FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 1999
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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, 1999, 158,949,848 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, changes in energy and distribution
costs in North America, continuation of acquisition activities in the surface
technologies and other businesses, tax planning initiatives and effective tax
rates, impacts in Brazil related to economic conditions, currency movements and
the change in functional currency, other impacts from currency, management's
assessments of the impacts of the Year 2000 Problem and Euro Conversion, and
market risks and sensitivity analyses disclosures relating to financial
instruments involve risks and uncertainties, and are subject to change based on
various factors, including the impact of changes in worldwide and national
economies, foreign currency movements, pricing fluctuations for the company's
products, changes in interest rates, the continued timely development and
acceptance of new products and processes, the impact of competitive products and
pricing, the ability to continue to develop potential acquisition opportunities,
and the impact of tax and other legislation and regulation in the jurisdictions
in which the Company operates.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income - Praxair, Inc. and Subsidiaries
Quarter and Nine Months Ended September 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Balance Sheet - Praxair, Inc. and Subsidiaries
September 30, 1999 (Unaudited) and December 31, 1998
Condensed Consolidated Statement of Cash Flows - Praxair, Inc. and
Subsidiaries Nine Months Ended September 30, 1999 and 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements - Praxair, Inc.
and Subsidiaries (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signature
Exhibit Index
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Millions of dollars, except per share data)
Quarter Ended Nine Months Ended
September 30, September 30,
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
SALES .................................. $1,169 $1,201 $3,436 $3,636
Cost of sales, exclusive of
depreciation and amortization ........ 691 697 2,016 2,105
Selling, general and administrative .... 155 153 480 485
Depreciation and amortization .......... 111 118 335 352
Research and development ............... 16 18 49 55
Other income-net ....................... 12 10 64 27
------- ------- ------- -------
OPERATING PROFIT ....................... 208 225 620 666
Interest expense ....................... 47 64 154 196
------- ------- ------- -------
INCOME BEFORE INCOME TAXES ............. 161 161 466 470
Income taxes ........................... 40 40 112 118
------- ------- ------- -------
INCOME OF CONSOLIDATED ENTITIES ........ 121 121 354 352
Minority interests ..................... (11) (15) (34) (41)
Income from equity investments ......... 2 2 7 7
------- ------- ------- -------
INCOME BEFORE ACCOUNTING CHANGE ........ 112 108 327 318
Cumulative effect of an accounting change - - (10) -
------- ------- ------- -------
NET INCOME ............................. $ 112 $ 108 $ 317 $ 318
======= ======= ======= =======
PER SHARE DATA:
Basic earnings per share:
Before accounting change.............. $ 0.70 $ 0.68 $ 2.05 $ 2.01
Accounting change .................... - - (.06) -
------- ------- ------- -------
Net income $ 0.70 $ 0.68 $ 1.99 $ 2.01
======= ======= ======= =======
Diluted earnings per share:
Before accounting change............... $ 0.69 $ 0.66 $ 2.02 $ 1.94
Accounting change...................... - - (.06) -
------- ------- ------- -------
Net income............................. $ 0.69 $ 0.66 $ 1.96 $ 1.94
======= ======= ======= =======
Cash dividends per share ............... $ 0.14 $ 0.125 $ 0.42 $ 0.375
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING (000'S):
Basic shares outstanding ............... 159,704 158,893 159,068 158,517
Diluted shares outstanding ............. 162,564 163,417 162,100 163,550
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Millions of dollars)
September 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
ASSETS
Cash and cash equivalents ....................... $ 35 $ 34
Accounts receivable ............................. 865 919
Inventories ..................................... 286 319
Prepaid and other current assets ................ 97 122
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TOTAL CURRENT ASSETS ....................... 1,283 1,394
Property, plant and equipment-net ............... 4,563 4,875
Other assets .................................... 1,562 1,827
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TOTAL ASSETS ............................... $ 7,408 $ 8,096
======= =======
LIABILITIES AND EQUITY
Accounts payable ................................ $ 305 $ 378
Short-term debt ................................. 96 295
Current portion of long-term debt ............... 113 84
Other current liabilities ....................... 487 532
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TOTAL CURRENT LIABILITIES .................. 1,001 1,289
Long-term debt .................................. 2,745 2,895
Other long-term obligations ..................... 1,095 1,018
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TOTAL LIABILITIES .......................... 4,841 5,202
Minority interests .............................. 337 487
Preferred stock ................................. 75 75
Shareholders' equity ............................ 2,155 2,332
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TOTAL LIABILITIES AND EQUITY ............... $ 7,408 $ 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)
Nine Months Ended September 30,
-------------------------
1999 1998
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OPERATIONS
Net income ..................................... $ 317 $ 318
Adjustments:
Depreciation and amortization ................ 335 352
Deferred income taxes ........................ 42 77
Working capital .............................. 39 (106)
Long-term assets and liabilities ............. (120) (41)
Other non-cash charges ....................... 15 3
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Net cash provided by operating activities .. 628 603
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INVESTING
Capital expenditures ........................... (464) (539)
Acquisitions ................................... (16) (236)
Divestitures and asset sales ................... 99 189
-------- --------
Net cash used for investing activities ..... (381) (586)
-------- --------
FINANCING
Short-term repayments-net ...................... (186) (76)
Long-term borrowings ........................... 47 367
Long-term debt repayments ...................... (137) (254)
Minority transactions and other ................ 68 (20)
Issuances of common stock ...................... 92 97
Purchases of common stock ...................... (61) (74)
Dividends ...................................... (67) (59)
-------- --------
Net cash used for financing activities ..... (244) (19)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents ............................... (2) (1)
-------- --------
Change in cash and cash equivalents .............. 1 (3)
Cash and cash equivalents beginning-of-year....... 34 43
-------- --------
Cash and cash equivalents end-of-period .......... $ 35 $ 40
======== ========
Supplemental Data:
Effect of functional currency change ............. $ - $ 81
Acquired debt from acquisitions................... $ - $ 20
The accompanying notes are an integral part of these financial statements.
<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 September 30, 1999, the remaining accrual balance related to the 1996
and 1997 special charges was $14 million (see Note 3 to Praxair's 1998
consolidated financial statements).
4. Inventories
The following is a summary of Praxair's consolidated inventories:
(Millions of dollars)
September 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
Raw materials and supplies...... $ 100 $ 115
Work in process................. 41 38
Finished goods.................. 145 166
----- -----
$ 286 $ 319
===== =====
<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 (c) .............. 2,403 1,024
--------- --------
Balance, September 30, 1999............. 163,920 4,970
========= ========
<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 .................. 317 317
Translation adjustments (a).. (458) (458)
-------
Comprehensive income(loss)(b) $ (141)
Dividends - common stock..... (67) (67)
Common stock activity (c).... 74 (43) 31
--- ------ ------ ------- ------ -------
Balance, September 30, 1999.. $ 2 $1,602 $(209) $1,630 $(870) $2,155
=== ====== ====== ======= ====== =======
</TABLE>
(a) Primarily currency translation adjustments in Brazil and is net of a 1999
first quarter $60 million gain (after taxes and minority interest) related
to Brazilian net investment hedges (see Note 10).
(b) Comprehensive income (loss) for the quarter and nine months ended
September 30, 1999 was $42 and ($141) million, respectively, as compared
to $95 million and $173 million, respectively, in the 1998 periods.
(c) Relates to issuances of common stock for the Dividend Reinvestment and
Stock Purchase Plan, employee savings and incentive plans, and
issuances/purchases of common stock.
During the quarter and nine months ended September 30, 1999, Praxair
granted options for 650,455 and 1,832,515 shares, respectively, of common
stock having option prices ranging from $33.00 to $51.13 per share, the
closing market price of Praxair's common stock on the day of the grants.
At September 30, 1999 there were 11,773,994 shares under option at prices
ranging from $9.80 to $56.13 per share (weighted average of $31.07) of
which options for 6,830,184 shares were exercisable at prices ranging
from $9.80 to $56.13 per share (weighted average of $23.62). During the
quarter and nine months ended September 30, 1999, 209,405 and 1,949,520
options were exercised, respectively.
<PAGE>
6. Debt and Financial Instruments
Debt - The following is a summary of Praxair's outstanding debt at
September 30, 1999 and December 31, 1998:
(Millions of dollars) September 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
Short-term:
Canadian borrowings....................... $ 12 $ 116
South American borrowings................. 53 95
Other international borrowings............ 31 82
Other U.S. borrowings..................... - 2
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Total short-term debt....................... 96 295
------- -------
Long-term:
U.S.:
Commercial paper and U.S. bank borrowings. $ 479 $ 627
6.25% Notes due 2000..................... 75 75
6.70% Notes due 2001..................... 250 250
6.625% Notes due 2003..................... 75 75
6.75% Notes due 2003..................... 300 300
6.15% Notes due 2003..................... 250 250
6.85% Notes due 2005..................... 150 150
6.90% Notes due 2006..................... 250 250
6.625% Notes due 2007..................... 250 250
8.70% Debentures due 2022
(Redeemable after 2002)............ 300 300
Other borrowings.......................... 133 52
Canadian subsidiary borrowings.............. 178 204
South American subsidiary borrowings........ 93 126
Other international borrowings.............. 75 70
------- -------
2,858 2,979
Less: current portion of long-term debt..... 113 84
------- -------
Total long-term debt........................ 2,745 2,895
------- -------
Total debt.................................. $2,954 $3,274
======= =======
At September 30, 1999, $579 million of borrowings have been classified
as long term ($627 million at December 31, 1998) because of the
Company's intent to refinance this debt on a long-term basis and the
availability of such financing under the terms of its $1.5 billion
credit agreement, which has a remaining term of greater than 12 months
and expires in December 2000.
<PAGE>
Financial Instruments - At September 30, 1999, Praxair had $80 million
notional amount of interest rate swap agreements that effectively
convert variable rate debt to fixed rate debt. These agreements mature
in 2001. Praxair is also a party to currency exchange forward contracts
to manage its exposure to changing currency exchange rates. At September
30, 1999 Praxair had $320 million of currency exchange forward contracts
outstanding: $280 million to hedge recorded balance sheet exposures, $13
million to hedge firm commitments (generally for the purchase of
equipment related to construction projects) and $27 million to hedge
future net income. Additionally, there are $114 million notional value
of currency exchange contracts that effectively offset. These contracts
all mature within one year.
7. Earnings Per Share
Basic earnings per share is computed by dividing net income for the
period by the weighted average number of Praxair common shares
outstanding. Diluted earnings per share is computed by dividing net
income for the period by the weighted average number of Praxair common
shares outstanding and dilutive common stock equivalents. The difference
between the number of shares used in the basic earnings per share
calculation compared to the diluted earnings per share calculation is
due primarily to the dilutive effect of outstanding stock options. Stock
options for 636,795 and 3,569,455 shares were not included in the
computation of diluted earnings per share for the quarter and nine
months ended September 30, 1999, respectively, because the exercise
prices were greater than the average market price of the common stock.
8. Sale Leaseback Transaction
On March 30, 1999, Praxair sold and leased back certain U.S.
distribution equipment for $80 million. The lease has an initial two
year term and has been accounted for as an operating lease. Praxair has
purchase and lease renewal options at projected future fair market
values beginning in 2001 and has guaranteed $68 million of the residual
value. The gain on the sale transaction of $63 million has been deferred
until the expiration of Praxair's guarantee of the residual value and is
shown in other long-term liabilities.
9. South American Rights Offering
During the first quarter of 1999, Praxair's South American subsidiary,
S.A. White Martins, completed a rights offering resulting in Praxair's
ownership interest in White Martins increasing from 69.33% at December
31, 1998 to 76.57%. As consideration for the additional shares it
purchased during the rights offering, Praxair used approximately $138
million of intercompany loans it had previously made to White Martins.
Approximately $15 million of the rights offering were purchased by
minority shareholders.
<PAGE>
10. Brazilian Currency Hedge Agreements
In early January 1999, Praxair entered into currency exchange forward
contracts totaling $325 million notional value for estimated Brazilian
net income in 1999 and to hedge a portion of its net investment. The net
income hedge agreements were effectively settled during the first
quarter resulting in a pre-tax gain of $21 million ($14 million after
tax and minority interest). The net investment hedge contracts were
either closed out or were effectively settled in the first quarter
resulting in a gain of approximately $60 million (after tax and minority
interest) which was recognized on the balance sheet in the accumulated
other comprehensive income(loss) (cumulative translation adjustment)
component of shareholders' equity. By April 1999, all of these contracts
were settled and the cash proceeds relating to the pre-tax gain on the
equity hedges (approximately $89 million) is shown in the financing
section of the condensed consolidated statement of cash flows under the
caption "Minority transactions and other", and the pre-tax gain relating
to the net income hedges is shown under the caption "net income" in
operating cash flows.
11. Commitments and Contingencies
On July 1, 1999 Praxair, Inc. received a favorable verdict in a
four-count lawsuit filed by Airgas, Inc., a competitor. Airgas had
alleged that Praxair breached an oral contract with Airgas by acquiring
CBI Industries, Inc. without allowing Airgas to participate in the
acquisition. The complaint also contained allegations of conversion,
fraud and quantum meruit.
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Consolidated Results
(Dollar amounts in millions) Quarter Ended Nine Months Ended
September 30, Percent September 30, Percent
1999(a) 1998 Change 1999(a) 1998 Change
------ ------- ------- -------- ------ -------
Sales.......................... $1,169 $1,201 - 3% $3,436 $3,636 - 6%
Selling, general
and administrative............ $ 155 $ 153 + 1% $ 480 $ 485 - 1%
Depreciation and amortization.. $ 111 $ 118 - 6% $ 335 $ 352 - 5%
Operating profit............... $ 208 $ 225 - 8% $ 620 $ 666 - 7%
Interest expense............... $ 47 $ 64 - 27% $ 154 $ 196 - 21%
Effective tax rate............. 25% 25% -% 24% 25% - 1%
Income before accounting change $ 112 $ 108 + 4% $ 327 $ 318 + 3%
Excluding one-time hedge gain in Brazil:
Operating profit............... $ 208 $ 225 - 8% $ 599 $ 666 - 10%
Effective tax rate............. 25% 25% -% 25% 25% -%
Income before accounting change $ 112 $ 108 + 4% $ 313 $ 318 - 2%
(a) The results for the quarter and nine months ended September 30, 1999 versus
the comparative 1998 periods were significantly impacted by the devaluation of
the Brazilian currency (Real) from a rate of 1.21 Reais to the U.S. Dollar at
December 31, 1998 to 1.92 at September 30, 1999 (1.86 average rate for the
quarter and 1.78 average rate for the nine month period). Reported amounts from
Brazil were all reduced in proportion to the exchange rate changes. Also, as
described in Note 10, in early January 1999 Praxair entered into various
currency exchange forward contracts to hedge anticipated Brazilian net income
and a portion of its investment. The net income hedges were effectively closed
out in the first quarter resulting in a non-recurring pre-tax gain of $21
million in the 1999 first quarter and nine month periods ($14 million after
taxes and minority interests or $0.09 per share). The amounts shown above under
the section "Excluding one-time hedge gain in Brazil" exclude the impacts of
this hedge gain.
The sales decrease of 3% for the quarter and 6% for the nine months ended
September 30, 1999 versus the respective 1998 periods was due primarily to
unfavorable currency translation effects in South America. These factors were
partially offset by the impact of price increases in North and South America,
continued volume growth in Asia and Europe, and third quarter volume growth in
North America. Excluding the impact of currency, sales grew 4% for the quarter
and decreased 1% for the nine months ended September 30, 1999.
Operating profit decreased 8% for the 1999 quarter and, excluding the impact of
the 1999 first quarter Brazilian hedge gain, also decreased 10% for the nine
months ended September 30, 1999 versus the respective 1998 periods. These
decreases were due primarily to the sales decrease described above, cost
inflation and currency translation impacts, partially offset by productivity
improvements. Selling, general and administrative expenses for the nine months
ended September 30, 1999 is higher as a percentage of sales versus 1998 due
primarily to long-term incentive plan costs, higher business development costs
and cost inflation impacts, partially offset by productivity improvements. The
decrease in depreciation and amortization expense for both periods reflects the
impact of currency translation, primarily in Brazil, and the impact of the North
American sale leaseback transactions in 1999 and 1998; offset by new projects
coming on-stream and packaged gases and Surface Technologies acquisitions. Other
income - net for the nine months ended September 30, 1999 is $37 million greater
than the 1998 period due primarily to a $50 million gain related to the
redemption of preference shares from an earlier business sale, the 1999 first
quarter $21 million gain on the net income hedges in Brazil, and the collection
of a $12 million note receivable from an earlier business sale; partly offset by
$45 million of costs primarily for postemployment benefits and an anticipated
loss on the
<PAGE>
sale of an air separation plant under construction for a third party.
Income before accounting change increased 4% for the 1999 quarter and, excluding
the Brazilian hedge gain, decreased 2% for the nine months versus the respective
1998 periods. The increase in the 1999 quarter versus 1998 was due primarily to
the lower interest expense and minority interest impact which more than offset
the lower operating profit. The decrease in the 1999 nine month period versus
1998 was because the lower operating profit more than offset the decreased
interest expense and minority interest impacts. Interest expense decreased $17
million or 27% for the quarter and $42 million or 21% for the nine month period
versus the respective 1998 periods due primarily to currency translation effects
in Brazil and lower debt levels. Minority interests decreased $4 million for the
quarter and $7 million for the nine month period due primarily to Brazilian
currency impacts and the rights offering (see Note 9). The effective tax rate
remained at 25% for all periods, excluding the impact of the Brazilian hedge
gain.
The number of employees at September 30, 1999 was approximately 23,600 which
reflects a decrease of approximately 1,200 from December 31, 1998. The decrease
is principally the result of continued productivity improvement initiatives in
North America and South America, and the divestiture of a business in Asia.
Segment Discussion
The following summary of sales and operating profit by segment provides a basis
for the discussion that follows (for a description of Praxair's operating
segments, refer to Note 4 to the consolidated financial statements included in
Praxair's 1998 annual report to shareholders):
(Dollar amounts in millions)
Quarter Ended Nine Months Ended
September 30, Percent September 30, Percent
1999 1998 Change 1999 1998 Change
------- ------- ------- ------- ------- -------
SALES
North America $ 714 $ 677 + 5% $2,067 $2,080 - 1%
South America 178 246 -28% 520 728 -29%
Europe 123 124 - 1% 388 379 + 2%
Surface Technologies 105 106 - 1% 324 309 + 5%
All Other 49 48 + 2% 137 140 - 2%
------- ------- ------- -------
Total Sales $1,169 $1,201 - 3% $3,436 $3,636 - 6%
======= ======= ======= =======
OPERATING PROFIT
North America $ 133 $ 128 + 4% $ 382 $ 409 - 7%
South America 37 53 -30% 124(a) 150 -17%
Europe 29 25 +16% 91 79 +15%
Surface Technologies 17 18 - 6% 56 55 + 2%
All Other (2) 6 -133% (14) (10) +40%
Corporate (6) (5) +20% (19) (17) +12%
------- ------- ------- -------
Total Operating Profit $ 208 $ 225 - 8% $ 620 $ 666 - 7%
======= ======= ======= =======
(a) The South American operating profit for the 1999 nine months includes a
one-time $21 million benefit from net income hedges in Brazil that were
effectively settled in the 1999 first quarter.
<PAGE>
North America
- -------------
Sales for the quarter and nine months ended September 30, 1999 increased 5% and
decreased 1%, respectively, as compared to the 1998 periods. The third quarter
increase was due primarily to volume growth in the U.S. and Canadian industrial
gases businesses and price increases in the U.S. and Mexican businesses. The
third quarter price increases in the U.S. were primarily related to higher
natural gas feedstock costs, which passed through to on-site hydrogen and carbon
monoxide customers. The price increases in Mexico were primarily attributed to
local inflation. The decrease of 1% for the nine months reflects volume declines
and unfavorable currency translation effects in Mexico and Canada through the
second quarter, partly offset by the third quarter sales growth and the impact
from 1998 acquisitions.
Operating profit increased 4% and decreased 7%, respectively, for the quarter
and nine months ended September 30, 1999 versus the respective 1998 periods. The
third quarter increase was due primarily to sales growth and productivity
improvement initiatives, partially offset by unusually high energy and
distribution costs as a result of the summer weather conditions and crude carbon
dioxide source curtailments. The decrease for the nine month period was due
primarily to the decreased sales and negative currency translation effects
through the first two quarters, cost inflation, and higher than expected energy
and distribution costs, partly offset by the benefits of productivity
improvements. For the fourth quarter, it is anticipated that energy and
distribution costs should return to more normalized levels.
South America
- -------------
As discussed above under the section on Consolidated Results, the results for
the 1999 periods were significantly impacted by the devaluation of the Brazilian
currency (Real). For the quarter and nine months ended September 30, 1999, the
currency devaluation reduced sales by $75 million and $214 million,
respectively, and reduced operating profit by $16 million and $46 million,
respectively, as compared to the 1998 periods. Also as described in Note 10, in
early January 1999 Praxair entered into various currency exchange forward
contracts to hedge anticipated Brazilian net income and a portion of its net
investment. The net income hedges were effectively closed out in the first
quarter of 1999 resulting in a non-recurring pre-tax gain of $21 million which
is included in the South American operating profit for the 1999 nine month
period.
Sales for the quarter and nine months ended September 30, 1999 decreased 28% and
29%, respectively, as compared to the 1998 periods. This was primarily due to
the unfavorable currency translation effects, with volume decreases almost
equally offset by price increases. Excluding the currency effects for the
quarter and nine months ended September 30, 1999, sales increased by
approximately 3% for the quarter, and were flat for the year. The devaluation of
the Real in Brazil and a recessionary environment in South America have
contributed to volume decreases of approximately 3% for the quarter and 5% for
the nine months versus the respective 1998 periods.
Operating profit for the quarter and nine months ended September 30, 1999
decreased 30% and 31%, respectively, as compared to the 1998 periods, excluding
the 1999 first quarter hedge gain. These decreases were caused primarily by the
1999 currency devaluations in Brazil and cost inflation, which were offset by
productivity improvement initiatives. Excluding the impacts of currency
movements and the first quarter hedge gain, operating profit was essentially
flat for the 1999 third quarter and nine month periods versus the respective
1998 periods.
<PAGE>
Europe
- ------
Sales for the quarter and nine months ended September 30, 1999 decreased 1% and
increased 2%, respectively, as compared to the 1998 periods. The decrease for
the quarter was attributed to unfavorable currency translation effects, which
offset volume growth and price increases. Volume growth, price increases and the
impact of acquisitions, offset by unfavorable currency translation effects,
created overall sales growth for the nine months. Excluding the currency
translation effects for the quarter and nine months ended September 30, 1999,
sales increased by 4% and 5%, respectively.
Operating profit for the quarter and nine months ended September 30, 1999
increased 16% and 15%, respectively, as compared to the 1998 periods. This was
due primarily to the sales impacts previously discussed, cost improvement
initiatives, and net income hedge gains which helped to offset the impact of
currency movements. Excluding currency effects for the quarter and nine months
ended September 30, 1999, operating profit increased 12% and 7%, respectively.
Surface Technologies
- --------------------
Sales for the quarter and nine months ended September 30, 1999 decreased 1% and
increased 5%, respectively, as compared to the 1998 periods. Volume growth in
the first two quarters and the impact of acquisitions were partly offset by
volume declines in the aerospace markets, pricing pressure and negative currency
impacts in the third quarter.
Operating profit for the quarter and nine months ended September 30, 1999
decreased 6% and increased 2% as compared to the 1998 periods. The sales growth
in the first two quarters and productivity improvement initiatives through the
third quarter were offset by the sales decreases in the third quarter, and by
cost inflation through the third quarter.
All Other
- ---------
Sales for the quarter ended September 30, 1999 increased 2% and decreased 2% for
the nine months ended September 30, 1999 as compared to the 1998 periods. Asia
experienced 44% sales growth for the quarter and nine months, due primarily to
volume growth, particularly in Korea and Thailand, new plants coming on stream
in China and India, and favorable currency translation effects. Asia's growth
was more than offset by decreased sales of global supply systems.
Operating Profit for the quarter and nine months ended September 30, 1999 was
down $8 million and $4 million, respectively, when compared to the 1998 period.
This was due primarily to decreases in the global supply systems business and
higher business development costs, partly offset by the improvements in Asia.
<PAGE>
Liquidity, Capital Resources and Other Financial Data
The following selected cash flow information provides a basis for the discussion
that follows:
(Dollar amounts in millions)
Nine Months Ended September 30, 1999 1998
- -------------------------------------- ------ ------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net income plus depreciation
and amortization ................... $ 652 $ 670
Working capital ...................... $ 39 $ (106)
Total from operating activities ...... $ 628 $ 603
INVESTING ACTIVITIES:
Capital expenditures ................. $ (464) $ (539)
Acquisitions ......................... (16) (236)
Divestitures and asset sales ......... 99 189
------- -------
Total used for investing activities... $ (381) $ (586)
======= =======
FINANCING ACTIVITIES:
Debt increases (reductions) - net .... $ (276) $ 37
Minority transactions and other ...... 68 (20)
Net issuances of common stock ........ 31 23
Cash dividends ....................... (67) (59)
------- -------
Total used for financing activities... $ (244) $ (19)
======= =======
September 30, December 31,
DEBT-TO-CAPITAL RATIO 1999 1998
- -------------------------------------- --------- ------------
Debt ................................. $2,954 $3,274
Capital .............................. $5,521 $6,168
Debt-to-capital ratio ................ 53.5% 53.1%
Cash Flow From Operations
- -------------------------
Cash flow from operations increased to $628 million in the first nine months of
1999 versus $603 million in 1998. This increase is primarily due to lower
working capital requirements, a direct result of Praxair's work process
improvement efforts, and the proceeds from the redemption of preference shares
from an earlier business sale.
Investing
- ---------
Cash flow used for investing in the first nine months of 1999 totaled $381
million, a decrease of $205 million from the 1998 period. This decrease was due
primarily to lower capital and acquisition expenditures, partly offset by lower
proceeds from divestitures and asset sales.
<PAGE>
Capital expenditures for the first nine months of 1999 totaled $464 million,
down $75 million from the corresponding period in 1998. The lower level of
capital expenditures is in line with previous expectations and is reflective of
a slower economic environment, primarily in the United States and South America,
and currency impacts in South America.
Acquisition expenditures for the first nine months of 1999 totaled $16 million,
a decrease of $220 million from the 1998 period. This decrease is primarily
related to the purchase in 1998 of the remaining shares outstanding of GasTech,
Inc. a U.S. packaged gases distributor (previously an equity investment), other
investments related to Praxair Distribution, acquisitions in the Surface
Technologies' business and the acquisition of two companies in India.
Acquisition expenditures for the first nine months of 1999 related to a Chinese
joint venture, an acquisition in the Surface Technologies business, acquisitions
in India and buy-outs of minority interests in South America. It is planned that
additional acquisitions will take place in the fourth quarter, but they are
subject to successful negotiations.
Divestiture and asset sales in the first nine months of 1999 totaled $99
million, a decrease of $90 million from the 1998 period. This change is
primarily attributed to the proceeds from sale leaseback transactions in 1999
and 1998.
On a worldwide basis, capital and acquisition expenditures for the full year
1999 are still expected to be about 20% lower as compared to 1998, due primarily
to anticipated lower capital expenditures in North America, South America and
the Surface Technologies business, and currency translation impacts.
Financing
- ---------
At September 30, 1999, Praxair's total debt outstanding was $2,954 million, a
decrease of $320 million versus December 31, 1998. This decrease is due to the
operating and investing activities discussed above, currency translation
impacts, and proceeds from the hedge gains and rights offering in Brazil (see
Notes 9 and 10). As of September 30, 1999, there were no borrowings under
Praxair's $1.5 billion U.S. bank credit facility.
Praxair's debt-to-capital ratio increased from 53.1% at December 31, 1998 to
53.5% at September 30, 1999. This increase from December is due primarily to the
balance sheet impacts of the currency devaluation in Brazil and reduced minority
interests (primarily related to the rights offering in Brazil), partially offset
by lower debt levels.
YEAR 2000
The Problem
The "year 2000 problem" arises because many existing computer programs or
date-sensitive microprocessors embedded in operating equipment use only the last
two digits to refer to a year. Therefore, these computer programs and operating
systems may not properly recognize a year that begins with "20" instead of "19".
If not corrected, many applications could fail or create erroneous results.
Although not all computer applications or systems are subject to this flaw, all
are suspect until they are assessed. Like most companies, Praxair operates and
maintains computer systems for accounting, payroll, invoicing and many other
business purposes. In addition, Praxair's operations systems (including, among
others, plant control, diagnostic and monitoring, quality control, distribution
and logistics), and its infrastructure systems (including, among others,
telecommunications) use computer programs or
<PAGE>
embedded microprocessors. Also, Praxair, as other companies, may be affected by
the year 2000 problems of its suppliers (e.g., by the interruption of supply of
critical raw materials or utilities) or of its customers (e.g., interrupted or
reduced demand for Praxair's products due to interruptions in the customer's own
manufacturing processes).
Praxair's Readiness Status
Management currently believes that Praxair has in place the appropriate programs
and plans to achieve timely year 2000 readiness for its safety and
mission-critical systems. However, Praxair's on-going assessment program may, at
some time in the future, reveal as yet unidentified or not fully understood
issues that may not be addressable in a timely fashion contrary to the foregoing
forward-looking assumption. Further, it is uncertain whether the year 2000
problems of Praxair's suppliers and customers will be resolved in a timely
manner.
Praxair's Readiness Program
Work on year 2000 issues at Praxair has been ongoing since 1996. Praxair has
established a Year 2000 Global Project Office to coordinate and accelerate its
year 2000 activities. The director of the Global Year 2000 Project Office
reports directly to Praxair's chief executive officer. The Global Project Office
currently consists of a project manager and 13 global functional team leaders
representing: applications technology; communications; finance; energy/other
utilities; facilities; human resources; information technology;
operations/production; procurement; product sales and services equipment; law;
research and development; and safety and environmental services. In addition,
the Global Project Office currently includes team members representing eight
Praxair businesses and affiliates in North America, South America, Europe and
Asia who have accountability for year 2000 activities.
Praxair's year 2000 readiness program consists of six phases: awareness;
inventory and assessment; renovation; validation; implementation; and business
continuity planning. These phases at any point in time may run concurrently with
respect to different systems, issues and business units. While the following
represents a general description of Praxair's overall progress in each of these
phases, progress for any individual system, issue or business unit may be more
or less advanced than that indicated.
Awareness: Praxair has launched a worldwide communications and awareness effort
in order to inform employees about year 2000 issues and enlist their assistance
in implementing solutions. This effort is ongoing. Praxair also is in continuous
discussions on year 2000 issues with customers and suppliers.
Inventory and Assessment: A global inventory of Praxair systems, and assessment
of those systems as to year 2000 readiness, has been conducted which management
currently believes has covered Praxair's safety and mission-critical systems,
and most of its other systems. However, inventory and assessment efforts are
ongoing which may reveal as yet unidentified components or issues; contrary to
the foregoing assumption. With respect to assessment of the year 2000 readiness
of suppliers, certain critical suppliers have been identified and discussions
are ongoing or planned with each.
Renovation: Solutions for most year 2000 readiness issues have been identified.
Renovation activities for safety and mission-critical systems have been
substantially completed.
Validation: An integrated testing strategy has been developed to validate the
readiness of safety and mission-critical systems affected by year 2000.
Substantially all systems have been tested and validation is substantially
complete.
<PAGE>
Implementation: Solutions that have been validated through testing have been
implemented. Substantially all of the solutions for safety and mission-critical
Praxair-maintained systems have been implemented.
Business Continuity Planning: Praxair has developed business continuity, or
contingency plans with respect to the build-up of product inventory and, where
possible, allocation of product from alternate plants in the event of electric
power or other interruptions of utility supplies to certain Praxair plants.
Praxair has also prepared contingency plans for failure of Praxair-maintained
systems. In September, Praxair conducted a successful global "rehearsal" of its
contingency plans. Throughout the remainder of the year, Praxair will continue
to rehearse its contingency and business continuity plans. These activities will
provide another level of readiness preparation should any external or unknown
year 2000 problem arise.
Overall, Praxair has essentially completed the above phases. Though some
scheduled work exists, it is minimal and should be completed before December 31,
1999. Assessment and communication will be ongoing to ensure that there is no
change in readiness status and that currently unknown issues, if any, are timely
identified and resolved. Praxair's corporate audits group has completed reviews
to test the business units' completeness of their year 2000 readiness program.
Costs
Praxair estimates that the total external expenditures to address year 2000
issues associated with Praxair-maintained systems and components will be
approximately $25 million over the life of the project. Of this total, the
Company expects approximately $11 million will be expensed as incurred and the
remainder will be for capital upgrades and replacements. The capital costs were
planned for later years independent of year 2000 issues, but are being
accelerated because those costs are for projects that will also address year
2000 issues. To date, approximately $21 million has been incurred. Of the
amounts not yet incurred, approximately $3 million relates to the business
continuity plans. Costs associated with internal resources are not being
accumulated separately and relate to normal ongoing payroll costs.
Risks
If Praxair does not successfully complete a material portion of its year 2000
program by the year 2000 or if the Company is negatively impacted by the failure
of a significant third party customer or supplier to become year 2000 compliant,
it could have a material impact on the Company's results of operations or cash
flows.
Management's current projection is that the "most reasonably likely worst case"
year 2000 scenario would involve the temporary interruption of electric power or
other utility supplies to one or more of Praxair's production plants due to
failure of the utility supplier to be year 2000 ready. Management is unable to
estimate the impact of such failure or failures, but it could have a material
adverse impact on Praxair's results of operations or cash flows, the measure of
such impact would depend on the number and nature of the interruptions that
would result. Other worst case year 2000 scenarios can be conceived which would
have a material impact on Praxair as well as on many other companies, including,
for example, break-downs of communications, governmental or banking systems
external to Praxair, but Praxair has not independently evaluated the risks of
these events.
<PAGE>
Cautionary Statements
As to the foregoing forward-looking statements about Praxair's expected year
2000 readiness, actual results will depend on, and may be affected by changes
in, among other factors; the level of interest and sense of urgency with respect
to year 2000 issues by governments and institutions in various regions of the
world; and the cooperation of raw materials and utilities suppliers in providing
readiness assurances to Praxair and the accuracy of those assurances.
Management does not currently believe that the failures described above as the
"most reasonably likely worst case scenario" are likely or that they will be so
widespread as to have an adverse material effect on Praxair. Efforts to assess
the year 2000 readiness of energy suppliers and other suppliers are ongoing,
however, and these efforts may, at some time in the future, reveal serious
deficiencies, not currently identified or fully understood, which may cause a
material impact on Praxair contrary to the foregoing forward-looking assumption.
The above forward-looking projection of costs may be affected by year 2000
issues not yet identified or fully understood. If these or other circumstances
arise, Praxair's costs to address the year 2000 issues of Praxair-maintained
systems and components may differ from those projected above.
To the extent that any reader of this statement reviews it for the purpose of
making any decision for the purchase of goods or services from Praxair or
evaluating Praxair's Year 2000 readiness, such reader should construe this
statement to be a Year 2000 readiness disclosure and that any statements made to
such reader in the course of any sale are subject to the Year 2000 Information
and Readiness Disclosure Act (15 USC 1 Note, P.L. 105-271, 112 Stat). Such
reader should be further advised that in the case of a dispute, this Act may
reduce the reader's legal rights regarding the use of any such statements,
unless otherwise specified in a contract or tariff.
Euro Conversion
The Company's overall plan to address the euro conversion is described in its
1998 Annual Report on Form 10-K.
Impact of Recently Issued Accounting Standards
See Note 2 related to SOP 98-5, "Reporting on the Costs of Start-Up Activities."
In June 1999, the Financial Accounting Standards board extended the required
implementation date of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activity," from January 1,
2000 to January 1, 2001. Praxair is currently evaluating the impact on its
financial statements of adopting the standard and will comply as required.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to the Market Risks and Sensitivity Analyses in the Management's
Discussion and Analysis section of Praxair's 1998 Annual Report on Form 10-K.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 1, 1999, Praxair, Inc. received a favorable defense verdict in a lawsuit
brought against it in 1996 by Airgas, Inc. Also, see Note 11 to the condensed
consolidated financial statements and Part II, Item 6 - Reports on Form 8-K.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
27. Financial Data Schedule
Reports on Form 8-K
On July 2, 1999, Praxair, Inc. filed a Current Report on Form 8-K reporting a
defense verdict in favor of Praxair, Inc. in a lawsuit brought against it in
1996 by Airgas, Inc.
<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 5, 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<PRAXAIR, INC. EXHIBIT 27 FINANCIAL DATA SCHEDULE AS OF SEPTEMBER 30, 1999>
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 35
<SECURITIES> 0
<RECEIVABLES> 894
<ALLOWANCES> 29
<INVENTORY> 286
<CURRENT-ASSETS> 1283
<PP&E> 8339
<DEPRECIATION> 3776
<TOTAL-ASSETS> 7408
<CURRENT-LIABILITIES> 1001
<BONDS> 2745
75
0
<COMMON> 2
<OTHER-SE> 2153
<TOTAL-LIABILITY-AND-EQUITY> 7408
<SALES> 3436
<TOTAL-REVENUES> 3436
<CGS> 2016 <F1>
<TOTAL-COSTS> 2016 <F1>
<OTHER-EXPENSES> 335 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154
<INCOME-PRETAX> 466
<INCOME-TAX> 112
<INCOME-CONTINUING> 327
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (10)
<NET-INCOME> 317
<EPS-BASIC> 1.99 <F2>
<EPS-DILUTED> 1.96 <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>
