $250 million of 6.625% non-redeemable Notes due 2007 with interest payable semi-annually. As discussed above, Praxair sold most of the remaining assets held for sale acquired in the CBI acquisition. The proceeds from these transactions were used to repay outstanding commercial paper and for general corporate purposes. Also, during 1997, a Canadian subsidiary of Praxair refinanced approximately $70 million of short-term debt on a long-term basis. Praxair's financing strategy is to secure sufficient funds to support its operations in the United States and around the world. Praxair sources the funding through a combination of local borrowing and intercompany lending in order to minimize the total cost of funds and to manage and centralize currency exchange exposures. Praxair manages its exposure to interest rate changes through the use of financial derivatives (see Note 6 to the consolidated financial statements). Raw Materials and Markets Energy is the single largest cost item in the production and distribution of industrial gases. For some products, such as carbon dioxide, helium, hydrogen, specialty gases and surface coatings and powders, raw materials are largely purchased from outside sources. Praxair generally has contracts or commitments for, or readily available sources of, these raw materials. Praxair's industrial gases are used by a diverse group of customers in a variety of industries including metal fabrication, primary metals, chemicals, healthcare, food processing, electronics, beverage, aerospace, petroleum refining, pulp and paper, oil and gas, glass, and numerous other markets. By using the gases Praxair produces and, in many cases, the proprietary processes that it invents, customers benefit through improved product quality, increased productivity, lower operating costs, conservation of energy and the attainment of environmental improvement objectives. Praxair has a large number of customers and no single customer accounts for a significant portion of Praxair's annual sales. Aircraft engines are Surface Technologies primary market, but it also serves the printing, textile, chemical and primary metals markets. Aircraft-engine and airframe-component overhaul services are another offering. Year 2000 Praxair is aware of the potential for Year 2000 software failures and the associated impact on business operations. The Company has been actively working on this project since mid-1996 and teams are in place worldwide to address this situation. An assessment has been and continues to be conducted and plans are being developed to complete Year 2000 software compliance for business sensitive areas before the year 2000. Costs to complete this program are expected to approximate $15 million. New Accounting Standards The FASB has issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which will not become effective for Praxair until the fourth quarter of 1998. These standards will require Praxair to review its current segment information and report a new Comprehensive Income amount. Praxair has not determined what changes, if any, SFAS No. 131 will require to its current segment definitions. 32 Management's Discussion and Analysis Market Risks and Sensitivity Analyses Like other global companies, Praxair is exposed to market risks relating to fluctuations in interest rates and currency exchange rates. The objective of financial risk management at Praxair is to minimize the negative impact of interest rate and foreign exchange rate fluctuations on the Company's earnings, cash flows and equity. To manage these risks, Praxair uses various derivative financial instruments, including, interest rate swap, forward starting interest rate swap and interest rate cap and option agreements, and currency swap, forward and option contracts. These derivative financial instruments are generally held to maturity and Praxair only uses commonly traded and non-leveraged instruments. These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss. Also, refer to Notes 1 and 6 to the consolidated financial statements for a more complete description of Praxair's accounting policies and use of such instruments. As required by new Securities and Exchange Commission (SEC) rules, the following analyses present the sensitivity of the market value, earnings and cash flows of Praxair's financial instruments to hypothetical changes in interest and exchange rates as if these changes occurred at December 31, 1997. The range of changes chosen for these analyses reflect Praxair's view of changes which are reasonably possible over a one-year period. Market values are the present values of projected future cash flows based on the interest rate and exchange rate assumptions. These forward looking disclosures are selective in nature and only address the potential impacts from financial instruments. They do not include other potential effects which could impact Praxair's business as a result of these changes in interest and exchange rates. Interest Rate and Debt Sensitivity Analysis At December 31, 1997, Praxair has debt totaling $3,305 million and interest rate swaps with a net notional value of $1,150 million. Interest rate swaps are entered into as a hedge of underlying debt instruments to effectively change the characteristics of the interest rate without actually changing the debt instrument. At December 31, 1997, most of Praxair's interest rate swap agreements convert outstanding floating rate debt to fixed rate debt for a period of time. For fixed rate debt, interest rate changes affect the fair market value but do not impact earnings or cash flows. Conversely for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. At December 31, 1997 after adjusting for the effect of interest rate swap agreements, Praxair has fixed rate debt of $2,637 million and floating rate debt of $668 million. Holding other variables constant (such as foreign exchange rates and debt levels) a one percentage point decrease in interest rates would increase the unrealized fair market value of the fixed rate debt by approximately $105 million. The earnings and cash flows impact for the next year resulting from a one percentage point increase in interest rates would be approximately $6 million, holding other variables constant. Exchange Rate Sensitivity Analysis Praxair's exchange rate exposures result primarily from its investments and ongoing operations in South America (primarily Brazil), Europe (primarily Spain and Italy), Canada, Mexico, Asia (primarily China, India, Korea and Thailand) and certain other business transactions such as the procurement of equipment from foreign sources. Among other techniques, Praxair utilizes foreign exchange forward contracts to hedge these exposures. At December 31, 1997 Praxair had $324 million notional amount of foreign exchange contracts of which $254 million hedged recorded balance sheet exposures or firm commitments. Holding other variables constant, if there were a ten percent adverse change in foreign currency exchange rates, the market value of foreign currency contracts outstanding at December 31, 1997 would decrease by approximately $21 million. Of this decrease, only about $4 million would impact earnings since the gain (loss) on the majority of these contracts would be offset by an equal (gain) loss on the underlying exposure being hedged. 33 Consolidated Statement of Income
Year Ended December 31, 1997 1996 1995 Sales $ 4,735 $ 4,449 $ 3,146 Cost of sales, exclusive of depreciation and amortization 2,764 2,564 1,777 Selling, general and administrative 662 688 496 Depreciation and amortization 444 420 279 Research and development 79 72 61 Special charges 10 85 -- Other income (expenses) - net 62 27 15 ====================================================================================================== Operating profit 838 647 548 Interest expense 216 195 116 - ------------------------------------------------------------------------------------------------------ Income before taxes 622 452 432 Income taxes 151 110 122 - ------------------------------------------------------------------------------------------------------ Income of consolidated entities 471 342 310 Minority interests (66) (68) (50) Income from equity investments 11 8 2 - ------------------------------------------------------------------------------------------------------ Income before cumulative effect of an accounting change 416 282 262 Cumulative effect of an accounting change (11) -- -- - ------------------------------------------------------------------------------------------------------ Net income $ 405 $ 282 $ 262 ====================================================================================================== Basic earnings per share: Income before cumulative effect of an accounting change $ 2.63 $ 1.85 $ 1.89 Cumulative effect of an accounting change (.07) -- -- Net income $ 2.56 $ 1.85 $ 1.89 Diluted earnings per share: Income before cumulative effect of an accounting change $ 2.53 $ 1.77 $ 1.82 Cumulative effect of an accounting change (.07) -- -- Net income $ 2.46 $ 1.77 $ 1.82 ====================================================================================================== The accompanying notes are an integral part of these financial statements. (Millions of dollars, except per share data)
34 Consolidated Balance Sheet
Year Ended December 31, 1997 1996 Assets Cash and cash equivalents $ 43 $ 63 Accounts receivable 971 914 Inventories 329 312 Prepaid and other current assets 154 377 - -------------------------------------------------------------------------------------------------------- Total current assets 1,497 1,666 Property, plant and equipment - net 4,607 4,269 Equity investments 210 195 Other long-term assets 1,496 1,408 - -------------------------------------------------------------------------------------------------------- Total assets $ 7,810 $ 7,538 ======================================================================================================== Liabilities and Equity Accounts payable $ 383 $ 408 Short-term debt 391 1,520 Current portion of long-term debt 40 42 Accrued taxes 51 69 Other current liabilities 501 511 - -------------------------------------------------------------------------------------------------------- Total current liabilities 1,366 2,550 Long-term debt 2,874 1,703 Other long-term liabilities 528 535 Deferred credits 324 258 - -------------------------------------------------------------------------------------------------------- Total liabilities 5,092 5,046 ======================================================================================================== Minority interests 521 493 Preferred stock 75 75 Shareholders' equity: Common stock $.01 par value, authorized 500,000,000 shares, issued 159,969,641 shares in 1997 and 157,501,453 shares in 1996 2 2 Additional paid-in capital 1,471 1,350 Retained earnings 1,034 698 Cumulative translation adjustment (256) (126) Less: Treasury stock, at cost (2,596,417 shares in 1997 and 12,496 shares in 1996) (129) -- - -------------------------------------------------------------------------------------------------------- Total shareholders' equity 2,122 1,924 - -------------------------------------------------------------------------------------------------------- Total liabilities and equity $ 7,810 $ 7,538 ======================================================================================================== The accompanying notes are an integral part of these financial statements. (Millions of dollars)
35 Consolidated Statement of Cash Flows
Year Ended December 31, 1997 1996 1995 Increase (decrease) in cash and cash equivalents Operations Net income $405 $282 $262 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 444 420 279 Special charges (13) 37 -- Deferred income taxes 67 48 42 Gain on sale of fixed assets (7) (4) 1 Other non-cash charges 42 49 39 Working capital: Accounts receivable (54) (121) (48) Inventories (14) (4) (52) Prepaid and other (10) 25 (12) Payables and accruals (41) 9 118 CBI acquisition payments -- (75) -- Long-term assets and liabilities (67) (60) (18) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 752 606 611 - ----------------------------------------------------------------------------------------------------------------------- Investing Capital expenditures (902) (893) (600) Acquisitions (101) (1,705) (202) Divestitures and asset sales 300 264 82 - ----------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (703) (2,334) (720) - ----------------------------------------------------------------------------------------------------------------------- Financing Short-term borrowings (repayments) - net (269) 1,114 3 Long-term borrowings 438 602 201 Long-term debt repayments (110) (489) (154) Minority transactions and other (31) 4 (10) Issuances of common stock 110 611 111 Purchases of common stock (137) (7) (45) Dividends (69) (58) (45) - ----------------------------------------------------------------------------------------------------------------------- Net cash (used for) provided by financing activities (68) 1,777 61 - ----------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (1) (1) -- - ----------------------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents (20) 48 (48) Cash and cash equivalents, beginning-of-year 63 15 63 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end-of-year $43 $63 $15 ======================================================================================================================= Supplemental data: Taxes paid $58 $59 $74 Interest paid $211 $241 $120 Short-term debt classified as long-term (Note 6) $860 $ -- $ -- Other long-term liabilities reclassified to equity (Note 7) $19 $ -- $ -- Acquired debt from CBI Industries, Inc. (Note 2) $ -- $735 $ -- ======================================================================================================================= The accompanying notes are an integral part of these financial statements. (Millions of dollars)
36 Consolidated Statement of Shareholders' Equity
Additional Cumulative Common Stock Paid-In Retained Translation Treasury Stock Activity Shares Amounts Capital Earnings Adjustment Shares Amounts Total Balance, December 31, 1994 138,237 $1 $688 $257 $(99) 374 $(8) $839 Net income 262 262 Dividends on common stock ($.32 per share) (45) (45) Issuances of common stock: For the dividend reinvestment and stock purchase plan 107 1 1 For employee savings and incentive plans 2,280 59 (2,284) 52 111 Purchases of common stock 1,999 (45) (45) Translation adjustments (2) (2) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 140,624 $1 $748 $474 $(101) 89 $(1) $1,121 ============================================================================================================================= Net income 282 282 Dividends on common stock ($.38 per share) (58) (58) Issuances of common stock: Public offering 12,650 1 461 462 For the dividend reinvestment and stock purchase plan 83 2 2 For employee savings and incentive plans 4,144 139 (264) 8 147 Purchases of common stock 187 (7) (7) Translation adjustments (25) (25) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 157,501 $2 $1,350 $698 $(126) 12 $-- $1,924 ============================================================================================================================= Net income 405 405 Dividends on common stock ($.44 per share) (69) (69) Issuances of common stock: For the dividend reinvestment and stock purchase plan 74 2 2 For employee savings and incentive plans 2,395 119 (157) 8 127 Purchases of common stock 2,742 (137) (137) Translation adjustments (130) (130) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 159,970 $2 $1,471 $1,034 $(256) 2,597 $(129) $2,122 ============================================================================================================================= The accompanying notes are an integral part of these financial statements. (Millions of dollars, shares in thousands)
37 Notes to Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies Operations - Praxair, Inc. (Praxair or Company) was founded in 1907 and became an independent publicly traded company on June 30, 1992. Praxair is the largest industrial gases company in North and South America, and one of the largest worldwide. The Company is also the world's largest supplier of carbon dioxide. Praxair produces, sells and distributes atmospheric, process and specialty gases, and high-performance surface coatings to a diverse group of industries including metal fabrication, primary metals, chemicals, healthcare, electronics, oil and gas, aerospace, food processing, glass, and pulp and paper. Principles of Consolidation - The consolidated financial statements include the accounts of all significant subsidiaries where control exists. Equity investments generally consist of 20-50% owned operations. Operations less than 20% owned are generally carried at cost. Pre-tax income from equity investments which are partnerships is included in other income (expenses) - net with related taxes included in income taxes. Partnership net assets are reported as equity investments in the balance sheet. Praxair does not allocate corporate costs to its equity investments. Significant intercompany transactions are eliminated. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While actual results could differ, management believes such estimates to be reasonable. Cash and Cash Equivalents - Cash equivalents are considered to be highly liquid securities with original maturities of three months or less. Inventories - Inventories are stated at the lower of cost or market. Cost is determined generally using the last-in, first-out (LIFO) method for certain U.S. operations and the average cost method for most other operations. Property, Plant and Equipment-net - Property, plant and equipment are carried at cost, net of accumulated depreciation. Depreciation is calculated on the straight-line method based on the estimated useful lives of the assets which range from 3 to 40 years. Praxair generally uses accelerated depreciation methods for tax purposes where appropriate. The Company periodically reviews the recoverability of long-lived assets based upon anticipated cash flows generated from such assets. Foreign Currency Translation - For international subsidiaries where the local currency is the functional currency, translation gains and losses are accumulated as a separate component of shareholders' equity. For international subsidiaries operating in hyperinflationary economies, the U.S. dollar is the functional currency and translation gains and losses are included in income. Financial Instruments - Praxair enters into various derivative financial instruments to manage its exposure to fluctuating interest and currency exchange rates. Such instruments include interest rate swap, forward rate, cap and option agreements, and currency swap, forward and option contracts. These instruments are not entered into for trading purposes and are generally held to maturity. Praxair only uses commonly traded and non-leveraged instruments. Interest rate swap and forward rate agreements involve the exchange of fixed and floating interest payments without the exchange of the underlying principal amounts. The differential to be paid or received is recognized as an adjustment to interest expense. Interest rate cap and option agreements are used to reduce the impact of interest rate changes on floating rate debt. The premiums paid are amortized to interest expense over the terms of the agreements. The notional amounts of interest rate swap, forward rate and cap agreements do not exceed the underlying debt principal amounts. If an interest rate swap or forward rate agreement is terminated before its maturity, any gain or loss is deferred and amortized as interest expense over the remaining life of the underlying debt or the remaining life of the swap, if shorter. Currency swap, forward and option contracts are generally entered into to hedge recorded balance sheet amounts related to international operations and firm commitments that create currency exposures. Gains and losses on hedges of assets and liabilities are recorded in other income (expenses) - net as offsets to the gains and losses from the underlying hedged amounts; gains and losses on hedges of net investments are reported on the balance sheet as part of the cumulative translation adjustment within shareholders' equity; and gains and losses on hedges of firm commitments are recorded on the balance sheet and included in the basis of the underlying transaction. Forward exchange contracts that cover exposures which do not qualify as hedges are recorded in other income (expenses) - - net on a mark-to-market basis. Praxair uses the following methods and assumptions to estimate the fair value of each class of financial instrument. Due to their nature, the carrying value of cash, short-term investments and short-term debt, receivables and payables approximates fair value. The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues. The fair value of interest rate swaps and currency exchange contracts are estimated based on market prices obtained from dealer quotes. Such quotes represent the estimated amount Praxair would receive or pay to terminate the agreements taking into consideration current rates and the credit worthiness of the counterparties. (See Note 6). 38 Notes to Consolidated Financial Statements Patents, Trademarks And Goodwill - Amounts paid for patents and the excess of the purchase price over the fair value of the net assets of acquired operations (goodwill) are recorded as other long-term assets. Patents are amortized over their remaining useful lives, while trademarks and goodwill are amortized over the estimated period of benefit, up to forty years. Praxair periodically evaluates the recoverability of patents, trademarks and goodwill by assessing whether the unamortized balance can be recovered over its remaining life through cash flows generated by underlying tangible assets. Research And Development - Research and development costs are charged to expense as incurred. Income Taxes - Deferred income taxes are recorded for the temporary differences between the financial statement and tax bases of assets and liabilities using current tax rates. Retirement Programs - Most Praxair employees worldwide are covered by various pension plans. The cost of pension benefits under these plans is determined using the "projected unit credit" actuarial cost method. Funding of pension plans varies and is in accordance with local laws and practices. Praxair accrues the cost of retiree life and health insurance benefits during the employees' service period when such benefits are earned. Postemployment Benefits - Praxair recognizes the estimated cost of future benefits provided to former and inactive employees after employment but before retirement on the accrual basis. Stock-Based Compensation - Effective in 1996, Praxair adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, and continues to account for incentive plans and stock options using the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Pro forma information required by SFAS No. 123 is included in Note 10. Earnings Per Share - Effective with the fourth quarter of 1997, Praxair implemented SFAS No. 128 which establishes new standards for computing and presenting earnings per share and requires the disclosure of basic and diluted amounts. Earnings per share amounts for all prior periods have been restated. Basic earnings per share is computed by dividing net income for the period by the weighted average number of Praxair common shares outstanding. Diluted earnings per share, which is consistent with Praxair's previously disclosed amounts, is computed by dividing net income for the period by the weighted average number of Praxair common shares outstanding and dilutive common stock equivalents. Weighted average shares used to compute basic earnings per share were 158,094,511, 152,653,827, and 138,817,512 shares in 1997, 1996, and 1995, respectively. Weighted average shares and common stock equivalents used to compute diluted earnings per share amounts were 164,053,485, 159,037,716, and 144,147,469 shares in 1997, 1996, and 1995, respectively. The difference between the number of shares used in the basic earnings per share calculation compared to the diluted earnings per share calculation is due to the dilutive effect of outstanding stock options. Accounting Change - In accordance with Emerging Issues Task Force (EITF) Consensus No. 97-13, Praxair recorded an after-tax charge of $11 million in the fourth quarter of 1997 as the cumulative effect of an accounting change related to previously capitalized business process reengineering and information technology transformation costs. Reclassifications - Certain prior years' amounts have been reclassified to conform to the current year's presentation. Note 2 1996 Acquisition of CBI Industries, Inc. (CBI) Acquisition: On January 12, 1996, Praxair acquired approximately 94% of the outstanding shares of CBI common stock and on March 13, 1996 Praxair acquired the remaining common stock outstanding. The total purchase price for CBI's common stock was $2.2 billion including assumed debt of $735 million. The purchase price for the common stock of CBI has been allocated to the assets and liabilities of Liquid Carbonic based on appraisals, valuations and other studies; and to assets held for sale based on estimated net realizable values, as adjusted. The goodwill associated with the CBI acquisition, representing the costs in excess of the fair value of net assets acquired (shown on the balance sheet in other long-term assets), is being amortized on a straight line basis over forty years. The results of Liquid Carbonic's operations have been included in the consolidated financial statements effective January 1, 1996. Pro forma information: The following table provides the unaudited pro forma consolidated results of operations for the year ended December 31, 1995, reflecting the acquisition as though it had occurred at January 1, 1995. The 1995 pro forma amounts are based upon the historical consolidated financial statements of Praxair and CBI combined and adjusted to give effect to the acquisition using the purchase method of accounting and to eliminate the operations and interest carrying costs related to acquired businesses to be sold. 39 Notes to Consolidated Financial Statements This unaudited pro forma financial information is not necessarily indicative of the results of the combined company that would have occurred had the acquisition occurred at the beginning of 1995 nor are they necessarily indicative of future operating results. 1995 Pro Forma results (unaudited)* Sales $4,109 Operating profit $ 576 Net income $ 190 Basic earnings per share $ 1.37 Diluted earnings per share $ 1.32 (Millions of dollars, except per share data) *Pro forma results include an operating profit charge of $54 million ($33 million after tax or $0.23 diluted earnings per share and $0.24 basic earnings per share) principally relating to legal, environmental and other matters of CBI's Liquid Carbonic business. Assets Held for Sale: At the acquisition date, Praxair determined that the Contracting and Investments segments of CBI were not strategic to the combined company and has now completed the sale of substantially all of these businesses. The operations related to these assets held for sale have been eliminated from Praxair's consolidated financial statements in 1997 and 1996 and the remaining assets and liabilities to be sold are included in the consolidated balance sheet within the prepaid and other current assets line at amounts equal to estimated net realizable values adjusted for anticipated earnings, interest and other carrying costs until sale. The following table provides summary data for activity during 1997 and 1996 related to these businesses: Assets Held for Sale 1997 1996 Balance, January 1 $ 287 $ -- Acquisition of CBI -- 476 Add: interest carrying costs 4 17 Less: net income of operations held for sale (3) (15) After-tax proceeds from sale of businesses* (273) (191) - -------------------------------------------------------------- Balance, December 31 $ 15 $ 287 ============================================================== (Millions of dollars) * During 1997, Praxair sold 96% of Chicago Bridge & Iron Company N.V. in an initial public offering transaction, and five other small businesses. During 1996, Praxair sold four of Liquid Carbonic's air separation plants (based on an agreement with the U.S. Federal Trade Commission), Statia Terminals, Inc. and a small business that was part of CBI's Investments segment. Note 3 Special Charges In the fourth quarter of 1997, Praxair recorded a charge of $10 million ($6 million after tax) related primarily to profit improvement initiatives in its North American packaged gases business. In the first quarter of 1996, Praxair recorded a charge of $85 million pre-tax ($53 million after tax benefits of $30 million and minority interests of $2 million) for severance-related and other exit costs, primarily lease termination costs, associated with the integration of the Liquid Carbonic business of CBI and Praxair. The severance-related costs are for payments for the termination of Praxair and CBI employees due to synergies related to integrating the operations of the two companies, primarily manufacturing and product distribution, sales and marketing, and administrative functions. The employee terminations have been completed as of December 31, 1997. The other exit costs are primarily related to estimated net costs associated with lease commitments for surplus office and production space. The following table summarizes 1997 and 1996 accrual activity: Other Total Accrual - Special Charges Severance Exit Costs Accrual Balance, January 1, 1996 $ -- $ -- $ -- CBI integration 50 35 85 1996 activity (29) (10) (39) - ------------------------------------------------------------------------ Balance, December 31, 1996 $ 21 $ 25 $ 46 Packaged gases -- 10 10 1997 activity (21) (9) (30) - ------------------------------------------------------------------------ Balance, December 31, 1997 $ -- $ 26 $ 26 ======================================================================== (Millions of dollars) 40 Notes to Consolidated Financial Statements Note 4 Segment Data Praxair operates principally in the industrial gases business. The following is a summary of sales, operating profit and total assets by geographic segment. Transfers between geographic segments were not significant.
Year Ended December 31, 1997 1996 1995 Sales: United States $ 2,411 $ 2,157 $ 1,569 South America 996 990 667 Europe 603 613 494 Canada, Mexico, Asia and Other 725 689 416 - -------------------------------------------------------------------------------- Total sales $ 4,735 $ 4,449 $ 3,146 ================================================================================ Operating profit:(a) United States $ 465 $ 322 $ 285 South America 197 190 137 Europe 110 113 90 Canada, Mexico, Asia and Other 89 52 53 Corporate (23) (30) (17) - -------------------------------------------------------------------------------- Total operating profit $ 838 $ 647 $ 548 ================================================================================ Total assets: United States $ 3,369 $ 3,102 $ 1,869 South America 2,508 2,177 993 Europe 897 955 741 Canada, Mexico, Asia and Other(b) 1,036 1,304 531 - -------------------------------------------------------------------------------- Total assets $ 7,810 $ 7,538 $ 4,134 ================================================================================ (Millions of dollars)
(a) During 1997, Praxair recorded an operating profit charge of $10 million related primarily to profit improvement initiatives in the North American packaged gases business. During 1996, Praxair recorded an operating profit charge of $85 million related to CBI integration costs. The following are the operating profit impacts, by geographic segment for these special charges. 1997 1996 United States $ 9 $37 South America -- 13 Europe -- 4 Canada, Mexico, Asia and Other 1 28 Corporate -- 3 - -------------------------------------------------------------- Total operating profit $10 $85 ============================================================== (Millions of dollars) (b) Includes $15 million in 1997 and $287 million in 1996 related to assets held for sale - net. Note 5 Income Taxes Pre-tax income applicable to U.S. and foreign operations is as follows: Year Ended December 31, 1997 1996 1995 United States $290 $154 $188 Foreign 332 298 244 - ------------------------------------------------------------------------------ Total income before income taxes $622 $452 $432 ============================================================================== (Millions of dollars) The following is an analysis of the provision for income taxes: Year Ended December 31, 1997 1996 1995 Current tax expense U.S. Federal $ 23 $ 15 $ 48 State and local 12 5 9 Foreign 49 42 23 - ------------------------------------------------------------ Total current 84 62 80 ============================================================ Deferred tax expense U.S. Federal 65 39 14 Foreign 2 9 28 - ------------------------------------------------------------ Total deferred 67 48 42 ============================================================ Total income taxes $151 $110 $122 ============================================================ (Millions of dollars) Net deferred tax liabilities are comprised of the following: December 31, 1997 1996 Deferred tax liabilities Fixed assets $453 $405 State and local 9 9 Other 148 156 - --------------------------------------------------------------- Total deferred tax liabilities 610 570 - --------------------------------------------------------------- Deferred tax assets Benefit plans and related 174 160 Inventory 17 15 Alternative minimum tax 16 18 Loss carryforwards - gross 72 40 Other 107 138 - --------------------------------------------------------------- 386 371 - --------------------------------------------------------------- Less: Valuation allowances 30 11 - --------------------------------------------------------------- Total deferred tax assets 356 360 - --------------------------------------------------------------- Net deferred tax liabilities $254 $210 =============================================================== (Millions of dollars) 41 Notes to Consolidated Financial Statements An analysis of the difference between the provision for income taxes and the amount computed by applying the U.S. statutory income tax rate to pre-tax income follows (amounts are in millions of dollars and percentages are of pre-tax income):
Year Ended December 31, 1997 1996 1995 $ % $ % $ % U.S. statutory income tax rate 218 35.0 158 35.0 151 35.0 State and local taxes 8 1.3 3 0.7 5 1.2 U.S. tax credits (1) (0.1) (1) (0.2) (1) (0.2) Foreign taxes (65) (10.5) (51) (11.4) (30) (6.9) Other - net (9) (1.4) 1 0.2 (3) (0.9) - ---------------------------------------------------------------------------------- Provision for income tax 151 24.3 110 24.3 122 28.2 ==================================================================================
The valuation allowances increased $19 million in 1997, and $1 million in 1996 and 1995, all relating to foreign net operating loss carryforwards activity. At December 31, 1997, Praxair has approximately $81 million of foreign net operating loss carryforwards that expire principally through 2002, for which the deferred tax asset has been fully reserved by valuation allowances. During 1997, Italy and the United Kingdom decreased and France increased their top marginal tax rate. During 1996, Brazil increased its top marginal tax rate. The effects of these tax rate changes were immaterial. In 1995, income taxes included a $6 million charge related to the decrease in Brazil's top marginal income tax rate from 43% to 30.6%. Provision has not been made for additional Federal or foreign taxes at December 31, 1997 on $1,212 million of undistributed earnings of foreign subsidiaries that are planned to be reinvested indefinitely. These earnings could become subject to additional tax if they were remitted as dividends, loaned to Praxair, or upon sale of the subsidiary's stock. It is not practicable to estimate the amount or timing of the additional tax, if any, that might eventually be payable on the foreign earnings. Note 6 Debt and Financial Instruments Debt - The following is a summary of Praxair's outstanding debt at December 31, 1997 and 1996: Debt 1997 1996 Short-Term Commercial paper and U.S. bank borrowings $ -- $1,181 Other U.S. bank borrowings 1 17 Canadian borrowings 84 167 South American borrowings 268 106 Other International borrowings 38 49 - --------------------------------------------------------------------------- Total short-term debt 391 1,520 - --------------------------------------------------------------------------- Long-Term U.S.: Commercial paper and U.S. bank borrowings 860 -- 6.25% Notes due 2000 75 75 6.70% Notes due 2001 250 250 6.625% Notes due 2003 75 75 6.75% Notes due 2003 300 300 6.85% Notes due 2005 150 150 6.90% Notes due 2006 250 250 6.625% Notes due 2007 250 -- 8.70% Debentures due 2022 (Redeemable after 2002) 300 300 Other borrowings 55 65 Canadian subsidiary borrowings 160 90 South American subsidiary borrowings 130 109 Other International borrowings 17 36 Obligations under capital leases 42 45 - --------------------------------------------------------------------------- 2,914 1,745 Less: current portion of long-term debt 40 42 - --------------------------------------------------------------------------- Total long-term debt 2,874 1,703 - --------------------------------------------------------------------------- Total debt $3,305 $3,265 =========================================================================== (Millions of dollars) Praxair has available a $1.5 billion credit agreement which expires in December 2000 and is used to support commercial paper and other short-term U.S. bank borrowings. No borrowings were outstanding under this credit agreement at December 31, 1997 and 1996. At December 31, 1997, $860 million of short-term borrowings have been classified as long-term debt because of the Company's intent to refinance this debt on a long-term basis and the availability of such financing under the terms of the credit agreement. The weighted-average interest rate on commercial paper and U.S bank borrowings was 6.1% at December 31, 1997 and 5.7% at December 31, 1996. 42 Notes to Consolidated Financial Statements Praxair's major bank credit and long-term debt agreements contain various covenants which may, among other things, restrict the ability of Praxair to merge with another entity, incur or guarantee debt, sell or transfer certain assets, create liens against assets, enter into sale and leaseback agreements, or pay dividends and make other distributions beyond certain limits. These agreements also require Praxair to meet leverage, net worth and interest coverage ratios. At December 31, 1997, Praxair was in compliance with all such covenants. Excluding commercial paper and U.S. bank borrowings, payments due on long-term debt in the five years following 1997 are: 1998, $40 million; 1999, $92 million; 2000, $108 million; 2001, $342 million and 2002, $93 million. At December 31, 1997, $40 million of Praxair's assets (principally international fixed assets) were pledged as security for long-term debt including the current portion of long-term debt. At December 31, 1997, the estimated fair value of Praxair's long-term debt portfolio was $2,971 million versus a carrying value of $2,914 million. (At December 31, 1996 the estimated fair value of long-term debt was $1,760 million versus a carrying value of $1,745 million). These differences are attributable to interest rates changes subsequent to when the debt was issued. Financial Instruments - Praxair has entered into various interest rate swap and cap agreements that are used to manage exposure to interest rate changes. Fixed rate swaps are used to convert floating rate debt into fixed rate debt. Forward starting fixed rate swaps are generally used to extend coverage of existing swaps and increase the period for which floating rate debt is converted to fixed rate debt. Floating rate swaps are used to convert fixed rate debt into floating rate debt. Interest rate caps are used to limit the impact of rising interest rates on short-term floating rate debt. The fair market value of these swaps and caps approximated their carrying amounts at December 31, 1997 and 1996. The following table is a summary of the notional amount of interest rate swap and cap agreements at December 31, 1997 and 1996: December 31, 1997(a) 1996 Maturing within one year: Fixed Rate Swaps $220 $950(b) Floating Rate Swaps $150 $ 15 Caps -- $200 Maturing between 1-2 years: Fixed Rate Swaps $550(b) $ 20 Forward Starting Fixed Rate Swaps $150 -- Floating Rate Swaps -- $150 Maturing 2001: Fixed Rate Swaps $ 80 $ 80 (Millions of dollars) (a) Additionally, at December 31, 1997 there are $300 million notional value of forward starting fixed rate swaps that have been effectively offset through June 1998 using $300 million notional value of forward starting floating rate swaps. (b) At December 31, 1997, the expiration dates for $300 million ($600 million in 1996) of these swaps have effectively been extended to these dates through the use of forward starting fixed rate swaps. Praxair is also a party to currency exchange forward contracts to manage its exposure to changing currency exchange rates. At December 31, 1997 and 1996, respectively, Praxair had $324 million and $262 million of currency exchange forward contracts outstanding: $216 million to hedge recorded balance sheet exposures ($239 million in 1996), $38 million to hedge firm commitments generally for the purchase of equipment related to construction projects ($23 million in 1996) and in 1997 only, $70 million to hedge other operating exposures that are accounted for on a mark-to-market basis. Additionally, at December 31, 1997 there are $100 million notional value of currency exchange forward contracts that effectively offset. These contracts all mature within one year. At December 31, 1997 and 1996, the fair market value of currency exchange contracts approximated their carrying amounts and the deferred gains and losses on these contracts were not material. Counterparties to interest rate derivative contracts and currency exchange forward contracts are major financial institutions with credit ratings of investment grade or better and no collateral is required. There are no significant risk concentrations. Management believes the risk of incurring losses related to credit risk is remote and any losses would be immaterial. 43 Notes to Consolidated Financial Statements Note 7 Shareholders' Equity At December 31, 1997 there were 500,000,000 shares of common stock authorized (par value $.01 per share) of which 159,969,641 shares were issued and 157,373,224 were outstanding. During 1997, Praxair reclassified $19 million to additional paid-in capital from other long-term liabilities for deferred compensation that will be paid in common stock. Additional paid-in capital includes unearned performance stock of $(4) million at December 31, 1995 and $(5) million at December 31, 1994. The Board of Directors of Praxair declared a dividend distribution of one common stock purchase right (a "Right") for each share of Praxair's common stock outstanding at the close of business on June 30, 1992. The holders of any additional shares of Praxair's common stock issued after June 30, 1992 and before the redemption or expiration of the Rights are also entitled to one Right for each such additional share. Each Right entitles the registered holders, under certain circumstances, to purchase from Praxair one share of Praxair's common stock at $47.33 (subject to adjustment). At no time will the Rights have any voting power. The Rights may not be exercised until 10 days after a person or group acquires 15 percent or more of Praxair's common stock, or announces a tender offer that, if consummated, would result in 15 percent or more ownership of Praxair's common stock. Separate Rights certificates will not be issued and the Rights will not be traded separately from the stock until then. Should an acquirer become the beneficial owner of 15 percent or more of Praxair's common stock (other than as approved by Praxair's Board of Directors) and under certain additional circumstances, Praxair Rightholders (other than the acquirer) would have the right to buy common stock in Praxair, or in the surviving enterprise if Praxair is acquired, having a value of two times the exercise price then in effect. Also, Praxair's Board of Directors may exchange the Rights (other than the acquirer's Rights which will have become void), in whole or in part, at an exchange ratio of one share of Praxair common stock (and/or other securities, cash or other assets having equal value) per Right (subject to adjustment). The Rights will expire on June 30, 2002, unless exchanged or redeemed prior to that date. The redemption price is $.001 per Right. Praxair's Board of Directors may redeem the Rights by a majority vote at any time prior to the 20th day following public announcement that a person or group has acquired 15 percent of Praxair's common stock. Under certain circumstances, the decision to redeem requires the concurrence of a majority of the independent directors. Note 8 Preferred Stock At December 31, 1997 and 1996, there were 25,000,000 shares of preferred stock (par value $.01 per share) authorized, of which, 750,000 shares were issued and outstanding. The outstanding preferred shares were issued in December 1996 when CBI was merged into Praxair. At that time, each outstanding share of CBI preferred stock was exchanged for a share of Praxair preferred stock having the same terms. Each series of preferred stock ranks on parity with the other, and no dividends may be paid on Praxair common stock unless preferred stock dividends have been paid. The preferred stock has limited voting rights. Dividends are included in minority interests on the consolidated statement of income. Following is a summary of each series of preferred stock outstanding. Series A Preferred Stock - There are 550,000 outstanding shares of Praxair 7.48% Cumulative Preferred Stock, Series A which are entitled to receive cumulative annual dividends of $7.48 per share, payable quarterly. The Series A Preferred Stock is mandatorily redeemable on, but not prior to, April 1, 2000 at a price of $100 per share and has a liquidation preference of $100 per share. Series B Preferred Stock - There are 200,000 outstanding shares of Praxair 6.75% Cumulative Preferred Stock, Series B which are entitled to receive cumulative annual dividends of $6.75 per share, payable quarterly. The Series B Preferred Stock is mandatorily redeemable on, but not prior to, September 5, 2002 at a price of $100 per share and has a liquidation preference of $100 per share. 44 Notes to Consolidated Financial Statements Note 9 Supplementary Income Statement Information Year Ended December 31, 1997 1996 1995 Selling, general and administrative Selling $ 333 $ 331 $ 236 General and administrative 329 357 260 - ----------------------------------------------------------------------- $ 662 $ 688 $ 496 ======================================================================= Other income (expenses) - net Investment income $ 13 $ 6 $ 4 Currency 4 3 (4) Partnership income 12 8 10 Other 33(a) 10 5(b) - ----------------------------------------------------------------------- $ 62 $ 27 $ 15 ======================================================================= Interest expense Interest incurred on debt $ 248 $ 220 $ 125 Interest capitalized (32) (25) (9) - ----------------------------------------------------------------------- $ 216 $ 195 $ 116 ======================================================================= Minority Interests Minority interests $ (58) $ (62) $ (50) Preferred stock dividends (8) (6) -- - ----------------------------------------------------------------------- $ (66) $ (68) $ (50) ======================================================================= (Millions of dollars) (a) Includes $11 million from a favorable judgment related to a dispute with State public hospitals in Brazil. (b) Includes employee severance costs in Brazil and expenses for future lease payments on excess office space in the U.S.; partly offset by income from the sale of the name and trademark Linde and a favorable settlement of a social contribution tax issue in Brazil. Note 10 Incentive Plans and Stock Options The 1992 Praxair Long-Term Incentive Plan (the "1992 Plan") provides for granting nonqualified or incentive stock options, stock grants, performance awards, and other stock-related incentives for key employees. Awards may be made under the 1992 Plan through the year 2001. Under the 1992 Plan, the total number of shares available for options or stock grants shall not exceed one percent of the number of shares outstanding on the first day of each year, plus any shares that were available but not used in a prior year up to two percent of the total number of shares outstanding on the first day of the year of the grant. Option prices are equal to the closing price of Praxair's common stock on the date of the grant. The options issued under the 1992 Plan become exercisable only after one or more years, and the option term can be no more than ten years. In 1996, the Board of Directors approved the 1996 Praxair, Inc. Performance Incentive Plan (the "1996 Plan") that provides for granting nonqualified or incentive stock options, stock grants, performance awards and other stock-related incentives for Praxair employees other than officers and directors, employees subject to Section 16 of the Securities Exchange Act of 1934 and employees subject to Section 162(m) of the Internal Revenue Code. Under the 1996 Plan, the number of shares of stock available for options or grants in each calendar year is limited to two percent of the total number of shares of common stock outstanding as of the first day of the year plus any carryover shares from prior years that were not granted up to a maximum of four percent of the shares of common stock that were outstanding on the first day of the year. Options granted under the 1996 Plan have terms and conditions identical to those that may be granted under the 1992 Plan. In 1992, Praxair issued performance stock to corporate officers and other key employees which became fully vested on February 1, 1997 since the cumulative 15 percent per year net income growth target for the five-year period was achieved. During 1994 the performance stock plan was modified to provide incentive for management to achieve net income growth beyond the original 15% per year target. Under the modification, participants earned additional cash payments equal to 87% of the value of the original performance stock grant. The pre-tax compensation expense related to this performance stock plan was $23 million in 1996 and $19 million in 1995. Effective January 1, 1997, Praxair initiated a new three-year executive compensation plan by granting performance share equivalents (payable in Praxair common stock) and stock options to corporate officers and other key employees. The performance share equivalents will fully vest on January 1, 2000, provided that Praxair meets its three-year cumulative 15 percent per year earnings per share growth target for the period. The number of actual performance share equivalents that vest is governed by a sliding scale starting at 6.5 percent growth based on cumulative earnings per share achieved over the three-year period with no maximum. The performance share equivalents will be included in earnings per share calculations as minimum performance targets are achieved. The stock options become exercisable on January 1, 2000. For 1997, Praxair's earnings per share growth for purposes of this calculation was 16.6% and the pre-tax compensation expense related to this plan was $15 million. 45 Notes to Consolidated Financial Statements The following table summarizes the changes in outstanding shares under option, performance stock grants and performance stock equivalents for 1997, 1996 and 1995 (Shares in thousands): Stock Options Average Performance Exercise Stock and Activity Options Price Equivalents(a) Outstanding at December 31, 1994 12,285 $ 14.45 631 - --------------------------------------------------------------- Granted 1,422 21.14 9 Exercised (2,224) 13.94 -- Cancelled or expired (54) 18.68 (4) - --------------------------------------------------------------- Outstanding at December 31, 1995 11,429 15.36 636 - --------------------------------------------------------------- Granted 2,615 40.52 6 Exercised (2,478) 14.99 -- Cancelled or expired (89) 33.19 (3) - --------------------------------------------------------------- Outstanding at December 31, 1996 11,477 21.03 639 - --------------------------------------------------------------- Granted 1,232 50.63 992 Exercised (1,737) 15.11 -- Vested -- -- (639) Cancelled or expired (73) 40.19 (24) - --------------------------------------------------------------- Outstanding at December 31, 1997(b) 10,899 25.20 968 - --------------------------------------------------------------- Options exercisable at: December 31, 1995 8,671 13.99 December 31, 1996 7,275 14.20 December 31, 1997(b) 7,167 15.51 =============================================================== (a) The weighted-average price per share on the date performance stock equivalents were granted was $46.25 and for performance stock grants was $41.83 in 1996 and $25.18 in 1995. (b) The following table summarizes information about options outstanding and exercisable at December 31, 1997 (shares in thousands, life in years): Outstanding Exercisable Average Range of Average Average Year of Remain- Exercise Exercise Exercise Grant ing Life Options Prices Price Options Price To 6/92* 2.9 3,651 $ 9.80-16.63 $12.86 3,651 $12.86 7/92-12/93 4.8 1,703 $15.50-17.13 $15.84 1,703 $15.84 1994 6.4 584 $17.88-23.63 $19.38 574 $19.31 1995 7.1 1,244 $20.25-29.88 $21.14 1,234 $21.07 1996 8.5 2,502 $34.13-47.75 $40.59 5 $34.13 1997 9.4 1,215 $43.88-56.13 $50.65 - - - -------------------------------------------------------------------------- 5.9 10,899 $ 9.80-56.13 $25.20 7,167 $15.51 ========================================================================== *Options issued at June 30, 1992, the day Praxair became a public company. Pro forma information: SFAS No. 123 requires Praxair to disclose pro forma net income and pro forma earnings per share amounts as if compensation expense was recognized for options granted after 1994. Using this approach, pro forma net income and the related basic and diluted earnings per share amounts would be as follows: Year Ended December 31, 1997 1996 1995 Net income: As reported $ 405 $ 282 $ 262 Pro forma $ 391 $ 274 $ 259 - ------------------------------------------------------------------------ Basic earnings per share: As reported $ 2.56 $ 1.85 $ 1.89 Pro forma $ 2.47 $ 1.80 $ 1.87 - ------------------------------------------------------------------------ Diluted earnings per share: As reported $ 2.46 $ 1.77 $ 1.82 Pro forma $ 2.37 $ 1.72 $ 1.80 ======================================================================== The weighted average fair value of options granted during 1997 was $16.54 ($13.52 in 1996 and $7.26 in 1995). These values, which were used as a basis for the pro forma disclosures, were estimated using the Black-Scholes Options-Pricing Model with the following assumptions used for grants in 1997, 1996, and 1995: Year Ended December 31, 1997 1996 1995 Dividend yield 1.0% 1.0% 1.3% Volatility 27.0% 30.0% 30.0% Risk-free interest rate 6.1% 6.1% 7.7% Expected term - years 5.0 5.0 5.0 These pro forma disclosures may not be representative of the effects for future years since options vest over several years and options granted prior to 1995 are not considered in these disclosures. Also, additional awards generally are made each year. 46 Notes to Consolidated Financial Statements Note 11 Supplementary Balance Sheet Information December 31, 1997 1996 Accounts receivable Trade $ 884 $ 835 Other 112 110 - ------------------------------------------------------------------------------- 996 945 Less: allowance for doubtful accounts(a) 25 31 - ------------------------------------------------------------------------------- $ 971 $ 914 =============================================================================== Inventories(b) Raw materials and supplies $ 120 $ 118 Work in process 48 40 Finished goods 161 154 - ------------------------------------------------------------------------------- $ 329 $ 312 =============================================================================== Property, plant and equipment - net Land and improvements $ 206 $ 183 Buildings 489 477 Machinery and equipment 6,629 6,126 Construction in progress and other 850 722 - ------------------------------------------------------------------------------- 8,174 7,508 Less: accumulated depreciation 3,567 3,239 - ------------------------------------------------------------------------------- $ 4,607 $ 4,269 =============================================================================== Other long-term assets Patents, trademarks and goodwill(c) $ 1,213 $ 1,173 Deposits(d) 47 40 Investments at cost 5 4 Other 231 191 - ------------------------------------------------------------------------------- $ 1,496 $ 1,408 =============================================================================== Other current liabilities Accrued accounts payable $ 199 $ 160 Payrolls 108 125 Employee benefits and related 41 72 Special charges 12 24 Accrued interest payable 39 41 Other 102 89 - ------------------------------------------------------------------------------- $ 501 $ 511 =============================================================================== (continued) December 31, 1997 1996 Other long-term liabilities Employee benefits and related $ 443 $ 463 Special charges 14 22 Other(d) 71 50 - ------------------------------------------------------------------------------- $ 528 $ 535 =============================================================================== Deferred credits Income taxes(e) $ 296 $ 213 Other 28 45 - ------------------------------------------------------------------------------- $ 324 $ 258 =============================================================================== Cumulative translation adjustment Europe $ (78) $ (10) Canada, Mexico, Asia and Other (178) (116) - ------------------------------------------------------------------------------- $ (256) $ (126) =============================================================================== (Millions of dollars) (a) Provisions to the allowance for doubtful accounts were $11 million, $6 million and $5 million in 1997, 1996 and 1995, respectively. (b) Approximately 30% and 31% of total inventories were valued using the LIFO method at December 31, 1997 and 1996, respectively. If inventories had been valued at current costs, they would have been approximately $22 million and $23 million higher than reported at December 31, 1997 and 1996, respectively. (c) Net of accumulated amortization of $100 million in 1997 and $73 million in 1996. (d) $65 million and $79 million of other long-term assets and other long-term liabilities in Brazil have been offset in 1997 and 1996, respectively. (e) Deferred income taxes related to current items are included in prepaid and other current assets in the amount of $42 million in 1997 and $3 million in 1996. 47 Notes to Consolidated Financial Statements Note 12 Retirement Programs Pensions - Praxair has two main U.S. retirement programs which are non-contributory defined benefit plans, the Praxair Retirement Program and the CBI Retirement Program (see Note 2). Pension benefits for both are based predominantly on years of service, age and compensation levels prior to retirement. Pension coverage for employees of Praxair's international subsidiaries generally is provided by those companies through separate plans. Obligations under such plans are typically provided for by depositing funds with trustees, under insurance policies, or by book reserves. The components of net pension cost for 1997, 1996 and 1995 and the funded status as of December 31, 1997 and 1996 for Praxair's domestic retirement programs and significant international plans are shown below.
Year Ended December 31, 1997 1996 1995 Net Pension Cost Service cost - benefits earned during the period $ 33 $ 36 $ 26 Interest on projected benefit obligation 56 53 43 Actual return on plan assets (79) (80) (134) Net amortization and deferral 18 25 92 - ------------------------------------------------------------------------------------------------ $ 28 $ 34 $ 27 ================================================================================================ (Millions of dollars)
U.S. Plans International Plans Overfunded Underfunded Overfunded Underfunded December 31, 1997 1996 1996* 1997 1996 1997 1996 Funded Status Accumulated benefit obligation: Vested benefits $(463) $(301) $ (90) $(138) $(123) $ (67) $ (59) Non-vested benefits (50) (37) (6) (1) (3) (50) (39) - ----------------------------------------------------------------------------------------------------------------------------------- $(513) $(338) $ (96) $(139) $(126) $(117) $ (98) =================================================================================================================================== Projected benefit obligation $(617) $(431) $(108) $(159) $(145) $(149) $(147) Plan assets at fair value, primarily common stocks and fixed income securities 589 415 93 202 194 75 64 - ----------------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation (in excess of) less than plan assets (28) (16) (15) 43 49 (74) (83) Unamortized net (asset) obligation at transition (4) (5) -- (8) (11) 9 10 Unamortized prior service cost 7 9 -- 2 3 10 10 Unrecognized (gains) losses - net (53) (28) (12) (19) (26) (13) -- - ----------------------------------------------------------------------------------------------------------------------------------- Prepaid (accrued) pension obligation $ (78) $ (40) $ (27) $ 18 $ 15 $ (68) $ (63) =================================================================================================================================== *Related to the CBI Retirement Program. (Millions of dollars)
48 Notes to Consolidated Financial Statements The significant actuarial assumptions used were as follows:
U.S. Plans International Plans Year Ended December 31, 1997 1996 1995 1997 1996 1995 Discount rate for determining the projected benefit obligation 7.0% 7.5% 7.0% 4-9% 4-9% 4-8.5% Rate of increase in compensation levels 4.25% 4.75% 4.25% 2-7% 3-7% 3-6.5% Expected long-term rate of return on plan assets 9.5% 9.5% 9.5% 4.5-9.0% 5.5-9.5% 5.5-9.5% - -------------------------------------------------------------------------------------------------------------------------------
Effective in 1996, Praxair's North American packaged gases business has two defined contribution plans. Company contributions to these plans are calculated as a percentage of salary based on age plus service. U.S. employees may supplement the company contributions up to the maximum allowable by IRS regulations. The cost for these plans was $3 million in 1997 and $1 million in 1996. Postretirement Benefits Other Than Pensions - Praxair provides health care and life insurance benefits to certain eligible retired employees. These benefits are provided through various insurance companies and health care providers. Praxair is obligated to make payments for a portion of postretirement benefits related to retirees of Praxair's former parent. As part of the CBI acquisition (see Note 2), Praxair assumed responsibility for health care and life insurance benefit obligations for CBI's retired employees. Praxair does not currently fund its postretirement benefits obligations. The retiree plans may be changed or terminated by Praxair at any time for any reason with no liability to current or future retirees. The components of net periodic postretirement benefit cost for 1997, 1996 and 1995 and the funded status as of December 31, 1997 and 1996 were as follows: Year Ended December 31, 1997 1996 1995 Net periodic postretirement benefit cost Service cost - benefits earned during the year $ 5 $ 7 $ 5 Interest on accumulated post- retirement benefit obligation 15 14 14 Actual return on plan assets (1) (1) (2) Net amortization and deferral (8) (9) (7) - ------------------------------------------------------------------------ $ 11 $ 11 $ 10 ======================================================================== (Millions of dollars) December 31, 1997 1996 Funded Status Accumulated postretirement benefit obligation attributed to: Retirees $(180) $(185) Fully eligible active plan participants (28) (30) Other active plan participants (21) (15) - ------------------------------------------------------------------------- (229) (230) Plan assets at fair value, primarily common stocks and fixed income securities 10 9 Unrecognized prior service cost (11) (19) Unrecognized gains - net (18) (3) - ------------------------------------------------------------------------- Accrued postretirement benefit obligation $(248) $(243) ========================================================================= (Millions of dollars) For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1997, gradually reducing to 4.5% in 2004 and thereafter. For 1996 and 1995 measurement purposes, the annual rate of increase was gradually reducing to 5.0% and 4.5%, respectively. This health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate the effect, increasing the assumed health care cost trend rates by one percentage point would increase the accumulated postretirement benefit obligation by $12 million as of December 31, 1997 ($11 million as of December 31, 1996 and 1995), and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by $1 million in 1997, 1996, and 1995. Under the CBI plan, retiree health care benefits are provided under an established formula which limits costs based on prior years of service of retired employees. Other significant actuarial assumptions used to calculate the accumulated postretirement benefit obligation were the same as those used for the U.S. pension plan (see above). 49 Notes to Consolidated Financial Statements Note 13 Leases For operating leases, primarily involving manufacturing and distribution equipment and office space, noncancelable commitments extending for more than one year will require the following future minimum payments at December 31, 1997 (millions of dollars): Lease Payments 1998 $64 2001 $ 42 1999 $54 2002 $ 38 2000 $46 after 2002 $206 Included in these totals are $67 million of lease commitments to Praxair's former parent company, principally for office space. Praxair is also contingently required to pay certain Canadian lease obligations of the former parent company in the event of a default totaling approximately $18 million ($25 million Canadian). If such payment is required, Praxair has a legal right to set off any such amounts paid against other amounts it owes to the former parent company for lease commitments. Total lease and rental expenses under operating leases were $70 million in 1997 and 1996 and $37 million in 1995. The present value of the future lease payments under operating leases is approximately $312 million at December 31, 1997. Note 14 Commitments And Contingencies In the normal course of business, Praxair is involved in legal proceedings and claims with both private and governmental parties. These cover a variety of items, including product liability and environmental matters. In some of these cases, the remedies that may be sought or damages claimed are substantial. While it is impossible at this time to determine with certainty the ultimate outcome of any of these cases, in the opinion of management, they will not have a material adverse effect on the consolidated financial position of Praxair or on the consolidated results of operations or cash flows in a given year. Should any losses be sustained in connection with any of these cases in excess of provisions therefore, they will be charged to income in the future. In September 1996, Praxair was named as a defendant in a four count lawsuit filed by Airgas, Inc., a competitor, in the Philadelphia Court of Common Pleas alleging essentially that Praxair breached an oral contract with Airgas by acquiring CBI Industries, Inc. without allowing Airgas to participate in the acquisition. The complaint also contains allegations of conversion, fraud and quantum meruit. Praxair believes that the complaint is totally without merit and intends to defend itself vigorously. Praxair's 60%-owned Italian subsidiary has entered into two unconditional long-term purchase agreements, signed in 1989 and 1992, for oxygen and nitrogen to be used to supply existing merchant liquid customers. Obligations in connection with financing under these agreements total $24 million ($19 million on a present value basis), with annual obligations of $4 million over the next two years and $2 million over the succeeding three years. Total purchases of product in 1997, 1996 and 1995, including other amounts purchased under these agreements, were $8 million, $9 million and $9 million, respectively. At December 31, 1997, the estimated cost of completing authorized construction projects in the normal course of business is approximately $480 million. 50 Notes to Consolidated Financial Statements Note 15 Quarterly Data (Unaudited)
1997 1Q 2Q 3Q 4Q Year Sales $ 1,158 1,178 1,190 1,209 $ 4,735 Cost of sales $ 665 681 699 719 $ 2,764 Depreciation and amortization $ 110 110 111 113 $ 444 Operating profit(a) $ 207 213 211 207 $ 838 - ----------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of an accounting change(a) $ 102 107 107 100 $ 416 Cumulative effect of an accounting change(b) -- -- -- (11) (11) Net income(a) $ 102 107 107 89 $ 405 - ----------------------------------------------------------------------------------------------------------------------- Basic Per Share Data:(a) Income before cumulative effect of an accounting change $ .65 $ .68 $ .68 $ .63 $ 2.63 Cumulative effect of an accounting change(b) -- -- -- (.07) (.07) Net income $ .65 $ .68 $ .68 $ .56 $ 2.56 Weighted average shares (000's) 158,128 158,276 158,196 157,828 158,095 - ----------------------------------------------------------------------------------------------------------------------- Diluted Per Share Data:(a) Income before cumulative effect of an accounting change $ .62 $ .65 $ .65 $ .61 $ 2.53 Cumulative effect of an accounting change(b) -- -- -- (.07) (.07) Net income $ .62 $ .65 $ .65 $ .54 $ 2.46 Weighted average shares (000's) 164,332 164,542 164,384 162,926 164,053 ======================================================================================================================= (Millions of dollars, except per share data)
1996 1Q 2Q 3Q 4Q Year Sales $ 1,090 1,093 1,115 1,151 $ 4,449 Cost of sales $ 629 631 637 667 $ 2,564 Depreciation and amortization $ 101 105 107 107 $ 420 Operating profit(c) $ 82 177 190 198 $ 647 - ----------------------------------------------------------------------------------------------------------------------- Net income(c) $ 17 81 88 96 $ 282 - ----------------------------------------------------------------------------------------------------------------------- Basic Per Share Data: Net income $ .12 $ .52 $ .56 $ .61 $ 1.85 Weighted average shares (000's) 142,161 155,307 156,084 157,063 152,654 ======================================================================================================================= Diluted Per Share Data: Net income $ .11 $ .50 $ .54 $ .59 $ 1.77 Weighted average shares (000's) 148,438 161,680 162,316 163,473 159,038 ======================================================================================================================= (Millions of dollars, except per share data)
(a) Operating profit and net income for the 1997 fourth quarter and year include a charge of $10 million and $6 million, respectively, related primarily to profit improvement initiatives in Praxair's North American packaged gases business (see Note 3) and a favorable judgment of $11 million and $6 million, respectively, related to a dispute with State public hospitals in Brazil (see Note 9). (b) Related to a required accounting change for capitalized business process reengineering costs associated with information technology transformation (see Note 1). (c) Operating profit and net income for the first quarter and year of 1996 include a charge of $85 million and $53 million, respectively, for severance-related, lease termination and other exit costs associated with the integration of the industrial gases businesses of CBI and Praxair (see Note 3). 51 Management's Statement of Responsibility for Financial Statements Praxair's financial statements are prepared by management, which is responsible for their fairness, integrity and objectivity. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis except for accounting changes as disclosed and include amounts that are estimates and judgments. All historical financial information in this annual report is consistent with the accompanying financial statements. Praxair maintains accounting systems, including internal accounting controls monitored by a staff of internal auditors, that are designed to provide reasonable assurance of the reliability of financial records and the protection of assets. The concept of reasonable assurance is based on recognition that the cost of a system should not exceed the related benefits. The effectiveness of those systems depends primarily upon the careful selection of financial and other managers, clear delegation of authority and assignment of accountability, inculcation of high business ethics and conflict-of-interest standards, policies and procedures for coordinating the management of corporate resources and the leadership and commitment of top management. Praxair's financial statements are audited by Price Waterhouse LLP, independent accountants, in accordance with generally accepted auditing standards. These standards provide for a review of Praxair's internal accounting controls to the extent they deem appropriate in order to issue their opinion on the financial statements. The Audit Committee of the Board of Directors, which consists solely of non-employee directors, is responsible for overseeing the functioning of the accounting system and related controls and the preparation of annual financial statements. The Audit Committee periodically meets with management, internal auditors and the independent accountants to review and evaluate their accounting, auditing and financial reporting activities and responsibilities. The independent accountants and internal auditors have full and free access to the Audit Committee and meet with the Committee, with and without management present. /s/ H. William Lichtenberger H. William Lichtenberger Chairman and Chief Executive Officer /s/ John A. Clerico John A. Clerico Executive Vice President and Chief Financial Officer /s/ J. Robert Vipond J. Robert Vipond Vice President and Controller Danbury, Connecticut February 6, 1998 52 Report of Independent Accountants To the Board of Directors and Shareholders of Praxair, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of cash flows and of shareholders' equity present fairly, in all material respects, the financial position of Praxair, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Stamford, Connecticut February 6, 1998 53 Information for Investors Common Stock Information Praxair lists its common stock for trading on the New York Stock Exchange under the stock symbol, "PX." Unlisted trading privileges also have been granted by the Pacific, Cincinnati and Midwest Stock Exchanges. There were 36,294 shareholders of record as of December 31, 1997. Shareholder Returns Closing high and low stock prices and dividends are presented below: Stock Prices and Dividends High Low Dividends 1997 Fourth quarter $49.313 $40.875 $0.11 Third quarter $57.563 $50.313 $0.11 Second quarter $57.125 $43.500 $0.11 First quarter $51.875 $44.250 $0.11 - ------------------------------------------------------------ 1996 Fourth quarter $49.375 $43.125 $0.095 Third quarter $43.375 $36.500 $0.095 Second quarter $42.250 $37.125 $0.095 First quarter $39.875 $31.750 $0.095 - ------------------------------------------------------------ 1995 Fourth quarter $33.875 $24.375 $0.08 Third quarter $28.750 $24.875 $0.08 Second quarter $25.250 $22.250 $0.08 First quarter $23.250 $19.875 $0.08 ============================================================ Dividend Policy Dividends on Praxair's common stock are declared by the Board of Directors and, when declared, usually will be paid in March, June, September and December. It is the company's objective to pay dividends consistent with the reinvestment of earnings necessary for long-term growth. Dividend Reinvestment and Stock Purchase Plan Shareholders holding shares registered in their name may increase their investment in Praxair shares through the Dividend Reinvestment and Stock Purchase Plan without payment of any brokerage commission. Full details concerning this plan may be obtained from The Bank of New York. Diluted earnings per share* 1997 $2.57++ 1996 $2.11++ 1995 $1.82 1994 $1.45 1993 $1.06 *Before cumulative effect of accounting changes ++Before special charges Shareholder Information The annual report is the principal means of communicating Praxair's business strategies and financial performance to its shareholders. Additional information on corporate governance matters is provided in the proxy statement prepared in conjunction with Praxair's annual meeting. Also, Praxair's 1997 Annual Report on Form 10-K, which incorporates parts of this annual report by reference and is filed with the U.S. Securities and Exchange Commission, provides certain additional information. Praxair Investor Relations is responsible for shareholder communications and welcomes shareholder inquiries about Praxair, either by telephone or in writing. The Bank of New York is Praxair's stock transfer agent and registrar, and maintains shareholder records. Shareholders needing information about account records, stock certificates, change of address and dividend payments should contact: The Bank of New York 800-432-0140 or, outside the U.S., (212) 815-5800 e-mail address: Shareowner-svcs@bankofny.com website address: http://stock.bankofny.com Address shareholder inquiries to: Shareholder Relations, Department 11E P.O. Box 11258 Church Street Station New York, NY 10286-1258 Send certificates for transfer and address changes to: Receive and Deliver Department - 11W P.O. Box 11002 Church Street Station New York, New York 10286 The annual report, proxy statement and filings with the U.S. Securities and Exchange Commission can be obtained upon request to The Bank of New York or: Investor Relations, Praxair, Inc., 39 Old Ridgebury Road, Danbury, CT 06810-5113 (203) 837-2210 Annual Meeting of Shareholders The 1998 annual meeting of shareholders of Praxair, Inc. will be held at 9:30 a.m. on Tuesday, April 28, 1998 at Hilton Inn and Towers, 18 Old Ridgebury Road, Danbury, Connecticut. General Corporate Information For general information about Praxair, its products and services, write or call: Corporate Communications, Praxair, Inc., 39 Old Ridgebury Road, Danbury, CT 06810-5113 800-PRAXAIR or, outside the U.S., (716) 879-4077 Visit Praxair Online on the World Wide Web: http://www.praxair.com 54 Alejandro Achaval Director, Argentine National Institute of Technology; former Vice Chairman & Chief Executive Officer, IPAKO Industrias Petroquimicas Argentinas S.A. Audit; Finance & Pension Committees John A. Clerico Executive Vice President & Chief Financial Officer, Praxair, Inc. Finance & Pension Committee C. Fred Fetterolf Director of various corporations; former President & Chief Operating Officer, Aluminum Company of America Audit (Chairman); Public Policy & Nominating Committees Dale F. Frey Director of various corporations; former Vice President, General Electric Company; former Chairman & President, General Electric Investment Corporation Finance & Pension (Chairman); Public Policy & Nominating Committees Claire W. Gargalli Vice Chairman, Diversified Search Companies Finance & Pension; Compensation & Management Development Committees Edgar G. Hotard President & Chief Operating Officer, Praxair, Inc. Finance & Pension Committee Ronald L. Kuehn, Jr. Chairman, President & Chief Executive Officer, Sonat Inc. Audit; Compensation & Management Development (Chairman) Committees Raymond W. LeBoeuf Chairman & Chief Executive Officer, PPG Industries, Inc. Finance & Pension, Compensation & Management Development Committees H. William Lichtenberger Chairman & Chief Executive Officer, Praxair, Inc. Public Policy & Nominating Committee Benjamin F. Payton President, Tuskegee University Audit; Public Policy & Nominating Committees G. Jackson Ratcliffe, Jr. Chairman, President & Chief Executive Officer, Hubbell Incorporated Compensation & Management Development; Public Policy & Nominating (Chairman) Committees H. Mitchell Watson, Jr. President, Sigma Group of America Audit; Compensation & Management Development Committees 55 Officers Leonard M. Baker Vice President, Technology Paul J. Bilek President, North American Industrial Gases and President, Praxair Canada David H. Chaifetz Vice President, General Counsel & Secretary John A. Clerico Executive Vice President & Chief Financial Officer Michael E. DeDomenico President, Praxair Europe Theodore W. Dougher Vice President, Safety & Production Excellence Ivan Ferreira Garcia Chief Executive Officer, S.A. White Martins Jesus E. Gonzalez Vice President, Chemicals & Refining Business and Steel Market Barbara R. Harris Vice President, Human Resources John F. Hill Chief Information Officer Bradley J. Holcomb Vice President, Global Procurement & Materials Management Edgar G. Hotard President & Chief Operating Officer Thomas W. von Krannichfeldt President, Praxair Surface Technologies, Inc. H. William Lichtenberger Chairman & Chief Executive Officer Sunil Mattoo Vice President, Marketing Murilo Barros de Melo Vice President, Food Market Nigel D. Muir Vice President, Communications & Public Relations John S. Pirretti Vice President, General Industry Markets Jose R. Rivero President, Praxair Distribution, Inc. (North American Packaged Gases) Sally A. Savoia Vice President, Healthcare Market James S. Sawyer Vice President & Treasurer Donald W. Terry Vice President, Carbon Dioxide Product and Services William M. Therrien Vice President, Engineering and Supply Systems Theodore F. Trumpp Vice President, Electronics Business J. Robert Vipond Vice President & Controller Regional Management North America Michael J. Douglas Managing Director, Praxair Canada Cesar Guajardo Managing Director, Praxair Mexico Robert P. Sheehan President, Praxair Puerto Rico Alan J. Westendorf Senior Vice President, Sales South America Domingos Bulus Assistant Director, Andean Treaty Countries Albino Carneiro Assistant Director, South Cone Countries Ricardo Malfitano Industrial Gases Officer, Brazil Europe Olivier Lambotte Business Director, Specialty Gases Robert Matthe General Manager, Poland Franco Mazzali Managing Director, Italy and Middle East Jean-Michel Tiard Managing Director, Western Europe Gabriel Toledo Managing Director, Spain and Turkey Asia James J. Fuchs Vice President, Asia V. Thad Evans Managing Director, Praxair Japan, and President, Praxair Iwatani Electronics Gases Brian Evison Managing Director, Praxair Indonesia and Praxair Australia K.H. Lee President, Praxair Korea Brent Lok President, Praxair Greater China Indrajit Mookerjee Managing Director, Praxair India Kitti Prapasuchart Managing Director, Praxair Thailand South American Advisory Council H. William Lichtenberger Chairman Ivan Ferreira Garcia Deputy Chairman Ricardo Cillioniz President, Aceros Arequipa, Peru Enzo Debernardi Senior Consultant, Paraguay Isaac Gilinski President, Bancol SA, Colombia Agostino Rocca President for Latin America, Organizacion Techint, Argentina Paolo Rocca President, Organizacion Techint, Argentina Benjamin Steinbruch Chairman, Companhia Siderugica Nacional, Brazil 56 World Headquarters Praxair, Inc. 39 Old Ridgebury Road Danbury, CT 06810-5113 USA 1-800-PRAXAIR (716) 879-4077 (from outside the U.S.) Praxair Surface Technologies, Inc. Indianapolis, IN, USA (317) 240-2500 (affiliates in Brazil, Denmark, France, Germany, Italy, Japan, Singapore, Spain, Switzerland, United Kingdom) North America Praxair, Inc. Danbury, CT, USA 1-800-PRAXAIR (716) 879-4077 Praxair Mexico S.A. de C.V. Mexico City, Mexico 52 (5) 627-9500 Praxair Canada Inc. Mississauga, Ontario, Canada (905) 803-1600 South America S.A. White Martins Rio de Janeiro, Brazil 55 (21) 588.6622 Argentina, Bolivia, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay, Venezuela Central America/Caribbean Praxair Puerto Rico Gurabo, PR (787)258-7200 Belize, Costa Rica Europe Praxair N.V. Zaventem (Brussels), Belgium 32 (2) 716.0580 Austria, Croatia, Czech Republic, France, Germany, Israel, Italy, The Netherlands, Poland, Portugal, Slovenia, Spain, Turkey Asia Praxair Asia, Inc. Singapore (65)736-3800 Australia, India, Indonesia, Japan, People's Republic of China, South Korea, Thailand EX-21.01 6 EXHIBIT 21.01 Place of INCORPORATION Accent Cay Holdings Inc. British Virgin Island Adirondack Insurance Company Vermont Amko Service Company Ohio Asian Surface Technologies Pte. Ltd. Singapore Beijing Praxair Huashi Carbondioxide Co., Ltd. China Carbonatos Andinos S.A. Argentina Carborio Industria E. Comercio, Lta. Brazil Catalana de Gases Medicinales S.L. Spain CBI Investments, Inc. Delaware CBI Terminal COmpany Delaware CBI Comercio e Participacoes Ltda. Brazil Chameleon Finance Company B.V. The Netherlands CILBRAS - Empresa Brasileira de Cilindros Ltda. Brazil Coatec Gesellschaft Fur Oberflachentechnik GmbH Germany Companhia Nacional de Calcareos e Derivados - CONCAL Brazil Companhia Nacional de Carbureto Brazil Companhia Nacional de Oxigenio S.A. Portugal Cryo Teruel S.A. Spain Distribudora Mexicana de Criogenicos S.A. de C.V. Mexico Domolife S.r.l. Italy Emigas Servizi S.r.l. Italy Euro Cantley S.A. Colombia Euro Silver S.A. Uruguay Euro Vitoria S/A Uruguay Fabrica de Oxigeno Miller Hermanos, S.A. Costa Rica Frios Industrias Argentinas S.A. Argentina Gases de Ensenada S/A Argentina Gases International, Inc. Delaware GASOX - Goias Oxigenio Ltda. Brazil Gas Tech, Incorporated Illinois Glace Seche Quebec Inc. Canada Groupo Praxair S.A. de C.V. Mexico Hielo Secco S.A. Bolivia Ibis Investments, Inc. Delaware Igas Servizi S.r.l. Italy IMOX Industria e Comercio Ltda. Brazil Industrial Gases, Inc. Delaware Innovative Membrane Systems, Inc. Delaware Intercorp Mexico S.A. de C.V. Mexico International Cryogenic Equipment Corporation Delaware Jacksonville Welding Supply, Inc. Florida Julio Pastafiglia & Cia. S.A. Argentina Kelvin Finance Company Ireland L. Clausen & Cia. SRL Uruguay Liquid Carbonic Corporation Delaware Liquid Carbonic Del Paraguay S.A. Paraguay Liquid Carbonic do Ceara Ltd. Brazil Liquid Carbonic Do Nordeste, S.A. Brazil Liquid Carboinc Industrias S.A. Brazil Liquid Carbonic LNG International, Inc. Delaware Liquid Carbonic Noroeste Ltda. Brazil Liquid Carbonic of Oklahoma, Inc. Oklahoma EXHIBIT 21.01 (cont'd.) Place of INCORPORATION Liquid Carbonico Colombiana S.A. Colombia Liquid Natural Gas de Mexico S.A. de C.V. Mexico Liquid Quimica Mexicana, S.A. de C.V. Mexico Liquid Quimica S.A. Brazil Maxima Air Separation Center Limited Israel Medigas Iberica S.A. Spain Miller Hermanos S.A. Costa Rica Monte Bravo S.A. Uruguay Nitropet, S.A. Mexico Oak Brook International Insurance Co. Ltd. Bermuda Old Danford S.A. Uruguay Operadora Perinorte, S.A. de C.V. Mexico Oxiazuay & Cia. Ltda. Ecuador Oxiambato Ltda. Ecuador Oxigenos de Colombia Efese S.A. Colombia Oxigenus S.A. Spain Oximesa S.A. Spain Oximinas Ltda. Brazil P. T. Praxair Indonesia Indonesia Plainfield, Inc. Delaware Praxair e Compania Portugal Praxair & M.I. Services, S.R.L. Italy Praxair Asia, Inc. Delaware Praxair Argentina, S.A. Argentina Praxair Australia Pty. Ltd. Australia Praxair B.V. The Netherlands Praxair BCEEP Carbon Dioxide, Inc. China Praxair Belize, Ltd. Belize Praxair Bolivia, S.A. Bolivia Praxair Canada Inc. Canada Praxair Chile S.A. Chile Praxair Comercio e Participacos Ltda. Brazil Praxair Costa Rica, S.A. Costa Rica Praxair Deer Park Cogen, Inc. Delaware Praxair Distribution, Inc. Delaware Praxair Ecuador S.A. Ecuador Praxair Energy Resources, Inc. Delaware Praxair Energy Services, Inc. Delaware Praxair Espana, S.L. Spain Praxair Foreign Sales Corporation Virgin Islands Praxair G.m.b.H. Germany Praxair Gmbh & Co., KG Germany Praxair Holding Espana, S.L. Spain Praxair Holding N.V. Belgium Praxair Hydrogen Supply, Inc. Delaware Praxair Iberica, S.A. Spain Praxair India Private Limited India Praxair International, Inc. Delaware Praxair Iwatani Electronics Gases Co. Japan Praxair K.K. Japan Praxair Korea Company Limited Republic South Korea Praxair Martime Company Nova Scotia EXHIBIT 21.01 (cont'd.) Place of INCORPORATION Praxair Mexico, S.A. de C.V. Mexico Praxair N.V. Belgium Praxair-Ozone, Inc. Delaware Praxair Pacific Limited Mauritius Praxair Polska, SP. z o.o. Poland Praxair Paraguay S.R.L. Paraguay Praxair Peru S.A. Peru Praxair Produccion Espana, S.L. Spain Praxair Production N.V. Belgium Praxair Products Inc. Canada Praxair Puerto Rico, Inc. Delaware Praxair (Shanghai) Co., Ltd. China Praxair S.A. France Praxair S.p.A. Italy Praxair S. T. Technology, Inc. Delaware Praxair Services et Systemes S.A. France Praxair Services G.m.b.H. Germany Praxair Shanghai Meishan Inc. China Praxair Soldadura S.A. Spain Praxair Surface Technologies A/S Denmark Praxair Surface Technologies Espana S.A. Spain Praxair Surface Technologies (Europe) S.A. Switzerland Praxair Surface Technologies G.m.b.H. Germany Praxair Surface Technologies, Inc. Delaware Praxair Surface Technologies K.K. Japan Praxair Surface Technologies Limited United Kingdom Praxair Surface Technologies Mexico, S.A. de C.V. Mexico Praxair Surface Technologies Pte. Ltd. Singapore Praxair Surface Technologies S.A. France Praxair Surface Technologies S.p.A. Italy Praxair Technology, Inc. Delaware Praxair (Thailand) Company, Ltd. Thailand Praxair UK Limited United Kingdom Praxair US Holdings, Inc. Delaware Praxair Uruguay S.A. Uruguay Praxair Venezuela, S.A. Venezuela Precigas Gases Industriais S.A. Brazil Production Praxair Canada Inc. Canada Products Especiales Quimicos, S.A. de C.V. Mexico Quimica Industrial Bara Do Pirai S.A. Brazil Rapidox Gases Industriais Ltda. Brazil Rivoira S.p.A. Italy Rolmaster Industrial Ltda. Brazil S. A. White Martins Brazil Servicios Ejecutivos Praxair, S.A. de C.V. Mexico Servicios Energeticos Chile S.A. Chile Specialty International Chemicals, Inc. Delaware Tianjin Praxair Inc. China Topaz Consultoria S.A. Uruguay Transportes Flamingo S/A Peru UCISCO Canada Inc. Canada UCISCO, Inc. Texas Unigases Comercial Ltda. Brazil EXHIBIT 21.01 (cont'd.) Place of INCORPORATION Wall Chemicals, Inc. Illinois Westair Cryogenics Company Delaware White Martins Administracao, Investimentos e Fomento Comercial Ltda. Brazil White Martins de Camacari S.A. Bahia White Martins e Companhia Comercio e Servicos Brazil White Martins & White Martins Comercio e Servicos Portugal White Martins Gases Industriais do Nordeste S.A. Brazil White Martins Gases Industriais do Norte S.A. Brazil White Martins Gases Industriais S.A. Brazil White Martins Soldagem Ltda. Brazil 3/12/98 EX-23.01 7 EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (Nos. 333-40003, 333-18141, 333-304, 33-93444, and 33-48480) and in the Registration Statement on Form S-8 (Nos. 333-18111, 333-18113, 33-92868, 33-87274, 33-48479, and 33-48478) of Praxair, Inc. of our report dated February 6, 1998 appearing on page 53 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. /s/PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Stamford, Connecticut March 16, 1998 EX-27 8
5 1,000,000 YEAR DEC-31-1997 DEC-31-1997 43 0 996 25 329 1497 8174 3567 7810 1366 2874 75 0 2 2120 7810 4735 4735 2764 2764 444 0 216 622 151 471 0 0 (11) 405 2.56 2.46 Cost of goods sold and total costs are exclusive of depreciation and amortization which is shown on the other expense line in the Financial Data Schedule. Effective in 1997, SFAS No. 128 established new standards for computing and presenting earnings per share (EPS). In the Financial Data Schedule, Praxair's Basic EPS is presented on the "EPS-Primary" line and Diluted EPS is presented on the "EPS-Diluted" line. Diluted EPS is consistent with Praxair's previously disclosed amounts.
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