-----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, EI0n2W8+xQAh1+1jhvb/o0NSYqcnTJmz/05a7zhulef7NUTaUxl//IR+NYSJS87U Yd4Cjk4ovlr2sqNn4qptPg== 0000950159-99-000053.txt : 19990316 0000950159-99-000053.hdr.sgml : 19990316 ACCESSION NUMBER: 0000950159-99-000053 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990315 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: 99564704 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 - ------------------------------------------------------------------------------- [] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 1-11037 Praxair, Inc. 1998 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 par 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, 1999, 157,454,972 shares of common stock of Praxair, Inc. were outstanding. The aggregate market value of common stock held by non-affiliates at January 31, 1999 was approximately $5,071 million. Documents incorporated by reference: Portions of the 1998 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, 1999, 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, currency movements, and the change in functional currency, impacts from currency and economic developments in Asia, management's assessments of the impacts of the Year 2000 Problem and Euro Conversion, 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, 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 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 in 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 also the world's largest supplier of carbon dioxide. Praxair's primary products for its industrial gases business are atmospheric gases (oxygen, nitrogen, argon, rare gases) and process gases (carbon dioxide, helium, hydrogen, electronic gases, specialty gases, acetylene). The Company's surface technology segment, operated through Praxair Surface Technologies, Inc., supplies wear-resistant and high-temperature corrosion-resistant metallic and ceramic coatings and powders. The Company also designs, engineers and builds equipment that produces industrial gases (for internal use and external sale) through its global supply systems included in its All Other segment. Sales for Praxair were $4,833 million, $4,735 million, and $4,449 million for 1998, 1997 and 1996, respectively, with industrial gases accounting for 90% of sales in 1998 and 1997, and 91% in 1996, and surface technologies and global supply systems accounting for the balance. Refer to Note 4 of the section captioned "Notes to Consolidated Financial Statements" in Praxair's 1998 Annual Report to Shareholders for information related to Praxair's segment information. During 1996, Praxair acquired the common stock of CBI Industries, Inc. (CBI) (See Note 2 of the section captioned "Notes to Consolidated Financial Statements" in Praxair's 1998 Annual Report to Shareholders). 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. Gases produced by the Company find wide use in the metal fabrication, chemicals & refining, primary metals, food & beverage, healthcare, electronics, aerospace, glass, pulp & paper, environmental remediation, and 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 industrial production 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 primarily produces oxygen, nitrogen and argon through several air separation processes. Cryogenic air separation, which is the primary process, compresses and cools air until it liquefies. 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. 2 PART I (Cont.) Praxair, Inc. and Subsidiaries - ------------------------------------------------------------------------------- Process gases, including carbon dioxide, hydrogen, carbon monoxide, 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. Hydrogen and carbon monoxide are produced by purifying hydrocarbon sources or by purifying by-product sources obtained from the chemical and petrochemical industries. 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. 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 and process gas 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 trucks to storage containers owned or leased and maintained by Praxair or the customer 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 in the United States. 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 40 states in the U.S. and Puerto Rico. Praxair has acquired independent distributors in various locations in the United States. 3 PART I (Cont.) Praxair, Inc. and Subsidiaries - ------------------------------------------------------------------------------- Surface Technologies Praxair's surface technologies business supplies wear-resistant and high-temperature corrosion-resistant metallic and ceramic coatings and powders to the aircraft, electronics, printing, textile, plastics, primary metals petrochemical, and other industries. It also provides aircraft engine and airframe component overhaul services. 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; including its patented Super D-Gun. This equipment is used for the application of thermal barrier wear resistant coatings. The coatings extend wear life at high temperatures and under corrosive conditions and 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 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 48% of its 1998 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 1998 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. 4 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, 1998, Praxair had 24,834 employees worldwide. Of this number, 9,373 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 1998 Annual Report to Shareholders. 5 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 329 cryogenic air separation plants (196 in the United States); 94 by-product carbon dioxide plants (23 in the United States); 297 non-cryogenic plants, and 31 hydrogen plants. No single production facility is material except for the following complexes: Number of Supply System Connected Plants Products Produced - ------------- ---------------- --------------------------- Northern Indiana 12 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 38 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 1998 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 1998. 6 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 1998 Annual Report to Shareholders. Praxair's annual dividend on its common stock for 1998 was $0.50 per share. In January 1999, Praxair's Board of Directors declared a dividend of $0.14 per share for the first quarter of 1999, or $0.56 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, 1998 is incorporated herein by reference to the section captioned "Five-year Financial Summary" in Praxair's 1998 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 1998 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 1998 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 1998 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. 7 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 27, 1999. 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 27, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this item is incorporated herein by reference to the section captioned "Share Ownership" in Praxair's Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 1999. Item 13. Certain Relationships and Related Transactions Information required by this item is incorporated by reference to the section captioned "Certain Relationships and Related Transactions" in Praxair's Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 1999. 8 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 1998 Annual Report (AR)* Financial Statements Consolidated Statement of Income for the Years Ended December 31, 1998, 1997 and 1996 ..........................AR-18 Consolidated Balance Sheet at December 31, 1998 and 1997 .........AR-19 Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 ................................AR-20 Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 ....................AR-21 Notes to Consolidated Financial Statements .......................AR-32 Report of Independent Accountants .............................AR-48 * Incorporated by reference to the indicated pages of the 1998 Annual Report to Shareholders. With the exception of this information and the information incorporated in Items 5, 6, 7, 7A, 8 and 9, the 1998 Annual Report to Shareholders is not to be deemed filed as part of this Annual Report on Form 10-K. 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. Quarterly Segment Information (Unaudited) Effective in 1998, Praxair adopted Statement of Financial Accounting Standards No. 131 which requires a new "management" approach to segment disclosures (see Notes 1 and 4 in the section captioned "Notes to Consolidated Financial Statements" in Praxair's 1998 Annual Report to Shareholders). Restated segment information to conform to the new requirements for the 1998 quarters (unaudited) is included in Exhibit 99.01 to this Form 10-K. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 1998. (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. 9 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 15, 1999 /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 23, 1999.
/s/ Paul J. Bilek /s/ Alejandro Achaval /s/ Ronald L. Kuehn, Jr. - --------------------------- --------------------------- --------------------------- Paul J. Bilek Alejandro Achaval Ronald L. Kuehn, Jr. Executive Vice President Director Director /s/ John A. Clerico /s/ Raymond W. LeBoeuf /s/ Benjamin F. Payton - --------------------------- --------------------------- --------------------------- John A. Clerico Raymond W. LeBoeuf Benjamin F. Payton Executive Vice President and Director Director Chief Financial 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 and Director /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
10 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). *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). 11 INDEX TO EXHIBITS (Cont.) Praxair, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Exhibit No. Description *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 (Filed as Exhibit 10.02 to the Company's 1997 Annual Report on Form 10K, Filing No. 1-11037, and incorporated herein by reference). *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 Amended and Restated 1995 Stock Option Plan for Non-Employee Directors. *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). 12 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). 13 INDEX TO EXHIBITS (Cont.) Praxair, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Exhibit No. Description 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). 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 (Filed as Exhibit 10.17a to the Company's 1997 Annual Report on Form 10-K, Filing No. 1-11037, and incorporated herein by reference). *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 1998 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. 27.01 Financial Data Schedule. 99.01 Segment Information for the 1998 Quarters (Unaudited). 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. 14 EX-10 2 EX-10.04 Praxair, Inc. and Subsidiaries - -------------------------------------------------------------------------------- EXHIBIT 10.04 PRAXAIR, INC. 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS AMENDED AND RESTATED AS OF OCTOBER 27, 1998 Adopted by the Board: February 21, 1995 Approved by Shareholders: April 19, 1995 Effective: February 21, 1995 Amendment #1 Adopted by the Committee: As of October 21, 1997 Ratified by the Board: October 27, 1998 Amendment #2 Adopted by the Board: October 27, 1998 THE PRAXAIR, INC. 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1. Purposes. The 1995 Stock Option Plan for Non-Employee Directors (the "Plan") is established to attract, retain and compensate highly qualified individuals, who are not employees of Praxair, Inc. (the "Company") or any of its subsidiaries or affiliates for service as members of the Company's Board of Directors ("Non-Employee Directors") and to provide them with an ownership interest in the Company's common stock. The Plan will be beneficial to the Company and its stockholders by allowing these Non-Employee Directors to have a personal financial stake in the Company through an ownership interest in the Company's common stock, in addition to underscoring their common interest with stockholders in increasing the value of the Company's stock over the long term. 2. Effective Date. The Plan shall be effective as of February 21, 1995, subject to the approval of the Plan by the holders of at least a majority of the outstanding shares of Company common stock present, or represented, and entitled to vote at the 1995 Annual Meeting of Stockholders. Grants of options may be made under the Plan on and after its effective date, subject to stockholder approval of the Plan as provided above. In the event such approval is not obtained, any options granted under the Plan shall be null and void. Amendment #1 hereof relating to the transferability of options shall be effective as of October 21, 1997. Amendment #2 hereof relating to administration of the Plan, Change in Control and other matters shall be effective as of October 27, 1998. 3. Administration of the Plan. The Plan shall be administered by the Public Policy and Nominating Committee of the Company's Board of Directors (the "Committee"). Subject to the provisions of the Plan, the Committee shall be authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make, or delegate to the Corporate Secretary or other officer the authority to make, all other determinations necessary or advisable for the administration of the Plan; provided, however, that the Committee shall have no discretion with respect to the eligibility or selection of Non-Employee Directors to receive options under the Plan, the number of shares of stock subject to any such options or the Plan, or the purchase price thereunder; and provided further, that the Committee shall not have the authority to take any action or make any determination that would materially increase the benefits accruing to participants under the Plan. The Committee's interpretation of the Plan, and all actions taken and determinations made by the Committee pursuant to the powers vested in it hereunder, shall be conclusive and binding upon all parties concerned including the Company, its stockholders and persons or entities to whom options have been granted or transferred under the Plan. The Corporate Secretary of the Company shall be authorized to implement the Plan in accordance with its terms and to take or cause to be taken such actions of a ministerial nature as shall be necessary to effectuate the intent and purposes thereof; including, among other actions, the establishment of administrative procedures and rules for the exercise of options, the payment of option price and tax withholding obligations, the designation of beneficiaries, the transfer of options and the administration of transferred options. 4. Participation in the Plan. All Non-Employee Directors in service on the grant date (as hereinafter defined) shall be eligible to receive grants hereunder. Former Non-Employee Directors who have been granted stock options under this Plan and all Non-Employee Directors so long as they are in such service are hereinafter referred to collectively as "Participants" in the Plan. A person or entity to whom options granted under this Plan have been assigned or transferred pursuant to Article 10(b) herein is hereinafter referred to as a "Transferee"; such term to include a grantee's or transferee's estate and persons or entities holding an option as a beneficiary of a grantee or as a distributee of a grantee's estate. 5. Non-Qualified Stock Options. Only non-qualified stock options ("options") may be granted under this Plan. 6. Terms, Conditions and Form of Options. (a) Option Grant Dates. Options to purchase 2,500 shares of the Company's Common Stock (as adjusted pursuant to Section 9) shall be automatically granted on an annual basis to each eligible Non-Employee Director on April 1st (or the first succeeding business day thereafter on which the Company's common stock is traded on the principal securities exchange on which it is listed) of each year, except for the first year in which case options shall be granted on February 21, 1995. (b) Exercise Price. The exercise price per share of stock for which each option is exercisable shall be 100% of the closing price of the Company's common stock on the date the option is granted, as reported on the New York Stock Exchange - Composite Transactions. (c) Exercisability and Term of Options. Each option granted under the Plan shall become exercisable on the second anniversary of its date of grant. Each option granted under the Plan shall expire ten years from the date of grant, and shall be subject to earlier termination as hereinafter provided. (d) Termination of Service. In the event of the termination of service on the Board by the grantee of any option by reason of voluntary resignation (other than for disability or mandatory retirement) or failure, as a nominee, to be elected at an Annual Meeting of Shareholders, the then outstanding options held by such grantee and such grantee's Transferees shall be exercisable on their stated exercisable dates and shall expire three years after such termination, or on their stated expiration dates, whichever occurs first. In the case of removal of a grantee for cause, the then outstanding options held by such grantee and such grantee's Transferees shall be exercisable only to the extent that they were exercisable on the date of such removal and shall expire six months after such removal or on their stated expiration dates, whichever occurs first. Such options that are not exercisable on the date of such removal shall be forfeited. (e) Retirement. In the event of termination of service of a grantee by reason of mandatory retirement pursuant to Board policy, the then outstanding options held by such grantee and such grantee's Transferees shall be exercisable on their stated exercisable dates and shall expire on their stated expiration dates. In the case of retirement of a grantee prior to the retirement date required by mandatory Board policy, all outstanding options held by such grantee and such grantee's Transferees on the retirement date shall be exercisable on their stated exercisable dates and shall expire three years after the retirement date, or on their stated expiration dates, whichever occurs first. (f) Disability. In the event of termination of service of a grantee by reason of disability (as defined herein), the then outstanding options held by such grantee and such grantee's Transferees shall be exercisable on their stated exercisable dates and shall expire on their stated expiration dates. "Disability" as used herein shall mean a grantee's inability to engage in any substantial gainful activity because of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of six months or longer. (g) Death. In the event of a grantee's death, each of the then outstanding options held by such grantee and such grantee's Transferees shall become immediately exercisable. Options held by a grantee at the time of his/her death shall be exercisable by the grantee's designated beneficiary, if any and if alive, by the executor or administrator of the grantee's estate before distribution to the grantee's heirs by will or the laws of descent and distribution, or by the distributee(s) of such options by will or the laws of descent and distribution. Any such option shall be so exercisable at any time until the expiration date of the option (as such date may have been adjusted pursuant to Sections 6(d)or 6(e)). A grantee may designate a beneficiary for an option in accordance with procedures established by the Corporate Secretary, however such beneficiary designation shall not be binding on grantee's Transferee with respect to any option that has been transferred before the grantee's death. In the event of the death of a Transferee, any outstanding option then held by the Transferee shall become immediately exercisable, and shall be exercisable only by the executor or administrator of such Transferee's estate at any time until the expiration date of the option (as such date may have been adjusted pursuant to Sections 6(d) or 6(e)). (h) Change in Control. In the event of a Change in Control of the Company (as defined herein), all of the then outstanding options held by a grantee and such grantee's Transferees shall become immediately exercisable on the date the Change in Control has been deemed to have occurred and shall expire on the earlier of their stated expiration dates or three years after any termination of service of such grantee, other than by reason of mandatory retirement, disability, death or removal for cause (in which cases the expiration provisions of this Plan associated with those events shall apply), which occurs after said Change in Control. "Change in Control" as used herein shall have the meaning set forth in Section 14 herein. 7. Exercise and Payment (a) Exercise. An option may be exercised by its holder with respect to part or all of the shares subject to the option by giving written notice to the Company of the exercise of the option. The option price for the shares for which an option is exercised shall be paid by the exercisor on or within ten business days after the date of exercise in cash, in whole shares of common stock of the Company owned by the exercisor prior to exercising the option, or in a combination of cash and such shares of common stock. If the exercisor is a Participant, the Participant may elect to satisfy the option price obligation by requesting that the Company withhold a number of shares that would be otherwise issuable pursuant to the exercise having an aggregate value equal to the option price obligation. Such request shall be accompanied by a form approved by the Corporate Secretary and executed by the Participant attesting that the Participant owns, as of the date of exercise, an equal number of shares of the Company's common stock and has held such number of shares continuously for at least six (6) months prior to the date of exercise. The value of any share of common stock delivered or withheld in payment of the option price shall be the mean of the high and low prices of the stock as reported in the New York Stock Exchange - Composite Transactions on the date the option is exercised. (b) Payment of Tax Withholding. To enable the Company to meet any applicable federal, state or local withholding tax requirements arising as a result of the exercise of a stock option, whether by the grantee or by such grantee's Transferee, the grantee or grantee's estate shall pay the Company the amount of tax to be withheld, if any, or may elect to satisfy such obligation by delivering to the Company shares of the Company's common stock owned by the grantee prior to exercising the option, or by making a payment to the Company consisting of a combination of cash and such shares of common stock. If the exercisor is a Participant, the Participant may elect to satisfy the tax obligation by requesting that the Company withhold a number of shares that would be otherwise issuable pursuant to the exercise having an aggregate value equal to the tax obligation. The value of any share of common stock delivered to the Company or withheld in payment of the tax obligation shall be the mean of the high and low prices of the stock as reported in the New York Stock Exchange - Composite Transactions on the date used to determine the amount of tax to be withheld. The Company reserves the right to delay completion of any exercise of an option until the applicable withholding tax has been paid. 8. Shares of Stock Subject to the Plan. The shares that may be purchased pursuant to options under the Plan shall not exceed an aggregate of 500,000 shares of Company Common Stock (as adjusted pursuant to Section 9). Any shares subject to an option which for any reason expires or is terminated unexercised as to such shares shall again be available for issuance under the Plan. 9. Dilution and Other Adjustment. In the event of any change in the outstanding shares of Company stock by reason of any stock split, stock dividend, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, such equitable adjustments shall be made in the Plan and the grants thereunder, including the exercise price of outstanding options, as the Committee determines are necessary or appropriate, including, if necessary, any adjustments in the maximum number of shares referred to in Section 8 of the Plan. Such adjustment shall be conclusive and binding for all purposes of the Plan. 10. Miscellaneous Provisions. (a) Rights as Stockholder. A grantee or Transferee shall have no rights as a holder of Company common stock with respect to options granted hereunder, unless and until certificates for shares of such stock are issued to the grantee or Transferee, or such shares are credited to the grantee's or Transferee's Dividend Reinvestment and Stock Purchase Plan Account. (b) Assignment or Transfer. No options granted under the Plan or any rights or interests therein shall be assignable or transferable other than: (1) In the case of the grantee's death, pursuant to the beneficiary designation then on file with the Company, or, in the absence of such a beneficiary designation(or if the designated beneficiary has predeceased the grantee), by will or the laws of descent or distribution (in which case, the Company, without liability to any other person, may rely on the directions of the executor or administrator of the grantee's estate with respect to the disposition or exercise of such options); or (2) For all options granted hereunder on or after October 21, 1997, and, if the Committee approves, for options granted earlier: By the grantee, in whole or parts to (i) the grantee's spouse, children(including by adoption), stepchildren or grandchildren ("Immediate Family Members"), (ii) a trust for the exclusive benefit of such Immediate Family Members, (iii) a partnership in which such Immediate Family Members are the only partners, or (iv) such other persons or entities as the Committee may approve on a case-by-case basis; so long as such transfer under this Article 10(b)(2) does not cause the total number of shares included in all unexpired, unexercised options held by the grantee's Transferees to exceed the total number of shares included in all unexpired, unexercised options held by the grantee; or (3) In the case of a Transferee's death, to his/her estate without rights to further distribution. (c) Transfer of Options. Any transfer of an option pursuant to Article 10(b) herein is subject to acceptance by the Company and shall be effected according to such procedures as the Corporate Secretary may establish. (d) Agreements. All options granted under the Plan shall be evidenced by agreements in such form and containing such terms and conditions (not inconsistent with the Plan) as the Corporate Secretary may adopt. (e) Compliance with Regulations. During the term of the Plan and the term of any options granted under the Plan, the Company shall at all times reserve and keep available such number of shares as may be issuable under the Plan, and shall seek to obtain from any regulatory body having jurisdiction any requisite authority required in the opinion of counsel for the Company in order to grant or transfer options to purchase shares of Company common stock or to issue such stock pursuant thereto. If, in the opinion of counsel for the Company, the transfer, issue or sale of any options or shares of its stock under the Plan shall not be lawful for any reason, including the inability of the Company to obtain from any regulatory body having jurisdiction authority deemed by such counsel to be necessary to such transfer, issuance or sale, the Company shall not be obligated to transfer, issue or sell any such options or shares. In any event, the Company shall not be obligated to transfer, issue or sell any options or shares to any Participant or Transferee unless a registration statement which complies with the provisions of the Securities Act of 1933, as amended (the "Securities Act"), is in effect at the time with respect to such options or shares or other appropriate action has been taken under and pursuant to the terms and provisions of the Securities Act, or the Company receives evidence satisfactory to the Committee that the transfer, issuance or sale of such options or shares, in the absence of an effective registration statement or other appropriate action, would not constitute a violation of the terms and provisions of the Securities Act. (f) Costs and Expenses. The costs and expenses of administering the Plan shall be borne by the Company and not charged to any option or to any Participant or Transferee. 11. Amendment and Termination of the Plan. (a) Amendments. The Board of Directors of Praxair, Inc. may from time to time amend the Plan in whole or in part; provided that no such action shall adversely affect any rights or obligations with respect to any options theretofore granted under the Plan. Unless the holders of at least a majority of the outstanding shares of Company common stock present, or represented, and entitled to vote at a meeting of stockholders shall have first approved thereof, no amendment of the Plan shall be effective which would (i) materially increase the maximum number of shares which may be issued under the Plan, or (ii) materially increase the benefits accruing to Participants under the Plan, or (iii) materially modify the requirements as to eligibility for participation in the Plan. With the consent of the grantee, the Committee may direct the Corporate Secretary to amend any outstanding agreement evidencing options granted to such grantee under the Plan, whether held by grantee or by his/her Transferee, so long as such amendment is not inconsistent with the terms of the Plan. No such consent shall be required from grantees for amendments pursuant to Article 10(b)(2) herein relating to the transferability of options granted before October 21, 1997. No such consent shall be required from a Transferee with respect to amendments of any kind to options held by such Transferee, so long as grantee has provided such consent. (b) Termination. The Committee may terminate the Plan (but not any options theretofore granted under the Plan) at any time. The Plan (but not any options theretofore granted under the Plan) shall in any event terminate on, and no options shall be granted after, December 31, 2005. 12. Compliance with SEC Regulations. It is the Company's intent that the Plan comply in all respects with Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any related regulations. If any provision of this Plan is later found not to be in compliance with such Rule and regulations, the provision shall be deemed null and void. All grants, transfers and exercises of options under this Plan shall be executed in accordance with the requirements of Section 16 of the Exchange Act and regulations promulgated thereunder. 13. Governing Law. The validity and construction of the Plan and any agreements entered into thereunder shall be governed by the laws of the State of Connecticut. 14. Change-in-Control A "Change in Control" shall be deemed to occur in the event, and on the first date, that any of the following circumstances have occurred (as used herein, "Board" shall refer to the Board of Directors of Praxair, Inc. ): (i) individuals who, on October 22, 1996, 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 October 22, 1996, 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, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)); (iii) the consummation of a merger, consolidation, 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 Company"), 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 Company (the "Parent Company"), 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 Company or the Parent Company), 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 Company (or, if there is no Parent Company, the Surviving Company) and (C) at least a majority of the members of the board of directors of the Parent Company (or, if there is no Parent Company, the Surviving Company) 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 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. EX-12 3 EX-12.01 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, 1998 1997 1996 1995 1994 EARNINGS Income of consolidated companies before provision for income taxes $596 $622 $452 $432 $339 Capitalized interest (36) (32) (25) (9) (4) Depreciation of capitalized interest 7 7 9 8 8 Dividends from less than 50%-owned companies carried at equity 2 1 1 1 - Praxair share of income (loss) before provision for income taxes of 50%-owned companies carried at equity 1 3 16 15 8 Total earnings, net of fixed charges $570 $601 $453 $447 $351 FIXED CHARGES Interest on long-term and short-term debt $260 $216 $195 $116 $108 Capitalized interest 36 32 25 9 4 Rental expenses representative of an interest factor 23 23 23 10 11 Praxair share of fixed charges of 50%-owned companies carried at equity 2 1 3 4 2 Total fixed charges $321 $272 $246 $139 $125 Total adjusted earnings available for payment of fixed charges $891 $873 $699 $586 $476 Preferred stock dividend requirements $ 6 $ 8 $ 8 - - RATIO OF EARNINGS TO FIXED CHARGES 2.8 3.2 2.8 4.2 3.8 RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 2.7 3.1 2.7 4.2 3.8 EX-13 4 EX-13.01 Financial Index Audited Financial Statements Consolidated Statement of Income 18 Consolidated Balance Sheet 19 Consolidated Statement of Cash Flows 20 Consolidated Statement of Shareholders' Equity 21 Notes to Consolidated Financial Statements 32 Management's Discussion and Analysis 22 Consolidated Results 22 Segment Discussion 23 Liquidity, Capital Resources and Financial Data 26 Raw Materials and Markets 28 Year 2000 28 Euro Conversion 30 Market Risks and Sensitivity Analyses 30 Management's Statement of Responsibility for Financial Statements 47 Report of Independent Accountants 48 Five-Year Financial Summary 49 Information for Investors 50 [GRAPHICS OMITTED] *Excludes special charges. Consolidated Statement of Income
Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Sales $ 4,833 $ 4,735 $ 4,449 Cost of sales, exclusive of depreciation and amortization 2,807 2,764 2,564 Selling, general and administrative 644 662 688 Depreciation and amortization 467 444 420 Research and development 72 79 72 Special charges 29 10 85 Other income (expenses) - net 42 62 27 ============================================================================================================= Operating profit 856 838 647 Interest expense 260 216 195 - ------------------------------------------------------------------------------------------------------------- Income before taxes 596 622 452 Income taxes 127 151 110 - ------------------------------------------------------------------------------------------------------------- Income of consolidated entities 469 471 342 Minority interests (55) (66) (68) Income from equity investments 11 11 8 - ------------------------------------------------------------------------------------------------------------- Income before cumulative effect of an accounting change 425 416 282 Cumulative effect of an accounting change -- (11) -- - ------------------------------------------------------------------------------------------------------------- Net income $ 425 $ 405 $ 282 ============================================================================================================= Basic earnings per share: Income before cumulative effect of an accounting change $ 2.68 $ 2.63 $ 1.85 Cumulative effect of an accounting change -- (.07) -- Net income $ 2.68 $ 2.56 $ 1.85 Diluted earnings per share: Income before cumulative effect of an accounting change $ 2.60 $ 2.53 $ 1.77 Cumulative effect of an accounting change -- (.07) -- Net income $ 2.60 $ 2.46 $ 1.77 Weighted average shares outstanding (000's): Basic shares outstanding 158,462 158,095 152,654 Diluted shares outstanding 163,356 164,053 159,038 ============================================================================================================= The accompanying notes on pages 32 to 46 are an integral part of these financial statements. (Dollar amounts in millions, except per share data)
18 Praxair
Consolidated Balance Sheet Year Ended December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 34 $ 43 Accounts receivable 919 971 Inventories 319 329 Prepaid and other current assets 122 154 - ---------------------------------------------------------------------------------------------------------------- Total current assets 1,394 1,497 Property, plant and equipment - net 4,875 4,607 Equity investments 251 210 Other long-term assets 1,576 1,496 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 8,096 $ 7,810 ================================================================================================================ Liabilities and Equity Accounts payable $ 378 $ 383 Short-term debt 295 391 Current portion of long-term debt 84 40 Accrued taxes 63 51 Other current liabilities 469 501 - ---------------------------------------------------------------------------------------------------------------- Total current liabilities 1,289 1,366 Long-term debt 2,895 2,874 Other long-term liabilities 553 528 Deferred credits 465 324 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 5,202 5,092 ================================================================================================================ Minority interests 487 521 Preferred stock 75 75 Shareholders' equity: Common stock $.01 par value, authorized 500,000,000 shares, issued 161,517,042 shares in 1998 and 159,969,641 shares in 1997 2 2 Additional paid-in capital 1,528 1,471 Retained earnings 1,380 1,034 Cumulative translation adjustment (412) (256) Less: Treasury stock, at cost (3,945,843 shares in 1998 and 2,596,417 shares in 1997) (166) (129) - ---------------------------------------------------------------------------------------------------------------- Total shareholders' equity 2,332 2,122 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and equity $ 8,096 $ 7,810 ================================================================================================================ The accompanying notes on pages 32 to 46 are an integral part of these financial statements. (Millions of dollars)
Making Our Planet More Productive 19
Consolidated Statement of Cash Flows Year Ended December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATIONS Net income $ 425 $ 405 $ 282 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 467 444 420 Special charges 22 (13) 37 Deferred income taxes 11 67 48 Gain on sale of fixed assets (6) (7) (4) Other non-cash charges 22 42 49 Working capital: Accounts receivable 17 (54) (121) Inventories 18 (14) (4) Prepaid and other (2) (10) 25 Payables and accruals (14) (41) 9 CBI acquisition payments -- -- (75) Long-term assets and liabilities (24) (67) (60) - --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 936 752 606 - --------------------------------------------------------------------------------------------------------- INVESTING Capital expenditures (781) (902) (893) Acquisitions (241) (101) (1,705) Divestitures and asset sales 206 300 264 - --------------------------------------------------------------------------------------------------------- Net cash used for investing activities (816) (703) (2,334) - --------------------------------------------------------------------------------------------------------- FINANCING Short-term (repayments) borrowings - net (93) (269) 1,114 Long-term borrowings 388 438 602 Long-term debt repayments (331) (110) (489) Minority transactions and other (31) (31) 4 Issuances of common stock 117 110 611 Purchases of common stock (97) (137) (7) Dividends (79) (69) (58) - --------------------------------------------------------------------------------------------------------- Net cash (used for) provided by financing activities (126) (68) 1,777 Effect of exchange rate changes on cash and cash equivalents (3) (1) (1) - --------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents (9) (20) 48 Cash and cash equivalents, beginning-of-year 43 63 15 - --------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end-of-year $ 34 $ 43 $ 63 ========================================================================================================= SUPPLEMENTAL DATA: Taxes paid $ 66 $ 58 $ 59 Interest paid $ 265 $ 211 $ 241 Short-term debt classified as long-term (Note 6) $ -- $ 860 $ -- Other liabilities reclassified to equity (Note 7) $ -- $ 19 $ -- Effect of functional currency change (Note 1) $ 81 $ -- $ -- Acquired debt from acquisitions (Note 2) $ 20 $ -- $ 735 ========================================================================================================= The accompanying notes on pages 32 to 46 are an integral part of these financial statements. (Millions of dollars)
20 Praxair Consolidated Statement of Shareholders' Equity
Accumulated Additional Other Com- Common Stock Paid-In Treasury Stock Retained prehensive Activity Shares Amounts Capital Shares Amounts Earnings Income (Loss) Total - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 140,624 $ 1 $ 748 89 $ (1) $ 474 $ (101) $ 1,121 Net income 282 282 Translation adjustments (25) (25) -------- Comprehensive income 257 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) - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 157,501 $ 2 $ 1,350 12 $ -- $ 698 $ (126) $ 1,924 ================================================================================================================================= Net income 405 405 Translation adjustments (130) (130) -------- Comprehensive income 275 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) - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 159,970 $ 2 $ 1,471 2,597 $ (129) $ 1,034 $ (256) $ 2,122 ================================================================================================================================= Net income 425 425 Translation adjustments (99) (99) Effect of functional currency change (Note 1) (57) (57) -------- Comprehensive income 269 Dividends on common stock ($.50 per share) (79) (79) Issuances of common stock: For the dividend reinvestment and stock purchase plan 80 1 1 For employee savings and incentive plans 1,467 56 (1,279) 60 116 Purchases of common stock 2,628 (97) (97) - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 161,517 $ 2 $ 1,528 3,946 $ (166) $ 1,380 $ (412) $ 2,332 ================================================================================================================================= The accompanying notes on pages 32 to 46 are an integral part of these financial statements. (Dollar amounts in millions, shares in thousands)
Making Our Planet More Productive 21 Management's Discussion and Analysis Praxair's 1998 results versus 1997 reflect volume growth in all major operating segments and significant productivity improvements; largely offset by currency impacts, higher depreciation and interest expense, and cost inflation. CONSOLIDATED RESULTS The following provides summary data for 1998, 1997 and 1996: Year Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------- Sales $ 4,833 $ 4,735 $ 4,449 Selling, general and administrative $ 644 $ 662 $ 688 Depreciation and amortization $ 467 $ 444 $ 420 Operating profit $ 856 $ 838 $ 647 Interest expense $ 260 $ 216 $ 195 Effective tax rate 21% 24% 24% Income before cumulative effect of an accounting change $ 425 $ 416 $ 282 Number of employees(a) 24,834 25,388 25,271 - -------------------------------------------------------------------------- Excluding special charges and tax credits(b): Operating profit $ 885 $ 848 $ 732 Effective tax rate 25% 25% 26% Income before cumulative effect of an accounting change $ 425 $ 422 $ 335 ========================================================================== (Dollar amounts in millions) (a) Excludes employees related to assets held for sale. (b) During 1998, Praxair recorded pre-tax special charges totaling $29 million ($18 million after tax) for an impairment loss in Indonesia and a provision for an anticipated loss on the sale of an air separation plant to a third party. Additionally, in 1998 Praxair recorded non-recurring tax credits of $18 million related to the favorable settlement of various tax matters. 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 (referred to as Praxair Distribution). During 1996, Praxair recorded an $85 million pre-tax special charge ($53 million after tax and minority interests) for CBI integration costs. Special Items Reported amounts include special items that affect period-to-period comparisons. The management's discussion and analysis that follows excludes the impact of these special items. 1998 compared with 1997 The sales growth of 2% in 1998 as compared to 1997 was due primarily to acquisitions in the North American packaged gases (referred to as Praxair Distribution) and Surface Technologies businesses and sales volume increases in all major segments. These were partially offset by unfavorable currency translation impacts in all international segments. Overall, pricing was slightly positive as compared to 1997, with positive comparisons in Asia, South America and Mexico offset by negative comparisons in the United States industrial gases and Surface Technologies businesses worldwide. Operating profit grew 4% to $885 million. This was due primarily to the sales growth described above and productivity improvements (mostly in North and South America) offset by cost inflation and currency translation impacts. The productivity improvements and currency translation impacts resulted in an $18 million decrease in selling, general and administrative expenses despite the increase due to acquisitions. The increase in depreciation and amortization expense reflects new projects coming on-stream and acquisitions, partially offset by currency translation impacts. Interest expense increased $44 million due primarily to the functional currency change in Brazil (see Note 1 to the consolidated financial statements), higher interest rates in South America and higher average debt levels throughout the year. The effective tax rate for 1998 remained at 25%. Net income for 1998 increased 1% over 1997 due primarily to the higher operating profit, partially offset by increased interest expense. Praxair's return on average capital was 11.1% in 1998. The number of employees at December 31, 1998 decreased about 600 as compared to December 31, 1997 due primarily to Praxair's worldwide productivity improvement efforts, particularly in North and South America. The number of employees decreased despite the increase associated with acquisitions (about 1,100 employees) and the addition of employees to support volume growth. 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 Praxair Distribution and Surface Technologies businesses. This increase was partly offset by unfavorable currency translation impacts. Overall pricing was unchanged for the year. The operating profit growth of 16% for 1997 as compared to 1996 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 impacts. Increased depreciation and amortization expense reflected new projects coming on-stream, as well as Praxair Distribution 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. This decrease is due primarily to planned tax initiatives. 22 Praxair Net Income for 1997 increased 26% over 1996 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. 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. This was partially offset by decreases resulting from profit improvement efforts in South America and Praxair Distribution, the integration of the Liquid Carbonic business and other cost improvement efforts. SEGMENT DISCUSSION Effective in 1998, Praxair implemented the new segment disclosure requirements required by the FASB's Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information (See Notes 1 and 4 to the consolidated financial statements). Accordingly, this summary of segment sales and operating profit has been restated to conform to Praxair's current segment definitions and provides a basis for the discussion that follows: [GRAPHIC OMITTED] Year Ended December 31, 1998 1997 1996 ----------------------------------------------------------- Sales: North America $ 2,752 $ 2,636 $ 2,459 South America 964 964 987 Europe 515 493 522 Surface Technologies 420 381 311 All Other 182 261 170 ----------------------------------------------------------- Total $ 4,833 $ 4,735 $ 4,449 =========================================================== Operating profit(a): North America $ 533 $ 493 $ 422 South America 199 197 206 Europe 109 93 105 Surface Technologies 73 69 49 All Other (6) 19 (20) Corporate Overhead (23) (23) (30) ----------------------------------------------------------- Total $ 885 $ 848 $ 732 =========================================================== (Millions of dollars) (a) Excludes special charges (see Note 3 to the consolidated financial statements). North America The North America operating segment includes Praxair's industrial gases operations in the U.S., Canada, and Mexico. Praxair's U.S. and Canadian packaged gases operations within the North American industrial gases business are collectively referred to as Praxair Distribution. Sales for 1998 increased 4% as compared to 1997. Sales were up 16% in Praxair Distribution and 9% in Mexico, and down 1% in the U.S. and Canadian industrial gases operations. Overall, this increase reflects the impact of acquisitions in Praxair Distribution and sales volume growth in all geographies, partly offset by currency translation effects in Canada and Mexico and overall lower pricing. Pricing improved in Mexico and in Praxair Distribution, but was down in the U.S. and Canadian industrial gases business, reflecting more intense competitive activity. In the U.S. and Canada, industrial gases volumes were up about 2% while pricing decreased 3%. Praxair Distribution's sales increased to $892 million primarily reflecting the impact of acquisitions (19%) and improved pricing, somewhat offset by currency translation and slightly lower sales volumes. Mexico's sales increase was driven by volume growth (14%) and improved pricing, partially offset by currency impacts. Sales for 1997 increased 7% as compared to 1996. Sales were up 5% in the U.S. and Canadian industrial gases operations, 7% in Praxair Distribution, and 34% in Mexico. The increases were due primarily to sales volume growth in the U.S. and Mexico, acquisitions in Praxair Distribution, and pricing increases in Mexico and Praxair Distribution in excess of currency impacts. In the U.S. and Canada, industrial gases volumes were up about 6%, while pricing decreased about 1%. Praxair Distribution's sales increased to $768 million primarily reflecting the impact of acquisitions. Mexico showed strong sales growth from volume (22%) and pricing (18%) as compared to 1996. Operating profit improved 8% in 1998 as compared to 1997, while operating margins remained about flat at 19% of sales. The sales increase including the impact of acquisitions, and continued strong productivity improvements were the main drivers behind the operating profit growth, partially offset by negative currency impacts in Canada and Mexico and cost inflation. In the U.S. and Canadian industrial gases business, operating profit increased about 4% due primarily to productivity improvements which more than offset cost inflation. Economic conditions remain weak in several of the Company's key markets, especially in the steel and chemical industries. Praxair Distribution's and Mexico's operating profit each improved 21% over 1997. Praxair Distribution's increase reflects the impact of acquisitions while Mexico reflects strong sales volume growth, partially offset by currency impacts and cost inflation. Making Our Planet More Productive 23 Management's Discussion and Analysis Operating profit improved 17% in 1997 as compared to 1996, and operating margins improved 2% to 19% of sales. The sales increase including the impact of acquisitions, cost synergies associated with the integration of the Liquid Carbonic business, and other productivity improvements were the main drivers behind the operating profit growth; offsetting cost inflation and negative currency translation impacts. In the U.S. and Canadian industrial gases business, operating profit improved about 19%. Mexico's operating profit improved 23% over 1996 due primarily to strong sales growth. Praxair Distribution's operating profit increased 4% in 1997 over 1996 due to the sales increases and productivity improvements, largely offset by cost inflation. South America Praxair's South American industrial gases operations are conducted by its 69.3% owned subsidiary, S.A. White Martins (White Martins), which is the largest industrial gases company in Brazil. White Martins has operations throughout South America, including Argentina, Chile, Columbia, Peru and Venezuela. Sales for 1998 were flat when compared to 1997, primarily because sales volume growth of 5% and price increases of about 2% were offset by negative currency translation effects. Excluding currency translation effects, sales increased by about 7%, as compared to the 1997 period. The sales decrease of 2% in 1997 as compared to 1996 occurred because the strong sales volume growth of approximately 5% was more than offset by price declines and unfavorable currency translation impacts. The 1997 price declines were attributable to the effects of the Brazilian government's economic plan ("Real Plan") which resulted in industrial commodity pricing deflation across a wide range of industries, and an increased competitive environment in Brazil. Excluding currency translation effects, sales increased by about 3% as compared to the 1996 period. Operating profit for 1998 decreased $7 million as compared to the 1997 period after excluding the $20 million positive impact of the required functional currency change in Brazil (see Note 1 to the consolidated financial statements), and an $11 million benefit in 1997 from a favorable judgment related to a dispute with the Rio de Janeiro State public hospitals. The decrease was due primarily to the effects of currency movements throughout the year and cost inflation, partially offset by productivity improvements and sales volume growth. Excluding the impact of currency and the functional currency change in Brazil, operating profit was flat. Operating profit for 1997 decreased $9 million or about 4% as compared to 1996. The decrease was due primarily to unfavorable currency translation effects and higher energy and distribution costs, partly offset by sales volume growth, productivity improvements and an $11 million benefit in 1997 due to a favorable judgment related to a dispute with the Rio de Janeiro State public hospitals. The early 1999 devaluation of the Brazilian currency and the eventual impact on the local economic and competitive conditions in Brazil and throughout South America will have an impact on future results. Refer to the discussion in the Market Risks and Sensitivity Analyses sections of this management's discussion and analysis. In November 1998, White Martins announced a plan to increase its share capital through a rights offering equal to 50% of its current number of shares outstanding and in January 1999, the rights offering was initiated. At December 31, 1998, Praxair owned 69.3% of the share capital of White Martins and it is Praxair's intent to subscribe for its pro rata share of the rights offering and to subscribe for additional shares that are not subscribed to by the minority shareholders. Praxair will effect its portion of the rights offering by means of converting its existing loans to White Martins into stock. The rights offering is expected to be completed in the first quarter of 1999. Europe Praxair's European industrial gases business is primarily in Italy and Spain with additional operations in Benelux, Germany, France, Israel and Poland. Sales increased 4% in 1998 as compared to 1997, primarily due to moderate volume increases that were partly offset by negative currency translation effects in the first three quarters of 1998. Excluding the negative currency translation effects, sales increased by about 8% as compared to 1997. Sales for 1997 decreased 6% as compared to the 1996 period, as negative currency translation effects more than offset the strong sales volume growth of 6%. Operating profit increased a strong 17% in 1998 as compared to 1997 due primarily to the sales growth and the impact of productivity improvements, partly offset by cost inflation and unfavorable currency translation effects. Operating profit for 1997 decreased 11% as compared to 1996, primarily because the lower sales and cost inflation more than offset the productivity improvements. Surface Technologies Praxair's worldwide Surface Technologies business primarily includes operations in the U.S. and Europe, with smaller operations in Asia and Brazil. Sales for 1998 increased 10% as compared to 1997. This increase was primarily due to acquisitions and sales volume growth which added 13% in total, partly offset by price decreases and unfavorable currency impacts. Sales for 1997 increased 23% as compared to 1996 due primarily to strong volume growth and acquisitions which added about 26% in total, partly offset by price decreases. 24 Praxair Operating profit for 1998 increased 6% as compared to 1997, due to sales growth and productivity improvements, partly offset by cost inflation. Operating profit for 1997 increased 41% from 1996 due primarily to the strong sales growth and productivity improvements, partly offset by cost inflation. All Other The All Other segment includes Praxair's industrial gases operations in Asia, its global supply systems business which designs, engineers and builds equipment that produces industrial gases (for internal use and external sale), and other globally managed functions. Praxair's operations in Asia are currently concentrated in China, India, Japan, Korea and Thailand. Operations in China and India are also conducted through nonconsolidated joint venture companies. Sales for the segment decreased 30% in 1998 as compared to 1997 due to a 42% lower level of third party plant sales in the global supply systems business and lower reported sales in Asia. The level of activity for global supply systems is reflective of the overall capacity in the industry and local economic conditions, and is subject to fluctuation from one year to the next; 1997 was an unusually high sales year. Excluding currency impacts, Asian sales were up about 18% versus 1997, reflecting the impact of sales volume growth and price improvements which added 12%, and acquisitions. In contrast, 1997 sales for the segment increased 54% versus 1996. Global supply systems sales increased 125% over 1996, while Asian reported sales increased about 9%. Excluding currency impacts, 1997 sales in Asia were up about 22% versus 1996, reflecting the impact of sales volume growth and acquisitions. Operating profit for the segment is significantly influenced by the sales volume in the global supply systems business and by the costs associated with the globally managed functions, all of which fluctuate from year to year. In 1998, Asian operating profit decreased 22%, while global supply systems decreased 38% as compared to 1997. These decreases were due primarily to decreased sales in the global supply systems business and the impact of currency translation effects in Asia, partly offset by productivity improvements. The remaining operating profit reduction is related to increased costs for globally managed initiatives. The operating profit increase in 1997 as compared to 1996 of $39 million was caused by the sales growth in both global supply systems and Asia, partly offset by cost inflation and increased business development costs in Asia. The remaining increase was due to the lower level of costs associated with globally managed initiatives between the two years. Selling, General and Administrative Expenses [GRAPHIC OMITTED] In 1998, selling, general and administrative expenses were $644 million, an $18 million decrease from the 1997 amount. This decrease is due to the 1998 productivity improvement initiatives and positive currency impacts; partially offset by acquisitions and cost inflation. Selling, general and administrative expenses as a percentage of sales declined to 13.3% in 1998 from 14.0% in 1997. In 1997, selling, general and administrative expenses were $662 million, a $26 million decrease from the 1996 amount. The decrease was due primarily 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. Other income (expenses) - net In 1998, other income (expenses) - net decreased $20 million as compared to the 1997 amount due primarily to an $11 million benefit from a favorable judgment related to a dispute with the Rio de Janeiro State public hospitals occurring in 1997, and increased severance expense in 1998 as compared to 1997. In 1997, other income (expenses) - net increased $35 million over the 1996 amount of $27 million due primarily to the $11 million favorable judgment with the Rio de Janeiro State public hospitals mentioned above, higher partnership income and higher non-recurring expenses in 1996 related to the integration of the Liquid Carbonic business. Interest Expense The 1998 interest expense increased $44 million from the 1997 amount due primarily to the functional currency change in Brazil (see Note 1 to the consolidated financial statements), higher interest rates in South America and higher average debt levels throughout the year. 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. Making Our Planet More Productive 25 Management's Discussion and Analysis Income Taxes The effective tax rate for 1998 and 1997 was 25%, and was 26% for 1996. Praxair currently expects the effective tax rate to remain at approximately the 25% level in 1999. Minority Interests On December 31, 1998, minority interests consisted primarily of minority shareholders' investments in two affiliates: S.A. White Martins (Brazil) and Rivoira S.p.A. (Italy). Additionally, Praxair records the dividends on preferred stock in minority interests ($6 million in 1998). Minority shareholders' share of income for 1998 was $55 million, a decrease of $11 million as compared to the 1997 amount of $66 million. This decrease was primarily due to the acquisition of minority interests and lower income in South America. Income from Equity Investments Praxair's more significant equity investments are in the United States, Belgium, China, India, Italy, Spain, and Turkey. Praxair's share of net income from corporate equity investments was $11 million for 1998 and 1997, and $8 million in 1996. 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 in 1998 were approximately $8 million of capital expenditures and $14 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 1998 and will not have a material adverse effect on the consolidated financial position 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 Year Ended December 31, 1998 1997 1996 ------------------------------------------------------------------------ Net cash provided by (used for): Operating activities: Net income plus depreciation and amortization $ 892 $ 849 $ 702 Working capital 19 (119) (91) Non-recurring CBI acquisition costs -- -- (75) Total from operating activities 936 752 606 Investing activities: Capital expenditures (781) (902) (893) CBI acquisition -- -- (1,445) Other acquisitions (241) (101) (260) Divestitures and asset sales 206 300 264 Total (used for)investing (816) (703) (2,334) Financing activities: Debt increases (reductions) (36) 59 1,227 Issuances (purchases) of stock 20 (27) 604 Cash dividends (79) (69) (58) Total from (used for) financing $ (126) $ (68) $ 1,777 ======================================================================== Debt-to-Capital Ratio, at December 31: Debt $ 3,274 $ 3,305 $ 3,265 Capital $ 6,168 $ 6,023 $ 5,757 Debt-to-capital ratio 53.1% 54.9% 56.7% ======================================================================== (Millions of dollars)
Cash Flow from Operations Cash flow from operations increased to $936 million in 1998 from $752 million in 1997, or 24%. The increase is primarily related to the improvement in working capital investment needs; a direct result of Praxair's work process improvement initiative designed to reduce working capital as a percentage of sales, and to lower payments for incentive compensation programs. [GRAPHIC OMITTED] 26 Praxair Cash flow from operations increased in 1997 versus 1996 from $606 million to $752 million. The increase is primarily related to higher cash earnings and the impact of 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 approximately $75 million. Investing Cash flow used for investing in 1998 totaled $816 million versus $703 million in 1997. This increase was due primarily to the net impact of higher acquisition expenditures and lower proceeds from divestiture and asset sales, partly offset by lower capital expenditures. Capital expenditures for 1998 totaled $781 million, down $121 million from 1997. The lower level of capital expenditures is due primarily to decreased spending in South America and the United States. Acquisition expenditures for 1998 totaled $241 million, an increase of $140 million from the 1997 period. This increase is related to the purchase of the remaining shares outstanding of Gas Tech, Inc. a U.S. packaged gases distributor (previously an equity investment), other U.S. investments related to Praxair Distribution, acquisitions in the Surface Technologies business, the acquisition of two companies in India, a company in Puerto Rico and buy-outs of minority interests in Asia, South America and Canada. Divestitures and asset sales in 1998 decreased $94 million as compared to the 1997 period primarily due to proceeds received on the initial public offering of Chicago Bridge and Iron Co., N.V. (see Note 2 to the consolidated financial statements) in 1997, partially offset by the proceeds from a sale leaseback transaction in 1998 (see Note 13 to the consolidated financial statements). There are no remaining CBI assets held for sale as of December 31, 1998. On a worldwide basis, capital and acquisition expenditures for the full year 1999 are expected to be about 20% lower as compared to 1998, due primarily to the expected timing of acquisitions and lower capital expenditures in Asia, the United States and South America. Financing At December 31, 1998, Praxair's total debt outstanding was $3,274 million, a decrease of $31 million from 1997. As of December 31, 1998, 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+. [GRAPHIC OMITTED] On April 2, 1998, Praxair issued $250 million of 6.15% non-redeemable Notes due 2003 with interest payable semi-annually. The proceeds from the Notes were used to repay outstanding commercial paper and for other general corporate purposes. On September 30, 1998, Praxair sold and leased back certain U.S. storage equipment for $150 million which is being accounted for as an operating lease (see Note 13 to the consolidated financial statements). The proceeds from the sale of the equipment have been used to repay debt. Praxair's debt-to-capital ratio decreased to 53.1% at December 31, 1998 from 54.9% at December 31, 1997. This decrease is due to an increase in retained earnings and the lower debt levels, partially offset by the negative impact of net currency translation losses on the accumulated other comprehensive income (loss) component of shareholders' equity, including the effect of the functional currency change in Brazil, which reduced Praxair's shareholders' equity and minority interests (see Note 1 to the consolidated financial statements). Praxair's financing strategy is to secure sufficient funds to support its operations in the United States and around the world using 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 and the MD&A section titled "Market Risks and Sensitivity Analyses"). Making Our Planet More Productive 27 Management's Discussion and Analysis 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 & refining, healthcare, food & beverage, electronics, aerospace, pulp and paper, glass, environmental remediation 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 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 Based upon its best available information, management 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, 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 Year 2000 Global 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. 28 Praxair Renovation: Solutions for most year 2000 readiness issues have been identified; some are in development while others are being put in place. Renovation activities for safety and mission-critical systems are projected to be completed in the first quarter of 1999. Validation: An integrated testing strategy has been developed to validate the readiness of safety and mission- critical systems affected by year 2000. Some systems have been tested and some pilot tests have been conducted. Management currently projects that most testing and validation will occur beginning the first quarter of 1999 and will be completed by mid-1999. Implementation: Solutions that have been validated through testing will be implemented by being put into routine operation. Praxair currently expects safety and mission-critical Praxair-maintained systems to be so implemented by mid-1999. Business Continuity Planning: Praxair expects to develop 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 is also prepared to develop contingency plans for failure of Praxair-maintained systems. The number and nature of the contingency plans ultimately developed and finalized by Praxair will depend on management's ongoing assessment of the progress of Praxair and its suppliers towards year 2000 readiness. Contingency plans are currently projected to be developed by mid-1999. Costs At this time, Praxair estimates that the total external expenditures to address year 2000 issues associated with Praxair-maintained systems and components will be approximately $30 million over the life of the project. Of this total, the Company expects approximately $13 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 $12 million has been incurred. 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 The continued progress and timing of completion of Praxair's year 2000 readiness program phases as projected above depend on, and may be affected by changes in, among other factors, the cooperation and responsiveness of systems and components suppliers with respect to solutions development; the availability of critical skills such as instrument technicians and software applications personnel; 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. Making Our Planet More Productive 29 Management's Discussino and Analysis The above forward-looking projection of costs may be affected by, among other factors, year 2000 issues not yet identified or fully understood, unexpected problems in the renovation or in testing of identified solutions, and shortages in critical renovation or replacement components or skills. 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 Effective January 1, 1999, the euro has become the new common currency for 11 European countries (including Belgium, France, Germany, Italy and Spain; where Praxair has most of its European operations). Since then, transactions in the euro have become possible, but the national currencies will continue to circulate until 2002. During this transition period, payments can be made using both the euro and the national currencies at fixed exchange rates. Praxair has established teams in each of the businesses and countries affected by the euro conversion. These teams are identifying issues that must be addressed to accommodate the conversion, are developing plans to address these issues, and are in the process of implementing those necessary changes identified to date. This is an ongoing process. Beginning January 1, 1999, Praxair has the ability to conduct business with customers in both the euro and the respective national currency. Systems and processes that are initially impacted by this dual currency requirement are customer billing and receivables and cash management activities, including cash collections and disbursements. To accomplish full readiness and automatic recording in dual currencies, Praxair continues to make the necessary system and process changes. By 2002, Praxair will have systems and processes in the 11 euro countries (including payroll and other accounting systems) to accommodate the automatic recording of all business transactions in the euro, and the euro will then become the functional currency for these 11 countries. Praxair is identifying all system and process changes that will be required to facilitate timely compliance before the year 2002. Teams are also working with the respective country marketing organizations to identify and address the potential business implications of the creation of the euro. Management currently believes that Praxair has in place the appropriate programs and plans to make any required changes to its systems and processes to accommodate a complete, timely euro conversion. The external costs associated with implementing and completing Praxair's euro conversion program with respect to Praxair-maintained systems are not expected to be material in any year. Also, management currently believes the business and market implications, if any, of the euro conversion will not be material. However, the competitive impact of increased cross-border price transparency is uncertain; both with respect to products sold by Praxair as well as products, utilities and services purchased by Praxair. Praxair's ongoing efforts and those of its significant customers and suppliers (including financial institutions), at some time in the future, may reveal as yet unidentified or not fully understood issues that may not be addressable in a timely fashion, or that may cause currently unexpected competitive or market effects; all contrary to the foregoing forward-looking assumptions. These issues, if not resolved favorably, could have a material impact on the Company's results of operations or cash flows in any year. New Accounting Standards See Note 1 to the consolidated financial statements for information concerning new accounting standards. 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 currency swap, forward and option contracts. 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. 30 Praxair As required by Securities and Exchange Commission 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, 1998. 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, 1998, Praxair has debt totaling $3,274 million ($3,305 million at December 31, 1997) and interest rate swaps with a notional value of $876 million ($1,150 million in 1997). 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, 1998, the 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, 1998 after adjusting for the effect of interest rate swap agreements, Praxair has fixed rate debt of $2,978 million ($2,637 at December 31, 1997) and floating rate debt of $296 million ($668 million in 1997). Holding other variables constant (such as foreign exchange rates, swaps 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 $98 million ($105 million in 1997). At December 31, 1998, the after-tax earnings and cash flows impact for the next year resulting from a one percentage point increase in interest rates would be approximately $7 million ($6 million at December 31, 1997), 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, 1998 Praxair had $406 million notional amount ($324 million at December 31, 1997) of foreign exchange contracts of which $306 million ($254 million in 1997) hedged recorded balance sheet exposures or firm commitments and $100 million ($70 million in 1997) are to hedge anticipated future net income. 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, 1998 would decrease by approximately $39 million ($21 million at December 31, 1997). Of this decrease, only about $7 million ($4 million at December 31, 1997) 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. 1999 Brazilian Devaluation As of February 22, 1999, the Brazilian currency (the Real) has devalued to 1.97 Reais to the U.S. dollar from 1.21 at December 31, 1998. The currency impact on Praxair's Brazilian sales and operating results will be in direct proportion to the change in exchange rates. At the same time, interest rates have generally increased and the local economy is in recession. These developments will impact Praxair's Brazilian operations in 1999 as reported sales and earnings will be lower. As described in Note 6 to the consolidated financial statements, in early January 1999 Praxair entered into various currency exchange forward contracts totaling $325 million to hedge anticipated Brazilian net income and a portion of its investment. The net income hedges were effectively closed out in January 1999 resulting in a non-recurring pre-tax gain of about $20 million in the 1999 first quarter. Any gains or losses from the remaining hedge contracts will be recognized on the balance sheet. The after-tax cash proceeds from any hedge contracts will be used to repay debt. Additionally, Praxair's debt-to-capital ratio will increase in the first quarter of 1999 due to the impacts of the devaluation on the translation of Praxair's net assets in Brazil. When the Brazilian currency stabilizes, the debt-to-capital ratio should trend downward as it has done since the CBI acquisition in 1996. Making Our Planet More Productive 31 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 in 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, chemicals and refining, primary metals, food and beverage, healthcare, electronics, aerospace, glass, pulp and paper, and environmental remediation. 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. Functional Currency Change in Brazil - As required by accounting standards, effective January 1, 1998, Brazil is no longer a hyperinflationary economy. Accordingly, Praxair's majority owned subsidiary (S.A. White Martins) designated the Brazilian Real as its functional currency instead of the U.S. dollar. This change increased operating profit and interest expense by approximately $20 million for the year ended December 31, 1998. The impact on sales, taxes and net income was not significant. This change also required Praxair to record a one-time cumulative adjustment for additional deferred income taxes of $81 million with offsetting balance sheet adjustments to the accumulated other comprehensive income (cumulative translation adjustment) component of shareholders' equity, and minority interests of $57 million and $24 million, respectively. 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 and forward rate agreements, and currency swap, forward and option contracts. These instruments are not entered into for trading purposes. 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. The notional amounts of interest rate swap and forward rate 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, firm commitments that create currency exposures and projected net income. 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 32 Praxair 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 for hedge accounting (e.g., net income 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). 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. In 1998, Praxair implemented Statement of Financial Accounting Standards (SFAS) No. 132, Employers' Disclosures about Pension and Other Postretirement Benefits, which changes the format of the required disclosures relating to pensions and other postemployment benefits. All prior years' information has been restated to conform to the current presentation. Disclosures required by SFAS No. 132 are included in Note 12. 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 - Praxair accounts 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, Accounting for Stock-Based Compensation, is included in Note 10. 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. Stock options for 2,999,075 shares were not included in the computation of diluted earnings per share for the year ended December 31, 1998 because the exercise prices were greater than the average market price of the common stock. All references in the consolidated financial statements are to diluted earnings per share unless stated otherwise. 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. Segment Information - Effective in 1998, Praxair adopted SFAS No. 131 which requires a new "management" approach to segment disclosures. This new management approach requires Praxair to define its reportable segments based on the internal organization structure that is used by management to make operating decisions and evaluate performance. SFAS No. 131 also requires additional disclosures about products and services, and geographic areas. The adoption of SFAS No. 131 did not affect results of operations, financial position or cash flows. All prior years' segment information has been restated to conform to the current presentation. Disclosures required by SFAS No. 131 are included in Note 4. Comprehensive Income - Effective January 1, 1998, Praxair adopted SFAS No. 130, Reporting Comprehensive Income. The adoption produced no effect on Praxair's financial position, cash flows or results of operations. Comprehensive income has been disclosed on the Consolidated Statement of Shareholders' Equity. The accumulated other comprehensive income (loss) balance as of December 31, 1998 represents the cumulative translation adjustment. Making Our Planet More Productive 33 Notes to Consolidated Financial Statements Accounting Changes - 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. Impact of Recently Issued Accounting Standards Derivatives - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which Praxair is required to adopt effective beginning January 1, 2000. Praxair is currently evaluating the impact on its financial statements of adopting the standard and will comply as required. Start-up costs - In April 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities. This SOP is effective January 1, 1999 and generally requires that all start-up costs, as defined, be expensed as incurred. Praxair is in the process of identifying any previously capitalized costs which have to be expensed under this guidance. Any required adjustment, which is not estimated to be material, will be recorded as a cumulative effect adjustment in the first quarter of 1999. 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) 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 was 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. 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. 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 these businesses. The operations related to these assets held for sale have been eliminated from Praxair's consolidated financial statements and at December 31, 1998 there are no remaining assets held for sale. NOTE 3 SPECIAL CHARGES In the fourth quarter of 1998, Praxair recorded a pre-tax charge of $29 million ($18 million after tax) related to its investment in Indonesia ($19 million or $11 million after tax) and an anticipated loss on the sale of an air separation plant under construction for a third party ($10 million or $7 million after tax). The charge related to Indonesia reflects the recent deterioration of the local economy and reduces Praxair's investment in the net assets of its consolidated Indonesian subsidiary to an amount equal to management's current estimate of the fair value of the business, assuming a sale transaction. The anticipated contract loss reflects management's best estimate of the amount by which final costs will exceed the contract sale price. The construction is expected to be completed in 1999. 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 had 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. 34 Praxair The following table summarizes the activity in the 1996 CBI integration accrual and the 1997 North American packaged gases' accrual: 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 1998 activity -- (8) (8) Balance, December 31, 1998 $ -- $ 18 $ 18 =========================================================== (Millions of dollars) NOTE 4 Segment Information Effective in 1998, Praxair adopted SFAS No. 131 which requires Praxair to redefine its operating segments using a management approach and restate all prior years' segment information on the same basis (see Note 1). Praxair operates principally in the industrial gases business through three reportable operating segments: North America, South America and Europe. In addition, Praxair operates its worldwide Surface Technologies business through its wholly-owned subsidiary, Praxair Surface Technologies, Inc. The All Other category is composed of Praxair's industrial gases business in Asia, Praxair's global supply systems business which designs, engineers and builds equipment that produces industrial gases (for internal use and external sale), and other globally managed functions including primarily procurement and strategic marketing. Corporate includes costs related to corporate functions. The accounting policies of the operating segments are the same as those described in Note 1. Praxair evaluates the performance of its operating segments based on operating profit, excluding intercompany royalties and other special charges. Sales are determined based on the country in which the legal subsidiary is domiciled and intersegment sales are not material. Research and development costs relating to Praxair's industrial gases business are managed globally and for purposes of segment reporting are allocated to operating segments based on sales. Long-lived assets includes property, plant and equipment; patents and trademarks; and goodwill. The table below presents information about reported segments for the years ended December 31, 1998, 1997 and 1996: Segment Information 1998 1997 1996 ---------------------------------------------------------------------- Sales: North America $ 2,752 $ 2,636 $ 2,459 South America 964 964 987 Europe 515 493 522 Surface Technologies 420 381 311 All Other 182 261 170 ---------------------------------------------------------------------- Total sales $ 4,833 $ 4,735 $ 4,449 ====================================================================== Operating profit(a): North America $ 533 $ 493 $ 422 South America(b) 199 197 206 Europe 109 93 105 Surface Technologies 73 69 49 All Other (6) 19 (20) Corporate (23) (23) (30) ---------------------------------------------------------------------- Total operating profit $ 885 $ 848 $ 732 ====================================================================== Total assets: North America(c) $ 3,917 $ 3,821 $ 3,608 South America 2,313 2,493 2,175 Europe(c) 871 795 872 Surface Technologies 523 397 315 All Other(c) 472 304 568 ---------------------------------------------------------------------- Total assets $ 8,096 $ 7,810 $ 7,538 ====================================================================== Depreciation and Amortization: North America $ 267 $ 254 $ 243 South America 116 108 102 Europe 47 46 45 Surface Technologies 23 19 16 All Other 14 17 14 ---------------------------------------------------------------------- Total depreciation and amortization $ 467 $ 444 $ 420 ====================================================================== Capital expenditures and acquisitions(d): North America $ 501 $ 423 $ 604 South America 180 288 307 Europe 87 76 104 Surface Technologies 130 94 61 All Other 124 122 77 ---------------------------------------------------------------------- Total capital expenditures and acquisitions $ 1,022 $ 1,003 $ 1,153 ====================================================================== (continued) Making Our Planet More Productive 35 Notes to Consolidated Financial Statements Segment Information 1998 1997 1996 ---------------------------------------------------------------------- Sales by Major Country: United States $ 2,508 $ 2,411 $ 2,157 Brazil 786 823 760 All Other Foreign 1,539 1,501 1,532 ---------------------------------------------------------------------- Total sales $ 4,833 $ 4,735 $ 4,449 ====================================================================== Long-lived Assets by Major Country: United States $ 2,707 $ 2,426 $ 2,208 Brazil 1,505 1,588 1,471 All Other Foreign 1,935 1,806 1,763 ---------------------------------------------------------------------- Total long-lived assets $ 6,147 $ 5,820 $ 5,442 ====================================================================== (Millions of dollars) (a) During 1998, Praxair recorded pre-tax special charges totaling $29 million for an impairment loss in Indonesia and a provision for an anticipated loss on the sale of an air separation plant to a third party. During 1997, Praxair recorded an operating profit charge of $10 million related primarily to profit improvement initiatives in the North American 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 operating segment for these special charges. Special Charges 1998 1997 1996 -------------------------------------------------------------- Segment operating profit $ 885 $ 848 $ 732 Less special charges: North America -- (10) (66) South America -- -- (13) Europe -- -- (4) Surface Technologies -- -- (2) All Other (29) -- -- -------------------------------------------------------------- Consolidated operating profit $ 856 $ 838 $ 647 ============================================================== (Millions of dollars) (b) As required by accounting standards, effective January 1, 1998 Brazil is no longer a hyperinflationary economy. This change increased the South American segment operating profit for 1998 by approximately $20 million versus 1997. The impact on sales was not significant. (c) Includes equity investments as follows: Equity Investments 1998 1997 1996 --------------------------------------------- North America $ 66 $ 69 $ 65 Europe 101 88 89 All other (Asia) 84 53 41 --------------------------------------------- Total $251 $210 $195 ============================================= (Millions of dollars) (d) 1996 excludes CBI acquisition amounts totaling $1,445 million, net of assumed debt of $735 million. NOTE 5 INCOME TAXES Pre-tax income applicable to U.S. and foreign operations is as follows: Year Ended December 31, 1998 1997 1996 ----------------------------------------------------------- United States $277 $290 $154 Foreign 319 332 298 ----------------------------------------------------------- Total income before income taxes $596 $622 $452 =========================================================== (Millions of dollars) The following is an analysis of the provision for income taxes: Year Ended December 31, 1998 1997 1996 ----------------------------------------------------------- Current tax expense U.S. Federal $ 54 $ 23 $ 15 State and local 12 12 5 Foreign 50 49 42 ----------------------------------------------------------- Total current 116 84 62 ----------------------------------------------------------- Deferred tax expense U.S. Federal 29 65 39 Foreign (18) 2 9 ----------------------------------------------------------- Total deferred 11 67 48 ----------------------------------------------------------- Total income taxes $ 127 $ 151 $ 110 =========================================================== (Millions of dollars) Net deferred tax liabilities are comprised of the following: December 31, 1998 1997 -------------------------------------------------- Deferred tax liabilities Fixed assets $611 $453 State and local 10 9 Other 163 168 -------------------------------------------------- Total deferred tax liabilities 784 630 -------------------------------------------------- Deferred tax assets Benefit plans and related 163 174 Inventory 19 17 Alternative minimum tax 42 16 Carryforwards - gross 175 72 Other 70 107 -------------------------------------------------- 469 386 Less: Valuation allowances 6 10 -------------------------------------------------- Total deferred tax assets 463 376 -------------------------------------------------- Net deferred tax liabilities $321 $254 ================================================== (Millions of dollars) 36 Praxair 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:
Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------- $ % $ % $ % - ------------------------------------------------------------------------------------- U.S. statutory income tax rate 208 35.0 218 35.0 158 35.0 State and local taxes 8 1.3 8 1.3 3 0.7 U.S. tax credits (3) (0.5) (1) (0.1) (1) (0.2) Foreign taxes (80) (13.4) (65) (10.5) (51) (11.4) Other - net (6) (1.0) (9) (1.4) 1 0.2 - ------------------------------------------------------------------------------------- Provision for income tax 127 21.4 151 24.3 110 24.3 ===================================================================================== (Dollar amounts in millions)
The valuation allowances decreased $4 million in 1998 (decreased $1 million in 1997 and increased $1 million in 1996) all relating to foreign net operating loss carryforwards activity. At December 31, 1998, Praxair has approximately $16 million of foreign net operating loss carryforwards that expire principally through 2005, 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. Provision has not been made for additional Federal or foreign taxes at December 31, 1998 on $1,208 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, 1998 and 1997: Debt 1998 1997 - ------------------------------------------------------------------ Short-Term Canadian borrowings $ 116 $ 84 South American borrowings 95 268 Other International borrowings 82 38 Other U.S. borrowings 2 1 - ------------------------------------------------------------------ Total short-term debt 295 391 - ------------------------------------------------------------------ Long-Term U.S.: Commercial paper and U.S. borrowings 627 860 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 6.15% Notes due 2003 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 50 55 Canadian borrowings 204 160 South American borrowings 123 130 Other International borrowings 54 17 Obligations under capital leases 21 42 - ------------------------------------------------------------------ 2,979 2,914 Less: current portion of long-term debt 84 40 - ------------------------------------------------------------------ Total long-term debt 2,895 2,874 - ------------------------------------------------------------------ Total debt $3,274 $3,305 ================================================================== (Millions of dollars) Making Our Planet More Productive 37 Notes to Consolidated Financial Statements 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, 1998 or 1997. At December 31, 1998 and 1997, $627 million and $860 million respectively, 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 5.8% at December 31, 1998 and 6.1% at December 31, 1997. 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, 1998, Praxair was in compliance with all such covenants. Excluding commercial paper and U.S. bank borrowings, scheduled maturities on long-term debt are: 1999, $84 million; 2000, $150 million; 2001, $333 million; 2002, $98 million; 2003, $695 million and $992 million thereafter. At December 31, 1998, $170 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, 1998, the estimated fair value of Praxair's long-term debt portfolio was $3,055 million versus a carrying value of $2,979 million. At December 31, 1997 the estimated fair value of long-term debt was $2,971 million versus a carrying value of $2,914 million. These differences are attributable to interest rate changes subsequent to when the debt was issued. Financial Instruments - Praxair has entered into various interest rate swap 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. The fair market value of these swaps approximated their carrying amounts at December 31, 1998 and 1997. The following table is a summary of the notional amount of interest rate swap agreements at December 31, 1998 and 1997: December 31, 1998 1997(a) ------------------------------------------------------- Maturing within one year: Fixed Rate Swaps $796(b) $220 Floating Rate Swaps -- $150 Maturing between 1-2 years: Fixed Rate Swaps -- $550(c) Forward Starting Fixed Rate Swaps -- $150 Maturing 2001: Fixed Rate Swaps $ 80 $ 80 ======================================================== (Millions of dollars) (a) At December 31,1997 there was $300 million notional value of forward starting fixed rate swaps that had been effectively offset through June 1998 using $300 million notional value of forward starting floating rate swaps. (b) These swaps expire at various dates to February 1999. (c) At December 31, 1997, the expiration dates for $300 million of these swaps had 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, 1998 and 1997, respectively, Praxair had $406 million and $324 million of currency exchange forward contracts outstanding: $280 million to hedge recorded balance sheet exposures ($216 million in 1997), $26 million to hedge firm commitments generally for the purchase of equipment related to construction projects ($38 million in 1997) and $100 million to hedge future net income, accounted for on a mark-to-market basis ($70 million in 1997). Additionally, at December 31,1998 there was $34 million notional value of currency exchange forward contracts that effectively offset ($100 million in 1997). At December 31, 1998 and 1997, the fair market value of currency exchange contracts approximated their carrying amounts and the deferred gains and losses on these contracts were not material. In early 1999, the Brazilian currency devalued versus the U.S. dollar. In anticipation of this devaluation, in early January 1999 Praxair entered into currency exchange forward contracts totaling $325 million for estimated Brazilian net income in 1999 and to hedge a portion of its net investment. Approximately $100 million of these contracts were effectively settled by entering into contracts with opposite positions, resulting in income of about $20 million before income taxes and minority interests. The remaining $225 million of these contracts expire during April and May 1999 and any potential after-tax gains or losses from these contracts will be recognized on the balance sheet, mainly in the cumulative translation adjustment components of shareholders' equity and minority interests. 38 Praxair 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. NOTE 7 SHAREHOLDERS' EQUITY At December 31, 1998 there were 500,000,000 shares of common stock authorized (par value $.01 per share) of which 161,517,042 shares were issued and 157,571,199 were outstanding. During 1997, Praxair reclassified $19 million to additional paid-in capital from other 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. 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, 1998 and 1997, there were 25,000,000 shares of preferred stock (par value $.01 per share) authorized, of which, 750,000 shares were issued and outstanding. 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. Making Our Planet More Productive 39 Notes to Consolidated Financial Statements NOTE 9 SUPPLEMENTARY INCOME STATEMENT INFORMATION Year Ended December 31, 1998 1997 1996 -------------------------------------------------------------- Selling, general and administrative Selling $ 328 $ 333 $ 331 General and administrative 316 329 357 -------------------------------------------------------------- $ 644 $ 662 $ 688 ============================================================== Other income (expenses) - net Investment income $ 14 $ 13 $ 6 Currency 1 4 3 Partnership income 12 12 8 Other 15 33(a) 10 -------------------------------------------------------------- $ 42 $ 62 $ 27 ============================================================== Interest expense Interest incurred on debt $ 296 $ 248 $ 220 Interest capitalized (36) (32) (25) -------------------------------------------------------------- $ 260 $ 216 $ 195 ============================================================== Minority Interests Minority interests $ (49) $ (58) $ (62) Preferred stock dividends (6) (8) (6) -------------------------------------------------------------- $ (55) $ (66) $ (68) ============================================================== (Millions of dollars) (a) Includes $11 million from a favorable judgement related to a dispute with State public hospitals 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. Effective January 1, 1997, Praxair initiated a 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. Through 1998, Praxair's earnings per share growth for purposes of this calculation was 13% and the pre-tax compensation expense related to this plan was $8 million in 1998 and $15 million in 1997. Prior to 1997, there was a five-year plan relating to the period 1992 to 1996. The pre-tax compensation expense related to this plan was $23 million in 1996. 40 Praxair The following table summarizes the changes in outstanding shares under option, performance stock grants and performance stock equivalents for 1998, 1997 and 1996 (shares in thousands): Stock Options Average Performance Number of Exercise Stock & Activity Options Price Equivalents(a) -------------------------------------------------------------- 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 10,899 $ 25.20 968 Granted 2,022 $ 40.98 14 Exercised (889) $ 19.63 -- Cancelled or expired (60) $ 46.00 (31) -------------------------------------------------------------- Outstanding at December 31, 1998(b) 11,972 $ 28.17 951 -------------------------------------------------------------- Options exercisable at: December 31, 1996 7,275 $ 14.20 December 31, 1997 7,167 $ 15.51 December 31, 1998(b) 7,728 $ 18.95 ============================================================== (a) The weighted-average price per share on the date performance stock equivalents were granted was $50.26 in 1998 and $46.25 in 1997, and for performance stock grants made under the previous 5-year plan was $41.83 in 1996. (b) The following table summarizes information about options outstanding and exercisable at December 31, 1998 (shares in thousands, life in years):
Outstanding Exercisable ------------------------------------------ ----------------- Year Average Number Range of Average Number Average of Remain- of Exercise Exercise of Exercise Grant ing Life Options Prices Price Options Price ---------------------------------------------------------------------------- To 6/92* 2.0 3,154 $ 9.80-16.63 $12.55 3,154 $12.55 7/92-12/93 3.8 1,627 $15.50-17.13 $15.83 1,627 $15.83 1994 5.4 513 $17.88-23.63 $19.30 513 $19.30 1995 6.1 1,158 $20.25-29.63 $21.16 1,158 $21.16 1996 7.6 2,334 $34.13-47.75 $40.93 1,246 $36.40 1997 8.4 1,186 $43.88-56.13 $50.61 30 $44.99 1998 9.5 2,000 $31.25-52.50 $40.95 -- -- ---------------------------------------------------------------------------- 5.8 11,972 $ 9.80-56.13 $28.17 7,728 $18.95 ============================================================================ * 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, 1998 1997 1996 ------------------------------------------------------------------ Net Income: As reported $ 425 $ 405 $ 282 Pro forma $ 409 $ 391 $ 274 Basic earnings per share: As reported $ 2.68 $ 2.56 $ 1.85 Pro forma $ 2.58 $ 2.47 $ 1.80 Diluted earnings per share: As reported $ 2.60 $ 2.46 $ 1.77 Pro forma $ 2.50 $ 2.37 $ 1.72 ------------------------------------------------------------------ The weighted average fair value of options granted during 1998 was $12.57 ($16.54 in 1997 and $13.52 in 1996). 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 weighted average assumptions used for grants in 1998, 1997, and 1996: Year Ended December 31, 1998 1997 1996 -------------------------------------------------------------- Dividend yield 1.0% 1.0% 1.0% Volatility 28.0% 27.0% 30.0% Risk-free interest rate 5.2% 6.1% 6.1% 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. Making Our Planet More Productive 41 Notes to Consolidated Financial Statements NOTE 11 SUPPLEMENTARY BALANCE SHEET INFORMATION December 31, 1998 1997 ------------------------------------------------------------------ Accounts receivable Trade $ 904 $ 884 Other 44 112 ------------------------------------------------------------------ 948 996 Less: allowance for doubtful accounts(a) 29 25 ------------------------------------------------------------------ $ 919 $ 971 ================================================================== Inventories(b) Raw materials and supplies $ 115 $ 120 Work in process 38 48 Finished goods 166 161 ------------------------------------------------------------------ $ 319 $ 329 ================================================================== Property, plant and equipment - net Land and improvements $ 205 $ 206 Buildings 536 489 Machinery and equipment 7,042 6,629 Construction in progress and other 895 850 Less: accumulated depreciation 3,803 3,567 ------------------------------------------------------------------ $ 4,875 $ 4,607 ================================================================== Other long-term assets Patents, trademarks and goodwill(c) $ 1,272 $ 1,213 Deposits(d) 49 47 Investments at cost 5 5 Other 250 231 ------------------------------------------------------------------ $ 1,576 $ 1,496 ------------------------------------------------------------------ Other current liabilities Accrued accounts payable $ 150 $ 199 Payrolls 94 108 Employee benefits and related 45 41 Special charges 7 12 Accrued interest payable 42 39 Other 131 102 ------------------------------------------------------------------ $ 469 $ 501 ================================================================== (continued) December 31, 1998 1997 ------------------------------------------------------------------ Other long-term liabilities Employee benefits and related $ 439 $ 443 Special charges 11 14 Other(d) 103 71 ------------------------------------------------------------------ $ 553 $ 528 ================================================================== Deferred credits Income taxes(e) $ 357 $ 296 Deferred gain on sale leaseback (Note 13) 88 -- Other 20 28 ------------------------------------------------------------------ $ 465 $ 324 ================================================================== Cumulative translation adjustment North America $(181) $ (132) South America(f) (138) -- Europe (51) (76) Surface Technologies 1 (1) All Other (43) (47) ------------------------------------------------------------------ $ (412) $ (256) ================================================================== (Millions of dollars) (a) Provisions to the allowance for doubtful accounts were $13 million, $11 million and $6 million in 1998, 1997 and 1996, respectively. (b) Approximately 31% and 30% of total inventories were valued using the LIFO method at December 31, 1998 and 1997, respectively. If inventories had been valued at current costs, they would have been approximately $25 million and $22 million higher than reported at December 31, 1998 and 1997, respectively. (c) Net of accumulated amortization of $143 million in 1998 and $100 million in 1997. (d) $28 million and $65 million of other long-term assets and other long-term liabilities in Brazil have been offset in 1998 and 1997, respectively. (e) Deferred income taxes related to current items are included in prepaid and other current assets in the amount of $36 million in 1998 and $42 million in 1997. (f) 1998 includes a cumulative adjustment of $57 million related to the functional currency change in Brazil (see Note 1). 42 Praxair 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. 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. 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 $4 million in 1998, $3 million in 1997, and $1 million in 1996 (not included in the tables that follow). Postretirement Benefits Other Than Pensions (OPEB) - 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 in 1996 (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. Pension and Postretirement Benefit Costs The components of net pension and OPEB costs for 1998, 1997 and 1996 are shown below:
PENSIONS OPEB Year Ended December 31, 1998 1997 1996 1998 1997 1996 NET BENEFIT COST ----------------------------------------------------------------------------------------- Service cost $ 35 $ 33 $ 36 $ 7 $ 5 $ 7 Interest cost 59 56 53 13 15 14 Expected return on assets (67) (62) (55) (1) (1) (1) Net amortization and deferral -- 1 -- (9) (8) (9) ----------------------------------------------------------------------------------------- Net periodic benefit cost $ 27 $ 28 $ 34 $ 10 $ 11 $ 11 ========================================================================================= (Millions of dollars)
Making Our Planet More Productive 43 Notes to Consolidated Financial Statements The changes in benefit obligation and plan assets and the funded status reconciliation as of December 31, 1998 and 1997 for Praxair's significant pension and OPEB programs are shown below:
PENSIONS 1998 1997 OPEB Year Ended December 31, U.S. INT'L U.S. INT'L 1998 1997 ------------------------------------------------------------------------------------------------------------ CHANGE IN BENEFIT OBLIGATION Benefit obligation, January 1 $ 617 $ 308 $ 539 $ 292 $ 229 $ 230 Service cost 22 13 20 13 7 5 Interest cost 42 18 40 17 14 16 Participant contributions -- 1 -- -- 9 9 Plan amendments -- -- -- 1 (14) -- Actuarial loss(gain) 20 20 43 10 14 (7) Benefits paid (23) (16) (25) (13) (30) (24) Curtailments -- (3) -- -- (1) -- Currency translation -- (2) -- (12) (1) -- ------------------------------------------------------------------------------------------------------------ Benefit obligation, December 31 $678 $ 339 $ 617 $ 308 $ 227 $ 229 ------------------------------------------------------------------------------------------------------------ CHANGE IN PLAN ASSETS Fair value of plan assets, January 1 $ 589 $ 277 $ 508 $ 258 $ 10 $ 9 Actual return on plan assets 75 24 100 37 3 4 Participant contributions -- 1 -- -- -- -- Company contribution -- 7 5 7 -- -- Benefits paid (21) (16) (24) (12) (6) (3) Currency translation -- (8) -- (13) -- -- ------------------------------------------------------------------------------------------------------------ Fair value of plan assets, December 31 $ 643 $ 285 $ 589 $ 277 $ 7 $ 10 ------------------------------------------------------------------------------------------------------------ FUNDED STATUS RECONCILIATION Funded status, December 31 $ (35) $ (54) $ (28) $ (31) $(220) $(219) Unrecognized (gains) losses - net (61) 1 (53) (32) (6) (18) Unrecognized prior service cost 6 (2) 7 12 (16) (11) Unrecognized transition amount (3) 5 (4) 1 -- -- Prepaid (accrued) benefit cost, December 31 $ (93) $ (50) $ (78) $ (50) $(242) $(248) ------------------------------------------------------------------------------------------------------------ (Millions of dollars)
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $172 million, $144 million, and $81 million, respectively, as of December 31, 1998 ($149 million, $117 million and $75 million, respectively, as of December 31, 1997). 44 Praxair The weighted average or range of assumptions for the Company's pension and OPEB benefit plans were as follows: International U.S. Plans Plans Year Ended December 31, 1998 1997 1998 1997 - ------------------------------------------------------------------------------- Discount rate 6.75% 7.0% 4-9% 4-9% Rate of increase in compensation levels 4.0% 4.25% 2-7% 2-7% Expected long-term rate of return on plan assets 9.5% 9.5% 5-9% 4.5-9.0% - ------------------------------------------------------------------------------- For measurement purposes, a 7% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999, gradually reducing to 4.5% in 2004 and thereafter. These health care cost trend rate assumptions have an impact on the amounts reported. To illustrate the effect, a one-percentage point change in assumed health care cost trend rates would have the following effects: One-Percentage One-Percentage Sensitivity Point Increase Point Decrease ------------------------------------------------------------------- Effect on the total of service and interest cost components of net OPEB benefit cost $ 2 $ (1) Effect on OPEB benefit obligation $11 $(11) ------------------------------------------------------------------- (Millions of dollars) In addition to the above plans, U.S. employees other than the packaged gases business are eligible to participate in a defined contribution savings plan. Employees may contribute up to 18% of their compensation, subject to the maximum allowable by IRS regulations. Company contributions to this plan are calculated on a graduated scale based on employee contributions to the plan. The cost for this plan was $10 million in 1998, $9 million in 1997, and $7 million in 1996. 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, 1998: Lease Payments - -------------------------------------------- 1999 $81 2002 $ 40 2000 $66 2003 $ 35 2001 $54 after 2003 $194 - -------------------------------------------- (Millions of dollars) Included in these totals are $60 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 $15 million ($23 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 $80 million in 1998, and $70 million in 1997 and 1996. The present value of the future lease payments under operating leases is approximately $339 million at December 31, 1998. During 1998, Praxair sold and leased back certain U.S. storage equipment for $150 million. This operating lease has an initial two-year term with purchase and lease renewal options at projected future fair market values beginning in 2000. 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 $19 million ($16 million on a present value basis), with annual obligations of $4 million over the next year and $2 million over the succeeding four years, and $5 million thereafter. Total purchases of product in 1998, 1997 and 1996, including other amounts purchased under these agreements, were $8 million, $8 million and $9 million, respectively. Making Our Planet More Productive 45 Notes to Consolidated Financial Statements Praxair has entered into an operating lease on liquid storage equipment which includes a residual value guarantee not to exceed $127 million. Management expects any losses under this guarantee to be remote. At December 31, 1998, the estimated cost of completing authorized construction projects in the normal course of business is approximately $218 million. NOTE 15 Quarterly Data (Unaudited)
1998 1Q 2Q 3Q 4Q Year - ------------------------------------------------------------------------------------------------------------------- Sales $ 1,201 1,234 1,201 1,197 $ 4,833 Cost of sales $ 697 711 697 702 $ 2,807 Depreciation and amortization $ 115 119 118 115 $ 467 Operating profit(a) $ 214 227 225 190 $ 856 - ------------------------------------------------------------------------------------------------------------------- Net income(a) $ 102 108 108 107 $ 425 - ------------------------------------------------------------------------------------------------------------------- Basic Per Share Data:(a) Net income $ .65 $ .68 $ .68 $ .68 $ 2.68 Weighted average shares (000's) 158,058 158,623 158,893 158,297 158,462 - ------------------------------------------------------------------------------------------------------------------- Diluted Per Share Data:(a) Net income $ .62 $ .66 $ .66 $ .66 $ 2.60 Weighted average shares (000's) 163,236 164,057 163,417 162,341 163,356 =================================================================================================================== (Dollar amounts in millions, except per share data) 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(b) $ 207 213 211 207 $ 838 - ------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of an accounting change(b) $ 102 107 107 100 $ 416 Cumulative effect of an accounting change(c) -- -- -- (11) (11) Net income(b) $ 102 107 107 89 $ 405 - ------------------------------------------------------------------------------------------------------------------- Basic Per Share Data:(b) Income before cumulative effect of an accounting change $ .65 $ .68 $ .68 $ .63 $ 2.63 Cumulative effect of an accounting change(c) -- -- -- (.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:(b) Income before cumulative effect of an accounting change $ .62 $ .65 $ .65 $ .61 $ 2.53 Cumulative effect of an accounting change(c) -- -- -- (.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 =================================================================================================================== (Dollar amounts in millions, except per share data)
(a) Operating profit and net income for the 1998 fourth quarter and year include special charges of $29 million and $18 million, respectively, related primarily to an impairment loss in Indonesia and a provision for an anticipated loss on the sale of an air separation plant to a third party (see Note 3). Net income includes non-recurring tax credits totaling $18 million related to the favorable settlement of certain tax matters for the 1998 fourth quarter and year (see Note 9). (b) 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). (c) Related to a required accounting change for capitalized business process reengineering costs associated with information technology transformation (see Note 1). 46 Praxair 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 PricewaterhouseCoopers 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 & Chief Executive Officer /s/ John A. Clerico John A. Clerico Executive Vice President & Chief Financial Officer /s/ J. Robert Vipond J. Robert Vipond Vice President & Controller Danbury, Connecticut February 5, 1999 Making Our Planet More Productive 47 Report of Independent Accountants [PricewaterhouseCoopers logo] 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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/ PricewaterhouseCoopers LLP Stamford, Connecticut February 5, 1999 48 Praxair
Five-Year Financial Summary Year Ended December 31, 1998 1997 1996(a) 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- From the Income Statement Sales $ 4,833 $ 4,735 $ 4,449 $ 3,146 $ 2,711 Cost of sales 2,807 2,764 2,564 1,777 1,507 Selling, general and administrative 644 662 688 496 409 Depreciation and amortization 467 444 420 279 273 Research and development 72 79 72 61 58 Special charges 29 10 85 -- -- Other income (expenses) - net 42 62 27 15 (17) - -------------------------------------------------------------------------------------------------------------------------- Operating profit 856 838 647 548 447 Interest expense 260 216 195 116 108 - -------------------------------------------------------------------------------------------------------------------------- Income before taxes 596 622 452 432 339 Income taxes 127 151 110 122 82 - -------------------------------------------------------------------------------------------------------------------------- Income of consolidated entities 469 471 342 310 257 Minority interests (55) (66) (68) (50) (61) Income from equity investments 11 11 8 2 7 - -------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of an accounting change 425 416 282 262 203 Cumulative effect of an accounting change(b) -- (11) -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Net income $ 425 $ 405 $ 282 $ 262 $ 203 Net income excluding special items(c) $ 425 $ 422 $ 335 $ 262 $ 203 ========================================================================================================================== Per Share Data(d) Basic earnings per share: Income before cumulative effect of an accounting change $ 2.68 $ 2.63 $ 1.85 $ 1.89 $ 1.49 Net income(b) $ 2.68 $ 2.56 $ 1.85 $ 1.89 $ 1.49 Diluted earnings per share: Income before cumulative effect of an accounting change $ 2.60 $ 2.53 $ 1.77 $ 1.82 $ 1.45 Net income(b) $ 2.60 $ 2.46 $ 1.77 $ 1.82 $ 1.45 Cash dividends per share $ .50 $ .44 $ .38 $ .32 $ .28 - -------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding (000's) Basic shares outstanding 158,462 158,095 152,654 138,818 136,254 Diluted shares outstanding 163,356 164,053 159,038 144,147 139,991 ========================================================================================================================== Capital Total debt $ 3,274 $ 3,305 $ 3,265 $ 1,318 $ 1,265 Minority interests 487 521 493 408 371 Preferred stock 75 75 75 -- -- Shareholders' equity 2,332 2,122 1,924 1,121 839 - -------------------------------------------------------------------------------------------------------------------------- Total capital $ 6,168 $ 6,023 $ 5,757 $ 2,847 $ 2,475 ========================================================================================================================== Other Information and Ratios Operating profit as a percentage of sales(c) 18.3% 17.9% 16.5% 17.4% 16.5% Return on average shareholders' equity(c) 19.1% 20.9% 22.0% 26.7% 27.6% Capital expenditures and acquisitions $ 1,022 $ 1,003 $ 3,333 $ 802 $ 385 Total assets $ 8,096 $ 7,810 $ 7,538 $ 4,134 $ 3,520 Shares outstanding at year-end (000's) 157,571 157,373 157,489 140,536 137,863 Debt-to-capital ratio 53.1% 54.9% 56.7% 46.3% 51.1% Number of employees 24,834 25,388 25,271 18,222 17,780 - -------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in millions, 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) A required change in 1997 related to accounting for previously capitalized business process reengineering costs associated with information technology transformation. The cumulative effect of this accounting change had an impact of $0.07 per share for both basic and diluted earnings per share. (c) Special items include special charges and tax credits for 1998, and special charges in 1997 and 1996 (see Notes 3 and 5 to the consolidated financial statements). Operating profit as a percentage of sales excludes special charges. The return on average shareholders' equity is based on income before cumulative effect of an accounting change excluding special items. (d) Includes the effect of special items 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). Making Our Planet More Productive 49 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 33,441 shareholders of record as of December 31, 1998. Shareholder Returns Closing high and low stock prices and dividends are presented below: Stock Prices and Dividends High Low Dividends ---------------------------------------------------------- 1998 Fourth quarter $40.938 $32.000 $0.125 Third quarter $50.125 $31.250 $0.125 Second quarter $53.563 $44.438 $0.125 First quarter $51.438 $40.563 $0.125 ---------------------------------------------------------- 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 ---------------------------------------------------------- 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. 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 1998 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. Contact Joseph S. Cappello, Director, (203) 837 - 2073. 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 1-800-432-0140 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, New York 10286 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, Connecticut 06810-5113, (203) 837-2210 Annual Meeting of Shareholders The 1999 annual meeting of shareholders of Praxair, Inc. will be held at 9:30 a.m. on Tuesday, April 27, 1999 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, Connecticut 06810-5113. 1-800-PRAXAIR or, outside the U.S., (716) 879-4077 Visit Praxair Online on the World Wide Web: http://www.praxair.com 50 Praxair Board of Directors Alejandro Achaval Chairman, Chief Executive Officer and Controlling Partner of IMEXTRADE S.A. and TRINIDAD S.C.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 and Chairman & President, General Electric Investment Corporation Finance & Pension (Chairman); Public Policy & Nominating Committees Claire W. Gargalli Director of various corporations; former Vice Chairman, Diversified Search Companies Finance & Pension; Compensation & Management Development Committees 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 Making Our Planet More Productive 51 Officers, Regional Management and Advisory Council Officers Bal Agrawal Vice President, Services Development Leonard M. Baker Vice President, Technology Paul J. Bilek Executive Vice President David H. Chaifetz Vice President, General Counsel and Secretary John A. Clerico Executive Vice President & Chief Financial Officer Frank J. Crespo Vice President, Global Procurement and Materials Management Michael E. DeDomenico President, Praxair Distribution, Inc. Theodore W. Dougher Vice President, Safety and Production Excellence James J. Fuchs President, Praxair Asia Ivan Ferreira Garcia Chief Executive Officer, S.A. White Martins Jesus E. Gonzalez Vice President, Chemicals and Refining Business and Metals Market Barbara R. Harris Vice President, Human Resources John F. Hill Chief Information Officer Randy S. Kramer Vice President, Carbon Dioxide Product and Services Thomas W. von Krannichfeldt President, Praxair Surface Technologies, Inc. H. William Lichtenberger Chairman & Chief Executive Officer Ricardo Malfitano President, North American Industrial Gases & President, Praxair Canada Sunil Mattoo Vice President, Strategic Planning Murilo Barros de Melo Vice President, Food and Beverage Market Nigel D. Muir Vice President, Communications and Public Relations John S. Pirretti Vice President, Metal Fabrication Market Scott K. Sanderude Vice President, Marketing Sally A. Savoia Vice President, Healthcare Market James S. Sawyer Vice President & Treasurer William M. Therrien Vice President, Engineering and Supply Systems Theodore F. Trumpp Vice President, Electronics Business Gabriel Toledo Ugarte President, Praxair Europe J. Robert Vipond Vice President & Controller Regional Management North America Murray G. Covello Managing Director, Praxair Canada Cesar Guajardo Managing Director, Praxair Mexico Robert P. Sheehan President, Praxair Puerto Rico Alan J. Westendorf Senior Vice President, Sales Europe Miguel Martinez Astola Managing Director, Spain Robert Matth General Manager, Poland Franco Mazzali Managing Director, Italy and Middle East Jean-Michel Tiard Managing Director, Western Europe South America Domingos Bulus Assistant Director, Andean Treaty Countries Albino Carneiro Assistant Director, South Cone Countries Marcelo Pereira Quintaes Vice President, Industrial Gases, Brazil Asia V. Thad Evans Managing Director, Praxair Japan & 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 Carlos Langone Consultant, Brazil Agostino Rocca President for Latin America, Organizacin Techint, Argentina Paolo Rocca President, Organizacin Techint, Argentina Benjamin Steinbruch Chairman, Companhia Sidergica Nacional, Brazil 52 Praxair Locations Worldwide 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 (905) 803-1600 South America S.A. White Martins Rio de Janeiro, Brazil 55 (21) 588.6622 Argentina, Bolivia, Chile, Colombia, Paraguay, Peru, Uruguay, Venezuela Central America/Caribbean Praxair Puerto Rico Gurabo, PR (787) 258-7200 Belize, Costa Rica Europe Praxair Europe Madrid, Spain (349) 1 556-1100 Austria, Belgium, Croatia, Czech Republic, France, Germany, Israel, Italy, The Netherlands, Poland, Portugal, Slovenia, Turkey Asia Praxair Asia, Inc. Singapore (65) 736-3800 Australia, India, Indonesia, Japan, People's Republic of China, South Korea, Thailand 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, currency movements, and the change in functional currency, impacts from currency and economic developments in Asia, management's assessments of the impacts of the year 2000 problem and Euro conversion, 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, 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. Batman and Robin courtesy of Warner Bros. Praxair, MedigasTM, Praxair CoJetTM, and Point OneTM are trademarks of Praxair Technology, Inc. 1999 Praxair Technology, Inc. This report is printed on recycled paper Design: R.L. Marciniak Inc., Typography: Ginny Doyle, Printing: The Hennegan Company EX-21 5 EX-21.01 Praxair, Inc. and Subsidiaries - -------------------------------------------------------------------------------- EXHIBIT 21.01
Place of Incorporation Accent Cay Holdings Inc. British Virgin Island Adirondack Insurance Company Vermont Agas Servizi S.r.l. Italy Amko Service Company Ohio Asian Surface Technologies Pte. Ltd. Singapore Beijing Praxair Huashi Carbon Dioxide Co., Ltd. China Carbonatos Andinos S.A. Argentina Carborio Industria E. Comercio Ltda. Brazil Catalana de Gases Medicinales S.L. Spain CBI Comercio e Participacoes Ltda. Brazil CBI Investments, Inc. Delaware CBI Terminal Company Delaware Chameleon Finance Company B.V. The Netherlands CILBRAS - Empresa Brasileira de Cilindros Ltda. Brazil Coatec Gesellschaft Fur Oberflachentechnik GmbH Germany Companhia Nacional de Carbureto Brazil Companhia Nacional de Oxigenio S.A. Portugal Cryo Teruel S.A. Portugal Domolife S.r.l. Italy Dryce Italia 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 Gases de Ensenada S/A Argentina 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 Indugas S.A. France Innovative Membrane Systems, Inc. Delaware International Cryogenic Equipment Corporation Delaware Julio Pastafiglia & Cia. S.A. Argentina Kelvin Finance Company Ireland Korea Liquid Carbonic Co., Ltd. Korea 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 Liquid Carbonico Colombiana S.A. Colombia Liquid Quimica Mexicana, S.A. de C.V. Mexico Liquid Quimica S.A. Brazil Maxima Air Separation Center Limited Israel EXHIBIT 21.01 (cont'd.) Place of Incorporation 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 Oxigenos de Colombia Efese S.A. Colombia Oxigenus S.A. Spain Oximesa S.A. Spain Oximinas Ltda. Brazil P. T. Praxair Indonesia Indonesia Praxair (China) Invesment Co., Ltd. China Praxair (Nanjing) Carbon Dioxide Co. Ltd. China Praxair (Shanghai) Co., Ltd. China Praxair (Yueyang) Co., Ltd. China Praxair Asia, Inc. Delaware Praxair Argentina, S.A. Argentina Praxair Australia Pty. Ltd. Australia Praxair B.V. The Netherlands Praxair Belize, Ltd. Belize Praxair Bolivia, S.A. Bolivia Praxair Canada Inc. Canada Praxair Carbondioxide Private Limited India Praxair Chemax Semiconductor Materials Co. Taiwan 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 Distribution Southeast, LLC 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 Holdings International, Inc. Delaware Praxair Hydrogen Supply, Inc. Delaware Praxair Iberica, S.A. Spain Praxair India Private Limited India Praxair Iwatani Electronics Gases Co. Japan Praxair K.K. Japan Praxair Korea Company Limited Republic South Korea Praxair Mexico, S.A. de C.V. Mexico Praxair Martime Company Canada Praxair-Ozone, Inc. Praxair N.V. Belgium Praxair Pacific Limited Mauritius Praxair PC Partnership Canada Praxair Polska, SP. Z O.O Poland Praxair Paraguay S.R.L. Paraguay EXHIBIT 21.01 (cont'd.) Place of Incorporation Praxair Peru S.A. Peru Praxair Produccion Espana, S.A. Spain Praxair Production N.V. Belgium Praxair Puerto Rico, Inc. Delaware 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 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 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. Mexico PST Fluoropolymer S.p.A. Italy Quimica Industrial Bara Do Pirai S.A. Brazil Rapidox Gases Industriais Ltda. Brazil Rivoira S.p.A. Italy S. A. White Martins Brazil Servicios Energeticos Chile S.A. Chile Shanghai Praxair-Yidian, Inc. China Smaltirvia S.p.A. Italy Susano Carbonato De Calcio Ltda. Brazil Tianjin Praxair Inc. China Topaz Consultoria S.A. Uruguay Transportes Flamingo S/A Peru Treffers Precision, Inc. Arizona UCISCO Canada Inc. Canada UCISCO, Inc. Texas Unigases Comercial Ltda. Brazil Wall Chemicals, Inc. Illinois Westair Cryogenics Company Delaware White Martins & White Martins Comercio e Servicos Portugal 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 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
EX-23 6 EX-23.01 Praxair, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 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 5, 1999 appearing on page 48 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Stamford, Connecticut March 15, 1999 EX-27 7 EX-27.01
5 FINANCIAL DATA SCHEDULE - EXHIBIT 27 1,000,000 YEAR DEC-31-1998 DEC-31-1998 34 0 948 29 319 1394 8678 3803 8096 1289 2895 75 0 2 2330 8096 4833 4833 2807 2807 467 0 260 596 127 425 0 0 0 425 2.68 2.60 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.
EX-99 8 EX-99.01 Praxair, Inc. and Subsidiaries - -------------------------------------------------------------------------------- EXHIBIT 99.01 PRAXAIR, INC. AND SUBSIDIARIES Segment Information for the 1998 Quarters (Unaudited) 1998 Quarters 1Q 2Q 3Q 4Q(a) Year(a) Sales: North America $ 691 $ 712 $ 677 $ 672 $2,752 South America 244 238 246 236 964 Europe 124 131 124 136 515 Surface Technologies 99 104 106 111 420 All Other 43 49 48 42 182 - -------------------------------------------------------------------------- Total sales $1,201 $1,234 $1,201 $1,197 $4,833 - -------------------------------------------------------------------------- Operating Profit: North America $ 140 $ 141 $ 128 $ 124 $ 533 South America 47 50 53 49 199 Europe 26 28 25 30 109 Surface Technologies 18 19 18 18 73 All Other (11) (5) 6 4 (6) Corporate (6) (6) (5) (6) (23) - --------------------------------------------------------------------------- Total operating profit $ 214 $ 227 $ 225 $ 219 $ 885 - --------------------------------------------------------------------------- (Millions of dollars) (a) The fourth quarter and year segment operating profit amounts for the All Other segment are before special charges of $29 million (see Note 3 of the section captioned "Notes to Consolidated Financial Statements" in Praxair's 1998 Annual Report to Shareholders). -----END PRIVACY-ENHANCED MESSAGE-----