FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2002
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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 September 30, 2002, 161,712,423 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, changes in pension
asset returns, 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 Nine Months Ended September 30, 2002 and 2001 (Unaudited)
Condensed Consolidated Balance Sheet - Praxair, Inc. and Subsidiaries
September 30, 2002 and December 31, 2001 (Unaudited)
Condensed Consolidated Statement of Cash Flows - Praxair, Inc. and
Subsidiaries Nine Months Ended September 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
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
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 September 30,
-----------------------------
2002 2001
--------- ---------
SALES ...................................... $ 1,292 $ 1,271
Cost of sales, exclusive of
depreciation and amortization ............ 749 752
Selling, general and administrative ........ 187 180
Depreciation and amortization .............. 120 127
Research and development ................... 16 16
Other income (expense)-net ................. 15 (48)
--------- ---------
OPERATING PROFIT ........................... 235 148
Interest expense ........................... 63 59
--------- ---------
INCOME BEFORE INCOME TAXES ................. 172 89
Income taxes ............................... 38 24
--------- ---------
INCOME OF CONSOLIDATED ENTITIES ............ 134 65
Minority interests ......................... (5) (5)
Income from equity investments ............. 2 2
--------- ---------
NET INCOME ................................. $ 131 $ 62
========= =========
PER SHARE DATA:
Basic earnings per share:
Net income ............................... $ 0.81 $ 0.38
========= =========
Diluted earnings per share:
Net income ............................... $ 0.80 $ 0.38
========= =========
Cash dividends per share ................... $ 0.19 $ 0.17
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING (000'S):
Basic shares outstanding ................... 162,296 161,734
Diluted shares outstanding ................. 163,956 163,275
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)
Nine Months Ended September 30,
-------------------------------
2002 2001
--------- ---------
SALES ...................................... $ 3,831 $ 3,920
Cost of sales, exclusive of
depreciation and amortization ............ 2,203 2,345
Selling, general and administrative ........ 562 524
Depreciation and amortization .............. 361 374
Research and development ................... 49 48
Other income (expense)-net ................. 40 (37)
--------- ---------
OPERATING PROFIT ........................... 696 592
Interest expense ........................... 161 170
--------- ---------
INCOME BEFORE INCOME TAXES ................. 535 422
Income taxes ............................... 118 100
--------- ---------
INCOME OF CONSOLIDATED ENTITIES ............ 417 322
Minority interests ......................... (15) (14)
Income from equity investments ............. 6 6
--------- ---------
INCOME BEFORE CUMULATIVE EFFECT
OF AN ACCOUNTING CHANGE .................... 408 314
Cumulative effect of accounting changes .... (139) (2)
--------- ---------
NET INCOME ................................. $ 269 $ 312
========= =========
PER SHARE DATA:
Basic earnings per share:
Before cumulative effect of
accounting changes ...................... $ 2.50 $ 1.95
Accounting changes ....................... (0.85) (0.01)
--------- ---------
Net income ............................... $ 1.65 $ 1.94
========= =========
Diluted earnings per share:
Before cumulative effect of
accounting changes ...................... $ 2.47 $ 1.92
Accounting changes ....................... (0.84) (0.01)
--------- ---------
Net income ............................... $ 1.63 $ 1.91
========= =========
Cash dividends per share ................... $ 0.57 $ 0.51
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING (000'S):
Basic shares outstanding ................... 162,839 161,350
Diluted shares outstanding ................. 164,893 163,234
The accompanying notes are an integral part of these financial statements.
5
PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Millions of dollars)
(UNAUDITED)
September 30, December 31,
2002 2001
------ ------
ASSETS
Cash and cash equivalents ....... $ 44 $ 39
Accounts receivable ............. 869 857
Inventories ..................... 288 287
Prepaid and other current assets 120 93
------ ------
TOTAL CURRENT ASSETS ....... 1,321 1,276
Property, plant and equipment-net 4,551 4,817
Goodwill ........................ 948 1,136
Other intangible assets ......... 49 44
Other assets .................... 389 442
------ ------
TOTAL ASSETS ............... $7,258 $7,715
====== ======
LIABILITIES AND EQUITY
Accounts payable ................ $ 328 $ 413
Short-term debt ................. 224 178
Current portion of long-term debt 24 86
Other current liabilities ....... 532 517
------ ------
TOTAL CURRENT LIABILITIES .. 1,108 1,194
Long-term debt .................. 2,627 2,725
Other long-term obligations ..... 1,167 1,158
------ ------
TOTAL LIABILITIES .......... 4,902 5,077
Minority interests .............. 152 141
Preferred stock ................. - 20
Shareholders' equity ............ 2,204 2,477
------ ------
TOTAL LIABILITIES AND EQUITY $7,258 $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)
Nine Months Ended September 30,
-------------------------------
2002 2001
------- -------
OPERATIONS
Net income ..................................... $ 269 $ 312
Adjustments:
Depreciation and amortization ................ 361 374
Accounting change ............................ 139 -
Special charges .............................. - 67
Deferred income taxes ........................ 1 24
Other non-cash charges ....................... (4) (17)
Working capital .............................. (48) (68)
Long-term assets, liabilities and other ...... (55) (28)
------- -------
Net cash provided by operating activities .. 663 664
------- -------
INVESTING
Capital expenditures ........................... (340) (417)
Acquisitions ................................... (76) (196)
Divestitures and asset sales ................... 21 39
------- -------
Net cash used for investing activities ..... (395) (574)
------- -------
FINANCING
Short-term borrowings (repayments)- net ........ 87 19
Long-term borrowings ........................... 1,101 310
Long-term debt repayments ...................... (1,296) (337)
Minority transactions and other ................ 34 (10)
Issuance of common stock ....................... 171 89
Purchases of common stock ...................... (265) (76)
Cash dividends ................................. (93) (83)
------- -------
Net cash (used for) provided by
financing activities ................... (261) (88)
------- -------
Effect of exchange rate changes on cash and
cash equivalents ............................... (2) (3)
------- -------
Change in cash and cash equivalents .............. 5 (1)
Cash and cash equivalents beginning-of-year ...... 39 31
------- -------
Cash and cash equivalents end-of-period .......... $ 44 $ 30
======= =======
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
Descriptions of the following accounting policies are being expanded from
those included in the Company's 2001 Form 10K in Note 1 to the consolidated
financial statements. The enhanced disclosures are related to revenue
recognition, depreciation lives, accounting for shipping and handling fees,
and sales returns, but do not reflect any change in the Company's
accounting policies in these areas.
Revenue Recognition - Revenue is recognized when: a firm sales agreement
exists; product is shipped or services are provided to customers; and
collectibility of the fixed or determinable sales price is reasonably
assured. 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 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 (see note 10). 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
8
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 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 an 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.
During the second quarter Praxair completed the initial impairment test and
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.
9
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
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
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 6, 7 and 8).
In April 2002, the FASB issued SFAS 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 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 accordingly $15 million of costs associated with early
extinguishment of debt in the third quarter of 2002 was recorded as
interest expense (see note 7).
In July 2002 the FASB issued SFAS 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 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,
except as to the timing of recognition of such costs.
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 underlying the charges will not have any material effect on
revenues. Through September 30, 2002, all cost reductions related to the
2000 program have been achieved, while approximately 80% of the anticipated
cost reductions related to the 2001 program have been achieved. As of
September 30, 2002, 1,745 employees have been terminated and the remainder
are expected to be completed in 2002.
Also, during 2002, the Company recorded a benefit of $6 million to adjust
the original severance estimates to reflect actual costs incurred and
recorded an additional $4 million of expenses for newly identified
severance costs and restructuring activity.
Cash payments related to the special charges (primarily for severance)
during the quarter ended September 30, 2002 were $8 million, ($31 million
for the nine months ended September 30, 2002) and estimated payments for
the remainder of 2002 are $8 million.
10
The table below summarizes the activity in the accrual for special charges
since December 31, 2001. The remaining accrual relates primarily to
severance and lease payments:
(Millions of dollars) Other Total
Accrual- Special Charges Severance Charges Accrual
-------------------------- --------- ------- -------
Balance, December 31, 2001 $ 45 $ 26 $ 71
Adjustments ............... (5) (1) (6)
2002 payments ............. (27) (4) (31)
---- ---- ----
Balance, September 30, 2002 $ 13 $ 21 $ 34
==== ==== ====
The 2001 $70 million restructuring and other actions were recorded as
follows: $7 million in cost of sales, $5 million in selling, general and
administrative and $58 million in other income (expense).
5. Inventories
The following is a summary of Praxair's consolidated inventories:
(Millions of dollars) September 30, December 31,
2002 2001
---- ----
Raw materials and supplies $ 81 $ 87
Work in process .......... 34 36
Finished goods ........... 173 164
---- ----
$288 $287
==== ====
6. Shareholders' Equity
Changes in Shareholders' equity were as follows:
(Thousands of shares) Common Treasury
Stock Issued Stock
------------ -------
Balance, December 31, 2001 170,141 7,998
Common stock activity (b) . 3,374 3,804
------- -------
Balance, September 30, 2002 173,515 11,802
======= =======
Accumulated
Additional Other
Common Paid-In Treasury Retained Comprehensive
(Millions of dollars) Stock Capital Stock Earnings Income(Loss) Total
------- ------- ------- -------- ------------ -------
Balance, December 31, 2001 . $ 2 $ 1,795 $ (330) $ 2,307 $(1,297) $ 2,477
Net income .................. 269 269
Translation adjustments ..... (380) (380)
Derivatives (a) ............. 3 3
-------
Comprehensive income (loss) . (108)
Dividends - common stock .... (93) (93)
Common stock activity (b) ... 145 (217) (72)
------- ------- ------- ------- ------- -------
Balance, September 30, 2002 . $ 2 $ 1,940 $ (547) $ 2,483 $(1,674) $ 2,204
======= ======= ======= ======= ======= =======
11
(a) Derivatives (see Notes 3 and 8): Millions
--------
Balance at December 31, 2001 $(4)
Reclassed to earnings (primarily interest expense) 7
Change in fair value (4)
----
Balance at September 30, 2002 $(1)
====
(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. Includes $22 million of tax benefits
related to stock option exercises, which in the condensed consolidated
statement of cash flows is shown in the working capital component of
operating cash flow.
During the quarter and nine months ended September 30, 2002, Praxair
granted options for 5,000 and 1,323,500 shares, respectively, of common
stock having option prices ranging from $50.75 to $58.65 per share
(weighted average price of $56.75), the closing market price of Praxair's
common stock on the day of the grants. At September 30, 2002 there were
13,354,758 shares under option at prices ranging from $15.75 to $58.65 per
share (weighted average of $44.12) of which options for 8,528,019 shares
were exercisable at prices ranging from $15.75 to $56.13 per share
(weighted average of $40.74). During the quarter and nine months ended
September 30, 2002, 397,229 and 3,380,542 options were exercised,
respectively.
7. Debt
The following is a summary of Praxair's outstanding debt at September 30,
2002 and December 31, 2001.
September 30, December 31,
2002 2001
(Millions of Dollars) ----------- -----------
Short-term:
Canadian borrowings ................. $ 63 $ -
U.S. Borrowings ..................... 7 -
South American borrowings ........... 73 90
Asian borrowings .................... 76 58
Other international borrowings ...... 5 30
------ ------
Total short-term debt ................. 224 178
Long-term:
U.S.:
Commercial paper and U.S. borrowings 193 716
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* .............. 547 -
8.70% Debentures due 2022
(Redeemed in 2002) ........... - 300
Other borrowings .................... 40 41
Canadian borrowings ................... - 113
South American borrowings ............. 30 35
Asian borrowings ...................... 62 75
Other international borrowings ........ 4 6
------ ------
2,651 2,811
Less: current portion of long-term debt 24 86
------ ------
Total long-term debt .................. 2,627 2,725
------ ------
Total debt ............................ $2,875 $2,989
====== ======
* September 30, 2002 includes a $47 million fair value increase related
to SFAS 133 hedge accounting (see Note 8).
12
On March 19, 2002, Praxair issued $500 million 6.375% notes maturing April
1, 2012, and on June 19, 2002 Praxair issued $250 million 4.75% notes
maturing July 15, 2007. The proceeds were used to repay outstanding
commercial paper.
On July 15, 2002, Praxair redeemed the 8.7% Debentures due 2022 for $313
million resulting in an additional $15 million third quarter charge
recorded within interest expense.
At September 30, 2002, $818 million of notes due in 2003 and commercial
paper 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 September 30, 2002.
8. Financial Instruments
Interest Rate Swaps - At September 30, 2002 Praxair had a $100 million
notional amount interest rate swap agreement that effectively converts
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) with a scheduled maturity in
2003. The fair value of this swap at September 30, 2002 was a loss of less
than $1 million ($6 million loss at December 31, 2001). This swap agreement
has been designated as, and is effective as, a cash flow hedge of an
outstanding lease obligation. 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 hedged transactions occurred and were
recognized in earnings. Any hedging ineffectiveness was also recorded and
was not significant. Praxair expects to reclassify the after-tax deferred
losses of less than $1 million from accumulated other comprehensive income
(loss) to earnings (operating profit) in the next four months as the hedged
transaction settles.
During the 2002 third quarter, Praxair terminated the $500 million notional
amount of interest rate swap agreements that effectively converted fixed
rate interest to variable rate interest on the $500 million 6.375% Notes
that mature in April 2012 (none at December 31, 2001). The termination
resulted in a cash gain of $47 million, which Praxair recognized in
earnings and was equally offset with a charge to earnings for the changes
in fair value of the underlying debt instrument ($22 million in the 2002
third quarter and $25 million in the 2002 second quarter). The fair value
increase to the $500 million 6.375% Notes of $47 million will be recognized
in earnings as a reduction to interest expense over the next ten years. The
$47 million cash payment received upon termination of the swap and a
related $8 million cash receipt for interest on the swap are shown in
minority transactions and other in the financing section in the condensed
consolidated statement of cash flows.
13
Currency Contracts - Praxair is a party to currency exchange forward
contracts to manage its exposure to changing currency exchange rates that
all mature within one year. At September 30, 2002, Praxair had $314 million
notional amount of currency exchange forward contracts outstanding ($271
million at December 31, 2001): $255 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), $52 million to hedge
anticipated future net income ($97 million at December 31, 2001) and $6
million to hedge net investments in foreign subsidiaries ($13 million at
December 31, 2001). Additionally, there was $18 million notional value of
currency exchange contracts that effectively offset each other ($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
third quarter as a result of recognizing these contracts at fair value was
a gain of $10 million (of which $5 million related to hedges of anticipated
fourth quarter net income in Brazil). The 2002 year-to-date amount recorded
in other income-net as a result of net income hedging contracts (realized
and unrealized) was a gain of $16 million (of which $8 million related to
hedges of anticipated fourth quarter net income in Brazil). At September
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).
Commodity Swaps - At September 30, 2002, Praxair had one outstanding
commodity swap agreement (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 agreement settles in December
2002 and its impact is not significant.
The following table is a summary of the notional amount of interest rate
and currency derivatives outstanding at September 30, 2002 and December 31,
2001:
- ------------------------------------------------------------------------------------------------
Derivative Instrument Maturity 2002 2001
- ------------------------------------------------------------------------------------------------
Interest rate swaps:
Floating to fixed <1 Year $100 $750
Floating to fixed 1-2 years - 100
Currency Contracts:
Balance sheet items <1 Year 255 160
Firm commitments <1 Year 1 1
Anticipated net income <1 Year 52 97
Net investments <1 Year 6 13
- ------------------------------------------------------------------------------------------------
At September 30, 2002 the fair value of all derivative instruments has been
recorded in the consolidated balance sheet as follows: $8 million in
current assets and $2 million in current liabilities ($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
14
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 2,839,280 and 1,221,480 shares
were not included in the computation of diluted earnings per share for the
quarter and nine months ended September 30, 2002, respectively (3,843,385
and 3,665,820 during the quarter and nine months ended September 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,
which eliminates goodwill amortization expense prospectively. The following
table reconciles the prior year's reported net income and earnings per
share amounts to their respective amounts adjusted to exclude goodwill
amortization expense. Current period results are presented for comparative
purposes.
(Millions of dollars, except per share data)
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
NET INCOME:
Reported net income ..................... $ 131 $ 62 $ 269 $ 312
Add back: goodwill amortization after-tax - 9 - 25
------- ------- ------- -------
Adjusted net income ..................... $ 131 $ 71 $ 269 $ 337
======= ======= ======= =======
PER SHARE DATA:
Basic earnings per share:
Reported net income ..................... $ 0.81 $ 0.38 $ 1.65 $ 1.94
Add back: goodwill amortization after-tax - .06 - .15
------- ------- ------- -------
Adjusted net income .............. $ 0.81 $ 0.44 $ 1.65 $ 2.09
======= ======= ======= =======
Diluted earnings per share:
Reported net income ..................... $ 0.80 $ 0.38 $ 1.63 $ 1.91
Add back: goodwill amortization after-tax - .06 - .15
------- ------- ------- -------
Adjusted net income .............. $ 0.80 $ 0.44 $ 1.63 $ 2.06
======= ======= ======= =======
Changes in the carrying amount of goodwill for the nine months ended September
30, 2002, were as follows:
North South Surface
(Millions of dollars) America America Europe Asia Technologies Total
- --------------------- ------- ------- ------ ---- ------------ -----
Balance, December 31, 2001 ... $ 628 $ 337 $ 48 $ 35 $ 88 $ 1,136
Acquisitions ............... 37 2 3 - - 42
Cumulative effect of an
accounting change(a) ..... - (84) (18) (17) (25) (144)
Foreign currency translation
and other adjustments .... (6) (87) 2 2 3 (86)
------- ------- ------- ------- ------- -------
Balance, September 30,2002 ... $ 659 $ 168 $ 35 $ 20 $ 66 $ 948
======= ======= ======= ======= ======= =======
(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 a write-down of the investment, and is also net of a $7 million
tax benefit (see note 3).
15
Other intangible assets amounted to $49 million dollars (inclusive of
accumulated amortization of $27 million) and $44 million dollars (inclusive
of accumulated amortization of $22 million) at September 30, 2002 and
December 31, 2001, respectively. Intangible assets at September 30, 2002
consist primarily of patents ($13 million net of accumulated amortization
of $1 million), non-compete agreements($10 million net of accumulated
amortization of $19 million), and license/use agreements($26 million net of
accumulated amortization of $7 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). There are no
expected residual values related to these intangible assets. Estimated
annual amortization expense is as follows: 2002 - $6 million; 2003 - $6
million; 2004 - $5 million; 2005 - $4 million; and 2006 - $3 million. The
weighted average amortization period for intangible assets is approximately
12 years. Additions to other intangible assets for the nine months ended
September 30, 2002 was approximately $9 million, and amortization expense
for the quarter and nine months ended September 30, 2002 was $1 million and
$4 million, respectively.
11. Leases
As noted in note 12 to the 2001 consolidated financial statements, in 1998
Praxair sold certain US liquid storage equipment for $150 million and in
1999 sold certain US distribution equipment for $80 million and
simultaneously leased the equipment back. Each lease terminates at the end
of its initial two-year term which can be extended by three one-year
renewal options and further provides that at each renewal date or at lease
termination the Company may purchase the equipment for $150 million and $80
million, respectively. At these dates, the Company may also elect to sell
the equipment on behalf of the lessors and has guaranteed proceeds to the
lessors equal to $128 million for the liquid storage equipment and $68
million for the distribution equipment. The leases for the liquid storage
and distribution equipment terminate in September 2003 and March 2004,
respectively.
The leases have been treated as operating leases as at inception and each
renewal date the exercise of the purchase option was not reasonably
assured. Gains of $89 million from the sale of the liquid storage equipment
and of $63 million from the sale of the distribution equipment have been
deferred subject to the resolution of the guarantees. If the Company elects
to sell the equipment, these gains will be recognized in income to the
extent that they exceed any guarantee payment. Management considers the
probability of a guarantee payment in excess of either deferred gain to be
remote. If the Company elects to purchase the equipment, the purchase price
will be reduced by the deferred gain in determining the carrying value of
the equipment.
16
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations Consolidated Results
(Dollar amounts in millions) Quarter Ended Nine Months Ended
September 30, Percent September 30, Percent
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Sales ........................... $ 1,292 $ 1,271 + 2% $ 3,831 $ 3,920 - 2%
Cost of sales* .................. $ 749 $ 752 -% $ 2,203 $ 2,345 - 6%
Gross margin % .................. 42% 41% + 1% 42% 40% + 2%
Selling, general
and administrative ............. $ 187 $ 180 + 4% $ 562 $ 524 + 7%
Depreciation and amortization.... $ 120 $ 127 - 6% $ 361 $ 374 - 3%
Other income (expense) - net .... $ 15 $ (48) +131% $ 40 $ (37) +208%
Operating profit ................ $ 235 $ 148 + 59% $ 696 $ 592 + 18%
Interest expense ................ $ 63 $ 59 + 7% $ 161 $ 170 - 5%
Effective tax rate .............. 22% 27% - 5% 22% 24% - 2%
Income before cumulative effect
of accounting changes .......... $ 131 $ 62 +111% $ 408 $ 314 + 30%
Adjusted(a) Quarter Ended Nine Months Ended
September 30, Percent September 30, Percent
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Sales ........................... $ 1,292 $ 1,271 + 2% $ 3,831 $ 3,920 - 2%
Cost of sales* .................. $ 749 $ 745 + 1% $ 2,203 $ 2,338 - 6%
Gross margin % .................. 42% 41% + 1% 42% 40% + 2%
Selling, general
and administrative ............. $ 187 $ 175 + 7% $ 562 $ 519 + 8%
Other income (expense) - net .... $ 15 $ 10 + 50% $ 40 $ 21 + 90%
Operating profit ................ $ 235 $ 218 + 8% $ 696 $ 662 + 5%
Effective tax rate .............. 22% 23% - 1% 22% 23% - 1%
Income before cumulative effect
of accounting changes .......... $ 131 $ 119 + 10% $ 408 $ 371 + 10%
* Cost of sales excludes depreciation and amortization expense
(a) The adjusted results for the quarter and nine months ended September 30,
2001 exclude $70 million of pre-tax charges ($57 million after-tax) related
to restructuring and other actions (see note 4 to the condensed
consolidated financial statements).
Sales increased 2% for the quarter and decreased 2% for the nine months ended
September 30, 2002 versus the respective 2001 periods. In the third quarter,
price and volume improvements each increased sales by 1% and acquisitions
increased sales 2%. Sales were negatively effected by 2% by currency movements.
On a year to date basis, a reduction in natural gas costs, which we are
contractually obligated to pass on to on-site hydrogen customers, decreased
sales $74 million, or 2%, with no impact on operating profit. Realized price
increases increased sales by 2% and acquisitions of 2% offset the effect of
lower volumes and currency.
Gross margin, as a percent of sales, improved 1%, to 42%, in the third quarter
and 2%, to 42%, on a year to date basis. The gross margin improvement primarily
related to cost reductions as a result of productivity initiatives and the
implementation of the restructuring program initiated in 2001.
Operating profit increased 59% for the quarter and 18% for the nine months ended
September 30, 2002 versus the respective 2001 periods. Excluding the effects of
the $70 million pre-tax charge taken in the third quarter of 2001 (see note 4 to
the condensed consolidated financial statements), operating profit increased 8%
17
for the quarter and 5% on a year to date basis. As a percentage of sales,
selling, general and administrative expenses for the quarter and for the first
nine months of 2002 were 14% and 15% in 2002 versus 14% and 13% for 2001,
respectively. The year to date increase was due primarily to the decrease in
sales on a relatively fixed cost base and a change in the business mix to more
service oriented 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 nine month period in 2002 reflects a
$10 million and $28 million benefit from the adoption of SFAS 142, which
eliminated the amortization of goodwill in 2002. Other income increased $63
million for the quarter and $77 million for the nine months ended September 30,
2002 versus the respective 2001 periods. These increases were due primarily to
$58 million of the $70 million pre-tax charge being recorded in other income
(expense) for the quarter and nine months ended September 30, 2001. The 2002
third quarter also included $10 million of gains on net income hedges (primarily
in Brazil), of which $5 million related to hedges of Brazil's fourth quarter net
income. The nine months ended September 30, 2002 included $16 million of gains
on net income hedges (primarily in Brazil), of which $8 million related to
hedges of Brazil's fourth quarter net income and a net gain of $7 million
related to the settlement of litigation with Airgas, Inc.
Income before cumulative effect of accounting changes increased 111% for the
quarter, and 30% for the nine months ended September 30, 2002 versus the
respective 2001 periods. Excluding the effects of the 2001 special charge (see
note 4 to the condensed financial statements), net income growth was 10% for the
third quarter and nine months ending September 30, 2002. The growth was due to
the increased operating profit for reasons described above and lower interest
expense for the nine month period. Interest expense for the quarter increased 7%
mainly due to $15 million of additional interest expense related to the early
retirement of debt (see note 7 to the condensed consolidated financial
statements). Interest expense decreased $9 million for the nine months ended
September 30, 2002 due to lower debt levels and lower interest rates, which were
partially offset by the early debt retirement costs. For the quarter ended
September 30, 2002 the effective tax rate declined 5% versus the same period of
2001, primarily due to the incremental tax rates on the 2001 special charge (see
note 4 to the condensed consolidated financial statements). For the nine months
ended September 30, 2002 the effective tax rate declined to 22%, from 24% in the
prior year period, due to the elimination of amortizing goodwill (in conjunction
with the adoption of SFAS 142), most of which was not deductible for tax
purposes, and the aforementioned effect of the 2001 special charge on the
effective tax rate.
In 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 September 30, 2002 was 24,809, which reflects an
increase of 538 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).
18
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 Nine Months Ended
Ended September 30, Ended September 30,
-------------------- Percent -------------------- Percent
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
SALES
North America ............. $ 845 $ 844 -% $ 2,499 $ 2,634 - 5%
South America ............. 154 166 - 7% 496 507 - 2%
Europe .................... 151 128 + 18% 432 404 + 7%
Asia ...................... 84 68 + 24% 236 180 + 31%
Surface Technologies ...... 99 102 - 3% 297 310 - 4%
Elimination ............... (41) (37) - 11% (129) (115) - 12%
------- ------- ------- -------
Total Sales .......... $ 1,292 $ 1,271 + 2% $ 3,831 $ 3,920 - 2%
======= ======= ======= =======
SEGMENT OPERATING PROFIT(a,b)
North America ............. $ 139 $ 137 + 1% $ 415 $ 416 -%
South America ............. 37 34 + 9% 109 104 + 5%
Europe .................... 36 25 + 44% 100 88 + 14%
Asia ...................... 14 12 + 17% 37 25 + 48%
Surface Technologies ...... 9 10 - 10% 28 29 - 3%
All Other ................. - - -% 7 - + -%
------- ------- ------- -------
Total Operating Profit $ 235 $ 218 + 8% $ 696 $ 662 + 5%
======= ======= ======= =======
(a) Effective in 2002, Praxair adopted SFAS 142, which prospectively eliminated
the amortization of goodwill. A reconciliation of operating profit for the
quarter and nine months ended September 30, 2001 adjusted to exclude
goodwill amortization follows (millions of dollars):
Quarter Goodwill
------- Reported Amortization Adjusted
-------- ------------ --------
North America ............. $137 $ 5 $142
South America ............. 34 3 37
Europe .................... 25 1 26
Asia ...................... 12 1 13
Surface Technologies ...... 10 - 10
---- ---- ----
Total Operating Profit $218 $ 10 $228
==== ==== ====
Nine Months Goodwill
----------- Reported Amortization Adjusted
-------- ------------ --------
North America ............. $416 $ 15 $431
South America ............. 104 7 111
Europe .................... 88 3 91
Asia ...................... 25 2 27
Surface Technologies ...... 29 1 30
---- ---- ----
Total Operating Profit $662 $ 28 $690
==== ==== ====
(b) Praxair recorded pre-tax charges totaling $70 million in the third quarter
of 2001, which are not included in Praxair management's reporting
definition of operating profit. Following is a reconciliation of segment
operating profit to reported operating profit for the quarter and nine
months ended September 30, 2001:
Quarter Nine Months
------- -----------
Segment operating profit .... $ 218 $ 662
Less special charges:
North America ...... (26) (26)
South America ...... (30) (30)
Europe ............. (3) (3)
Asia ............... - -
Surface Technologies (4) (4)
All Other .......... (7) (7)
----- -----
Consolidated operating profit $ 148 $ 592
===== =====
19
North America
- -------------
Sales were in line with last years third quarter, and decreased 5% for the nine
months ended September 30, 2002 versus the respective 2001 periods. In the third
quarter volumes declined 1% primarily as a result of continued weakness in many
of our end markets, which was partially offset by growth in our healthcare
business. Sequential improvements in sales volumes from the second quarter have
been realized in healthcare, steel, electronics and merchant markets. Healthcare
related acquisitions favorably impacted sales growth by 2% and offset the
aforementioned volume declines and unfavorable currency impacts. On a year to
date basis, a reduction in natural gas costs, which we are contractually
obligated to pass on to on-site hydrogen customers, decreased sales by $74
million, or 3%, with no impact on operating profit. Economic conditions have
adversely effected markets for our packaged, on-site and merchant customer bases
and as a result sales volume declined by 4%. Health care acquisitions increased
sales by 2%.
Operating profit increased 1% for the quarter and was essentially flat for the
nine month period ended September 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 offset by cost
reductions due to productivity initiatives and the implementation of the
restructuring program initiated in 2001. Discontinued goodwill amortization, on
the adoption of SFAS 142, contributed to higher operating profit for both
periods. Operating profit, as a percentage of sales, in the third quarter of
2002 was 16.4% versus 16.2% in the third quarter of 2001. For the nine months
ended September 30, 2002, operating profit as a percentage of sales was 16.6%
versus 15.8% in the same period of 2001. The improvement in operating profit
margin for the third 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, and the discontinued goodwill amortization.
South America
- -------------
Sales decreased 7% and 2%, respectively, for the quarter and nine months ended
September 30, 2002 versus the respective 2001 periods. Realized price increases
of 8% and volume increases of 9% in the quarter have partially mitigated the
currency devaluation of 24% in the quarter. On a year to date basis realized
price increases of 13% and volume increases of 4% were more than offset by a 19%
currency decline. Volumes continued to grow as a result of expansion of services
and an improvement in business conditions as the government mandated energy
curtailment programs eased, albeit at a slower pace in the third quarter. Volume
growth continued to be driven by steel, chemical, and medical gas markets.
Operating profit increased 9% and 5%, respectively, for the quarter and nine
months ended September 30, 2002 versus the respective 2001 periods. These
increases were primarily due to: net income hedge gains of $9 million and $17
million for the 2002 quarter and nine month periods, respectively; realized
price increases; higher volumes, and; productivity improvement initiatives.
These favorable actions more than offset the adverse impact of currency
devaluation. The net income hedge gains (recorded on a mark-to-market basis in
accordance with SFAS 133 requirements) include $5 million and $8 million for the
quarter and nine months ended September 30, 2002, respectively, related to
anticipated fourth quarter net income in Brazil. The elimination of goodwill
amortization upon the adoption of SFAS 142 in 2002 (see note 3), marginally
improved operating profit for both periods versus 2001. Operating profit as a
percentage of sales, improved for both periods, predominantly, because of the
net income hedge gains and the 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 and significant currency movements versus the U.S. dollar.
Additionally, investors concern on economic policies and deficit spending and
their impact on debt repayment, has impacted the currency markets in Brazil. In
20
the 2002 third quarter, the Brazilian Real devalued from approximately 3 to 4
Real per U.S. dollar. Currency devaluations versus the U.S. dollar in these
countries, lowered reported 2002 results in U.S. dollars, as previously
described. Additionally, during the first nine months of 2002, the devaluations
of the Brazilian Real, Venezuelan Bolivar and the Argentine Peso versus the U.S.
dollar resulted in a charge of approximately $413 million to Other Comprehensive
Income in Shareholders' Equity. Subsequent to September 30, 2002 until November
12, 2002, the Brazilian Real has appreciated to about 3.6 Real per U.S. dollar.
Until the new government is in place and policies established, the Brazilian
economy and currency movements will continue to be uncertain.
To help understand the reported results and to anticipate the future impacts of
currency movements, 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.):
Currency Income statement* Balance Sheet
-------- ----------------- -------------
September 30, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Brazil Real ........... 3.11 2.55 3.89 2.32
Argentina Peso ........ 3.63 1.00 3.74 1.70
Venezuela Bolivar ..... 1,384 732 1,475 758
* Third Quarter Average
Future currency movements versus the U.S. dollar, if any, will continue to
impact reported results. In the first nine 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 the Company uses the U.S. dollar in Venezuela as it is 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
change the functional currency to the U.S. dollar.
Europe
- ------
Sales increased 18% and 7%, respectively, for the quarter and nine months ended
September 30, 2002 versus the respective 2001 periods. The increase in third
quarter sales was largely due to currency impacts (11%) and volume growth (6%)
partially related to metals and stainless steel construction markets in Spain.
On a year to date basis, currency and volume each contributed 3% growth. In
addition, sales benefited from moderate realized price increases.
Operating profit increased 44% and 14%, respectively, for the quarter and nine
months ended September 30, 2002 versus the respective 2001 periods.
Approximately 20% of the third quarter operating profit growth was attributed to
currency and continued productivity improvements above the pace of inflation,
and sales volume growth drove the remainder of the substantial improvement. On a
year to date basis, substantial productivity improvements and a stronger
currency are the main factors in operating profit growth. Discontinued goodwill
amortization, on the adoption of SFAS 142, marginally improved operating profit
in 2002 and operating profit as a percent of sales was 23.8% and 23.1% for the
quarter and nine months ended September 30, 2002, respectively.
The Euro strengthened during the first nine months of 2002, resulting in an
increase of $50 million to Other Comprehensive Income in Shareholders' Equity.
On August 28, 2002 Praxair announced an agreement to sell Praxair Polska, its
Polish subsidiary to the BOC Group for approximately $50 million, which exceeds
its carrying value. The sale is subject to various conditions and approvals from
21
the Polish regulatory authorities. For the nine months ended September 30, 2002,
Praxair Polska had sales of $20 million. The results of Praxair Polska will
continue to be consolidated until the completion of the sale. It is unknown at
this time if the sale will close in the fourth quarter of 2002, or in 2003.
Asia
- ------
Sales increased 24% for the quarter and 31% for the nine months ended September
30, 2002 versus the respective 2001 periods. This increase in sales is partially
due to the increased ownership and resultant consolidation of joint ventures in
India and China in the third quarter of 2001 and first quarter of 2002,
respectively. For the quarter and nine-month periods ended September 30, 2002
versus the 2001 periods, these consolidations increased sales by $7 million and
$45 million, respectively. Excluding the consolidation of these joint ventures
and the impact of exiting a business in Japan, sales for the quarter and nine
months ended September 30, 2002 would have increased 13% and 6%, respectively.
The sales growth is driven by higher volumes across our end markets, including
higher sales to semiconductor customers in China and South Korea.
Operating profit increased 17% and 48%, respectively, for the quarter and nine
months ended September 30, 2002 versus the respective 2001 periods. The increase
is due primarily to the consolidation of former joint ventures in India and
China as aforementioned. For the quarter and nine-month periods ended September
30, 2002 versus the 2001 periods, these consolidations increased operating
profit by $2 million and $11 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 nine month
periods ended September 30, 2002 versus the 2001 periods primarily due to
productivity improvements.
Surface Technologies
- --------------------
Sales decreased 3% and 4%, respectively, for the quarter and nine months ended
September 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 nine months ended September 30, 2002 was $1
million lower as compared to the respective 2001 periods. Productivity
improvements and benefits from business restructuring have partially mitigated
the impact of sales volume declines.
All Other
- ----------
Operating profit for the nine months ended September 30, 2002 was $7 million.
The $7 million represents a net gain from the settlement of litigation with
Airgas, Inc.
22
Liquidity, Capital Resources and Other Financial Data
The following selected cash flow information provides a basis for the discussion
that follows:
Nine Months Ended September 30,
(Dollar amounts in millions) ------------------------------
2002 2001
------- -------
NET CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net income plus depreciation
and amortization and accounting
changes/special charges ................ $ 769 $ 753
Deferred income taxes .................... 1 24
Working capital .......................... (48) (68)
Other - net .............................. (59) (45)
------- -------
Total provided by operating activities ... $ 663 $ 664
======= =======
INVESTING ACTIVITIES
Capital expenditures ..................... $ (340) $ (417)
Acquisitions ............................. (76) (196)
Divestitures and asset sales ............. 21 39
------- -------
Total used for investing activities ...... $ (395) $ (574)
======= =======
FINANCING ACTIVITIES
Debt increases (reductions) - net ........ $ (108) $ (8)
Minority transactions and other .......... 34 (10)
Net (purchases) issuances of common stock (94) 13
Cash dividends ........................... (93) (83)
------- -------
Total used for financing activities ...... $ (261) $ (88)
======= =======
OTHER FINANCIAL DATA:
After-tax return on capital(a) ........... 13.2% 12.1%
======= =======
September 30, December 31,
2002 2001
------- -------
Debt-to-capital ratio:
Debt ................................... $ 2,875 $ 2,989
Capital(b) ............................. $ 5,231 $ 5,627
Debt-to-capital ratio .................. 55.0% 53.1%
(a) Defined as after-tax operating profit plus income from equity investments,
divided by average capital, calculated on an annualized basis, and
excluding special items. The 2002 calculation excludes net litigation
settlement and net gains on net income hedges (primarily in Brazil) related
to fourth quarter 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). Following is a detailed calculation of Praxair's
measure of after-tax return on capital for the quarters and nine months
ended September 30, 2002 and 2001:
23
Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Operating Profit ......................... $ 235 $ 148 $ 696 $ 592
Less: 4th quarter net income hedges ...... (5) - (8) -
Less: net gain from litigation .......... - - (7) -
Add-back special charge .................. - 70 - 70
------- ------- ------- -------
230 218 681 662
Less taxes(year to date effective rate) .. (51) (52) (150) (157)
Add-back equity income ................... 2 2 6 6
------- ------- ------- -------
Net operating profit after tax (NOPAT) $ 181 $ 168 $ 537 $ 511
Beginning capital(b) ..................... $ 5,526 $ 5,759 $ 5,627 $ 5,656
Ending capital(b) ........................ $ 5,231 $ 5,643 $ 5,231
$ 5,643
Average capital(b) ....................... $ 5,379 $ 5,701 $ 5,429 $ 5,650
After-tax return on capital (annualized) . 13.5% 11.8% 13.2% 12.1%
(b) Includes debt, minority interests, preferred stock and shareholders' equity.
Cash Flow from Operations
- -------------------------
Cash flow from operations of $663 million in the nine months ended September 30,
2002 was in line with the $664 million in 2001. The 2002 year to date
improvement in net income plus depreciation and working capital, largely offset
deferred tax provision movements.
Investing
- ---------
Cash flow used for investing in the first nine months of 2002 totaled $395
million, a decrease of $179 million from the first nine months of 2001. This
decrease is due to the lower level of capital expenditures and acquisitions.
Capital expenditures for the nine months ended September 30, 2002 totaled $340
million, a decrease of $77 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 $500 million.
Acquisition expenditures for the nine months ended September 30, 2002 totaled
$76 million, a decrease of $120 million from the corresponding period in 2001.
The primary acquisition in the first nine months of 2002 was in the U.S.
healthcare market. Acquisitions in the first nine months of 2001 were in the
North American electronics and healthcare businesses, and in Surface
Technologies.
Financing
- ---------
At September 30, 2002, Praxair's total debt outstanding was $2,875 million, a
decrease of $114 million versus December 31, 2001. During the first nine 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. On July 15, 2002, Praxair redeemed
the 8.7% Debentures due 2022 for $313 million resulting in an additional $15
million third quarter charge recorded within interest expense. Minority
transactions and other for the nine months ended September 30, 2002 includes $55
million of cash proceeds related to the early termination of an interest rate
swap ($47 million was a gain on termination and $8 million was interest - see
note 8), and a $20 million payment for the retirement of preferred stock. Also,
in the first nine months of 2001, we repaid subsidiary preferred stock totaling
$10 million.
24
During the first nine 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 during the period. During the first nine months of 2002, Praxair
increased treasury stock purchases to partially offset the dilution effects of
the stock option exercises. In the first nine months of 2002, cash dividends
were increased to $0.57 per share ($0.76 per share annualized) from $0.51 per
share in the first nine months of 2001 ($0.68 per share annualized).
As noted in note 11 to the condensed consolidated financial statements, two
leases related to liquid storage and distribution equipment terminate in
September 2003 and March 2004, respectively. Management is currently evaluating
whether to exercise the purchase option or to sell the related equipment at the
termination of each lease. In the event a purchase option is exercised, the
Company currently plans to finance the purchase through sources of long-term
borrowing that are expected to be available. If the Company elects to sell the
equipment, cash requirements will be limited to the guarantee payment, if any,
which is not expected to be significant based on recent appraisals of the
equipment.
Other Financial Data
- --------------------
In spite of the decrease of $114 million in total debt outstanding, Praxair's
debt-to-capital ratio increased from 53.1% at December 31, 2001 to 55.0% at
September 30, 2002. The decrease in shareholders' equity primarily attributed to
currency movements, share repurchases and the SFAS 142 accounting change (see
Note 6 to the condensed consolidated financial statements), was responsible for
the increased debt-to-capital ratio.
The after-tax return on capital (excluding the net litigation settlement and net
gains on net income hedges related to fourth quarter of 2002 net income) for the
quarter and nine month period ended September 30, 2002, increased 1.7% to 13.5%
and 1.1% to 13.2%, respectively, due to higher after-tax operating income and
lower average capital.
Pension Plans Update
- -------------------------
The Company will complete its year end pension plan calculations in early
January 2003, because such amounts are based on December 31, 2002 interest rates
and asset values. At that time, the Company will determine the amount, if any,
which is required to be recorded as a minimum pension liability at year-end.
However, assuming interest rates and asset returns remain essentially unchanged
in the 2002 fourth quarter from the 2002 third quarter, a minimum liability
adjustment of approximately $100 million after-tax, may be required related to
the U.S. plans. The actual amount of required adjustment, if any, remains highly
dependent upon the market conditions at year-end and the required adjustment
could be significantly higher or lower than this amount. Any such liability
increase required at year-end will be recorded as a direct charge to the
accumulated other comprehensive income (loss) component of shareholders' equity
with no impact on 2002 net income, earnings per share, or cash flows.
No pension contributions have been made to the U.S. plans in 2002 and none are
required to be made in the 2002 fourth quarter. Current estimates of required
2003 contributions are in the range of $20 million.
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
25
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
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. Controls and Procedures
(a) Based on an evaluation of the effectiveness of the design and operation of
Praxair's disclosure controls and procedures, which evaluation was made under
the supervision and with the participation of management, including Praxair's
principal executive officer and principal financial officer within the 90-day
period prior to the filing of this Quarterly Report on Form 10-Q, the principal
executive officer and principal financial officer have each concluded that such
disclosure controls and procedures are effective in ensuring that information
required to be disclosed by Praxair in reports that it files under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
(b) No significant changes were made to Praxair's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
None
26
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRAXAIR, INC.
-------------
(Registrant)
Date: November 13, 2002 By: /s/Patrick M. Clark
------------------------ -----------------------------
Patrick M. Clark
Vice President and Controller
(On behalf of the Registrant
and as Chief Accounting Officer)
CERTIFICATIONS
--------------
I, Dennis H. Reilley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Praxair, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or to omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
27
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By: /s/Dennis H. Reilley
------------------------ -----------------------------
Dennis H. Reilley
Chairman, President and
Chief Executive Officer
(principal executive officer)
I, James S. Sawyer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Praxair, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or to omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
28
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By: /s/James S. Sawyer
------------------------ -----------------------------
James S. Sawyer
Chief Financial Officer
(principal financial officer)
29