FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-11037
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Praxair, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 06-1249050
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
39 Old Ridgebury Road, Danbury, CT 06810-5113
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(Address of principal executive offices) (Zip Code)
(203) 837-2000
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
At September 30, 1998, 157,757,602 shares of common stock ($.01 par value) of
the Registrant were outstanding.
<PAGE>
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
currency and a 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 (refer to Management's Discussion and
Analysis of Financial Condition and Results of Operations for additional
comments relating to forward-looking statements on these topics), and the
timing, proceeds and other terms of the disposition of assets held for sale
involve risks and uncertainties, and are subject to change based on various
factors, including the impact of changes in worldwide and national economies,
pricing fluctuations in foreign currencies, changes in interest rates, the
continued timely development and acceptance of new products and processes, the
impact of competitive products and pricing, the ability to continue to develop
potential acquisition opportunities, and the impact of tax and other
legislation and regulation in the jurisdictions in which the Company operates.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Income - Praxair, Inc. and Subsidiaries
Quarter and Nine Months Ended September 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Balance Sheet - Praxair, Inc. and Subsidiaries
September 30, 1998 (Unaudited) and December 31, 1997
Condensed Consolidated Statement of Cash Flows - Praxair, Inc. and
Subsidiaries Nine Months Ended September 30, 1998 and 1997 (Unaudited)
Notes to Condensed Consolidated Financial Statements - Praxair, Inc.
and Subsidiaries (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signature
Exhibit Index
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Millions of dollars, except per share data)
Quarter Ended Nine Months Ended
September 30, September 30,
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
SALES .................................. $1,201 $1,190 $3,636 $3,526
Cost of sales, exclusive of
depreciation and amortization ........ 697 699 2,105 2,045
Selling, general and administrative .... 153 162 485 494
Depreciation and amortization .......... 118 111 352 331
Research and development ............... 18 19 55 58
Other income-net ....................... 10 12 27 33
------- ------- ------- -------
OPERATING PROFIT ....................... 225 211 666 631
Interest expense ....................... 64 54 196 157
------- ------- ------- -------
INCOME BEFORE INCOME TAXES ............. 161 157 470 474
Income taxes ........................... 40 39 118 118
------- ------- ------- -------
INCOME OF CONSOLIDATED ENTITIES ........ 121 118 352 356
Minority interests ..................... (15) (15) (41) (49)
Income from equity investments ......... 2 4 7 9
------- ------- ------- -------
NET INCOME ............................. $ 108 $ 107 $ 318 $ 316
PER SHARE DATA:
Basic earnings per share ............... $ 0.68 $ 0.68 $ 2.01 $ 2.00
Diluted earnings per share.............. $ 0.66 $ 0.65 $ 1.94 $ 1.92
Cash dividends per share ............... $ 0.125 $ 0.11 $ 0.375 $ 0.33
WEIGHTED AVERAGE SHARES OUTSTANDING (000'S):
Basic shares outstanding ............... 158,893 158,196 158,517 158,191
Diluted shares outstanding ............. 163,417 164,384 163,550 164,448
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Millions of dollars)
September 30,
1998 December 31,
(Unaudited) 1997
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ASSETS
Cash and cash equivalents ....................... $ 40 $ 43
Accounts receivable ............................. 940 971
Inventories ..................................... 315 329
Prepaid and other current assets ................ 145 154
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TOTAL CURRENT ASSETS ....................... 1,440 1,497
Property, plant and equipment-net ............... 4,749 4,607
Other long-term assets .......................... 1,848 1,706
-------- --------
TOTAL ASSETS ............................... $ 8,037 $ 7,810
LIABILITIES AND EQUITY
Accounts payable ................................ $ 328 $ 383
Short-term debt ................................. 313 391
Current portion of long-term debt ............... 56 40
Other current liabilities ....................... 454 552
-------- --------
TOTAL CURRENT LIABILITIES .................. 1,151 1,366
Long-term debt .................................. 2,983 2,874
Other long-term liabilities ..................... 1,083 852
-------- --------
TOTAL LIABILITIES .......................... 5,217 5,092
Minority interests .............................. 486 521
Preferred stock ................................. 75 75
Shareholders' equity ............................ 2,259 2,122
-------- --------
TOTAL LIABILITIES AND EQUITY ............... $ 8,037 $ 7,810
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Millions of dollars)
Nine Months Ended September 30,
-------------------------
1998 1997
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OPERATIONS
Net income ..................................... $ 318 $ 316
Adjustments:
Depreciation and amortization ................ 352 331
Deferred income taxes ........................ 77 51
Working capital .............................. (106) (174)
Long-term assets and liabilities ............. (41) (57)
Other non-cash charges ....................... 3 (9)
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Net cash provided by operating activities ...... 603 458
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INVESTING
Construction ................................... (539) (635)
Acquisitions ................................... (236) (89)
Divestitures and asset sales ................... 189 316
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Net cash used for investing activities ......... (586) (408)
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FINANCING
Short-term repayments - net .................... (76) (36)
Long-term borrowings ........................... 367 174
Long-term debt repayments ...................... (254) (97)
Minority transactions and other ................ (20) (24)
Issuances of common stock ...................... 97 88
Purchases of common stock ...................... (74) (112)
Cash dividends ................................. (59) (52)
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Net cash used for financing activities ......... (19) (59)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents ............................... (1) (1)
-------- --------
Change in cash and cash equivalents .............. (3) (10)
Cash and cash equivalents beginning-of-year....... 43 63
-------- --------
Cash and cash equivalents end-of-period .......... $ 40 $ 53
Supplemental data:
Effect of functional currency change (Note 2) .... $ 81 $ -
Acquired debt from acquisitions .................. 20 -
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRAXAIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Presentation of Condensed Consolidated Financial Statements
In the opinion of Praxair, Inc. (Praxair) management, the accompanying
condensed consolidated financial statements include all adjustments
necessary for a fair presentation of the results for the interim periods
presented. These adjustments consisted of only normal recurring
adjustments. The accompanying condensed consolidated financial statements
should be read in conjunction with the notes to the financial statements
of Praxair, Inc. and subsidiaries in Praxair's 1997 Annual Report.
Certain prior years' amounts have been reclassified to conform to the
current years' presentation.
2. Accounting Matters
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 (SA 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 $6 million and $16
million, respectively, for the quarter and nine months ended September 30,
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 cumulative translation
component of shareholders' equity and minority interests of $57 million
and $24 million, respectively.
COMPREHENSIVE INCOME - Effective January 1, 1998, Praxair adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." The adoption produced no effect on the Company's
financial position, cash flows, or results of operations. Comprehensive
income has been disclosed in Note 5.
3. Special Charges
At September 30, 1998, the remaining accrual balance related to 1996 and
1997 special charges was $19 million (see Note 3 to Praxair's 1997
consolidated financial statements).
4. Inventories
The following is a summary of Praxair's consolidated inventories:
(Millions of dollars)
September 30,
1998 December 31,
(Unaudited) 1997
----------- ------------
Raw materials and supplies...... $ 112 $ 120
Work in process................. 39 48
Finished goods.................. 164 161
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$ 315 $ 329
<PAGE>
5. Shareholders' Equity
Changes in Shareholders' Equity were as follows:
(Thousands of shares)
Common Treasury
Stock Issued Stock
------------ ---------
Balance, January 1, 1998................ 159,970 2,597
Common stock activity (a) .............. 1,230 845
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Balance, September 30, 1998............. 161,200 3,442
(Millions of dollars) Accumulated
Additional Other
Common Paid-In Treasury Retained Comprehensive
Stock Capital Stock Earnings Income Total
------ ----------------- -------- ---------- ------
Balance, January 1, 1998 .... $ 2 $1,471 $(129) $1,034 $(256) $2,122
Net income .................. 318 318
Translation adjustments ..... (88) (88)
Effect of functional currency
change in Brazil (Note 2) . (57) (57)
-------
Comprehensive income (a)... 173
Dividends - common stock..... (59) (59)
Common stock activity (b).... 43 (20) 23
--- ------ ------ ------- ------ -------
Balance, September 30, 1998.. $ 2 $1,514 $(149) $1,293 $(401) $2,259
=== ====== ====== ======= ====== =======
(a) Comprehensive income for the quarter and nine months ended September 30,
1998 was $95 million and $173 million, respectively, as compared to $89
million and $246 million, respectively, in the 1997 periods.
(b) Relates to issuances of common stock for the Dividend Reinvestment and
Stock Purchase Plan, employee savings and incentive plans, and
issuances/purchases of common stock.
During the quarter and nine months ended September 30, 1998 Praxair granted
options for 571,020 and 1,460,445 shares, respectively, of common stock having
option prices ranging from $31.25 to $52.50 per share, the closing market price
of Praxair's common stock on the day of the grants. At September 30, 1998
there were 11,593,789 shares under option at prices ranging from $9.80 to
$56.13 per share (weighted average of $27.78) of which options for 7,839,439
shares were exercisable at prices ranging from $9.80 to $46.50 per share
(weighted average of $18.81). During the quarter and nine months ended
September 30, 1998, 178,770 and 732,645 options were exercised, respectively.
<PAGE>
6 Debt and Financial Instruments
Debt - The following is a summary of Praxair's outstanding debt at September
30, 1998 and December 31, 1997:
(Millions of dollars) September 30,
1998 December 31,
(Unaudited) 1997
----------- ------------
Short-term:
Canadian borrowings.................... $ 113 $ 84
South American borrowings.............. 117 268
Other borrowings....................... 83 39
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Total Short-term Debt.................... 313 391
Long-term:
U.S.:
Commercial paper and US bank borrowings. 650 860
6.25% Notes due 2000................... 75 75
6.70% Notes due 2001................... 250 250
6.15% Notes due 2003................... 250 -
6.625% Notes due 2003................... 75 75
6.75% Notes due 2003................... 300 300
6.85% Notes due 2005................... 150 150
6.90% Notes due 2006................... 250 250
6.625% Notes due 2007................... 250 250
8.70% Debentures due 2022
(Redeemable after 2002).......... 300 300
Other borrowings........................ 59 57
Canadian borrowings....................... 206 160
South American borrowings................. 149 136
Other International borrowings............ 75 51
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3,039 2,914
Less: Current portion of long-term debt .. 56 40
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Total Long-term Debt...................... 2,983 2,874
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Total Debt................................ $3,352 $3,305
At September 30, 1998, $650 million of short-term borrowings have been
classified as long term ($860 million at December 31, 1997) because of the
Company's intent to refinance this debt on a long-term basis and the
availability of such financing under the terms of its $1.5 billion credit
agreement.
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.
<PAGE>
Financial Instruments - The following table is a summary of the notional
amount of interest rate agreements at September 30, 1998:
(Millions of dollars) September 30,
1998
(Unaudited)
-----------
Maturing within one year:
Fixed Rate Swaps .................... $822
Maturing 2001:
Fixed Rate Swaps .................... $ 80
At September 30, 1998, Praxair had $409 million of currency exchange
forward contracts outstanding primarily to hedge balance sheet exposures.
Additionally, there are $103 million notional value of currency exchange
contracts that effectively offset. These contracts all mature within one
year.
7. Earnings Per Share
Basic earnings per share is computed by dividing net income for the period
by the weighted average number of Praxair common shares outstanding.
Diluted earnings per share is computed by dividing net income for the
period by the weighted average number of Praxair common shares outstanding
and dilutive common stock equivalents. The difference between the number
of shares used in the basic and diluted earnings per share calculations is
due to the dilutive effect of outstanding stock options. Stock options
for 3,021,075 and 2,937,980 shares were not included in the computation of
diluted earnings per share for the quarter and nine months ended September
30, 1998, respectively, because the exercise prices were greater than the
average market price of the common stock.
8. Sale Leaseback Transaction
On September 30, 1998, Praxair sold and leased back certain US storage
equipment for $150 million. The lease has an initial two year term and
has been accounted for as an operating lease. Praxair has purchase and
lease renewal options at projected future fair market values beginning in
2000 and has guaranteed $127 million of the residual value. The gain on
the sale transaction of $88 million has been deferred until the expiration
of Praxair's guarantee of the residual value and is shown in other
long-term liabilities.
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Consolidated Results
(Millions of dollars, except percentages)
Quarter Ended Nine Months Ended
September 30, Percent September 30, Percent
Quarter Ended September 30, 1998 1997 Change 1998 1997 Change
- - ---------------------------- ------- ------- ------- ------- ------- -------
Sales....................... $1,201 $1,190 + 1% $3,636 $3,526 + 3%
Selling, general
and administrative......... $ 153 $ 162 - 6% $ 485 $ 494 - 2%
Depreciation and
amortization............... $ 118 $ 111 + 6% $ 352 $ 331 + 6%
Operating profit............ $ 225 $ 211 + 7% $ 666 $ 631 + 6%
Interest expense............ $ 64 $ 54 + 19% $ 196 $ 157 + 25%
Effective tax rate.......... 25% 25% - 25% 25% -
Net income.................. $ 108 $ 107 + 1% $ 318 $ 316 + 1%
The sales growth for the quarter and nine months ended September 30, 1998, of
1% and 3%, respectively, was primarily due to the effect of newly acquired
packaged gases and Surface Technologies subsidiaries, offset largely by
unfavorable currency translation effects. The increase in the quarter was also
partly due to sales price increases. The increase for the nine month period was
also due to increased sales volume. Surface Technologies posted record sales,
increasing 9% for the quarter and 11% for the nine month period primarily due
to acquisitions and volume growth.
Productivity gains, sales growth (for the nine month period), acquisitions and
the effect of the functional currency change in Brazil (see Note 2), partially
offset by negative currency translation effects, were primarily responsible for
the increase in operating profit for the quarter and nine month period versus
the 1997 periods. Increased depreciation and amortization reflected new
projects coming on-stream, as well as the impact of acquisitions. Selling,
general and administrative expenses decreased for both periods versus the
respective prior year periods due primarily to the effects of productivity
gains, lower variable incentive plan costs and currency translation impacts;
partly offset by increased costs due to acquisitions and cost inflation.
Interest expense increased due primarily to higher average debt levels and the
effect of the functional currency change in Brazil. The effective tax rate for
all periods was 25%. Minority interests was flat during the quarter due to the
acquisition of minority interests offset by higher income from Brazil.
Minority interests decreased for the current nine month period versus 1997 due
to the acquisition of minority interests and lower income from Brazil.
Net income for the quarter and nine months ended September 30, 1998 increased
1% over the 1997 periods due principally to higher operating profit and a
reduction of minority interests (for the nine month period), partially offset
by the increased interest expense and decreased equity income.
The number of employees at September 30, 1998 was approximately 25,000 which,
when adjusted for acquisitions and divestitures, reflects a decrease of
approximately 1,300 from December 31, 1997. The decrease is principally the
result of productivity improvement initiatives primarily in South America,
Europe, and the North American packaged gases and industrial gases businesses;
partially offset by the addition of employees to support volume growth.
<PAGE>
Segment Discussion
This summary of sales and operating profit by geographic segment provides a
basis for the discussion that follows:
(Millions of dollars, except percentages)
Quarter Ended Nine Months Ended
September 30, Percent September 30, Percent
1998 1997 Change 1998 1997 Change
------- ------- ------- ------ ------ -------
SALES
United States....... $ 621 $ 607 + 2% $1,893 $1,786 + 6%
South America....... 247 257 - 4% 732 754 - 3%
Europe.............. 159 141 + 13% 479 446 + 7%
Canada, Mexico,
Asia and Other... 174 185 - 6% 532 540 - 1%
------- ------- ----- ------- ------- -------
$1,201 $1,190 + 1% $3,636 $3,526 + 3%
OPERATING PROFIT
United States....... $ 123 $ 122 + 1% $ 372 $ 351 + 6%
South America....... 54 44 + 23% 150 146 + 3%
Europe.............. 28 25 + 12% 90 83 + 8%
Canada, Mexico,
Asia and Other... 25 26 - 4% 71 68 + 4%
Corporate........... (5) (6) - 17% (17) (17) -%
------- ------- ------ -------- ------- -------
$ 225 $ 211 + 7% $ 666 $ 631 + 6%
United States
- - -------------
Sales increased 2% and 6%, respectively, for the quarter and nine months ended
September 30, 1998, as compared to the 1997 periods. The increase in the
quarter was primarily due to acquisitions, partly offset by volume and slight
price decreases. Acquisitions and volume growth, partly offset by price
decreases, accounted for the sales increase for the nine months ended September
30, 1998 as compared to the 1997 period. Acquisitions increased sales by 7% for
the quarter and nine month periods as compared to 1997.
Operating profit improved 1% and 6%, respectively, for the quarter and the nine
month period as compared to the 1997 periods. The improvement is due
primarily to increased sales and the benefits of productivity and cost
improvement initiatives; partially offset by cost inflation and higher energy
costs.
South America
- - -------------
Sales for the quarter and nine months ended September 30, 1998 decreased 4% and
3%, respectively, as compared to the 1997 periods. These decreases were
primarily due to unfavorable currency translation effects, partly offset by
favorable sales volume growth and an improvement in pricing trends. Excluding
currency translation effects, sales increased by 4%, as compared to the 1997
periods.
Operating profit for the quarter and nine months ended September 30, 1998
increased $4 million and decreased $12 million, respectively, as compared to
the 1997 periods after excluding the positive impact of the functional currency
change in Brazil (see Note 2 to the condensed consolidated financial
statements). The increase in the quarter was primarily due to the impact of
productivity improvement initiatives. The decrease for the nine months was due
to the impacts from the sales decrease, (including currency translation
effects) and cost inflation, partially offset by productivity improvement
gains.
<PAGE>
Europe
- - ------
Sales for the quarter and nine months ended September 30, 1998 increased 13%
and 7%, respectively, as compared to the 1997 periods. These increases were
due primarily to volume growth and increased sales associated with Surface
Technologies' acquisitions, partly offset by unfavorable currency translation
effects (primarily for the nine month period). Excluding the currency
translation effects for the quarter and nine months ended September 30, 1998,
sales increased by 13% and 12%, respectively, as compared to the 1997 periods.
Operating profit for the quarter and nine months ended September 30, 1998
increased 12% and 8%, respectively, as compared to the 1997 periods, due
primarily to sales growth and cost reduction initiatives, partly offset by cost
inflation and unfavorable currency translation effects (for the nine month
period).
Canada, Mexico, Asia and Other
- - ------------------------------
Sales for the quarter and nine months ended September 30, 1998 decreased 6% and
1%, respectively, as compared to the 1997 periods, due to unfavorable currency
translation effects, partly offset by pricing improvements, strong volume
growth in Mexico and Asia, and business and minority acquisitions in Asia.
Excluding the currency translation effects for the quarter and nine months
ended September 30, 1998, sales increased by 10% and 11%, respectively.
Operating profit for the quarter decreased 4%, and for the nine months
increased 4% as compared to the 1997 periods. The decrease in the quarter is
primarily due to unfavorable currency translation effects and cost inflation,
partially offset by the impact of productivity initiatives (primarily in
Canada) and sales growth in Mexico and Asia. The increase for the nine month
period is primarily due to the same reasons as the quarter, except that for the
nine month period versus the quarter, sales growth was stronger and negative
currency translation effects were less.
Liquidity, Capital Resources and Other Financial Data
Cash Flow From Operations
- - -------------------------
Cash flow from operations in the first nine months of 1998, as compared to
1997, increased $145 million, primarily due to improved earnings before
depreciation and amortization expenses and deferred taxes, reduced working
capital needs, the timing of cash payments and receipts, and payments made in
1997 for pre-1997 incentive compensation programs.
Investing
- - ---------
Cash flow used for investing in the first nine months of 1998 totaled $586
million, an increase of $178 million from the 1997 period. This increase was
due to the net impact of higher acquisition expenditures and lower proceeds
from divestiture and asset sales, partly offset by lower construction
expenditures.
Construction expenditures for the first nine months of 1998 totaled $539
million, down $96 million from the corresponding period in 1997, due to a lower
level of capital expenditures and the timing of cash payments. The lower level
of capital expenditures is due primarily to decreased spending in South America
and the United States. Acquisition expenditures for the first nine months of
1998 totaled $236 million, an increase of $147 million from the 1997 period.
This increase is primarily related to the purchase of the remaining shares
outstanding of Gas Tech, Inc. a U.S. packaged gases distributor (previously an
equity investment), other investments related to the U.S. packaged gases
business, the acquisition of two companies in India, acquisitions in the
Surface Technologies' business, and buy-outs of minority interests in Asia,
South America and Canada.
<PAGE>
Divestitures and asset sales in the first nine months of 1998 decreased $127
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. in the second
quarter of 1997, partially offset by the proceeds from a sale leaseback
transaction in the third quarter 1998 (see note 8 to the condensed consolidated
financial statements).
On a worldwide basis, construction and acquisition expenditures for the full
year 1998 are expected to be approximately $1 billion; primarily from growth
opportunities in the United States, South America, Europe and Asia, and the
continuation of Praxair's packaged gases and Surface Technologies acquisition
strategies. It is expected that construction and acquisition expenditures will
be about 20% lower in 1999, as compared to 1998, due primarily to the expected
timing of acquisitions and slowing economies in Asia.
Financing
- - ---------
At September 30, 1998, Praxair's total debt outstanding was $3,352 million, an
increase of $47 million versus December 31, 1997. This increase in debt was
needed primarily to finance the increased level of acquisitions. As of
September 30, 1998, there were no borrowings under Praxair's $1.5 billion U.S.
bank credit facility.
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 US storage
equipment for $150 million which is being accounted for as an operating lease
(see Note 8 to the condensed consolidated financial statements). The proceeds
of the sale of the equipment have been used to repay debt.
Praxair's debt-to-capital ratio decreased from 54.9% at December 31, 1997 to
54.3% at September 30, 1998. This decrease is due to an increase in retained
earnings and the sale leaseback transaction, partially offset by the negative
impact of currency movements on the accumulated other comprehensive income
component of shareholders' equity, the effect of the functional currency change
in Brazil, which reduced Praxair's shareholders' equity and minority interests
(see Note 2 to the condensed consolidated financial statements), and the higher
debt levels required to finance acquisitions.
Recently Issued Accounting Standards
Effective January 1, 1998, Praxair implemented the requirements of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
(see Note 2 to the condensed consolidated financial statements). Additionally,
Praxair will implement the disclosure requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," and SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," in the fourth quarter of 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
implementation no later than January 1, 2000. Praxair is currently analyzing
the requirements and has not yet determined when it will adopt the new
standard, or what the impact will be, if any, when adopted.
<PAGE>
Year 2000
The Problem
- - -------------
The "year 2000 problem" arises because many existing computer programs or
date-sensitive microprocessors embedded in operating equipment use only the
last two digits to refer to a year. Therefore, these computer programs and
operating systems may not properly recognize a year that begins with "20"
instead of "19". If not corrected, many applications could fail or create
erroneous results. Although not all computer applications or systems are
subject to this flaw, all are suspect until they are assessed. Like most
companies, Praxair operates and maintains computer systems for accounting,
payroll, invoicing and many other business purposes. In addition, Praxair's
operations systems (including, among others, plant control, diagnostic and
monitoring, quality control, distribution and logistics), and its
infrastructure systems (including, among others, telecommunications) use
computer programs or embedded microprocessors. Also, Praxair, as other
companies, may be affected by the year 2000 problems of its suppliers (e.g., by
the interruption of supply of critical raw materials or utilities) or of its
customers (e.g., interrupted or reduced demand for Praxair's products due to
interruptions in the customer's own manufacturing processes).
Praxair's Readiness Status
- - ---------------------------
Management currently believes that Praxair has in place the appropriate
programs and plans to achieve timely year 2000 readiness for its safety and
mission-critical systems. However, Praxair's on-going assessment program may,
at some time in the future, reveal as yet unidentified or not fully understood
issues that may not be addressable in a timely fashion contrary to the
foregoing forward-looking assumption. Further, it is uncertain whether the year
2000 problems of Praxair's suppliers and customers will be resolved by them in
a timely manner.
Praxair's Readiness Program
- - ----------------------------
Work on year 2000 issues at Praxair has been ongoing since 1996. Praxair has
established a Year 2000 Global Project Office to coordinate and accelerate its
year 2000 activities. The director of the Global Year 2000 Project Office
reports directly to Praxair's chief executive officer. The Global Project
Office currently consists of a project manager and 13 global functional team
leaders representing: applications technology; communications; finance;
energy/other utilities; facilities; human resources; information technology;
operations/production; procurement; product sales and services equipment; law;
research and development; and safety and environmental services. In addition,
the Global Project Office currently includes team members representing eight
Praxair businesses and affiliates in North America, South America, Europe and
Asia who have accountability for year 2000 activities.
Praxair's year 2000 readiness program consists of six phases: awareness;
inventory and assessment; renovation; validation; implementation; and business
continuity planning. These phases at any point in time may run concurrently
with respect to different systems, issues and business units. While the
following represents a general description of Praxair's overall progress in
each of these phases, progress for any individual system, issue or business
unit may be more or less advanced than that indicated.
AWARENESS: Praxair has launched a worldwide communications and awareness effort
in order to inform employees about year 2000 issues and enlist their assistance
in implementing solutions. This effort is ongoing. Praxair also is in
continuous discussions on year 2000 issues with customers and suppliers.
<PAGE>
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 its Praxair's safety and
mission-critical systems, and many of its other systems. However, inventory
and assessment efforts are ongoing which may reveal as yet unidentified
components or issues; contrary to the foregoing assumption. With respect to
assessment of the year 2000 readiness of suppliers, certain critical suppliers
have been identified and discussions are ongoing or planned with each.
RENOVATION: Solutions for most year 2000 readiness issues have been identified;
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 in the future contingency plans
for failure of Praxair-maintained systems if the need arises. 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
could range between $35-45 million over the life of the project. Of this
total, the Company expects $15-20 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 to 1998 and 1999 because those costs are for projects that will
also address year 2000 issues. To date, approximately $2 million has been
incurred of which approximately half were expensed. 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 in any year.
<PAGE>
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 in any year,
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.
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 will become the new common currency for 11
European countries (including Belgium, France, Germany, Italy, and Spain where
Praxair has most of its European operations). At that time, transactions in
the euro will be 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.
<PAGE>
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 plans to be able 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 compliance, Praxair is making the
necessary system and process changes and is also working with its significant
financial institution suppliers on various cash management issues.
By 2002, Praxair will have systems and processes in the 11 euro countries
(including payroll and other accounting systems) to accommodate the 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 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.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Refer to "Market Risks and Sensitivity Analyses" in the Management's Discussion
and Analysis section of Praxair's 1997 Annual Report and to Note 6 of the
condensed consolidated financial statements.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Non-applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits
27. Financial Data Schedule
Reports on Form 8-K
Non-applicable
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRAXAIR, INC.
-------------
(Registrant)
Date: November 13 , 1998 By: /s/J. Robert Vipond
------------------------ -----------------------------
J. Robert Vipond
Vice President and Controller
(On behalf of the Registrant
and as Chief Accounting Officer)
<PAGE>
Exhibit Index
-------------
Exhibit No.
- - -----------------------------------------------------------------------------
27. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule - Exhibit 27
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 40
<SECURITIES> 0
<RECEIVABLES> 969
<ALLOWANCES> 29
<INVENTORY> 315
<CURRENT-ASSETS> 1440
<PP&E> 8491
<DEPRECIATION> 3742
<TOTAL-ASSETS> 8037
<CURRENT-LIABILITIES> 1151
<BONDS> 2983
75
0
<COMMON> 2
<OTHER-SE> 2257
<TOTAL-LIABILITY-AND-EQUITY> 8037
<SALES> 3636
<TOTAL-REVENUES> 3636
<CGS> 2105<F1>
<TOTAL-COSTS> 2105<F1>
<OTHER-EXPENSES> 352<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 196
<INCOME-PRETAX> 470
<INCOME-TAX> 118
<INCOME-CONTINUING> 318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 318
<EPS-PRIMARY> 2.01<F2>
<EPS-DILUTED> 1.94<F2>
<FN>
<F1>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.
<F2>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.
</FN>
</TABLE>
