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 June 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
- --------------------------------------- ----------
(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 June 30, 1999, 159,388,105 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 and Six Months Ended June 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Balance Sheet - Praxair, Inc. and Subsidiaries
June 30, 1999 (Unaudited) and December 31, 1998
Condensed Consolidated Statement of Cash Flows - Praxair, Inc. and
Subsidiaries Six Months Ended June 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 Six Months Ended
June 30, June 30,
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
SALES .................................. $1,149 $1,234 $2,267 $2,435
Cost of sales, exclusive of
depreciation and amortization ........ 673 711 1,325 1,408
Selling, general and administrative .... 170 165 325 332
Depreciation and amortization .......... 111 119 224 234
Research and development ............... 17 18 33 37
Other income-net ....................... 23 6 52 17
------- ------- ------- -------
OPERATING PROFIT ....................... 201 227 412 441
Interest expense ....................... 50 67 107 132
------- ------- ------- -------
INCOME BEFORE INCOME TAXES ............. 151 160 305 309
Income taxes ........................... 37 40 72 78
------- ------- ------- -------
INCOME OF CONSOLIDATED ENTITIES ........ 114 120 233 231
Minority interests ..................... (10) (13) (23) (26)
Income from equity investments ......... 3 1 5 5
------- ------- ------- -------
INCOME BEFORE ACCOUNTING CHANGE ........ 107 108 215 210
Cumulative effect of an accounting change - - (10) -
------- ------- ------- -------
NET INCOME ............................. $ 107 $ 108 $ 205 $ 210
======= ======= ======= =======
PER SHARE DATA:
Basic earnings per share:
Before accounting change.............. $ 0.67 $ 0.68 $ 1.35 $ 1.33
Accounting change .................... - - (.06) -
------- ------- ------- -------
Net income $ 0.67 $ 0.68 $ 1.29 $ 1.33
======= ======= ======= =======
Diluted earnings per share:
Before accounting change............... $ 0.66 $ 0.66 $ 1.33 $ 1.28
Accounting change...................... - - (.06) -
------- ------- ------- -------
Net income............................. $ 0.66 $ 0.66 $ 1.27 $ 1.28
======= ======= ======= =======
Cash dividends per share ............... $ 0.14 $ 0.125 $ 0.28 $ 0.25
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING (000'S):
Basic shares outstanding ............... 159,363 158,623 158,750 158,329
Diluted shares outstanding ............. 162,641 164,057 161,825 163,632
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Millions of dollars)
June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
ASSETS
Cash and cash equivalents ....................... $ 45 $ 34
Accounts receivable ............................. 869 919
Inventories ..................................... 288 319
Prepaid and other ............................... 106 122
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TOTAL CURRENT ASSETS ....................... 1,308 1,394
Property, plant and equipment-net ............... 4,552 4,875
Other assets .................................... 1,577 1,827
------- -------
TOTAL ASSETS ............................... $ 7,437 $ 8,096
======= =======
LIABILITIES AND EQUITY
Accounts payable ................................ $ 315 $ 378
Short-term debt ................................. 99 295
Current portion of long-term debt ............... 159 84
Other current liabilities ....................... 488 532
------- -------
TOTAL CURRENT LIABILITIES .................. 1,061 1,289
Long-term debt .................................. 2,709 2,895
Other long-term obligations ..................... 1,084 1,018
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TOTAL LIABILITIES .......................... 4,854 5,202
Minority interests .............................. 345 487
Preferred stock ................................. 75 75
Shareholders' equity ............................ 2,163 2,332
------- -------
TOTAL LIABILITIES AND EQUITY ............... $ 7,437 $ 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)
Six Months Ended June 30,
-------------------------
1999 1998
---------- ----------
OPERATIONS
Net income ..................................... $ 205 $ 210
Adjustments:
Depreciation and amortization ................ 224 234
Deferred income taxes ........................ 19 19
Working capital .............................. 22 (50)
Long-term assets and liabilities ............. (71) (48)
Other non-cash charges ....................... 20 5
------- -------
Net cash provided by operating activities .. 419 370
------- -------
INVESTING
Capital expenditures ........................... (305) (363)
Acquisitions ................................... (7) (222)
Divestitures and asset sales ................... 88 13
-------- --------
Net cash used for investing activities ..... (224) (572)
-------- --------
FINANCING
Short-term repayments-net ...................... (183) (67)
Long-term borrowings ........................... 21 336
Long-term debt repayments ...................... (110) (76)
Minority transactions and other ................ 75 (1)
Issuances of common stock ...................... 77 71
Purchases of common stock ...................... (19) (32)
Cash dividends ................................. (44) (40)
-------- --------
Net cash (used for) provided by
financing activities ...................... (183) 191
-------- --------
Effect of exchange rate changes on cash and
cash equivalents ............................... (1) (1)
-------- --------
Change in cash and cash equivalents .............. 11 (12)
Cash and cash equivalents beginning-of-year....... 34 43
-------- --------
Cash and cash equivalents end-of-period .......... $ 45 $ 31
======== ========
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 June 30, 1999, the remaining accrual balance related to the 1996 and
1997 special charges was $17 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)
June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
Raw materials and supplies...... $ 105 $ 115
Work in process................. 39 38
Finished goods.................. 144 166
----- -----
$ 288 $ 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) .............. 2,069 252
--------- --------
Balance, June 30, 1999................. 163,586 4,198
========= ========
<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 .................. 205 205
Translation adjustments (a).. (388) (388)
-------
Comprehensive income(loss)(b) $ (183)
Dividends - common stock..... (44) (44)
Common stock activity (c).... 65 (7) 58
--- ------ ------ ------- ------ -------
Balance, June 30, 1999 ..... $ 2 $1,593 $(173) $1,541 $(800) $2,163
=== ====== ====== ======= ====== =======
</TABLE>
(a) Primarily currency translation 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).
(b) Comprehensive income (loss) for the quarter and six months ended June 30,
1999 was $70 and ($183) million, respectively, as compared to $62 million
and $78 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 six months ended June 30, 1999, Praxair granted
options for 30,900 and 1,182,060 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 June
30, 1999 there were 11,359,494 shares under option at prices ranging from
$9.80 to $56.13 per share (weighted average of $29.93) of which options
for 6,561,554 shares were exercisable at prices ranging from $9.80 to
$56.13 per share (weighted average of $21.00). During the quarter and six
months ended June 30, 1999, 1,367,285 and 1,740,115 options were
exercised, respectively.
<PAGE>
6. Debt and Financial Instruments
Debt - The following is a summary of Praxair's outstanding debt at June
30, 1999 and December 31, 1998:
(Millions of dollars) June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
Short-term:
Canadian borrowings....................... $ 12 $ 116
South American borrowings................. 53 95
Other international borrowings............ 34 82
Other U.S. borrowings..................... - 2
------- -------
Total short-term debt....................... 99 295
Long-term:
U.S.:
Commercial paper and U.S. bank borrowings. $ 548 $ 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.......................... 47 52
Canadian subsidiary borrowings.............. 208 204
South American subsidiary borrowings........ 97 126
Other international borrowings.............. 68 70
------- -------
2,868 2,979
Less: current portion of long-term debt..... 159 84
------- -------
Total long-term debt........................ 2,709 2,895
------- -------
Total debt.................................. $2,967 $3,274
======= =======
At June 30, 1999, $548 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.
<PAGE>
Financial Instruments - At June 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 June 30,
1999 Praxair had $299 million of currency exchange forward contracts
outstanding: $232 million to hedge recorded balance sheet exposures, $14
million to hedge firm commitments (generally for the purchase of
equipment related to construction projects) and $53 million to hedge
future net income. Additionally, there are $62 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 565,090 and 2,932,525 shares were not included in the computation of
diluted earnings per share for the quarter and six months ended June 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. At June 30, 1999, all of these
contracts have been 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 (approximately $21
million) 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, Inc. 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 Six Months Ended
June 30, Percent June 30, Percent
1999 1998 Change 1999(a) 1998 Change
------ ------- ------- -------- ------ -------
Sales.......................... $1,149 $1,234 - 7% $2,267 $2,435 - 7%
Selling, general
and administrative............ $ 170 $ 165 + 3% $ 325 $ 332 - 2%
Depreciation and amortization.. $ 111 $ 119 - 7% $ 224 $ 234 - 4%
Operating profit............... $ 201 $ 227 - 11% $ 412 $ 441 - 7%
Interest expense............... $ 50 $ 67 - 25% $ 107 $ 132 - 19%
Effective tax rate............. 25% 25% -% 24% 25% - 1%
Income before accounting change $ 107 $ 108 - 1% $ 215 $ 210 + 2%
Excluding one-time hedge gain in Brazil:
Operating profit............... $ 201 $ 227 - 11% $ 391 $ 441 - 11%
Effective tax rate............. 25% 25% -% 25% 25% -%
Income before accounting change $ 107 $ 108 - 1% $ 201 $ 210 - 4%
(a) The results for the quarter and six months ended June 30, 1999 versus the
comparative 1998 periods 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 1.76 at June 30, 1999 (1.71
average rate for the quarter and 1.74 average rate for the six month
period). 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 in the 1999 first
quarter and six month periods ($14 million after taxes and minority
interests or $0.09 per share). There was no impact on the current quarter.
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 and six months ended June 30, 1999
versus the respective 1998 periods 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 Surface
Technologies and North America, price increases in South America, strong growth
in Asia and sales growth in Europe.
Operating profit decreased 11% for the 1999 quarter and, excluding the impact of
the Brazilian hedge gain, also decreased 11% for the six months ended June 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 quarter and six months ended June 30, 1999
includes $11 million of costs related primarily to long-term incentive plans due
to the 36% increase in the Company's stock price during the 1999 second quarter.
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, as well as packaged gases and Surface Technologies
acquisitions. Other income - net for the quarter and six months ended June 30,
1999 includes a $50 million gain related to the redemption of preference shares
from an earlier business sale and $39 million of costs primarily for
postemployment benefits and an anticipated loss on the sale of an air separation
plant under construction for a third party. For the six months ended June 30,
1999, other income - net also includes the collection of a note receivable from
an earlier business sale and charges for severance costs, primarily in North
America (each about $12 million).
<PAGE>
Income before accounting change decreased 1% for the 1999 quarter and, excluding
the Brazilian hedge gain, decreased 4% for the six months versus the respective
1998 periods. This decrease was due principally to lower operating profit
partially offset by decreased interest expense. Interest expense decreased $17
million or 25% for the quarter and $25 million for the six month period versus
the respective 1998 periods due to currency translation effects in Brazil and
lower debt levels. The effective tax rate for the 1999 quarter and six months
remained at 25%, excluding the impact of the Brazilian hedge gain.
The number of employees at June 30, 1999 was approximately 24,200 which reflects
a decrease of approximately 600 from December 31, 1998. The decrease is
principally the result of continued productivity improvement initiatives in
South America, North America, Surface Technologies 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 Six Months Ended
June 30, Percent June 30, Percent
1999 1998 Change 1999 1998 Change
------ ------ ------- ------ ------ -------
SALES
North America $ 692 $ 712 - 3% $1,353 $1,403 - 4%
South America 174 238 -27% $ 342 $ 482 -29%
Europe 132 131 + 1% $ 265 $ 255 + 4%
Surface Technologies 108 104 + 4% $ 219 $ 203 + 8%
All Other 43 49 -12% $ 88 $ 92 - 4%
------- ------ ------- -------
$1,149 $1,234 - 7% $2,267 $2,435 - 7%
OPERATING PROFIT
North America $ 128 $ 141 - 9% $ 249 $ 281 -11%
South America 34 50 -32% $ 87(a)$ 97 -10%
Europe 32 28 +14% $ 62 $ 54 +15%
Surface Technologies 19 19 -% $ 39 $ 37 + 5%
All Other (5) (5) -% $ (12) $ (16) +25%
Corporate (7) (6) -17% $ (13) $ (12) - 8%
------ ------ ------- -------
$ 201 $ 227 -11% $ 412 $ 441 - 7%
(a) The South American operating profit for the 1999 six months includes a
one-time $21 million benefit from net income hedges in Brazil that were
effectively settled in the first quarter.
North America
- -------------
Sales for the quarter and six months ended June 30, 1999 decreased 3% and 4%,
respectively, as compared to the 1998 periods. This decrease reflects volume
declines and unfavorable currency translation effects in Mexico and Canada,
partly offset by the impact from 1998 acquisitions. Pricing was flat.
<PAGE>
Operating profit decreased 9% and 11%, respectively, for the quarter and six
months ended June 30, 1999 versus the respective 1998 periods. The decrease is
due primarily to the decreased sales, product mix, cost inflation, and higher
than expected distribution costs (due to carbon dioxide sourcing problems),
partly offset by the benefits of productivity improvements.
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 six months ended June 30, 1999, the
currency devaluation reduced sales by $68 million and $139 million,
respectively, and reduced operating profit by $17 million and $30 million,
respectively, as compared to the 1998 periods. 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 of 1999 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. Operating
profit for the quarter ended June 30, 1999 was not impacted by the hedge gains.
Sales for the quarter and six months ended June 30, 1999 decreased 27% and 29%,
respectively, primarily due to the unfavorable currency effects, with volume
decreases almost equally offset by price increases. Excluding the currency
effects for the quarter and six months ended June 30, 1999, sales increased by
approximately 2% 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 4% for the quarter and 6% for
the six months versus the respective 1998 periods.
Operating profit for the quarter and six months ended June 30, 1999 decreased
$16 million and $10 million, respectively, as compared to the 1998 periods. This
decrease was caused primarily by the currency devaluation and cost inflation,
which was offset by productivity improvement initiatives, and the $21 million
first quarter operating profit benefit from net income hedges in Brazil (see
Note 10). Excluding the impact of currency devaluation and the net income
hedges, operating profit increased 2% for the quarter and decreased 1% for the
six months versus the respective 1998 periods.
Europe
- ------
Sales for the quarter and six months ended June 30, 1999 increased 1% and 4%,
respectively, as compared to the 1998 periods due primarily to volume and price
growth, with favorable currency translation effects for the first quarter being
offset by unfavorable currency translation effects for the second quarter.
Excluding the currency effects for the quarter and six months ended June 30,
1999, sales increased by 2% and 3%, respectively.
Operating profit for the quarter and six months ended June 30, 1999 increased
14% and 15%, respectively, as compared to the 1998 periods. This was due to the
sales increases and cost improvement initiatives. Excluding currency translation
effects for the quarter and six months ended June 30, 1999, operating profit
increased 7% and 6%, respectively.
<PAGE>
Surface Technologies
- --------------------
Sales for the quarter and six months ended June 30, 1999 increased 4% and 8%,
respectively, as compared to the 1998 periods due primarily to volume growth and
first quarter acquisitions, partly offset by price decreases and negative
currency impacts in the second quarter.
Operating profit for the quarter ended June 30, 1999 was flat as compared to
the 1998 period and increased 5% for the year as compared to 1998. This was
due to the sales increases and the impact of acquisitions.
All Other
- ---------
Sales for the quarter and six months ended June 30, 1999 decreased 12% and 4%,
respectively as compared to the 1998 periods. Asia experienced 32% sales growth
for the period, due primarily to volume growth and favorable currency
translation effects. Asia's growth was more than offset by decreased sales of
global supply systems.
Operating Profit for the quarter ended June 30, 1999 was flat when compared to
the 1998 period, and improved $4 million for the six months ended June 30, 1999
as compared to the 1998 period due primarily to impacts from the global supply
systems business.
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)
Six Months Ended June 30, 1999 1998
- -------------------------------------- ------ ------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net income plus depreciation
and amortization.................... $ 429 $ 444
Working capital....................... $ 22 $ (50)
Total from operating activities....... $ 419 $ 370
INVESTING:
Capital expenditures.................. $ (305) $ (363)
Acquisitions.......................... $ (7) $ (222)
Divestitures and asset sales.......... $ 88 $ 13
------- -------
Total used for investing ............. $ (224) $ (572)
FINANCING ACTIVITIES:
Debt increases (reductions) - net..... $ (272) $ 193
Minority transactions and other....... $ 75 $ (1)
Net issuances of common stock......... $ 58 $ 39
Cash dividends........................ $ (44) $ (40)
Total from (used for) financing....... $ (183) $ 191
<PAGE>
June 30, December 31,
DEBT-TO-CAPITAL RATIO 1999 1998
- -------------------------------------- --------- ------------
Debt.................................. $2,967 $3,274
Capital............................... $5,550 $6,168
Debt-to-capital ratio................. 53.5% 53.1%
Cash Flow From Operations
- -------------------------
Cash flow from operations increased to $419 million in the first six months of
1999 versus $370 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 six months of 1999 totaled $224
million, a decrease of $348 million from the 1998 period. This decrease was due
primarily to lower capital and acquisition expenditures, and higher proceeds
from divestitures and asset sales.
Capital expenditures for the first six months of 1999 totaled $305 million, down
$58 million from the corresponding period in 1998. The lower level of capital
expenditures 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 six months of 1999 totaled $7 million, a
decrease of $215 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 six months of 1999 related to an
acquisition in the Surface Technologies business and buy-outs of minority
interests in South America.
Divestiture and asset sales in the first six months of 1999 totaled $88 million,
an increase of $75 million from the 1998 period. 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 June 30, 1999, Praxair's total debt outstanding was $2,967 million, a
decrease of $307 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 June 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 June 30, 1999 but decreased from 55.5% at March 31, 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.
<PAGE>
YEAR 2000
The Problem
The "year 2000 problem" arises because many existing computer programs or
date-sensitive microprocessors embedded in operating equipment use only the last
two digits to refer to a year. Therefore, these computer programs and operating
systems may not properly recognize a year that begins with "20" instead of "19".
If not corrected, many applications could fail or create erroneous results.
Although not all computer applications or systems are subject to this flaw, all
are suspect until they are assessed. Like most companies, Praxair operates and
maintains computer systems for accounting, payroll, invoicing and many other
business purposes. In addition, Praxair's operations systems (including, among
others, plant control, diagnostic and monitoring, quality control, distribution
and logistics), and its infrastructure systems (including, among others,
telecommunications) use computer programs or embedded microprocessors. Also,
Praxair, as other companies, may be affected by the year 2000 problems of its
suppliers (e.g., by the interruption of supply of critical raw materials or
utilities) or of its customers (e.g., interrupted or reduced demand for
Praxair's products due to interruptions in the customer's own manufacturing
processes).
Praxair's Readiness Status
Management currently believes that Praxair has in place the appropriate programs
and plans to achieve timely year 2000 readiness for its safety and
mission-critical systems. However, Praxair's on-going assessment program may, at
some time in the future, reveal as yet unidentified or not fully understood
issues that may not be addressable in a timely fashion contrary to the foregoing
forward-looking assumption. Further, it is uncertain whether the year 2000
problems of Praxair's suppliers and customers will be resolved in a timely
manner.
Praxair's Readiness Program
Work on year 2000 issues at Praxair has been ongoing since 1996. Praxair has
established a Year 2000 Global Project Office to coordinate and accelerate its
year 2000 activities. The director of the Global Year 2000 Project Office
reports directly to Praxair's chief executive officer. The Global Project Office
currently consists of a project manager and 13 global functional team leaders
representing: applications technology; communications; finance; energy/other
utilities; facilities; human resources; information technology;
operations/production; procurement; product sales and services equipment; law;
research and development; and safety and environmental services. In addition,
the Global Project Office currently includes team members representing eight
Praxair businesses and affiliates in North America, South America, Europe and
Asia who have accountability for year 2000 activities.
Praxair's year 2000 readiness program consists of six phases: awareness;
inventory and assessment; renovation; validation; implementation; and business
continuity planning. These phases at any point in time may run concurrently with
respect to different systems, issues and business units. While the following
represents a general description of Praxair's overall progress in each of these
phases, progress for any individual system, issue or business unit may be more
or less advanced than that indicated.
Awareness: Praxair has launched a worldwide communications and awareness effort
in order to inform employees about year 2000 issues and enlist their assistance
in implementing solutions. This effort is ongoing. Praxair also is in continuous
discussions on year 2000 issues with customers and suppliers.
<PAGE>
Inventory and Assessment: A global inventory of Praxair systems, and assessment
of those systems as to year 2000 readiness, has been conducted which management
currently believes has covered Praxair's safety and mission-critical systems,
and most of its other systems. However, inventory and assessment efforts are
ongoing which may reveal as yet unidentified components or issues; contrary to
the foregoing assumption. With respect to assessment of the year 2000 readiness
of suppliers, certain critical suppliers have been identified and discussions
are ongoing or planned with each.
Renovation: Solutions for most year 2000 readiness issues have been identified.
Renovation activities for safety and mission-critical systems have been
substantially completed.
Validation: An integrated testing strategy has been developed to validate the
readiness of safety and mission-critical systems affected by year 2000.
Substantially all systems have been tested and validation is substantially
complete.
Implementation: Solutions that have been validated through testing have been
implemented. Substantially all of the solutions for safety and mission-critical
Praxair-maintained systems have been implemented .
Business Continuity Planning: Praxair has developed business continuity, or
contingency plans with respect to the build-up of product inventory and, where
possible, allocation of product from alternate plants in the event of electric
power or other interruptions of utility supplies to certain Praxair plants.
Praxair has also prepared contingency plans for failure of Praxair-maintained
systems. In September, Praxair has plans to conduct a global "rehearsal" of its
contingency plans. The final contingency plans developed by Praxair will depend
upon the findings of such "rehearsals" and on the ongoing assessment of Praxair
suppliers towards year 2000 readiness. Overall, Praxair has essentially
completed the above phases. Though some scheduled work exists, it is minimal and
should be completed before December 31, 1999. Praxair's internal audits group
will be conducting audits verifying 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 $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 $20 million has been incurred. Of the
amounts not yet incurred, approximately $5 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.
<PAGE>
Management's current projection is that the "most reasonably likely worst case"
year 2000 scenario would involve the temporary interruption of electric power or
other utility supplies to one or more of Praxair's production plants due to
failure of the utility supplier to be year 2000 ready. Management is unable to
estimate the impact of such failure or failures, but it could have a material
adverse impact on Praxair's results of operations or cash flows, the measure of
such impact would depend on the number and nature of the interruptions that
would result. Other worst case year 2000 scenarios can be conceived which would
have a material impact on Praxair as well as on many other companies, including,
for example, break-downs of communications, governmental or banking systems
external to Praxair, but Praxair has not independently evaluated the risks of
these events.
Cautionary Statements
As to the foregoing forward-looking statements about Praxair's expected year
2000 readiness, actual results will depend on, and may be affected by changes
in, among other factors; the level of interest and sense of urgency with respect
to year 2000 issues by governments and institutions in various regions of the
world; and the cooperation of raw materials and utilities suppliers in providing
readiness assurances to Praxair and the accuracy of those assurances.
Management does not currently believe that the failures described above as the
"most reasonably likely worst case scenario" are likely or that they will be so
widespread as to have an adverse material effect on Praxair. Efforts to assess
the year 2000 readiness of energy suppliers and other suppliers are ongoing,
however, and these efforts may, at some time in the future, reveal serious
deficiencies, not currently identified or fully understood, which may cause a
material impact on Praxair contrary to the foregoing forward-looking assumption.
The above forward-looking projection of costs may be affected by year 2000
issues not yet identified or fully understood. If these or other circumstances
arise, Praxair's costs to address the year 2000 issues of Praxair-maintained
systems and components may differ from those projected above.
To the extent that any reader of this statement reviews it for the purpose of
making any decision for the purchase of goods or services from Praxair or
evaluating Praxair's Year 2000 readiness, such reader should construe this
statement to be a Year 2000 readiness disclosure and that any statements made to
such reader in the course of any sale are subject to the Year 2000 Information
and Readiness Disclosure Act (15 USC 1 Note, P.L. 105-271, 112 Stat). Such
reader should be further advised that in the case of a dispute, this Act may
reduce the reader's legal rights regarding the use of any such statements,
unless otherwise specified in a contract or tariff.
<PAGE>
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 to the condensed consolidated financial statements relating to SOP
98-5, "Reporting on the Costs of Start-Up Activities." In June 1999, the
Financial Accounting Standards board extended Praxair's 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.
The annual meeting of shareholders of Praxair, Inc. was held on April 27, 1999.
Information concerning the matters submitted to a vote of the security holders
at that meeting was disclosed in the company's Report on Form 10-Q for the
quarter ended March 31, 1999.
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: August 4, 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 JUNE 30, 1999>
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 898
<ALLOWANCES> 29
<INVENTORY> 288
<CURRENT-ASSETS> 1308
<PP&E> 8236
<DEPRECIATION> 3684
<TOTAL-ASSETS> 7437
<CURRENT-LIABILITIES> 1061
<BONDS> 2709
75
0
<COMMON> 2
<OTHER-SE> 2161
<TOTAL-LIABILITY-AND-EQUITY> 7437
<SALES> 2267
<TOTAL-REVENUES> 2267
<CGS> 1325 <F1>
<TOTAL-COSTS> 1325 <F1>
<OTHER-EXPENSES> 224 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> 305
<INCOME-TAX> 72
<INCOME-CONTINUING> 215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (10)
<NET-INCOME> 205
<EPS-BASIC> 1.29 <F2>
<EPS-DILUTED> 1.27 <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>
