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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, 2002
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 1-11037
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Praxair, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1249050
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
39 Old Ridgebury Road, Danbury, CT 06810-5113
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(203) 837-2000
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At June 30, 2002, 161,413,384 shares of common stock ($.01 par value) of the
Registrant were outstanding.
1
Forward-looking statements
--------------------------
The forward-looking statements contained in this quarterly report concerning
development and commercial acceptance of new products and services, financial
outlook, earnings growth, and other financial goals, involve risks and
uncertainties, and are subject to change based on various factors. These include
the impact of changes in worldwide and national economies, the cost and
availability of electric power and other energy and the ability to achieve price
increases to offset cost increases, development of operational efficiencies,
changes in foreign currencies, changes in interest rates, the continued timely
development and acceptance of new products and services, the impact of
competitive products and pricing, and the impact of tax and other legislation
and regulation in the jurisdictions which the Company operates.
2
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income - Praxair, Inc. and Subsidiaries
Quarter and Six Months Ended June 30, 2002 and 2001 (Unaudited)
Condensed Consolidated Balance Sheet - Praxair, Inc. and Subsidiaries
June 30, 2002 (Unaudited) and December 31, 2001
Condensed Consolidated Statement of Cash Flows - Praxair, Inc. and
Subsidiaries Six Months Ended June 30, 2002 and 2001 (Unaudited)
Notes to Condensed Consolidated Financial Statements - Praxair, Inc.
and Subsidiaries (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signature
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED)
Quarter Ended June 30,
-----------------------------
2002 2001
--------- ---------
SALES ...................................... $ 1,307 $ 1,314
Cost of sales, exclusive of
depreciation and amortization ............ 755 784
Selling, general and administrative ........ 191 176
Depreciation and amortization .............. 120 125
Research and development ................... 16 16
Other income-net ........................... 19 7
--------- ---------
OPERATING PROFIT ........................... 244 220
Interest expense ........................... 47 55
--------- ---------
INCOME BEFORE INCOME TAXES ................. 197 165
Income taxes ............................... 43 37
--------- ---------
INCOME OF CONSOLIDATED ENTITIES ............ 154 128
Minority interests ......................... (6) (4)
Income from equity investments ............. 2 2
--------- ---------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGES ...................... 150 126
Cumulative effect of accounting changes .... -- --
--------- ---------
NET INCOME ................................. $ 150 $ 126
========= =========
PER SHARE DATA:
Basic earnings per share:
Before cumulative effect of
accounting changes ...................... $ 0.92 $ 0.78
Cumulative effect of accounting changes .. -- --
--------- ---------
Net income ............................... $ 0.92 $ 0.78
========= =========
Diluted earnings per share:
Before cumulative effect of
accounting changes ...................... $ 0.91 $ 0.77
Cumulative effect of accounting changes .. -- --
--------- ---------
Net income ............................... $ 0.91 $ 0.77
========= =========
Cash dividends per share ................... $ 0.19 $ 0.17
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING (000'S):
Basic shares outstanding ................... 162,697 161,543
Diluted shares outstanding ................. 164,835 163,802
The accompanying notes are an integral part of these financial statements.
4
PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED)
Six Months Ended June 30,
-----------------------------
2002 2001
--------- ---------
SALES ...................................... $ 2,539 $ 2,649
Cost of sales, exclusive of
depreciation and amortization ............ 1,454 1,593
Selling, general and administrative ........ 375 344
Depreciation and amortization .............. 241 247
Research and development ................... 33 32
Other income-net ........................... 25 11
--------- ---------
OPERATING PROFIT ........................... 461 444
Interest expense ........................... 98 111
--------- ---------
INCOME BEFORE INCOME TAXES ................. 363 333
Income taxes ............................... 80 76
--------- ---------
INCOME OF CONSOLIDATED ENTITIES ............ 283 257
Minority interests ......................... (10) (9)
Income from equity investments ............. 4 4
--------- ---------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGES ...................... 277 252
Cumulative effect of accounting changes .... (139) (2)
--------- ---------
NET INCOME ................................. $ 138 $ 250
========= =========
PER SHARE DATA:
Basic earnings per share:
Before cumulative effect of
accounting changes ...................... $ 1.70 $ 1.56
Cumulative effect of accounting changes .. (.85) (.01)
--------- ---------
Net income ............................... $ 0.85 $ 1.55
========= =========
Diluted earnings per share:
Before cumulative effect of
accounting changes ...................... $ 1.67 $ 1.54
Cumulative effect of accounting changes .. (.84) (.01)
--------- ---------
Net income ............................... $ 0.83 $ 1.53
========= =========
Cash dividends per share ................... $ 0.38 $ 0.34
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING (000'S):
Basic shares outstanding ................... 163,111 161,158
Diluted shares outstanding ................. 165,383 163,216
The accompanying notes are an integral part of these financial statements.
5
PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Millions of dollars)
June 30, December 31,
2002 2001
(Unaudited)
------------ ------------
ASSETS
Cash and cash equivalents ....................... $ 32 $ 39
Accounts receivable ............................. 923 857
Inventories ..................................... 307 287
Prepaid and other current assets ................ 131 93
------- -------
TOTAL CURRENT ASSETS ....................... 1,393 1,276
Property, plant and equipment-net ............... 4,726 4,817
Goodwill ........................................ 1,004 1,136
Other intangible assets ......................... 50 44
Other assets .................................... 453 442
------- -------
TOTAL ASSETS ............................... $ 7,626 $ 7,715
======= =======
LIABILITIES AND EQUITY
Accounts payable ................................ $ 363 $ 413
Short-term debt ................................. 285 178
Current portion of long-term debt ............... 20 86
Other current liabilities ....................... 557 517
------- -------
TOTAL CURRENT LIABILITIES .................. 1,225 1,194
Long-term debt .................................. 2,717 2,725
Other long-term obligations ..................... 1,180 1,158
------- -------
TOTAL LIABILITIES .......................... 5,122 5,077
Minority interests .............................. 155 141
Preferred stock ................................. 20 20
Shareholders' equity ............................ 2,329 2,477
------- -------
TOTAL LIABILITIES AND EQUITY ............... $ 7,626 $ 7,715
======= =======
The accompanying notes are an integral part of these financial statements.
6
PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
(UNAUDITED)
Six Months Ended June 30,
---------------------------
2002 2001
------- -------
OPERATIONS
Net income ..................................... $ 138 $ 250
Adjustments:
Depreciation and amortization ................ 241 247
Accounting Change............................. 139 -
Deferred income taxes ........................ - 32
Other non-cash (benefits) charges............. (5) (3)
Working capital .............................. (69) (52)
Long-term assets and liabilities ............. (37) (37)
------- -------
Net cash provided by operating activities .. 407 437
------- -------
INVESTING
Capital expenditures ........................... (221) (284)
Acquisitions.................................... (69) (181)
Divestitures and asset sales ................... 15 11
-------- --------
Net cash used for investing activities ..... (275) (454)
-------- --------
FINANCING
Short-term borrowings (repayments)- net......... 118 34
Long-term borrowings ........................... 798 285
Long-term debt repayments ...................... (886) (263)
Minority transactions and other ................ (1) (12)
Issuance of common stock ....................... 131 70
Purchases of common stock ...................... (236) (25)
Cash dividends ................................. (62) (55)
-------- --------
Net cash (used for) or provided by
financing activities ...................... (138) 34
-------- --------
Effect of exchange rate changes on cash and
cash equivalents ............................... (1) (2)
-------- --------
Change in cash and cash equivalents .............. (7) 15
Cash and cash equivalents beginning-of-year....... 39 31
-------- --------
Cash and cash equivalents end-of-period .......... $ 32 $ 46
======== ========
The accompanying notes are an integral part of these financial statements.
7
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 2001 Annual Report. Certain prior years' amounts have been
reclassified to conform to the current year's presentation.
2. Accounting Policies Updates
The following accounting policies are being updated, from those included
in the Company's 2001 Form 10K in Note 1 to the consolidated financial
statements. The updates include additional disclosures related to
depreciation lives, accounting for shipping and handling fees, and sales
returns.
Revenue Recognition - Revenue is recognized when product is shipped or
services are provided to customers. Revenues from long-term construction
contracts are recognized using the percentage-of-completion method.
Under this method, revenues for sales of major equipment are recognized
primarily based on cost incurred to date relative to total estimated
cost. Changes to total estimated cost and anticipated losses, if any,
are recognized in the period determined. Sales returns and allowances
are not a normal business practice in the industry and are deminimis.
Amounts billed for shipping and handling fees are recorded as sales,
generally on FOB destination terms, and costs incurred for shipping and
handling are recorded as cost of sales.
Property, Plant and Equipment - net - Property, plant and equipment are
carried at cost, net of accumulated depreciation. Depreciation is
calculated on the straight-line method based on the estimated useful
lives of the assets, which range from 3 to 40 years.
Land improvements To 20 years
Buildings 25 to 40 years
Machinery and equipment 3 to 30 years
The Company generally uses accelerated depreciation methods for tax
purposes, where appropriate, and periodically reviews the recoverability
of long-lived assets based upon anticipated cash flows generated from
such assets.
3. Accounting Changes and Recently Issued Accounting Standards
Praxair has adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and
Other Intangible Assets", effective January 1, 2002. Under the new rule,
companies no longer amortize goodwill or indefinite life intangible
assets. In addition, the rule provides a six-month transitional period
from the effective date of adoption for the Company to perform an
initial assessment of whether there is an indication that the carrying
value of goodwill is impaired. This assessment is made by comparing the
fair value of each reporting unit, as determined in accordance with the
new rule, to its book value. To the extent that an impairment is
indicated (fair value is less than book value), the company must perform
8
a second test to measure the amount of the impairment. The rule requires
that any initial impairment be taken as a charge to net income as a
cumulative effect of accounting change retroactive to January 1, 2002.
In future years, this assessment must be conducted at least annually at
the reporting unit level, and any such impairment must be recorded as a
charge to operating earnings.
Praxair has completed the initial impairment test and has concluded that
certain of its goodwill was impaired, resulting in a non-cash after-tax
charge of $139 million or $0.84 per share on a diluted basis. The charge
was recorded as a cumulative effect of an accounting change, retroactive
to January 1, 2002, in accordance with the rule.
In determining this charge, our process was the following: First, in
accordance with the specific requirements of SFAS 142, Praxair
determined that it had 15 reporting units, which are sub-units of its
reporting segments, for which goodwill should be tested for impairment.
Second, we calculated the fair value of each reporting unit using a
combination of several valuation approaches including discounted cash
flows; multiples of sales and earnings before interest, taxes,
depreciation, and amortization (EBITDA); and, comparisons of historical
transactions where appropriate. We weighted the valuation approaches
based on the individual characteristics of the reporting unit. Third, we
compared the fair value of each reporting unit to its respective book
value. For nine of the reporting units the calculated fair values
exceeded the book values, and no impairment was indicated. For six
reporting units where the fair values were less than the book values, we
proceeded to step 2, which is to calculate the fair value of goodwill.
Because goodwill is defined as the excess of the cost of an acquired
entity over the fair value of all identifiable tangible and intangible
assets acquired and liabilities assumed, we were required to calculate
the fair value of such assets and liabilities for the six reporting
units. Through this process, we determined the amount of goodwill that
was impaired for each reporting unit.
The following is a summary of the impairment charge by business segment,
net of a $7 million tax benefit (millions of dollars):
Segment Reporting Unit Charge
South America Southern Cone, Andean Region $ 80
Europe* Poland, Israel $ 20
Asia India $ 17
Surface Technologies Aviation Services $ 22
----
$139
*Includes $2 million related to a non-consolidated equity investment
The goodwill in Poland, and the majority of goodwill in the Southern
Cone (primarily Argentina) and the Andean Region (Venezuela, Colombia
and Peru) of South America was related to the 1996 acquisition of CBI
Industries. Market and economic conditions have resulted in an
impairment to the goodwill allocated to these reporting units. Local
market and economic conditions have also affected the value of
acquisitions made in Israel and India primarily in 1996 through 1998.
Goodwill for Surface Technologies Aviation Services business was related
to several acquisitions made in 1995 through 1998 in the aviation
coatings and repair business. This business has been significantly
impacted by the general downturn in the aviation industry, especially
due to the events of September 11, 2001.
Also effective January 1, 2002, Praxair adopted SFAS 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS 144 did not
materially change the methods used by the Company to measure impairment
9
losses on long-lived assets, but may result in more matters being
reported as discontinued operations and assets held for sale in the
future.
Effective January 1, 2001, Praxair adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS 137
and 138. SFAS 133 requires all derivatives to be recorded on the balance
sheet at fair value. At January 1, 2001, Praxair recorded a one-time
after tax charge as a cumulative effect adjustment for the initial
adoption of SFAS No. 133 totaling $2 million in its consolidated
statement of operations, and a deferred loss of $4 million in the
accumulated other comprehensive income (loss) component of shareholders'
equity in the condensed consolidated balance sheet (see Notes 5, 6 and
7).
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections". The Statement rescinds Statement 4 which
required all gains and losses from extinguishment of debt to be
aggregated and, when material, classified as an extraordinary item net
of related income tax effect. Statement No. 145 also amends Statement 13
to require that certain lease modifications having economic effects
similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. We adopted this standard for
transactions occurring after April 1, 2002 and do not expect this
Statement will have a material effect on our financial position or
results of operations.
In July 2002 the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include
lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS No. 146 will be effective for
disposal activities initiated after December 31, 2002 and we do not
expect this Statement will have a material effect on our financial
position or results of operations.
4. Special Charges
In the third quarter of 2001, Praxair recorded pre-tax charges totaling
$70 million and in the fourth quarter of 2000, recorded pre-tax charges
totaling $159 million and $2 million of equity income charges for
severance and other costs (see Notes 2 and 10 to the consolidated
financial statements included in Praxair's 2001 Annual Report). These
special charges included the planned termination of approximately 1,760
employees. The programs will not have any material effect on revenues.
Through June 30, 2002, all of the cost reductions from the 2000 program
have been achieved, while about 80% of the anticipated cost reductions
have been achieved from the 2001 program. As of June 30, 2002, 1,640
employees have been terminated and the remainder are expected to be
completed in 2002. Also, during 2002, the Company made minor adjustments
to the original estimates to reflect actual costs incurred.
Cash payments related to the special charges (primarily for severance)
during the quarter ending June 30, 2002 were $10 million, ($23 million
for the six months ended, June 30, 2002) and estimated payments for the
remainder of 2002 are $18 million.
The table below summarizes the activity (primarily cash payments) in the
accrual for special charges since December 31, 2001. The remaining
accrual relates to primarily severance and lease payments:
10
(Millions of dollars) Other Total
Accrual- Special Charges Severance Charges Accrual
-------------------------- --------- ------- -------
Balance, December 31, 2001 $ 45 $ 26 $ 71
Adjustments .............. (2) -- (2)
2002 activity ............ (20) (3) (23)
---- ---- ----
Balance, June 30, 2002 ... $ 23 $ 23 $ 46
==== ==== ====
5. Inventories
The following is a summary of Praxair's consolidated inventories:
(Millions of dollars) June 30, December 31,
2002 2001
---------- ----------
Raw materials and supplies...... $ 88 $ 87
Work in process................. 40 36
Finished goods.................. 179 164
----- -----
$ 307 $ 287
===== =====
6. Shareholders' Equity
Changes in Shareholders' Equity were as follows:
(Thousands of shares) Common Treasury
Stock Issued Stock
------------ ---------
Balance, January 1, 2002................ 170,141 7,998
Common stock activity (b)............... 2,933 3,663
--------- --------
Balance, June 30, 2002 ............. 173,074 11,661
========= ========
Accumulated
Additional Other
Common Paid-In Treasury Retained Comprehensive
(Millions of dollars) Stock Capital Stock Earnings Income(Loss) Total
------ --------- -------- -------- ----------- -------
Balance, January 1, 2002... $ 2 $1,795 $ (330) $ 2,307 $(1,297) $2,477
Net income .................. 138 138
Translation adjustments...... (140) (140)
Derivatives (a).............. 2 2
Comprehensive income......... 0
Dividends - common stock..... (62) (62)
Common stock activity (b).... 124 (210) (86)
--- ------ ------ ------- ------ -------
Balance, June 30, 2002 $ 2 $1,919 $ (540) $2,383 $(1,435) $2,329
=== ====== ====== ======= ====== =======
(a) Derivatives (see Notes 2 and 7): Millions
--------
Balance at December 31, 2001 $(4)
Reclassed to earnings (primarily interest expense) 6
Change in fair value (4)
---
Balance at June 30, 2002 $(2)
====
(b) Relates to issuance of common stock for the Dividend Reinvestment and Stock
Purchase Plan, employee savings and incentive plans, and
issuances/purchases of common stock.
11
During the quarter and six months ended June 30, 2002, Praxair granted
options for 25,000 and 1,318,500 shares, respectively, of common stock
having option prices ranging from $54.86 to $58.65 per share (weighted
average price of $56.77), the closing market price of Praxair's common
stock on the day of the grants. At June 30, 2002 there were 13,789,420
shares under option at prices ranging from $15.50 to $58.65 per share
(weighted average of $43.78) of which options for 8,224,112 shares were
exercisable at prices ranging from $15.50 to $56.13 per share (weighted
average of $40.40). During the quarter and six months ended June 30,
2002, 310,657 and 2,983,313 options were exercised, respectively.
7. Debt
The following is a summary of Praxair's outstanding debt at June 30, 2002
and December 31, 2001.
June 30, December 31,
2002 2001
(Millions of Dollars) (Unaudited)
Short-term: ------------- --------------
Canadian borrowings....................... $ 49 $ -
U.S. Borrowings........................... 3 -
South American borrowings................. 108 90
Asian borrowings.......................... 101 58
Other international borrowings............ 24 30
------- -------
Total short-term debt....................... 285 178
Long-term:
U.S.:
Commercial paper and U.S. borrowings...... - 716
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
4.75% Notes due 2007..................... 250 -
6.625% Notes due 2007..................... 250 250
6.50% Notes due 2008..................... 250 250
6.375% Notes due 2012*................... 525 -
8.70% Debentures due 2022
(Redeemable starting in 2002)...... 300 300
Other borrowings ...................... 41 41
Canadian borrowings......................... - 113
South American borrowings................... 26 35
Asian borrowings............................ 65 75
Other international borrowings.............. 5 6
------- -------
2,737 2,811
Less: current portion of long-term debt..... 20 86
------- -------
Total long-term debt........................ 2,717 2,725
------- -------
Total debt.................................. $3,022 $2,989
======= =======
* June 30, 2002 includes a $25 million fair value increase
related to SFAS 133 hedge accounting (see Note 8).
On March 19, 2002, Praxair issued $500 million 6.375% notes maturing
April 1, 2012. The proceeds were used to repay outstanding commercial
paper.
12
On June 19, 2002 Praxair issued $250 million 4.75% notes maturing July
15, 2007. The proceeds were used to repay outstanding commercial paper.
At June 30, 2002, $625 million of notes due in 2003 have been classified
as long-term ($716 million of short-term borrowings at December 31,
2001) 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 credit agreements. No borrowings were outstanding under the
credit agreements at June 30, 2002.
On July 15, 2002, Praxair redeemed the 8.7% Debentures due 2022 for $313
million resulting in an additional $15 million third quarter charge
(primarily a call premium) to be recorded within interest expense.
8. Financial Instruments
Interest Rate Swaps and Forward Contract - At June 30, 2002 Praxair had
$200 million, notional amount of interest rate swap agreements that
effectively convert variable rate lease payments to fixed rate lease
payments ($850 million at December 31, 2001 that converted variable rate
interest and lease payments to fixed rate interest and lease payments).
The scheduled maturities of the swap agreements are $100 million in 2002
and 2003. The fair market value of these swaps at June 30, 2002 was a
loss of approximately $1 million ($6 million at December 31, 2001).
These swap agreements have been designated as, and are effective as,
cash flow hedges of outstanding lease obligations. During the quarter,
Praxair recorded the change in fair value to accumulated other
comprehensive income (loss) and reclassified to earnings a portion of
the deferred loss from accumulated other comprehensive income (loss) as
the hedged transactions occurred and were recognized in earnings. Any
ineffectiveness was also recorded and was not significant. Praxair
expects to reclassify the after-tax deferred losses of approximately $1
million from accumulated other comprehensive income (loss) to earnings
(operating profit) in the next seven months as the hedged transactions
occur.
At June 30, 2002 Praxair had $500 million notional amount of interest
rate swap agreements that effectively convert fixed rate interest to
variable rate interest (none at December 31, 2001). The swap agreements
mature in April 2012 and have been designated as and are effective as
fair value hedges of the $500 million 6.375% Notes. At June 30, 2002,
the fair value of these swaps was a gain of approximately $25 million,
which Praxair recognized in earnings as offsets to the changes in fair
value of the underlying debt instruments.
Currency Contracts - Praxair is also a party to currency exchange
forward contracts to manage its exposure to changing currency exchange
rates that all mature within one year. At June 30, 2002, Praxair had
$340 million notional amount of currency exchange forward contracts
outstanding ($271 million at December 31, 2001): $199 million to hedge
recorded balance sheet exposures ($160 million at December 31, 2001), $1
million to hedge firm commitments generally for the purchase of
equipment related to construction projects ($1 million at December 31,
2001), $125 million to hedge anticipated future net income ($97 million
at December 31, 2001) and $15 million to hedge net investments in
foreign subsidiaries ($13 million at December 31, 2001). Additionally,
there was $14 million notional value of currency exchange contracts that
effectively offset ($7 million at December 31, 2001). The net income
hedges are related to anticipated 2002 net income in Brazil, Spain,
Mexico, Thailand and Korea for the remainder of 2002. The amount
recorded in other income-net in the 2002 quarter as a result of
recognizing these contracts at fair value was a gain of approximately $9
million (of which $7 million relates to hedges of anticipated third and
fourth quarter net income). At June 30, 2002, the amount recorded in the
cumulative translation adjustment component of accumulated other
comprehensive income (loss) for the net investment contracts was an
insignificant loss ($1 million at December 31, 2001).
13
Commodity Swaps - At June 30, 2002, Praxair had three outstanding
commodity swap agreements (three outstanding at December 31,2001) to
hedge its exposure to the variability in future cash flows for
forecasted purchases of natural gas. The commodity swap agreements
settle through December 2002 and their impact is not significant.
The following table is a summary of the notional amount of interest rate
and currency derivatives outstanding at June 30, 2002 and December 31,
2001:
- ---------------------------------------- ------------------ -------------------
Derivative Instrument Maturity 2002 2001
- ---------------------------------------- ------------------ -------------------
Interest rate swaps:
Floating to fixed <1 Year $200 $750
Floating to fixed 1-2 years - 100
Fixed to Floating 2012 500 -
Currency Contracts:
Balance sheet items <1 Year 199 160
Firm commitments <1 Year 1 1
Anticipated net income <1 Year 125 97
Net investments <1 Year 15 13
- ---------------------------------------- ------------------ -------------------
At June 30, 2002 the fair value of all derivative instruments has been
recorded in the consolidated balance sheet as follows: $8 million in
current assets, $25 million in long-term assets, $4 million in current
liabilities, and $25 million in long-term debt ($1 million in current
assets and $12 million in current liabilities at December 31, 2001).
9. 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 899,300 and 899,300 shares were not included in the computation of
diluted earnings per share for the quarter and six months ended June 30,
2002 (915,145 and 1,381,520 during the quarter and six months ended June
30, 2001) because the exercise prices were greater than the average
market price of the common stock.
10. Goodwill and Other Intangible Assets
As described in Note 3, the Company adopted SFAS 142 as of January 1,
2002. The following table reconciles the prior year reported income
before cumulative effect of an accounting change and net income to their
respective balances adjusted to exclude goodwill amortization expense
which is no longer amortized under the provisions of SFAS 142.
Management's Discussion and Analysis of Financial Condition and Results
of Operations below includes a table, which reflects operating profit by
segment adjusted to exclude goodwill amortization expense. Current
period results are presented for comparative purposes.
14
(Millions of dollars, except per share data)
Quarter Ended Six Months Ended
------------- -----------------
June 30, June 30,
-------- --------
2002 2001 2002 2001
------- ------- ------- -------
NET INCOME:
Reported net income $ 150 $ 126 $ 138 $ 250
Add back: goodwill amortization after-tax -- 8 -- 16
------- ------- ------- -------
Adjusted net income $ 150 $ 134 $ 138 $ 266
======= ======= ======= =======
PER SHARE DATA:
Basic earnings per share:
Reported net income $ 0.92 $ 0.78 $ 0.85 $ 1.55
Add back: goodwill amortization after-tax -- .05 -- .10
------- ------- ------- -------
Adjusted net income $ 0.92 $ 0.83 $ 0.85 $ 1.65
======= ======= ======= =======
Diluted earnings per share:
Reported net income $ 0.91 $ 0.77 $ 0.83 $ 1.53
Add back: goodwill amortization after-tax -- .05 -- .10
------- ------- ------- -------
Adjusted net income $ 0.91 $ 0.82 $ 0.83 $ 1.63
======= ======= ======= =======
Changes in the carrying amount of goodwill for the six months ended June 30,
2002, were as follows:
North South Surface
(In millions) America America Europe Asia Technologies Total
------- ------- ------ ---- ------------ -----
Balance, December 31, 2001 $ 628 $ 337 $ 48 $ 35 $ 88 $1,136
Acquisitions 37 3 1 41
Cumulative effect of an
accounting(a) change - (84) (18) (17) (25) (144)
Foreign currency translation
and other adjustments 2 (38) 2 2 3 (29)
----- ----- ---- ---- ---- ------
Balance, June 30,2002 $ 667 $ 215 $ 35 $ 21 $ 66 $1,004
===== ===== ==== ==== ==== ======
a. The goodwill transition impairment charge of $139 million recorded
as an accounting change, includes the $144 million goodwill
write-down, a $2 million charge for goodwill held on an equity
investment, which was recorded as an write-down of the investment,
and is also net of a $7 million tax benefit (see note 3).
Other intangible assets amounted to $50 million dollars (net of
accumulated amortization of $25 million) and $44 million dollars (net of
accumulated amortization of $22 million) at June 30, 2002 and December
31, 2001, respectively. Intangible assets at June 30, 2002 consist
primarily of patents ($12 million net of accumulated amortization of $1
million), non-compete agreements($11 million net of accumulated
amortization of $18 million), and license/use agreements($27 million net
of accumulated amortization of $6 million). Intangible assets at
December 31, 2001 consist primarily of patents ($8 million net of
accumulated amortization of $1 million), non-compete agreements($10
million net of accumulated amortization of $17 million), and license/use
agreements($26 million net of accumulated amortization of $4 million).
15
There are no expected residual values related to theses intangible
assets. Estimated annual amortization expense is as follows ($ in
millions): 2002 - $6; 2003 - $6; 2004 - $5; 2005 - $4; and 2006 - $3.
The weighted average amortization period for intangible assets is
approximately 12 years. Additions to other intangible assets for the six
months ended June 30, 2002 was approximately $9 million, and
amortization expense for the quarter and six months ended June 30, 2002
was $2 million and $3 million, respectively.
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
2002 2001 Change 2002 2001 Change
------ ------- ------- -------- ------ -------
Sales.......................... $1,307 $1,314 - 1% $2,539 $2,649 - 4%
Cost of sales.................. $ 755 $ 784 - 4% $1,454 $1,593 - 9%
Gross margin %................. 42% 40% + 2% 43% 40% + 3%
Selling, general
and administrative............ $ 191 $ 176 + 9% $ 375 $ 344 + 9%
Depreciation and amortization.. $ 120 $ 125 - 4% $ 241 $ 247 - 2%
Operating profit............... $ 244 $ 220 + 11% $ 461 $ 444 + 4%
Interest expense............... $ 47 $ 55 - 15% $ 98 $ 111 - 12%
Effective tax rate............. 22% 22% -% 22% 23% - 1%
Income before cumulative effect
of an accounting change $ 150 $ 126 + 19% $ 277 $ 252 + 10%
Sales decreased 1% for the quarter and 4% for the six months ended June 30, 2002
versus the respective 2001 periods. A reduction in natural gas costs, which we
are contractually obligated to pass on to on-site hydrogen customers, reduced
sales $17 million and $75 million, respectively, with no impact on operating
profit. Lower volumes in our North American Merchant and Packaged Gas business
were offset by acquisitions worldwide in the second quarter. On a year to date
basis, volume declines have marginally outpaced acquisition related sales growth
of 3%. Realized price increases kept pace with currency devaluation in the
second quarter, which was predominantly focussed in South America. On a year to
date basis, the currency devaluation effect on revenues is slightly outpacing
realized price increase worldwide.
Operating profit increased 11% for the quarter and 4% for the six months ended
June 30, 2002 versus the respective 2001 periods. Gross margin, as a percent of
sales, improved 2% in the second quarter and 3% on a year to date basis.
Approximately 1% of the improvement related to the pass through of natural gas
costs and had no impact on operating profit for both periods. The remaining
underlying improvement primarily related to cost reductions as a result of
productivity initiatives and the implementation of the restructuring program
initiated in 2001. As a percentage of sales, selling, general and administrative
expenses for the quarter and for the first six months of 2002 were 15% in 2002
versus 13% for 2001, respectively. The variances were due primarily to the
decrease in sales on a relatively fixed cost base and a change in the business
mix to more service based revenues, which have a higher proportion of selling,
general and administrative expenses to sales. The decrease in depreciation and
amortization expense for the quarter and six month period in 2002 reflects a $9
million and $18 million benefit from the adoption of SFAS 142, which eliminated
the amortization of goodwill in 2002. Other income increased $12 million for the
quarter and $14 million for the six months ended June 30, 2002 versus the
respective 2001 periods. These increases were due primarily to $9 million net
gains on net income hedges (primarily in Brazil) and a net gain of $7 million
related to the settlement of litigation with Airgas, Inc. Other income for the
six months ended June 30, 2002 also includes net gains on the sale of assets
(primarily in Mexico).
16
Income before cumulative effect of an accounting change increased 19% for the
quarter, and 10% for the six months ended June 30, 2002 versus the respective
2001 periods. This increase was primarily due to the increase in operating
profit described above and lower interest expense partially offset by higher
income taxes. Interest expense decreased due to both lower debt levels and
interest rates. For the quarter ended June 30, 2002 the effective tax rate
remained flat at 22%. For the six months ended June 30, 2002 the effective tax
rate declined to 22% from 23%, respectively, mainly due to the effect of no
longer amortizing goodwill (in conjunction with the adoption of SFAS 142), most
of which was not deductible for tax purposes.
In the 2002 second quarter, Praxair completed the initial goodwill impairment
tests required for the adoption of SFAS 142 (see Note 2). These tests indicated
an impairment of goodwill related to previous acquisitions. As a result, a $139
million non-cash transition charge to earnings was recorded as a cumulative
effect of an accounting change, retroactive to January 1, 2002. In the first
quarter of 2001, a one-time transition charge of $2 million was recorded for the
adoption of SFAS 133, which established new accounting rules for derivatives.
The number of employees at June 30, 2002 was 24,627, which reflects an increase
of about 350 employees since December 31, 2001. This increase is related to
acquisitions (approximately 500 employees, including 356 related to the
consolidation of a former equity company in China) and new service initiatives,
primarily in Brazil, partially offset by reductions related to productivity
initiatives and reductions associated with the special charges (see Note 4).
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 3 to the consolidated financial statements included in
Praxair's 2001 Annual Report to shareholders):
(Dollar amounts in millions)
Quarter Six Months Ended
Ended June 30, Ended June 30,
----------------- Percent ---------------- Percent
2002 2001 Change 2002 2001 Change
SALES ------- -------- ------- ------ ------- ------
North America $ 852 $ 888 - 4% $1,654 $1,790 - 8%
South America 172 166 + 4% 342 341 -%
Europe 149 136 + 10% 281 276 + 2%
Asia 79 58 + 36% 152 112 + 36%
Surface Technologies 99 103 - 4% 198 208 - 5%
Elimination (44) (37) + 19% (88) (78) + 13%
------ ------ ------ ------
Total Sales $1,307 $1,314 - 1% $2,539 $2,649 - 4%
===== ====== ====== ======
SEGMENT OPERATING PROFIT
North America* $ 139 $ 142 - 2% $ 276 $ 279 - 1%
South America* 41 30 + 37% 72 70 + 3%
Europe* 34 31 + 10% 64 63 + 2%
Asia* 13 7 + 86% 23 13 + 77%
Surface Technologies* 10 10 -% 19 19 -%
All Other 7 - -% 7 - -%
------ ------ ------ ------
Total Operating Profit $ 244 $ 220 + 11% $ 461 $ 444 + 4%
===== ====== ====== ======
* Effective in 2002, Praxair adopted SFAS 142, which prospectively eliminated
the amortization of goodwill. A reconciliation of operating profit for the
quarter and six months ended June 30, 2001 adjusted for excluding goodwill
amortization follows (millions of dollars):
17
Quarter Goodwill
Reported Amortization Adjusted
North America $ 142 $ 5 $ 147
South America 30 2 32
Europe 31 1 32
Asia 7 - 7
Surface Technologies 10 1 11
------ ---- -------
Total Operating Profit $ 220 $ 9 $ 229
====== ==== =======
Six Months Goodwill
Reported Amortization Adjusted
North America $ 279 $ 10 $ 289
South America 70 4 74
Europe 63 2 65
Asia 13 14
Surface Technologies 19 1 20
------ ---- -------
Total Operating Profit $ 444 $ 18 $ 462
====== ==== =======
North America
- -------------
Sales decreased 4% and 8%, respectively for the quarter and six months ended
June 30, 2002 versus the respective 2001 periods. A reduction in natural gas
costs, which we are contractually obligated to pass on to on-site hydrogen
customers, reduced sales $17 million and $75 million, respectively. Lower
volumes, predominantly in merchant industrial gases, were partially offset by
healthcare acquisitions, which favorably impacted sales revenue growth figures
by 2% in both periods.
Operating profit decreased 2% and 1%, respectively, for the quarter and six
months ended June 30, 2002 versus the respective 2001 periods. For both periods,
the unfavorable operating profit impact of the sales volume reduction and
inflationary pressure on cost structures were mostly offset by cost reductions
due to productivity initiatives and the implementation of the restructuring
program initiated in 2001. Acquisitions marginally improved operating profit
growth and are in line with revenue increases. Discontinued goodwill
amortization, on the adoption of SFAS 142, marginally improved operating profit
for both periods. Operating profit, as a percentage of sales, in the second
quarter of 2002 was 16.3% versus 16.0% in the second quarter of 2001. For the
six months ended June 30, 2002, operating profit as a percentage of sales was
16.7% versus 15.6% in the same period of 2001. The improvement in operating
profit percentages for the second quarter and year to date comparisons are
primarily a result of the impact of lower natural gas prices reducing revenues
with no impact on operating profit.
South America
- -------------
Sales increased 4% and remained flat, respectively, for the quarter and six
months ended June 30, 2002 versus the respective 2001 periods. Realized price
increases in Brazil have largely offset the currency devaluation impact in the
quarter and on a year to date basis. Additionally, volumes continued to grow as
a result of expansion of services and an improvement in business conditions as
the government mandated energy curtailment programs ease.
Operating profit increased 37% and 3%, respectively, for the quarter and six
months ended June 30, 2002 versus the respective 2001 periods. These increases
were primarily due to: net income hedge gains of which $8 Million dollars was
recognized in the second quarter, realized price increases, improving volume
growth, and productivity improvement initiatives. These favorable actions offset
the adverse impact of currency devaluation. The net income hedge gains (recorded
18
on a mark-to-market basis in accordance with SFAS 133 requirements) include $8
million related to anticipated third and fourth quarter net income in Brazil.
Discontinued goodwill amortization, on the adoption of SFAS 142, marginally
improved operating profit for both periods. Operating profit, as a percentage of
sales, improved for both periods predominantly as a result of the net income
hedges and elimination of goodwill amortization in 2002.
There are significant uncertainties surrounding the economic and political
stability in both Argentina and Venezuela resulting in lower economic activity
in these countries. Currency devaluation versus the U.S. dollar in both of these
countries, and in Brazil, lowered reported results in U.S. dollars in 2002.
During the first six months of 2002, the Brazilian Real, Venezuelan Bolivar and
the Argentine Peso further devalued which, for South America, resulted in a
charge of approximately $211 million to Other Comprehensive Income in
Shareholders' Equity.
To help understand the impacts, following is a summary of the exchange rates
used to translate the financial statements in Brazil, Argentina and Venezuela
(rates of exchange expressed in units of local currency per U.S. dollar):
Currency Income statement average Balance Sheet
-------- ------------------------ -------------
June 30, December 31,
2002 2001 2002 2001
---- ---- ----
Brazil Real 2.71 2.15 2.84 2.32
Argentina Peso 2.72 1.00 3.80 1.70
Venezuela Bolivar 941 703 1353 758
Future currency movements versus the U.S. dollar, if any, will continue to
impact reported results. In the first six months of 2002, Brazil represents
approximately 78% of South America's sales, while Argentina and Venezuela each
represent about 5% of South America's sales. The functional currency used for
translation to the U.S. dollar for Argentina and Brazil are the Peso and Real,
respectively, while for Venezuela the Company uses the U.S. dollar (because it
is considered a highly inflationary economy in accordance with SFAS 52). Praxair
will continue to monitor developments in these countries and if the cumulative
inflation rate in Argentina or Brazil exceeds 100% for a consecutive three-year
period, we will be required to change the functional currency to the U.S.
dollar.
Europe
- ------
Sales increased 10% and 2%, respectively, for the quarter and six months ended
June 30, 2002 versus the respective 2001 periods. The increase in second quarter
sales was largely due to volume growth in merchant and packaged gases and was
enhanced by currency translation impacts. Minimal price increases were realized
in both periods. Excluding the currency translation effects for the quarter and
six months ended June 30, 2002, sales increased by 7% and 3%, respectively.
Operating profit increased 10% and 2%, respectively, for the quarter and six
months ended June 30, 2002 versus the respective 2001 periods. Productivity
improvements have offset the inflationary pressures on cost structures in both
periods. Excluding currency effects for the quarter and six months ended June
30, 2002, operating profit increased by 13% and 5%, respectively. Discontinued
goodwill amortization, on the adoption of SFAS 142, marginally improved
operating profit in 2002 and operating margin as a percent of sales remained at
23% for both periods.
The Euro strengthened during the second quarter of 2002, resulting in an
increase of $62 million and $59 million, respectively, for the quarter and six
months ended June 30, 2002 to Other Comprehensive Income in Shareholders'
Equity.
Asia
- ------
Sales increased 36% for the quarter and six months ended June 30, 2002 versus
the respective 2001 periods. This increase in sales is primarily due to the
increased ownership and resultant consolidation of former joint ventures in
India and China in the third quarter of 2001 and first quarter of 2002,
respectively. For the quarter and six-month periods ended June 30, 2002 versus
19
the 2001 periods, these consolidations increased sales by $19 million and $38
million, respectively. Excluding the consolidation of these joint ventures and
the impact of exiting a business in Japan, sales for the quarter and six months
ended June 30, 2002 would have increased 5% and 3%, respectively.
Operating profit increased 86% and 77%, respectively, for the quarter and six
months ended June 30, 2002 versus the respective 2001 periods. The increase is
due primarily to the consolidation of former joint ventures in India and China
as discussed above. For the quarter and six-month periods ended June 30, 2002
versus the 2001 periods, these consolidations increased operating profit by $5
million and $9 million, respectively. Absent the consolidation of the former
joint venture operations, operating profit would have remained flat and
increased by $1 million, respectively, for the quarter and six month periods
ended June 30, 2002 versus the 2001 periods primarily due to productivity
improvements.
Surface Technologies
- --------------------
Sales decreased 4% and 5%, respectively, for the quarter and six months ended
June 30, 2002 versus the respective 2001 periods. The decrease in sales is due
primarily to volume decreases in aviation repair and coatings services.
Operating profit for the quarter and six months ended June 30, 2002 was
unchanged as compared to the respective 2001 periods. Productivity improvements
were offset by sales volume declines.
All Other
- ----------
Operating profit for the quarter and six months ended June 30, 2002 was $7
million. The $7 million represents a net gain from the settlement of litigation
with Airgas, Inc.
Liquidity, Capital Resources and Other Financial Data
The following selected cash flow information provides a basis for the discussion
that follows:
Six Months Ended June 30,
(Dollar amounts in millions) ----------------------
2002 2001
------- -------
NET CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net income plus depreciation
and amortization and accounting
changes................................. $ 518 $ 497
Working capital........................... (69) (52)
Other - net............................... (42) (8)
------- -------
Total from operating activities........... $ 407 $ 437
======= =======
20
INVESTING ACTIVITIES
Capital expenditures...................... $ (221) $ (284)
Acquisitions.............................. (69) (181)
Divestitures and asset sales.............. 15 11
------- -------
Total used for investing activities....... $ (275) $ (454)
======= =======
FINANCING ACTIVITIES
Debt increases (reductions) - net......... $ 30 $ 56
Minority transactions and other........... (1) (12)
Net (purchases) issuances of common stock. (105) 45
Cash dividends............................ (62) (55)
-------- -------
Total (used for) from financing activities $ (138) $ 34
======== =======
OTHER FINANCIAL DATA
After-tax return on capital (a)........... 12.6% 12.1%
======== =======
June 30, December 31,
2002 2001
----------- ------------
Debt-to-capital ratio:
Debt.................................... $3,022 $2,989
Capital(b).............................. $5,526 $5,627
Debt-to-capital ratio................... 54.7% 53.1%
(a) Defined as after-tax operating profit plus income from equity investments,
divided by average capital, calculated on an annualized basis. The 2002
calculation excludes net litigation settlement and net gains on net income
hedges (primarily in Brazil) related to second half of 2002 net income.
Praxair's definition of after-tax return on capital may not be comparable to
similar definitions used by other companies. The Company believes that its
after-tax return on invested capital is an appropriate measure for judging
performance as it reflects the approximate after-tax profit earned as a
percentage of investments by all parties in the business (debt, minority
interest, preferred stock, and shareholders' equity. (b) Includes debt, minority
interests, preferred stock and shareholders' equity.
Cash Flow from Operations
- -------------------------
Cash flow from operations decreased to $407 million in the six months ended June
30, 2002 versus $437 million in 2001 primarily due to increased working capital
requirements from our geographical mix in receivables and reduced accounts
payable. In addition, deferred tax benefits declined as a result of reductions
in capital expenditures in 2001 and 2002.
Investing
- ---------
Cash flow used for investing in the first six months of 2002 totaled $275
million, a decrease of $179 million from the first six months of 2001. This
decrease is due to the lower level of capital expenditures and acquisitions.
Capital expenditures for the six months June 30, 2002 totaled $221 million, a
decrease of $63 million from the corresponding period in 2001. The decrease in
capital expenditures is primarily in North America, South America and Asia. On a
worldwide basis, capital expenditures for the full year 2002 are expected to be
around $550 million.
Acquisition expenditures for the six months ended June 30, 2002 totaled $69
million, a decrease of $112 million from the corresponding period in 2001. The
21
primary acquisition in the first six months of 2002 was in the U.S. healthcare
market. Acquisitions in the first six months of 2001 were in the North American
electronics and healthcare businesses, and in Surface Technologies.
During the first six months of 2002, our Mexican subsidiary completed the sale
of its headquarters building in Mexico City, which is the primary reason for the
increase in divestiture and asset sale proceeds over the corresponding period in
2001.
Financing
- ---------
At June 30, 2002, Praxair's total debt outstanding was $3,022 million, an
increase of $33 million versus December 31, 2001. This increase in debt includes
a $25 million fair value increase related to SFAS 133 hedge accounting (see Note
7). During the first six months of 2002, Praxair issued $500 million of 6.375%
notes maturing April 1, 2012 and $250 million of 4.75% notes maturing July 15,
2007 and used the proceeds from both to repay outstanding commercial paper. At
the same time we issued the 6.375% notes, we entered into an interest rate swap
agreement, which effectively converted the fixed interest rate payments on these
notes to floating rates. The terms of these swap agreements provide credit
support to both Praxair and the counterparties in the form of posted cash
collateral that is triggered when the fair value of the swaps exceeds a dollar
threshold. We do not anticipate that any collateral posting will be required in
the foreseeable future. On July 15, 2002 Praxair redeemed the 8.7% Debentures
due 2022 for $313 million resulting in an additional $15 million third quarter
charge (primarily a call premium) to be recorded within interest expense.
During the first six months of 2002, proceeds from stock option exercises were
unusually high due to the expiration of options granted in 1992 (when Praxair
became a public company) and the relatively high stock price for the Company's
common stock price during the period. During the first six months of 2002,
Praxair increased treasury stock purchases to partially offset the effects of
the stock option exercises. Also, in the first six months of 2001, we repaid
subsidiary preferred stock totaling $10 million which is the reason for the
change in minority transactions and other versus the first six months of 2002.
In the first six months of 2002, cash dividends were increased to $0.38 per
share ($0.76 per share annualized) from $0.34 per share in the first six months
of 2001 ($0.68 per share annualized).
Other Financial Data
- --------------------
Praxair's debt-to-capital ratio increased from 53.1% at December 31, 2001 to
54.7% at June 30, 2002 due to the decrease in shareholders' equity primarily
attributed to currency movements, share repurchases and the SFAS 142 accounting
change (see Note 5 to the condensed consolidated financial statements).
The after-tax return on capital (excluding the net litigation settlement and net
gains on net income hedges related to second half of 2002 net income) for the
six month period ended June 30, 2002, increased 0.5% to 12.6% due to higher
after-tax operating income and lower average capital.
Raw Materials
Energy is the single largest cost in the production and distribution of
industrial gases. Most of Praxair's energy requirements are in the form of
electricity. Other important elements are crude hydrogen and natural gas (for
hydrogen) and diesel fuel (for distribution). A shortage or interruption of
energy, or increases in energy prices that cannot be passed through to
customers, are risks to Praxair's business and financial performance. Because
many of Praxair's contracts with customers are long term, with pass-through
provisions, Praxair has not, historically, experienced significant difficulties
related to recovery of energy costs. Supply of energy also has not been a
significant issue. However, during 2000 and continuing into 2001, there was
unprecedented volatility in the cost and supply of electricity and in natural
22
gas prices in the United States, particularly in California. To date, Praxair
has been able to substantially mitigate the financial impact of these costs by
passing them on to customers. Praxair does not expect significant supply issues
in the United States. Brazil's major source of electricity is hydro-based, and
although the recent energy curtailments ended on March 1, 2002, any future
resumption of drought conditions could impact electricity supply. In
anticipation of continued volatility, the company has taken aggressive pricing
actions, is strengthening its energy-management program for purchased power, and
is implementing new customer contract terms and conditions. However, the outcome
of the energy situation and its impact on the national economies where Praxair
operates is unpredictable at this time and may pose unforeseen future risk.
Also, refer to Raw Materials and Markets in the Management's Discussion and
Analysis Section of Praxair's 2001 Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to the Market Risks and Sensitivity Analysis in the Management's
Discussion and Analysis section of Praxair's 2001 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 6. Exhibits and Reports on Form 8-K
On June 13, 2002, Praxair, Inc. filed a Current Report on Form 8-K, Item 5,
reporting Praxair's adoption of Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other
Intangible Assets," effective January 1, 2002. Praxair had completed an initial
impairment test and had concluded that certain of its goodwill was impaired,
resulting in a non-cash after-tax charge of $139 million or approximately $0.84
per share on a diluted basis. This charge was recorded as a cumulative effect of
an accounting change, retroactive to January 1, 2002, in accordance with the
rule.
On August 12, 2002, Praxair, Inc. filed a Current Report on Form 8-K, Item 9,
reporting that both the Principal Executive Officer, Dennis H. Reilley, and
Principal Financial Officer, James S. Sawyer, of Praxair, Inc. submitted to the
Securities and Exchange Commission sworn statements, dated August 9, 2002,
pursuant to Securities and Exchange Commission Order No. 4-460.
23
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 13, 2002 By: /s/Patrick M. Clark
------------------------ -----------------------------
Patrick M. Clark
Vice President and Controller
(On behalf of the Registrant
and as Chief Accounting Officer)
24