-----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, OLd6c6Ea4uV/O8tbQdg2qzDOvHhyOqshtWwYmdbGC5ahILnPsnTCG86jHOY1N7+X yqI+z95sJuF5Ou97PCl5zA== 0000884905-99-000017.txt : 19991108 0000884905-99-000017.hdr.sgml : 19991108 ACCESSION NUMBER: 0000884905-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991105 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-Q SEC ACT: SEC FILE NUMBER: 001-11037 FILM NUMBER: 99741885 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-Q 1 PRAXAIR, INC. FORM 10Q AS OF SEPTEMBER 30, 1999 FORM 10Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 --------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission File Number 1-11037 ------- Praxair, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 06-1249050 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 39 Old Ridgebury Road, Danbury, CT 06810-5113 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (203) 837-2000 -------------------------------------------------- Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 [ ] At September 30, 1999, 158,949,848 shares of common stock ($.01 par value) of the Registrant were outstanding. Forward-looking statements -------------------------- The forward-looking statements contained in this document concerning, among other things, projected capital spending, changes in energy and distribution costs in North America, continuation of acquisition activities in the surface technologies and other businesses, tax planning initiatives and effective tax rates, impacts in Brazil related to economic conditions, currency movements and the change in functional currency, other impacts from currency, management's assessments of the impacts of the Year 2000 Problem and Euro Conversion, and market risks and sensitivity analyses disclosures relating 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, foreign currency movements, pricing fluctuations for the company's products, 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. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Income - Praxair, Inc. and Subsidiaries Quarter and Nine Months Ended September 30, 1999 and 1998 (Unaudited) Condensed Consolidated Balance Sheet - Praxair, Inc. and Subsidiaries September 30, 1999 (Unaudited) and December 31, 1998 Condensed Consolidated Statement of Cash Flows - Praxair, Inc. and Subsidiaries Nine Months Ended September 30, 1999 and 1998 (Unaudited) Notes to Condensed Consolidated Financial Statements - Praxair, Inc. and Subsidiaries (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signature Exhibit Index PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PRAXAIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Millions of dollars, except per share data) Quarter Ended Nine Months Ended September 30, September 30, ---------------- ---------------- 1999 1998 1999 1998 ------- ------- ------- ------- SALES .................................. $1,169 $1,201 $3,436 $3,636 Cost of sales, exclusive of depreciation and amortization ........ 691 697 2,016 2,105 Selling, general and administrative .... 155 153 480 485 Depreciation and amortization .......... 111 118 335 352 Research and development ............... 16 18 49 55 Other income-net ....................... 12 10 64 27 ------- ------- ------- ------- OPERATING PROFIT ....................... 208 225 620 666 Interest expense ....................... 47 64 154 196 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES ............. 161 161 466 470 Income taxes ........................... 40 40 112 118 ------- ------- ------- ------- INCOME OF CONSOLIDATED ENTITIES ........ 121 121 354 352 Minority interests ..................... (11) (15) (34) (41) Income from equity investments ......... 2 2 7 7 ------- ------- ------- ------- INCOME BEFORE ACCOUNTING CHANGE ........ 112 108 327 318 Cumulative effect of an accounting change - - (10) - ------- ------- ------- ------- NET INCOME ............................. $ 112 $ 108 $ 317 $ 318 ======= ======= ======= ======= PER SHARE DATA: Basic earnings per share: Before accounting change.............. $ 0.70 $ 0.68 $ 2.05 $ 2.01 Accounting change .................... - - (.06) - ------- ------- ------- ------- Net income $ 0.70 $ 0.68 $ 1.99 $ 2.01 ======= ======= ======= ======= Diluted earnings per share: Before accounting change............... $ 0.69 $ 0.66 $ 2.02 $ 1.94 Accounting change...................... - - (.06) - ------- ------- ------- ------- Net income............................. $ 0.69 $ 0.66 $ 1.96 $ 1.94 ======= ======= ======= ======= Cash dividends per share ............... $ 0.14 $ 0.125 $ 0.42 $ 0.375 ======= ======= ======= ======= WEIGHTED AVERAGE SHARES OUTSTANDING (000'S): Basic shares outstanding ............... 159,704 158,893 159,068 158,517 Diluted shares outstanding ............. 162,564 163,417 162,100 163,550 The accompanying notes are an integral part of these financial statements. PRAXAIR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Millions of dollars) September 30, 1999 December 31, (Unaudited) 1998 ----------- ------------ ASSETS Cash and cash equivalents ....................... $ 35 $ 34 Accounts receivable ............................. 865 919 Inventories ..................................... 286 319 Prepaid and other current assets ................ 97 122 ------- ------- TOTAL CURRENT ASSETS ....................... 1,283 1,394 Property, plant and equipment-net ............... 4,563 4,875 Other assets .................................... 1,562 1,827 ------- ------- TOTAL ASSETS ............................... $ 7,408 $ 8,096 ======= ======= LIABILITIES AND EQUITY Accounts payable ................................ $ 305 $ 378 Short-term debt ................................. 96 295 Current portion of long-term debt ............... 113 84 Other current liabilities ....................... 487 532 ------- ------- TOTAL CURRENT LIABILITIES .................. 1,001 1,289 Long-term debt .................................. 2,745 2,895 Other long-term obligations ..................... 1,095 1,018 ------- ------- TOTAL LIABILITIES .......................... 4,841 5,202 Minority interests .............................. 337 487 Preferred stock ................................. 75 75 Shareholders' equity ............................ 2,155 2,332 ------- ------- TOTAL LIABILITIES AND EQUITY ............... $ 7,408 $ 8,096 ======= ======= The accompanying notes are an integral part of these financial statements. PRAXAIR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Millions of dollars) Nine Months Ended September 30, ------------------------- 1999 1998 ---------- ---------- OPERATIONS Net income ..................................... $ 317 $ 318 Adjustments: Depreciation and amortization ................ 335 352 Deferred income taxes ........................ 42 77 Working capital .............................. 39 (106) Long-term assets and liabilities ............. (120) (41) Other non-cash charges ....................... 15 3 ------- ------- Net cash provided by operating activities .. 628 603 ------- ------- INVESTING Capital expenditures ........................... (464) (539) Acquisitions ................................... (16) (236) Divestitures and asset sales ................... 99 189 -------- -------- Net cash used for investing activities ..... (381) (586) -------- -------- FINANCING Short-term repayments-net ...................... (186) (76) Long-term borrowings ........................... 47 367 Long-term debt repayments ...................... (137) (254) Minority transactions and other ................ 68 (20) Issuances of common stock ...................... 92 97 Purchases of common stock ...................... (61) (74) Dividends ...................................... (67) (59) -------- -------- Net cash used for financing activities ..... (244) (19) -------- -------- Effect of exchange rate changes on cash and cash equivalents ............................... (2) (1) -------- -------- Change in cash and cash equivalents .............. 1 (3) Cash and cash equivalents beginning-of-year....... 34 43 -------- -------- Cash and cash equivalents end-of-period .......... $ 35 $ 40 ======== ======== Supplemental Data: Effect of functional currency change ............. $ - $ 81 Acquired debt from acquisitions................... $ - $ 20 The accompanying notes are an integral part of these financial statements. PRAXAIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Presentation of Condensed Consolidated Financial Statements In the opinion of Praxair, Inc. ("Praxair") management, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation of the results for the interim periods presented. These adjustments consisted of only normal recurring adjustments. The accompanying condensed consolidated financial statements should be read in conjunction with the Notes to the consolidated financial statements of Praxair, Inc. and subsidiaries in Praxair's 1998 Annual Report. Certain prior years' amounts have been reclassified to conform to the current years' presentation. 2. Accounting Change Effective January 1, 1999, Praxair adopted Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." In accordance with SOP 98-5, Praxair recorded an after-tax charge of $10 million in the first quarter of 1999 as the cumulative effect of an accounting change related to previously capitalized start-up costs. 3. Special Charges At September 30, 1999, the remaining accrual balance related to the 1996 and 1997 special charges was $14 million (see Note 3 to Praxair's 1998 consolidated financial statements). 4. Inventories The following is a summary of Praxair's consolidated inventories: (Millions of dollars) September 30, 1999 December 31, (Unaudited) 1998 ----------- ------------ Raw materials and supplies...... $ 100 $ 115 Work in process................. 41 38 Finished goods.................. 145 166 ----- ----- $ 286 $ 319 ===== ===== 5. Shareholders' Equity Changes in Shareholders' Equity were as follows: (Thousands of shares) Common Treasury Stock Issued Stock ------------ --------- Balance, January 1, 1999................ 161,517 3,946 Common stock activity (c) .............. 2,403 1,024 --------- -------- Balance, September 30, 1999............. 163,920 4,970 ========= ========
(Millions of dollars) Accumulated Additional Other Common Paid-In Treasury Retained Comprehensive Stock Capital Stock Earnings Income(Loss) Total ------ --------- -------- -------- ----------- ------- Balance, January 1, 1999 .... $ 2 $1,528 $(166) $1,380 $(412) $2,332 ------- Net income .................. 317 317 Translation adjustments (a).. (458) (458) ------- Comprehensive income(loss)(b) $ (141) Dividends - common stock..... (67) (67) Common stock activity (c).... 74 (43) 31 --- ------ ------ ------- ------ ------- Balance, September 30, 1999.. $ 2 $1,602 $(209) $1,630 $(870) $2,155 === ====== ====== ======= ====== =======
(a) Primarily currency translation adjustments in Brazil and is net of a 1999 first quarter $60 million gain (after taxes and minority interest) related to Brazilian net investment hedges (see Note 10). (b) Comprehensive income (loss) for the quarter and nine months ended September 30, 1999 was $42 and ($141) million, respectively, as compared to $95 million and $173 million, respectively, in the 1998 periods. (c) Relates to issuances of common stock for the Dividend Reinvestment and Stock Purchase Plan, employee savings and incentive plans, and issuances/purchases of common stock. During the quarter and nine months ended September 30, 1999, Praxair granted options for 650,455 and 1,832,515 shares, respectively, of common stock having option prices ranging from $33.00 to $51.13 per share, the closing market price of Praxair's common stock on the day of the grants. At September 30, 1999 there were 11,773,994 shares under option at prices ranging from $9.80 to $56.13 per share (weighted average of $31.07) of which options for 6,830,184 shares were exercisable at prices ranging from $9.80 to $56.13 per share (weighted average of $23.62). During the quarter and nine months ended September 30, 1999, 209,405 and 1,949,520 options were exercised, respectively. 6. Debt and Financial Instruments Debt - The following is a summary of Praxair's outstanding debt at September 30, 1999 and December 31, 1998: (Millions of dollars) September 30, 1999 December 31, (Unaudited) 1998 ----------- ------------ Short-term: Canadian borrowings....................... $ 12 $ 116 South American borrowings................. 53 95 Other international borrowings............ 31 82 Other U.S. borrowings..................... - 2 ------- ------- Total short-term debt....................... 96 295 ------- ------- Long-term: U.S.: Commercial paper and U.S. bank borrowings. $ 479 $ 627 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 6.15% Notes due 2003..................... 250 250 6.85% Notes due 2005..................... 150 150 6.90% Notes due 2006..................... 250 250 6.625% Notes due 2007..................... 250 250 8.70% Debentures due 2022 (Redeemable after 2002)............ 300 300 Other borrowings.......................... 133 52 Canadian subsidiary borrowings.............. 178 204 South American subsidiary borrowings........ 93 126 Other international borrowings.............. 75 70 ------- ------- 2,858 2,979 Less: current portion of long-term debt..... 113 84 ------- ------- Total long-term debt........................ 2,745 2,895 ------- ------- Total debt.................................. $2,954 $3,274 ======= ======= At September 30, 1999, $579 million of borrowings have been classified as long term ($627 million at December 31, 1998) 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 its $1.5 billion credit agreement, which has a remaining term of greater than 12 months and expires in December 2000. Financial Instruments - At September 30, 1999, Praxair had $80 million notional amount of interest rate swap agreements that effectively convert variable rate debt to fixed rate debt. These agreements mature in 2001. Praxair is also a party to currency exchange forward contracts to manage its exposure to changing currency exchange rates. At September 30, 1999 Praxair had $320 million of currency exchange forward contracts outstanding: $280 million to hedge recorded balance sheet exposures, $13 million to hedge firm commitments (generally for the purchase of equipment related to construction projects) and $27 million to hedge future net income. Additionally, there are $114 million notional value of currency exchange contracts that effectively offset. These contracts all mature within one year. 7. Earnings Per Share 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 is computed by dividing net income for the period by the weighted average number of Praxair common shares outstanding and dilutive common stock equivalents. 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 primarily to the dilutive effect of outstanding stock options. Stock options for 636,795 and 3,569,455 shares were not included in the computation of diluted earnings per share for the quarter and nine months ended September 30, 1999, respectively, because the exercise prices were greater than the average market price of the common stock. 8. Sale Leaseback Transaction On March 30, 1999, Praxair sold and leased back certain U.S. distribution equipment for $80 million. The lease has an initial two year term and has been accounted for as an operating lease. Praxair has purchase and lease renewal options at projected future fair market values beginning in 2001 and has guaranteed $68 million of the residual value. The gain on the sale transaction of $63 million has been deferred until the expiration of Praxair's guarantee of the residual value and is shown in other long-term liabilities. 9. South American Rights Offering During the first quarter of 1999, Praxair's South American subsidiary, S.A. White Martins, completed a rights offering resulting in Praxair's ownership interest in White Martins increasing from 69.33% at December 31, 1998 to 76.57%. As consideration for the additional shares it purchased during the rights offering, Praxair used approximately $138 million of intercompany loans it had previously made to White Martins. Approximately $15 million of the rights offering were purchased by minority shareholders. 10. Brazilian Currency Hedge Agreements In early January 1999, Praxair entered into currency exchange forward contracts totaling $325 million notional value for estimated Brazilian net income in 1999 and to hedge a portion of its net investment. The net income hedge agreements were effectively settled during the first quarter resulting in a pre-tax gain of $21 million ($14 million after tax and minority interest). The net investment hedge contracts were either closed out or were effectively settled in the first quarter resulting in a gain of approximately $60 million (after tax and minority interest) which was recognized on the balance sheet in the accumulated other comprehensive income(loss) (cumulative translation adjustment) component of shareholders' equity. By April 1999, all of these contracts were settled and the cash proceeds relating to the pre-tax gain on the equity hedges (approximately $89 million) is shown in the financing section of the condensed consolidated statement of cash flows under the caption "Minority transactions and other", and the pre-tax gain relating to the net income hedges is shown under the caption "net income" in operating cash flows. 11. Commitments and Contingencies On July 1, 1999 Praxair, Inc. received a favorable verdict in a four-count lawsuit filed by Airgas, Inc., a competitor. Airgas had alleged that Praxair breached an oral contract with Airgas by acquiring CBI Industries, Inc. without allowing Airgas to participate in the acquisition. The complaint also contained allegations of conversion, fraud and quantum meruit. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results (Dollar amounts in millions) Quarter Ended Nine Months Ended September 30, Percent September 30, Percent 1999(a) 1998 Change 1999(a) 1998 Change ------ ------- ------- -------- ------ ------- Sales.......................... $1,169 $1,201 - 3% $3,436 $3,636 - 6% Selling, general and administrative............ $ 155 $ 153 + 1% $ 480 $ 485 - 1% Depreciation and amortization.. $ 111 $ 118 - 6% $ 335 $ 352 - 5% Operating profit............... $ 208 $ 225 - 8% $ 620 $ 666 - 7% Interest expense............... $ 47 $ 64 - 27% $ 154 $ 196 - 21% Effective tax rate............. 25% 25% -% 24% 25% - 1% Income before accounting change $ 112 $ 108 + 4% $ 327 $ 318 + 3% Excluding one-time hedge gain in Brazil: Operating profit............... $ 208 $ 225 - 8% $ 599 $ 666 - 10% Effective tax rate............. 25% 25% -% 25% 25% -% Income before accounting change $ 112 $ 108 + 4% $ 313 $ 318 - 2% (a) The results for the quarter and nine months ended September 30, 1999 versus the comparative 1998 periods were significantly impacted by the devaluation of the Brazilian currency (Real) from a rate of 1.21 Reais to the U.S. Dollar at December 31, 1998 to 1.92 at September 30, 1999 (1.86 average rate for the quarter and 1.78 average rate for the nine month period). Reported amounts from Brazil were all reduced in proportion to the exchange rate changes. Also, as described in Note 10, in early January 1999 Praxair entered into various currency exchange forward contracts to hedge anticipated Brazilian net income and a portion of its investment. The net income hedges were effectively closed out in the first quarter resulting in a non-recurring pre-tax gain of $21 million in the 1999 first quarter and nine month periods ($14 million after taxes and minority interests or $0.09 per share). The amounts shown above under the section "Excluding one-time hedge gain in Brazil" exclude the impacts of this hedge gain. The sales decrease of 3% for the quarter and 6% for the nine months ended September 30, 1999 versus the respective 1998 periods was due primarily to unfavorable currency translation effects in South America. These factors were partially offset by the impact of price increases in North and South America, continued volume growth in Asia and Europe, and third quarter volume growth in North America. Excluding the impact of currency, sales grew 4% for the quarter and decreased 1% for the nine months ended September 30, 1999. Operating profit decreased 8% for the 1999 quarter and, excluding the impact of the 1999 first quarter Brazilian hedge gain, also decreased 10% for the nine months ended September 30, 1999 versus the respective 1998 periods. These decreases were due primarily to the sales decrease described above, cost inflation and currency translation impacts, partially offset by productivity improvements. Selling, general and administrative expenses for the nine months ended September 30, 1999 is higher as a percentage of sales versus 1998 due primarily to long-term incentive plan costs, higher business development costs and cost inflation impacts, partially offset by productivity improvements. The decrease in depreciation and amortization expense for both periods reflects the impact of currency translation, primarily in Brazil, and the impact of the North American sale leaseback transactions in 1999 and 1998; offset by new projects coming on-stream and packaged gases and Surface Technologies acquisitions. Other income - net for the nine months ended September 30, 1999 is $37 million greater than the 1998 period due primarily to a $50 million gain related to the redemption of preference shares from an earlier business sale, the 1999 first quarter $21 million gain on the net income hedges in Brazil, and the collection of a $12 million note receivable from an earlier business sale; partly offset by $45 million of costs primarily for postemployment benefits and an anticipated loss on the sale of an air separation plant under construction for a third party. Income before accounting change increased 4% for the 1999 quarter and, excluding the Brazilian hedge gain, decreased 2% for the nine months versus the respective 1998 periods. The increase in the 1999 quarter versus 1998 was due primarily to the lower interest expense and minority interest impact which more than offset the lower operating profit. The decrease in the 1999 nine month period versus 1998 was because the lower operating profit more than offset the decreased interest expense and minority interest impacts. Interest expense decreased $17 million or 27% for the quarter and $42 million or 21% for the nine month period versus the respective 1998 periods due primarily to currency translation effects in Brazil and lower debt levels. Minority interests decreased $4 million for the quarter and $7 million for the nine month period due primarily to Brazilian currency impacts and the rights offering (see Note 9). The effective tax rate remained at 25% for all periods, excluding the impact of the Brazilian hedge gain. The number of employees at September 30, 1999 was approximately 23,600 which reflects a decrease of approximately 1,200 from December 31, 1998. The decrease is principally the result of continued productivity improvement initiatives in North America and South America, and the divestiture of a business in Asia. Segment Discussion The following summary of sales and operating profit by segment provides a basis for the discussion that follows (for a description of Praxair's operating segments, refer to Note 4 to the consolidated financial statements included in Praxair's 1998 annual report to shareholders): (Dollar amounts in millions) Quarter Ended Nine Months Ended September 30, Percent September 30, Percent 1999 1998 Change 1999 1998 Change ------- ------- ------- ------- ------- ------- SALES North America $ 714 $ 677 + 5% $2,067 $2,080 - 1% South America 178 246 -28% 520 728 -29% Europe 123 124 - 1% 388 379 + 2% Surface Technologies 105 106 - 1% 324 309 + 5% All Other 49 48 + 2% 137 140 - 2% ------- ------- ------- ------- Total Sales $1,169 $1,201 - 3% $3,436 $3,636 - 6% ======= ======= ======= ======= OPERATING PROFIT North America $ 133 $ 128 + 4% $ 382 $ 409 - 7% South America 37 53 -30% 124(a) 150 -17% Europe 29 25 +16% 91 79 +15% Surface Technologies 17 18 - 6% 56 55 + 2% All Other (2) 6 -133% (14) (10) +40% Corporate (6) (5) +20% (19) (17) +12% ------- ------- ------- ------- Total Operating Profit $ 208 $ 225 - 8% $ 620 $ 666 - 7% ======= ======= ======= ======= (a) The South American operating profit for the 1999 nine months includes a one-time $21 million benefit from net income hedges in Brazil that were effectively settled in the 1999 first quarter. North America - ------------- Sales for the quarter and nine months ended September 30, 1999 increased 5% and decreased 1%, respectively, as compared to the 1998 periods. The third quarter increase was due primarily to volume growth in the U.S. and Canadian industrial gases businesses and price increases in the U.S. and Mexican businesses. The third quarter price increases in the U.S. were primarily related to higher natural gas feedstock costs, which passed through to on-site hydrogen and carbon monoxide customers. The price increases in Mexico were primarily attributed to local inflation. The decrease of 1% for the nine months reflects volume declines and unfavorable currency translation effects in Mexico and Canada through the second quarter, partly offset by the third quarter sales growth and the impact from 1998 acquisitions. Operating profit increased 4% and decreased 7%, respectively, for the quarter and nine months ended September 30, 1999 versus the respective 1998 periods. The third quarter increase was due primarily to sales growth and productivity improvement initiatives, partially offset by unusually high energy and distribution costs as a result of the summer weather conditions and crude carbon dioxide source curtailments. The decrease for the nine month period was due primarily to the decreased sales and negative currency translation effects through the first two quarters, cost inflation, and higher than expected energy and distribution costs, partly offset by the benefits of productivity improvements. For the fourth quarter, it is anticipated that energy and distribution costs should return to more normalized levels. South America - ------------- As discussed above under the section on Consolidated Results, the results for the 1999 periods were significantly impacted by the devaluation of the Brazilian currency (Real). For the quarter and nine months ended September 30, 1999, the currency devaluation reduced sales by $75 million and $214 million, respectively, and reduced operating profit by $16 million and $46 million, respectively, as compared to the 1998 periods. Also as described in Note 10, in early January 1999 Praxair entered into various currency exchange forward contracts to hedge anticipated Brazilian net income and a portion of its net investment. The net income hedges were effectively closed out in the first quarter of 1999 resulting in a non-recurring pre-tax gain of $21 million which is included in the South American operating profit for the 1999 nine month period. Sales for the quarter and nine months ended September 30, 1999 decreased 28% and 29%, respectively, as compared to the 1998 periods. This was primarily due to the unfavorable currency translation effects, with volume decreases almost equally offset by price increases. Excluding the currency effects for the quarter and nine months ended September 30, 1999, sales increased by approximately 3% for the quarter, and were flat for the year. The devaluation of the Real in Brazil and a recessionary environment in South America have contributed to volume decreases of approximately 3% for the quarter and 5% for the nine months versus the respective 1998 periods. Operating profit for the quarter and nine months ended September 30, 1999 decreased 30% and 31%, respectively, as compared to the 1998 periods, excluding the 1999 first quarter hedge gain. These decreases were caused primarily by the 1999 currency devaluations in Brazil and cost inflation, which were offset by productivity improvement initiatives. Excluding the impacts of currency movements and the first quarter hedge gain, operating profit was essentially flat for the 1999 third quarter and nine month periods versus the respective 1998 periods. Europe - ------ Sales for the quarter and nine months ended September 30, 1999 decreased 1% and increased 2%, respectively, as compared to the 1998 periods. The decrease for the quarter was attributed to unfavorable currency translation effects, which offset volume growth and price increases. Volume growth, price increases and the impact of acquisitions, offset by unfavorable currency translation effects, created overall sales growth for the nine months. Excluding the currency translation effects for the quarter and nine months ended September 30, 1999, sales increased by 4% and 5%, respectively. Operating profit for the quarter and nine months ended September 30, 1999 increased 16% and 15%, respectively, as compared to the 1998 periods. This was due primarily to the sales impacts previously discussed, cost improvement initiatives, and net income hedge gains which helped to offset the impact of currency movements. Excluding currency effects for the quarter and nine months ended September 30, 1999, operating profit increased 12% and 7%, respectively. Surface Technologies - -------------------- Sales for the quarter and nine months ended September 30, 1999 decreased 1% and increased 5%, respectively, as compared to the 1998 periods. Volume growth in the first two quarters and the impact of acquisitions were partly offset by volume declines in the aerospace markets, pricing pressure and negative currency impacts in the third quarter. Operating profit for the quarter and nine months ended September 30, 1999 decreased 6% and increased 2% as compared to the 1998 periods. The sales growth in the first two quarters and productivity improvement initiatives through the third quarter were offset by the sales decreases in the third quarter, and by cost inflation through the third quarter. All Other - --------- Sales for the quarter ended September 30, 1999 increased 2% and decreased 2% for the nine months ended September 30, 1999 as compared to the 1998 periods. Asia experienced 44% sales growth for the quarter and nine months, due primarily to volume growth, particularly in Korea and Thailand, new plants coming on stream in China and India, and favorable currency translation effects. Asia's growth was more than offset by decreased sales of global supply systems. Operating Profit for the quarter and nine months ended September 30, 1999 was down $8 million and $4 million, respectively, when compared to the 1998 period. This was due primarily to decreases in the global supply systems business and higher business development costs, partly offset by the improvements in Asia. Liquidity, Capital Resources and Other Financial Data The following selected cash flow information provides a basis for the discussion that follows: (Dollar amounts in millions) Nine Months Ended September 30, 1999 1998 - -------------------------------------- ------ ------ NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Net income plus depreciation and amortization ................... $ 652 $ 670 Working capital ...................... $ 39 $ (106) Total from operating activities ...... $ 628 $ 603 INVESTING ACTIVITIES: Capital expenditures ................. $ (464) $ (539) Acquisitions ......................... (16) (236) Divestitures and asset sales ......... 99 189 ------- ------- Total used for investing activities... $ (381) $ (586) ======= ======= FINANCING ACTIVITIES: Debt increases (reductions) - net .... $ (276) $ 37 Minority transactions and other ...... 68 (20) Net issuances of common stock ........ 31 23 Cash dividends ....................... (67) (59) ------- ------- Total used for financing activities... $ (244) $ (19) ======= ======= September 30, December 31, DEBT-TO-CAPITAL RATIO 1999 1998 - -------------------------------------- --------- ------------ Debt ................................. $2,954 $3,274 Capital .............................. $5,521 $6,168 Debt-to-capital ratio ................ 53.5% 53.1% Cash Flow From Operations - ------------------------- Cash flow from operations increased to $628 million in the first nine months of 1999 versus $603 million in 1998. This increase is primarily due to lower working capital requirements, a direct result of Praxair's work process improvement efforts, and the proceeds from the redemption of preference shares from an earlier business sale. Investing - --------- Cash flow used for investing in the first nine months of 1999 totaled $381 million, a decrease of $205 million from the 1998 period. This decrease was due primarily to lower capital and acquisition expenditures, partly offset by lower proceeds from divestitures and asset sales. Capital expenditures for the first nine months of 1999 totaled $464 million, down $75 million from the corresponding period in 1998. The lower level of capital expenditures is in line with previous expectations and is reflective of a slower economic environment, primarily in the United States and South America, and currency impacts in South America. Acquisition expenditures for the first nine months of 1999 totaled $16 million, a decrease of $220 million from the 1998 period. This decrease is primarily related to the purchase in 1998 of the remaining shares outstanding of GasTech, Inc. a U.S. packaged gases distributor (previously an equity investment), other investments related to Praxair Distribution, acquisitions in the Surface Technologies' business and the acquisition of two companies in India. Acquisition expenditures for the first nine months of 1999 related to a Chinese joint venture, an acquisition in the Surface Technologies business, acquisitions in India and buy-outs of minority interests in South America. It is planned that additional acquisitions will take place in the fourth quarter, but they are subject to successful negotiations. Divestiture and asset sales in the first nine months of 1999 totaled $99 million, a decrease of $90 million from the 1998 period. This change is primarily attributed to the proceeds from sale leaseback transactions in 1999 and 1998. On a worldwide basis, capital and acquisition expenditures for the full year 1999 are still expected to be about 20% lower as compared to 1998, due primarily to anticipated lower capital expenditures in North America, South America and the Surface Technologies business, and currency translation impacts. Financing - --------- At September 30, 1999, Praxair's total debt outstanding was $2,954 million, a decrease of $320 million versus December 31, 1998. This decrease is due to the operating and investing activities discussed above, currency translation impacts, and proceeds from the hedge gains and rights offering in Brazil (see Notes 9 and 10). As of September 30, 1999, there were no borrowings under Praxair's $1.5 billion U.S. bank credit facility. Praxair's debt-to-capital ratio increased from 53.1% at December 31, 1998 to 53.5% at September 30, 1999. This increase from December is due primarily to the balance sheet impacts of the currency devaluation in Brazil and reduced minority interests (primarily related to the rights offering in Brazil), partially offset by lower debt levels. YEAR 2000 The Problem The "year 2000 problem" arises because many existing computer programs or date-sensitive microprocessors embedded in operating equipment use only the last two digits to refer to a year. Therefore, these computer programs and operating systems may not properly recognize a year that begins with "20" instead of "19". If not corrected, many applications could fail or create erroneous results. Although not all computer applications or systems are subject to this flaw, all are suspect until they are assessed. Like most companies, Praxair operates and maintains computer systems for accounting, payroll, invoicing and many other business purposes. In addition, Praxair's operations systems (including, among others, plant control, diagnostic and monitoring, quality control, distribution and logistics), and its infrastructure systems (including, among others, telecommunications) use computer programs or embedded microprocessors. Also, Praxair, as other companies, may be affected by the year 2000 problems of its suppliers (e.g., by the interruption of supply of critical raw materials or utilities) or of its customers (e.g., interrupted or reduced demand for Praxair's products due to interruptions in the customer's own manufacturing processes). Praxair's Readiness Status Management currently believes that Praxair has in place the appropriate programs and plans to achieve timely year 2000 readiness for its safety and mission-critical systems. However, Praxair's on-going assessment program may, at some time in the future, reveal as yet unidentified or not fully understood issues that may not be addressable in a timely fashion contrary to the foregoing forward-looking assumption. Further, it is uncertain whether the year 2000 problems of Praxair's suppliers and customers will be resolved in a timely manner. Praxair's Readiness Program Work on year 2000 issues at Praxair has been ongoing since 1996. Praxair has established a Year 2000 Global Project Office to coordinate and accelerate its year 2000 activities. The director of the Global Year 2000 Project Office reports directly to Praxair's chief executive officer. The Global Project Office currently consists of a project manager and 13 global functional team leaders representing: applications technology; communications; finance; energy/other utilities; facilities; human resources; information technology; operations/production; procurement; product sales and services equipment; law; research and development; and safety and environmental services. In addition, the Global Project Office currently includes team members representing eight Praxair businesses and affiliates in North America, South America, Europe and Asia who have accountability for year 2000 activities. Praxair's year 2000 readiness program consists of six phases: awareness; inventory and assessment; renovation; validation; implementation; and business continuity planning. These phases at any point in time may run concurrently with respect to different systems, issues and business units. While the following represents a general description of Praxair's overall progress in each of these phases, progress for any individual system, issue or business unit may be more or less advanced than that indicated. Awareness: Praxair has launched a worldwide communications and awareness effort in order to inform employees about year 2000 issues and enlist their assistance in implementing solutions. This effort is ongoing. Praxair also is in continuous discussions on year 2000 issues with customers and suppliers. Inventory and Assessment: A global inventory of Praxair systems, and assessment of those systems as to year 2000 readiness, has been conducted which management currently believes has covered Praxair's safety and mission-critical systems, and most of its other systems. However, inventory and assessment efforts are ongoing which may reveal as yet unidentified components or issues; contrary to the foregoing assumption. With respect to assessment of the year 2000 readiness of suppliers, certain critical suppliers have been identified and discussions are ongoing or planned with each. Renovation: Solutions for most year 2000 readiness issues have been identified. Renovation activities for safety and mission-critical systems have been substantially completed. Validation: An integrated testing strategy has been developed to validate the readiness of safety and mission-critical systems affected by year 2000. Substantially all systems have been tested and validation is substantially complete. Implementation: Solutions that have been validated through testing have been implemented. Substantially all of the solutions for safety and mission-critical Praxair-maintained systems have been implemented. Business Continuity Planning: Praxair has developed business continuity, or contingency plans with respect to the build-up of product inventory and, where possible, allocation of product from alternate plants in the event of electric power or other interruptions of utility supplies to certain Praxair plants. Praxair has also prepared contingency plans for failure of Praxair-maintained systems. In September, Praxair conducted a successful global "rehearsal" of its contingency plans. Throughout the remainder of the year, Praxair will continue to rehearse its contingency and business continuity plans. These activities will provide another level of readiness preparation should any external or unknown year 2000 problem arise. Overall, Praxair has essentially completed the above phases. Though some scheduled work exists, it is minimal and should be completed before December 31, 1999. Assessment and communication will be ongoing to ensure that there is no change in readiness status and that currently unknown issues, if any, are timely identified and resolved. Praxair's corporate audits group has completed reviews to test the business units' completeness of their year 2000 readiness program. Costs Praxair estimates that the total external expenditures to address year 2000 issues associated with Praxair-maintained systems and components will be approximately $25 million over the life of the project. Of this total, the Company expects approximately $11 million will be expensed as incurred and the remainder will be for capital upgrades and replacements. The capital costs were planned for later years independent of year 2000 issues, but are being accelerated because those costs are for projects that will also address year 2000 issues. To date, approximately $21 million has been incurred. Of the amounts not yet incurred, approximately $3 million relates to the business continuity plans. Costs associated with internal resources are not being accumulated separately and relate to normal ongoing payroll costs. Risks If Praxair does not successfully complete a material portion of its year 2000 program by the year 2000 or if the Company is negatively impacted by the failure of a significant third party customer or supplier to become year 2000 compliant, it could have a material impact on the Company's results of operations or cash flows. Management's current projection is that the "most reasonably likely worst case" year 2000 scenario would involve the temporary interruption of electric power or other utility supplies to one or more of Praxair's production plants due to failure of the utility supplier to be year 2000 ready. Management is unable to estimate the impact of such failure or failures, but it could have a material adverse impact on Praxair's results of operations or cash flows, the measure of such impact would depend on the number and nature of the interruptions that would result. Other worst case year 2000 scenarios can be conceived which would have a material impact on Praxair as well as on many other companies, including, for example, break-downs of communications, governmental or banking systems external to Praxair, but Praxair has not independently evaluated the risks of these events. Cautionary Statements As to the foregoing forward-looking statements about Praxair's expected year 2000 readiness, actual results will depend on, and may be affected by changes in, among other factors; the level of interest and sense of urgency with respect to year 2000 issues by governments and institutions in various regions of the world; and the cooperation of raw materials and utilities suppliers in providing readiness assurances to Praxair and the accuracy of those assurances. Management does not currently believe that the failures described above as the "most reasonably likely worst case scenario" are likely or that they will be so widespread as to have an adverse material effect on Praxair. Efforts to assess the year 2000 readiness of energy suppliers and other suppliers are ongoing, however, and these efforts may, at some time in the future, reveal serious deficiencies, not currently identified or fully understood, which may cause a material impact on Praxair contrary to the foregoing forward-looking assumption. The above forward-looking projection of costs may be affected by year 2000 issues not yet identified or fully understood. If these or other circumstances arise, Praxair's costs to address the year 2000 issues of Praxair-maintained systems and components may differ from those projected above. To the extent that any reader of this statement reviews it for the purpose of making any decision for the purchase of goods or services from Praxair or evaluating Praxair's Year 2000 readiness, such reader should construe this statement to be a Year 2000 readiness disclosure and that any statements made to such reader in the course of any sale are subject to the Year 2000 Information and Readiness Disclosure Act (15 USC 1 Note, P.L. 105-271, 112 Stat). Such reader should be further advised that in the case of a dispute, this Act may reduce the reader's legal rights regarding the use of any such statements, unless otherwise specified in a contract or tariff. Euro Conversion The Company's overall plan to address the euro conversion is described in its 1998 Annual Report on Form 10-K. Impact of Recently Issued Accounting Standards See Note 2 related to SOP 98-5, "Reporting on the Costs of Start-Up Activities." In June 1999, the Financial Accounting Standards board extended the required implementation date of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activity," from January 1, 2000 to January 1, 2001. Praxair is currently evaluating the impact on its financial statements of adopting the standard and will comply as required. Item 3. Quantitative and Qualitative Disclosures About Market Risk Refer to the Market Risks and Sensitivity Analyses in the Management's Discussion and Analysis section of Praxair's 1998 Annual Report on Form 10-K. PART II. OTHER INFORMATION Item 1. Legal Proceedings On July 1, 1999, Praxair, Inc. received a favorable defense verdict in a lawsuit brought against it in 1996 by Airgas, Inc. Also, see Note 11 to the condensed consolidated financial statements and Part II, Item 6 - Reports on Form 8-K. Item 4. Submission of Matters to a Vote of Security Holders None Item 6. Exhibits and Reports on Form 8-K Exhibits 27. Financial Data Schedule Reports on Form 8-K On July 2, 1999, Praxair, Inc. filed a Current Report on Form 8-K reporting a defense verdict in favor of Praxair, Inc. in a lawsuit brought against it in 1996 by Airgas, Inc. SIGNATURE --------- Pursuant to the requirements 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: November 5, 1999 By: /s/J. Robert Vipond ------------------------ ----------------------------- J. Robert Vipond Vice President and Controller (On behalf of the Registrant and as Chief Accounting Officer) Exhibit Index ------------- Exhibit No. - ----------------------------------------------------------------------------- 27. Financial Data Schedule EX-27 2 FDS --
5 1,000,000 9-MOS DEC-31-1999 SEP-30-1999 35 0 894 29 286 1283 8339 3776 7408 1001 2745 75 0 2 2153 7408 3436 3436 2016 2016 335 0 154 466 112 327 0 0 (10) 317 1.99 1.96 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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