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 MARCH 31, 1999
---------------
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
- --------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 837-2000
--------------------------------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
AT MARCH 31, 1999, 157,671,488 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 SURFACE TECHNOLOGIES AND OTHER BUSINESSES, TAX PLANNING
INITIATIVES AND EFFECTIVE TAX RATES, IMPACTS IN BRAZIL RELATED TO ECONOMIC
CONDITIONS, CURRENCY MOVEMENTS AND THE CHANGE IN FUNCTIONAL CURRENCY, 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 RELATING TO FINANCIAL INSTRUMENTS INVOLVE
RISKS AND UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUS FACTORS,
INCLUDING THE IMPACT OF CHANGES IN WORLDWIDE AND NATIONAL ECONOMIES, FOREIGN
CURRENCY MOVEMENTS, PRICING FLUCTUATIONS FOR THE COMPANY'S PRODUCTS, CHANGES IN
INTEREST RATES, THE CONTINUED TIMELY DEVELOPMENT AND ACCEPTANCE OF NEW PRODUCTS
AND PROCESSES, THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING, THE ABILITY TO
CONTINUE TO DEVELOP POTENTIAL ACQUISITION OPPORTUNITIES, AND THE IMPACT OF TAX
AND OTHER LEGISLATION AND REGULATION IN THE JURISDICTIONS IN WHICH THE COMPANY
OPERATES.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME - PRAXAIR, INC. AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEET - PRAXAIR, INC. AND SUBSIDIARIES
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - PRAXAIR, INC. AND
SUBSIDIARIES QUARTER ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - PRAXAIR, INC.
AND SUBSIDIARIES (UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 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
March 31
----------------
1999 1998
------- -------
SALES ..................................... $1,118 $1,201
Cost of sales, exclusive of
depreciation and amortization ........... 652 697
Selling, general and administrative ....... 155 167
Depreciation and amortization ............. 113 115
Research and development .................. 16 19
Other income-net .......................... 29 11
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OPERATING PROFIT .......................... 211 214
Interest expense .......................... 57 65
------- -------
INCOME BEFORE INCOME TAXES ................ 154 149
Income taxes .............................. 35 38
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INCOME OF CONSOLIDATED ENTITIES ........... 119 111
Minority interests ........................ (13) (13)
Income from equity investments ............ 2 4
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INCOME BEFORE ACCOUNTING CHANGE ........... $ 108 $ 102
Cumulative effect of an accounting change.. (10) -
------- -------
NET INCOME ................................ $ 98 $ 102
======= =======
PER SHARE DATA:
Basic earnings per share:
Before accounting change ................. $ 0.68 $ 0.65
Accounting change ........................ (.06) -
------- -------
Net Income ............................... $ 0.62 $ 0.65
======= =======
Diluted earnings per share:
Before accounting change ................. $ 0.67 $ 0.62
Accounting change ........................ (.06) -
------- -------
Net Income ............................... $ 0.61 $ 0.62
======= =======
Cash dividends per share .................. $ 0.14 $ 0.125
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING (000'S):
Basic shares outstanding .................. 158,138 158,030
Diluted shares outstanding ................ 161,819 163,236
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Millions of dollars)
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
ASSETS
Cash and cash equivalents ....................... $ 28 $ 34
Accounts receivable ............................. 918 919
Inventories ..................................... 289 319
Prepaid and other ............................... 107 122
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TOTAL CURRENT ASSETS ....................... 1,342 1,394
Property, plant and equipment-net ............... 4,535 4,875
Other assets .................................... 1,574 1,827
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TOTAL ASSETS ............................... $ 7,451 $ 8,096
======= =======
LIABILITIES AND EQUITY
Accounts payable ................................ $ 337 $ 378
Short-term debt ................................. 245 295
Current portion of long-term debt ............... 83 84
Other current liabilities ....................... 480 532
------- -------
TOTAL CURRENT LIABILITIES .................. 1,145 1,289
Long-term debt .................................. 2,764 2,895
Other long-term obligations ..................... 1,064 1,018
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TOTAL LIABILITIES .......................... 4,973 5,202
Minority interests .............................. 351 487
Preferred stock ................................. 75 75
Shareholders' equity ............................ 2,052 2,332
------- -------
TOTAL LIABILITIES AND EQUITY ............... $ 7,451 $ 8,096
======= =======
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)
Quarter ended March 31,
-------------------------
1999 1998
----------- -----------
OPERATIONS
Net income ..................................... $ 98 $ 102
Adjustments:
Depreciation and amortization ................ 113 115
Deferred income taxes ........................ 10 29
Working capital .............................. (23) (71)
Long-term assets and liabilities ............. (48) (35)
Other non-cash charges ....................... 16 -
------- -------
Net cash provided by operating activities .. 166 140
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INVESTING
Capital expenditures ........................... (141) (171)
Acquisitions ................................... (6) (160)
Divestitures and asset sales ................... 82 12
-------- --------
Net cash used for investing activities ..... (65) (319)
-------- --------
FINANCING
Short-term borrowings-net ...................... (39) 10
Long-term borrowings ........................... 6 157
Long-term debt repayments ...................... (115) (22)
Minority transactions and other ................ 68 22
Issuances of common stock ...................... 14 52
Purchases of common stock ...................... (19) (27)
Cash dividends ................................. (22) (20)
-------- --------
Net cash (used for) provided by
financing activities ...................... (107) 172
-------- --------
Effect of exchange rate changes on cash and
cash equivalents ............................... - -
-------- --------
Change in cash and cash equivalents .............. (6) (7)
Cash and cash equivalents beginning-of-year....... 34 43
-------- --------
Cash and cash equivalents end-of-period .......... $ 28 $ 36
======== ========
Supplemental data:
Effect of functional currency change ............. $ - $ 81
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 consolidated financial
statements of Praxair, Inc. and subsidiaries in Praxair's 1998 Annual
Report. Certain prior years' amounts have been reclassified to conform to
the current years' presentation.
2. Accounting Change
Effective January 1, 1999, Praxair adopted Statement of Position (SOP) 98-
5, "Reporting on the Costs of Start-Up Activities." In accordance with SOP
98-5, Praxair recorded an after-tax charge of $10 million in the first
quarter of 1999 as the cumulative effect of an accounting change related
to previously capitalized start-up costs.
3. Special Charges
At March 31, 1999, the remaining accrual balance related to the 1996 and
1997 special charges was $18 million (see Note 3 to Praxair's 1998
consolidated financial statements).
4. Inventories
The following is a summary of Praxair's consolidated inventories:
(Millions of dollars)
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
Raw materials and supplies...... $ 110 $ 115
Work in process................. 31 38
Finished goods.................. 148 166
----- -----
$ 289 $ 319
===== =====
<PAGE>
5. Shareholders' Equity
Changes in Shareholders' Equity were as follows:
(Thousands of shares)
Common Treasury
Stock Issued Stock
------------ ---------
Balance, January 1, 1999................ 161,517 3,946
Common stock activity (a) .............. 603 503
--------- --------
Balance, March 31, 1999................. 162,120 4,449
========= ========
<TABLE>
<CAPTION>
(Millions of dollars) Accumulated
Additional Other
Common Paid-In Treasury Retained Comprehensive
Stock Capital Stock Earnings Income(Loss) Total
<S> <C> <C> <C> <C> <C> <C>
------ --------- -------- -------- ----------- -------
Balance, January 1, 1999 .... $ 2 $1,528 $(166) $1,380 $(412) $2,332
Net income .................. 98 98
Translation adjustments (b).. (351) (351)
-------
Comprehensive income(loss)(c) $ (253)
Dividends - common stock..... (22) (22)
Common stock activity (a).... 13 (18) (5)
--- ------ ------ ------- ------ -------
Balance, March 31, 1999 ..... $ 2 $1,541 $(184) $1,456 $(763) $2,052
=== ====== ====== ======= ====== =======
</TABLE>
(a) 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.
(b) Primarily currency translations adjustments in Brazil and is net of a
$60 million gain (after taxes and minority interest) related to
Brazilian net investment hedges (see Note 10).
(c) Comprehensive income for the quarter ended March 31, 1998 was $16 million.
During the quarter ended March 31, 1999, Praxair granted options for
1,151,160 shares of common stock having option prices ranging from $33.00
to $36.06 per share, the closing market price of Praxair's common stock on
the day of the grants. At March 31, 1999 there were 12,714,829 shares
under option at prices ranging from $9.80 to $56.13 per share (weighted
average of $29.02) of which options for 7,888,514 shares were exercisable
at prices ranging from $9.80 to $56.13 per share (weighted average of
$20.95). During the quarter ended March 31, 1999, 372,830 options were
exercised.
<PAGE>
6. Debt and Financial Instruments
Debt - The following is a summary of Praxair's outstanding debt at March
31, 1999 and December 31, 1998:
(Millions of dollars) March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
Short-term:
Canadian borrowings....................... $ 129 $ 116
South American borrowings................. 41 95
Other international borrowings............ 75 82
Other U.S. borrowings..................... - 2
------- -------
Total short-term debt....................... 245 295
Long-term:
U.S.:
Commercial paper and U.S. bank borrowings. $ 520 $ 627
6.25% Notes due 2000..................... 75 75
6.70% Notes due 2001..................... 250 250
6.625% Notes due 2003..................... 75 75
6.75% Notes due 2003..................... 300 300
6.15% Notes due 2003..................... 250 250
6.85% Notes due 2005..................... 150 150
6.90% Notes due 2006..................... 250 250
6.625% Notes due 2007..................... 250 250
8.70% Debentures due 2022
(Redeemable after 2002)............ 300 300
Other borrowings.......................... 52 52
Canadian subsidiary borrowings.............. 206 204
South American subsidiary borrowings........ 100 126
Other international borrowings.............. 69 70
------- -------
2,847 2,979
Less: current portion of long-term debt..... 83 84
------- -------
Total long-term debt........................ 2,764 2,895
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Total debt.................................. $3,092 $3,274
======= =======
At March 31, 1999, $520 million of short-term borrowings have been
classified as long term ($627 million at December 31, 1998) because of the
Company's intent to refinance this debt on a long-term basis and the
availability of such financing under the terms of its $1.5 billion credit
agreement.
Financial Instruments - At March 31, 1999, Praxair had $80 million
notional amount of interest rate swap agreements that effectively convert
variable rate debt to fixed rate debt. These agreements mature in 2001.
Praxair is also a party to currency exchange forward contracts to manage
its exposure to changing currency exchange rates. At March 31, 1999
Praxair had $372 million of currency exchange forward contracts
outstanding: $271 million to hedge recorded balance sheet exposures, $16
million to hedge firm commitments (generally for the purchase of equipment
related to construction projects) and $85 million to hedge future net
income. Additionally, there are $492 million notional value of currency
exchange contracts that effectively offset. These contracts all mature
within one year.
7. Earnings Per Share
Basic earnings per share is computed by dividing net income for the period
by the weighted average number of Praxair common shares outstanding.
Diluted earnings per share is computed by dividing net income for the
period by the weighted average number of Praxair common shares outstanding
and dilutive common stock equivalents. The difference between the number
of shares used in the basic earnings per share calculation compared to the
diluted earnings per share calculation is due to the dilutive effect of
outstanding stock options. Stock options for 4,564,695 shares were not
included in the computation of diluted earnings per share for the quarter
ended March 31, 1999 because the exercise prices were greater than the
average market price of the common stock.
8. Sale Leaseback Transaction
On March 30, 1999, Praxair sold and leased back certain U.S. distribution
equipment for $80 million. The lease has an initial two year term and has
been accounted for as an operating lease. Praxair has purchase and lease
renewal options at projected future fair market values beginning in 2001
and has guaranteed $68 million of the residual value. The gain on the
sale transaction of $58 million has been deferred until the expiration of
Praxair's guarantee of the residual value and is shown in other long-term
liabilities.
9. South American Rights Offering
During the first quarter of 1999, Praxair's South American subsidiary,
S.A. White Martins, completed a rights offering resulting in Praxair's
ownership interest in White Martins increasing from 69.3% at December
31, 1998 to about 76% at March 31, 1999. As consideration for the
additional shares it purchased during the rights offering, Praxair used
approximately $138 million of intercompany loans it had previously made to
White Martins. Approximately $15 million of the rights offering were
purchased by minority shareholders.
10. BRAZILIAN CURRENCY HEDGE AGREEMENTS
IN EARLY JANUARY 1999, PRAXAIR ENTERED INTO CURRENCY EXCHANGE FORWARD
CONTRACTS TOTALING $325 MILLION NOTIONAL VALUE FOR ESTIMATED BRAZILIAN NET
INCOME IN 1999 AND TO HEDGE A PORTION OF ITS NET INVESTMENT. THE NET
INCOME HEDGE AGREEMENTS WERE EFFECTIVELY SETTLED DURING THE FIRST QUARTER
RESULTING IN A PRE-TAX GAIN OF $21 MILLION ($14 MILLION AFTER TAX AND
MINORITY INTEREST). THE NET INVESTMENT HEDGE CONTRACTS WERE EITHER CLOSED
OUT OR WERE EFFECTIVELY SETTLED IN THE FIRST QUARTER RESULTING IN A GAIN
OF APPROXIMATELY $60 MILLION (AFTER TAX AND MINORITY INTEREST) WHICH WAS
RECOGNIZED ON THE BALANCE SHEET IN THE ACCUMULATED OTHER COMPREHENSIVE
INCOME(LOSS) (CUMULATIVE TRANSLATION ADJUSTMENT) COMPONENT OF
SHAREHOLDERS' EQUITY. APPROXIMATELY $50 MILLION RELATED TO THE SETTLED
INVESTMENT HEDGES WAS RECEIVED IN THE FIRST QUARTER AND IS SHOWN IN THE
FINANCING SECTION OF THE CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
UNDER THE CAPTION "MINORITY TRANSACTIONS AND OTHER."
<PAGE>
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Consolidated Results
(Dollar amounts in millions)
Percent
Quarter Ended March 31, 1999(a) 1998 Change
- -------------------------------------- ------ ------- --------
Sales................................. $1,118 $1,201 - 7%
Selling, general and administrative... $ 155 $ 167 - 7%
Depreciation and amortization......... $ 113 $ 115 - 2%
Operating profit...................... $ 211 $ 214 - 1%
Interest expense...................... $ 57 $ 65 - 12%
Effective tax rate.................... 23% 25% - 8%
Income before accounting change....... $ 108 $ 102 + 6%
Excluding one-time hedge gain in Brazil:
Operating profit...................... $ 190 $ 214 - 11%
Effective tax rate.................... 25% 25% -%
Income before accounting change....... $ 94 $ 102 - 8%
(a) The results for the first quarter 1999 versus 1998 for South America were
significantly impacted by the devaluation of the Brazilian currency (Real) from
a rate of 1.21 Reais to the U.S. dollar at December 31, 1998 to 1.72 at March
31, 1999 (1.75 average rate for the quarter). Reported amounts from Brazil
were all reduced in proportion to the exchange rate changes. Also, as
described in Note 10 to the condensed 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 the first quarter resulting in a non-recurring pre-tax gain of $21 million
($14 million after taxes and minority interests). The amounts shown above
under the section "Excluding one-time hedge gain in Brazil" exclude the impacts
of this hedge gain.
THE SALES DECREASE OF 7% FOR THE QUARTER WAS DUE PRIMARILY TO UNFAVORABLE
CURRENCY TRANSLATION EFFECTS IN SOUTH AMERICA AND VOLUME DECREASES IN NORTH AND
SOUTH AMERICA. THESE WERE PARTIALLY OFFSET BY THE IMPACT OF ACQUISITIONS IN
NORTH AMERICA AND SURFACE TECHNOLOGIES, PRICE INCREASES IN SOUTH AMERICA,
STRONG VOLUME GROWTH IN ASIA AND SALES GROWTH IN EUROPE.
OPERATING PROFIT DECREASED 1% TO $211 MILLION. EXCLUDING THE ONE-TIME HEDGE
GAIN IN BRAZIL, OPERATING PROFIT DECREASED 11% TO $190 MILLION. THIS WAS DUE
PRIMARILY TO THE SALES DECREASE DESCRIBED ABOVE PARTIALLY OFFSET BY
PRODUCTIVITY IMPROVEMENTS AND CURRENCY TRANSLATION IMPACTS. AS A PERCENTAGE OF
SALES, SG&A REMAINED FLAT AT 13.9%. THE DECREASE IN DEPRECIATION AND
AMORTIZATION EXPENSE REFLECTS THE IMPACT OF CURRENCY TRANSLATION; OFFSET BY NEW
PROJECTS COMING ON-STREAM, AS WELL AS PACKAGED GASES AND SURFACE TECHNOLOGIES
ACQUISITIONS. OTHER INCOME INCLUDES THE $21 MILLION HEDGE GAIN IN BRAZIL, AND
OFFSETTING AMOUNTS RELATED TO THE COLLECTION OF A NOTE RECEIVABLE FROM AN
EARLIER BUSINESS SALE AND CHARGES FOR SEVERANCE COSTS, PRIMARILY IN NORTH
AMERICA (EACH ABOUT $12 MILLION).
INCOME BEFORE THE ACCOUNTING CHANGE FOR THE QUARTER INCREASED $6 MILLION OR 6%.
EXCLUDING THE ONE-TIME HEDGE GAINS IN BRAZIL, INCOME BEFORE ACCOUNTING CHANGE
DECREASED $8 MILLION OR 8%. THIS DECREASE WAS DUE PRINCIPALLY TO THE LOWER
OPERATING PROFIT PARTIALLY OFFSET BY DECREASED INTEREST EXPENSE, WHICH MORE
THAN OFFSET THE LOWER OPERATING PROFIT. INTEREST EXPENSE DECREASED $8 MILLION
OR 12% DUE TO CURRENCY TRANSLATION EFFECTS IN BRAZIL AND LOWER DEBT LEVELS.
THE EFFECTIVE TAX RATE FOR THE QUARTER REMAINED AT 25%, EXCLUDING THE IMPACT OF
THE BRAZILIAN HEDGE GAIN.
<PAGE>
THE NUMBER OF EMPLOYEES AT MARCH 31, 1999 WAS APPROXIMATELY 24,400 WHICH, WHEN
ADJUSTED FOR ACQUISITIONS, REFLECTS A DECREASE OF APPROXIMATELY 400 FROM
DECEMBER 31, 1998. THE DECREASE IS PRINCIPALLY THE RESULT OF CONTINUED
PRODUCTIVITY IMPROVEMENT INITIATIVES IN SOUTH AMERICA, SURFACE TECHNOLOGIES,
NORTH AMERICA AND EUROPE.
SEGMENT DISCUSSION
The following summary of sales and operating profit by segment provides a basis
for the discussion that follows (for a description of Praxair's operating
segments, refer to Note 4 to the consolidated financial statements included in
Praxair's 1998 annual report to shareholders):
(Dollar amounts in millions)
Quarter Ended March 31, Percent
1999 1998 Change
------ ------ -------
SALES
North America $ 661 $ 691 - 4%
South America 168 244 -31%
Europe 133 124 + 7%
Surface Technologies 111 99 +12%
All Other 45 43 + 5%
------ ------
$1,118 $1,201 - 7%
OPERATING PROFIT
North America $ 121 $ 140 -14%
South America (a) 53 47 +13%
Europe 30 26 +15%
Surface Technologies 20 18 +11%
All Other (7) (11) -36%
Corporate (6) (6) -%
------ ------
$ 211 $ 214 - 1%
(a) The 1999 quarter includes a one-time $21 million operating profit benefit
from net income hedges in Brazil that were effectively settled in the
quarter.
NORTH AMERICA
- -------------
SALES FOR THE CURRENT QUARTER DECREASED 4% AS COMPARED TO THE QUARTER ENDED
MARCH 31, 1998. THIS DECREASE REFLECTS A 3% DECLINE IN VOLUME AND A 2%
REDUCTION FROM UNFAVORABLE CURRENCY TRANSLATION IN CANADA AND MEXICO, PARTLY
OFFSET BY THE IMPACT FROM 1998 ACQUISITIONS. OVERALL, PRICING WAS FLAT. A
REDUCTION IN U.S. INDUSTRIAL DEMAND IN MANY OF THE INDUSTRIES TO WHICH PRAXAIR
SELLS (INCLUDING PRIMARY METALS, METAL FABRICATION, CHEMICALS & REFINING, AND
OIL-RELATED) WAS PRIMARILY RESPONSIBLE FOR THE VOLUME DECREASES IN NORTH
AMERICA.
OPERATING PROFIT DECREASED 14% FOR THE QUARTER. THE DECREASE IS DUE PRIMARILY
TO THE DECREASED SALES, PRODUCT MIX AND COST INFLATION, PARTLY OFFSET BY THE
BENEFITS OF PRODUCTIVITY IMPROVEMENTS.
<PAGE>
SOUTH AMERICA
- -------------
AS DISCUSSED ABOVE UNDER THE SECTION ON CONSOLIDATED RESULTS, THE RESULTS FOR
THE FIRST QUARTER 1999 WERE SIGNIFICANTLY IMPACTED BY THE DEVALUATION OF THE
BRAZILIAN CURRENCY (REAL). REPORTED SALES AND OPERATING PROFIT AMOUNTS WERE
REDUCED BY APPROXIMATELY $71 MILLION AND $13 MILLION, RESPECTIVELY, VERSUS THE
1998 AMOUNTS FROM CURRENCY TRANSLATION EFFECTS. AS DESCRIBED IN NOTE 10 TO THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, IN EARLY JANUARY 1999 PRAXAIR
ENTERED INTO VARIOUS CURRENCY EXCHANGE FORWARD CONTRACTS TO HEDGE ANTICIPATED
BRAZILIAN NET INCOME AND A PORTION OF ITS NET INVESTMENT. THE NET INCOME
HEDGES WERE EFFECTIVELY CLOSED OUT IN THE FIRST QUARTER RESULTING IN A NON-
RECURRING PRE-TAX GAIN OF $21 MILLION ($14 MILLION AFTER TAXES AND MINORITY
INTEREST) WHICH IS INCLUDED IN THE SOUTH AMERICAN OPERATING PROFIT.
SALES FOR THE QUARTER ENDED MARCH 31, 1999 DECREASED 31% PRIMARILY DUE TO
UNFAVORABLE CURRENCY EFFECTS AND A DECREASE IN VOLUME; OFFSET BY PRICE
INCREASES. EXCLUDING THE CURRENCY EFFECTS FOR THE QUARTER ENDED MARCH 31,
1999, SALES DECREASED BY APPROXIMATELY 2%. THE DEVALUATION OF THE REAL AND A
RECESSIONARY ENVIRONMENT IN BRAZIL HAVE CONTRIBUTED TO THE VOLUME DECREASES OF
APPROXIMATELY 8%.
OPERATING PROFIT FOR THE QUARTER ENDED MARCH 31, 1999 INCREASED $6 MILLION, OR
13%, COMPARED TO THE FIRST QUARTER 1998 DUE TO A $21 MILLION OPERATING PROFIT
BENEFIT FROM NET INCOME HEDGES IN BRAZIL (SEE NOTE 10). EXCLUDING THIS IMPACT,
OPERATING PROFIT DECREASED 32% DUE TO THE SALES DECREASE AND NEGATIVE CURRENCY
TRANSLATION EFFECTS, PARTIALLY OFFSET BY PRODUCTIVITY IMPROVEMENT INITIATIVES.
EUROPE
- ------
SALES FOR THE QUARTER ENDED MARCH 31, 1999 INCREASED 7% AS COMPARED TO THE
FIRST QUARTER OF 1998 DUE PRIMARILY TO FAVORABLE CURRENCY TRANSLATION EFFECTS,
SALES VOLUME GROWTH AND PRICE INCREASES. EXCLUDING THE CURRENCY EFFECTS FOR
THE QUARTER ENDED MARCH 31, 1999, SALES INCREASED BY APPROXIMATELY 4%.
OPERATING PROFIT FOR THE QUARTER ENDED MARCH 31, 1999 INCREASED 15% AS COMPARED
TO THE FIRST QUARTER OF 1998. THIS WAS DUE TO THE SALES INCREASES AND COST
IMPROVEMENT INITIATIVES. EXCLUDING CURRENCY TRANSLATION EFFECTS FOR THE
QUARTER ENDED MARCH 31, 1999, OPERATING PROFIT INCREASED 4%.
SURFACE TECHNOLOGIES
- --------------------
SALES FOR THE QUARTER ENDED MARCH 31, 1999 INCREASED 12% AS COMPARED TO THE
FIRST QUARTER OF 1998 DUE PRIMARILY TO ACQUISITIONS AND SALES VOLUME GROWTH,
PARTLY OFFSET BY PRICE DECREASES.
OPERATING PROFIT FOR THE QUARTER ENDED MARCH 31, 1999 INCREASED 11% AS COMPARED
TO THE FIRST QUARTER OF 1998. THIS WAS DUE TO THE SALES INCREASES AND THE
IMPACT OF ACQUISITIONS.
ALL OTHER
- ---------
SALES FOR THE QUARTER ENDED MARCH 31, 1999 INCREASED 5% AS COMPARED TO THE 1998
PERIOD DUE PRIMARILY TO VOLUME GROWTH AND FAVORABLE CURRENCY TRANSLATION
EFFECTS IN ASIA, PARTLY OFFSET BY DECREASED SALES OF GLOBAL SUPPLY SYSTEMS.
<PAGE>
OPERATING PROFIT FOR THE QUARTER ENDED MARCH 31, 1999 DECREASED BY $4 MILLION
AS COMPARED TO THE FIRST QUARTER OF 1998 DUE PRIMARILY TO THE LOWER
PROFITABILITY OF THE GLOBAL SUPPLY SYSTEMS BUSINESS.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
(Millions of dollars)
Quarter Ended March 31, 1999 1998
- -------------------------------------- ------ ------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net income plus depreciation
and amortization.................... $ 211 $ 217
Working capital....................... $ (23) $ (71)
Total from operating activities....... $ 166 $ 140
INVESTING:
Capital expenditures.................. $ (141) $ (171)
Acquisitions.......................... $ (6) $ (160)
Divestitures and asset sales.......... $ 82 $ 12
Total used for investing ............. $ (65) $ (319)
FINANCING ACTIVITIES:
Debt increases (reductions)........... $ (148) $ 145
Minority transactions and other....... $ 68 $ 22
Issuances (purchases) of stock........ $ (5) $ 25
Cash dividends........................ $ (22) $ (20)
Total from (used for) financing....... $ (107) $ 172
(Dollar amounts in millions)
March 31, December 31,
DEBT-TO-CAPITAL RATIO 1999 1998
- -------------------------------------- --------- ------------
Debt.................................. $3,092 $3,274
Capital............................... $5,570 $6,168
Debt-to-capital ratio................. 55.5% 53.1%
Cash Flow From Operations
- -------------------------
Cash flow from operations increased to $166 million in the first quarter 1999
versus $140 million in 1998, primarily due to the higher income before
cumulative effect of an accounting change and lower working capital
requirements - a direct result of Praxair's work process improvement.
Investing
- ---------
Cash flow used for investing in the first quarter of 1999 totaled $65 million,
a decrease of $254 million from the 1998 quarter. This decrease was due
primarily to lower capital and acquisition expenditures, and higher proceeds
from divestitures and asset sales.
<PAGE>
Capital expenditures for the first quarter of 1999 totaled $141 million, down
$30 million from the corresponding quarter in 1998. The lower level of capital
expenditures is reflective of a slower economic environment, primarily in South
America and the United States.
Acquisition expenditures for the first quarter of 1999 totaled $6 million, a
decrease of $154 million from the 1998 quarter. This decrease is primarily
related to the purchase in 1998 of the remaining shares outstanding of GasTech,
Inc. a U.S. packaged gases distributor (previously an equity investment), and
other investments related to Praxair Distribution. Acquisition expenditures for
the first quarter of 1999 related to an acquisition in the Surface Technologies
business.
Divestiture and asset sales totaled $82 million, an increase of $70 million
from the 1998 quarter. This change is primarily attributed to the sale
leaseback transaction in the United States (see Note 8).
On a worldwide basis, capital and acquisition expenditures for the full year
1999 are expected to be 20% lower as compared to 1998, due primarily to
anticipated lower capital expenditures in North America, South America and the
Surface Technologies business, and currency translation impacts.
Financing
- ---------
At March 31, 1999, Praxair's total debt outstanding was $3,092 million, a
decrease of $182 million versus December 31, 1998. This decrease is primarily
attributed to the operating and investing activities discussed above, currency
translation impacts, and proceeds from the hedge gains and rights offering in
Brazil (see Notes 9 and 10). As of March 31, 1999, there were no borrowings
under Praxair's $1.5 billion U.S. bank credit facility.
Praxair's debt-to-capital ratio increased from 53.1% at December 31, 1998 to
55.5% at March 31, 1999. This increase is due primarily to the balance sheet
impacts of the currency devaluation in Brazil and reduced minority interests,
primarily related to the rights offering in Brazil, partially offset by lower
debt levels.
YEAR 2000
THE PROBLEM
The "year 2000 problem" arises because many existing computer programs or date-
sensitive microprocessors embedded in operating equipment use only the last two
digits to refer to a year. Therefore, these computer programs and operating
systems may not properly recognize a year that begins with "20" instead of
"19". If not corrected, many applications could fail or create erroneous
results. Although not all computer applications or systems are subject to this
flaw, all are suspect until they are assessed. Like most companies, Praxair
operates and maintains computer systems for accounting, payroll, invoicing and
many other business purposes. In addition, Praxair's operations systems
(including, among others, plant control, diagnostic and monitoring, quality
control, distribution and logistics), and its infrastructure systems
(including, among others, telecommunications) use computer programs or embedded
microprocessors. Also, Praxair, as other companies, may be affected by the
year 2000 problems of its suppliers (e.g., by the interruption of supply of
critical raw materials or utilities) or of its customers (e.g., interrupted or
reduced demand for Praxair's products due to interruptions in the customer's
own manufacturing processes).
<PAGE>
PRAXAIR'S READINESS STATUS
Management currently believes that Praxair has in place the appropriate
programs and plans to achieve timely year 2000 readiness for its safety and
mission-critical systems. However, Praxair's on-going assessment program may,
at some time in the future, reveal as yet unidentified or not fully understood
issues that may not be addressable in a timely fashion contrary to the
foregoing forward-looking assumption. Further, it is uncertain whether the year
2000 problems of Praxair's suppliers and customers will be resolved in a timely
manner.
PRAXAIR'S READINESS PROGRAM
Work on year 2000 issues at Praxair has been ongoing since 1996. Praxair has
established a Year 2000 Global Project Office to coordinate and accelerate its
year 2000 activities. The director of the Global Year 2000 Project Office
reports directly to Praxair's chief executive officer. The Global Project
Office currently consists of a project manager and 13 global functional team
leaders representing: applications technology; communications; finance;
energy/other utilities; facilities; human resources; information technology;
operations/production; procurement; product sales and services equipment; law;
research and development; and safety and environmental services. In addition,
the Global Project Office currently includes team members representing eight
Praxair businesses and affiliates in North America, South America, Europe and
Asia who have accountability for year 2000 activities.
Praxair's year 2000 readiness program consists of six phases: awareness;
inventory and assessment; renovation; validation; implementation; and business
continuity planning. These phases at any point in time may run concurrently
with respect to different systems, issues and business units. While the
following represents a general description of Praxair's overall progress in
each of these phases, progress for any individual system, issue or business
unit may be more or less advanced than that indicated.
AWARENESS: Praxair has launched a worldwide communications and awareness effort
in order to inform employees about year 2000 issues and enlist their assistance
in implementing solutions. This effort is ongoing. Praxair also is in
continuous discussions on year 2000 issues with customers and suppliers.
INVENTORY AND ASSESSMENT: A global inventory of Praxair systems, and assessment
of those systems as to year 2000 readiness, has been conducted which management
currently believes has covered Praxair's safety and mission-critical systems,
and most of its other systems. However, inventory and assessment efforts are
ongoing which may reveal as yet unidentified components or issues; contrary to
the foregoing assumption. With respect to assessment of the year 2000 readiness
of suppliers, certain critical suppliers have been identified and discussions
are ongoing or planned with each.
RENOVATION: Solutions for most year 2000 readiness issues have been identified.
Renovation activities for safety and mission-critical systems have been
substantially completed 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. Most
systems have been tested. Management currently projects that testing and
validation will be completed by mid-1999.
IMPLEMENTATION: Solutions that have been validated through testing have been
implemented. Praxair currently expects that the remaining safety and mission-
critical Praxair-maintained systems to be so implemented by mid-1999.
<PAGE>
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 $17 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.
<PAGE>
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
The Company's overall plan to address the euro conversion is described in its
1998 Annual Report on Form 10-K.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 relating to SOP 98-5, "Reporting on the Costs of Start-Up
Activities." Also, refer to Note 2 to Praxair's 1998 Annual Report relating to
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the Market Risks and Sensitivity Analyses in the Management's
Discussion and Analysis section of Praxair's 1998 Annual Report.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Shareholders of Praxair, Inc. was held on April 27,
1999. At that meeting, four directors were elected. The vote was as follows:
Election of Directors:
NOMINEE VOTES FOR VOTES WITHHELD
- ------------------------- ----------- --------------
John A. Clerico 139,467,013 1,079,503
Dale F. Frey 139,296,655 1,249,861
Raymond W. LeBoeuf 139,439,771 1,106,745
Benjamin F. Payton 139,242,578 1,303,938
In addition to the foregoing elected directors, the terms of office for the
following individuals continue after the meeting:
Alejandro Achaval
C. Fred Fetterolf
Claire W. Gargalli
Ronald L. Kuehn, Jr.
H. William Lichtenberger
G. Jackson Ratcliffe, Jr.
H. Mitchell Watson, Jr.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27. Financial Data Schedule
Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 1999.
<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: May 12, 1999 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
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<F1>COST OF GOODS SOLD AND TOTAL COSTS ARE EXCLUSIVE OF DEPRECIATION AND
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<F2>EFFECTIVE IN 1997, SFAS NO. 128 ESTABLISHED NEW STANDARDS FOR COMPUTING AND
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